A Conversation with Ken Griffin and Steve Schwarzman

Today we're going to have a chance to listen to two individuals who have changed the world in many ways. And we're going to cover a broad range of topics. And I thought we would start with one that's a simple one, American competitiveness. So, Ken, today when you think about competitiveness in America, what are some of the things that come to mind for you?

So, first of all, I think about the great entrepreneurial energy that has defined our country's success for so many now centuries. For two centuries, people have come to this country looking for the chance to do something outside of the normal, to venture forth on their own merits and to achieve greatness. I worry that the United States takes this great heritage for granted. You see it in our education system where our ability to educate our children is now lagging most of the other developed countries. And you see something that's very, very distressing to me, which is the weight of government that is reducing the ability for new companies to form and to prosper and to grow, which has been the driver of so much success in our great nation.

Those are things that come to my mind when I think about American competitiveness today.

Steve, I've been spending a lot of time thinking about education. I ran into a guy who was like 12 years younger who went to my high school. He got a PhD in particle physics. He graduated from Yale, Oxford. He's just Deputy Secretary of Defense and came to visit me. We were talking about our high school in suburban Philadelphia and how we both were enormous beneficiaries of that educational system, as well as sort of racial balance in that community and our experiences and how that helped make us what we are today. It's just like core of America in the 1960s. And Mike just put up some slides—I don't know if you could see them in back—on education. And this is like the non-dynamic slide. This shows us number 16, number 21, and number 17 in the world.

And that's today, but what's non-dynamic about it is if you look back 30, 35 years, we would have been number one in everything. So this is like something going really wrong, really fast. And we have virtually no unemployment for college graduates. And as it goes down, it's inversely correlated. This is something that if you don't turn it, there's going to be all kinds of really significant problems, societal problems, political problems you're already seeing, and we're going to take a wonderful society and have basically vastly diminished it. From my perspective, this is not as complex a problem as it might be for others. I really think it's education. I think it's about hire, fire, and pay. And right now in our public school system, you can hire, but you fundamentally can't fire. And if you took Ken's business and

Mike's entire career, our business, and you were in a situation where you couldn't fire people who weren't up to standard, we would not, any of us, have been able to achieve what we do because you need large groups of people doing it with you. We're putting ourselves out of that business, and we have to get control of that system. And there are political inhibitions apparently, but we're sort of eating our young, and it's unfair. And if you want to use words like "immoral," it's sort of immoral, too. And you can change it. The charter schools are doing it. The Catholic schools are doing it. The other parochial schools and the private schools are getting really good results. And we could do that elsewhere.

So when I think about competitiveness—and I share Ken's dreams as well for America—I mean, we were like pretty unusual people to the extent we're talking about Americans. But we've got to protect this, and we actually have actively not been protecting what's essential for, whether it's upward mobility, competitiveness. We're completely dropping the ball.

So both, Steve, both you and Ken immediately gravitated to many issues—Ken, maybe a little broader yourself to education. If we look at what the President of the United States said on reelection night, 2012, he said, 'I believe we can keep the promise of our founding, the idea that if you're willing to work hard, you can make it here in America.' And if we look back a couple generations to the 1950s, you can see that most of the jobs in America really did not require a skill. And so very few of the jobs required a skill: 20%. Today, 65% of all the jobs. And I think one of the areas that you're both addressing here is the concern about job creation and formation of human capital. Let's take a look at Ken talking a little bit about human capital a year or two ago.

Let's take a look at a video here of Ken.

We've all learned over the years that if you reduce the cost of capital, you increase your use of fixed assets and you take out jobs. If you're out of the labor market throughout most of your 20s, where are you going to be in your 40s? The loss of human capital that takes place in Spain, in Italy, and the United States each and every day dwarfs the economic upside of the central banks' policies around the world.

If you have one piece of advice for policymakers, given the discussion we've just had—you can choose the United States, Europe, wherever you want to focus—what would it be? I think it's easy. In the United States, it's time to embrace entitlement reform.

Embrace? Entitlement reform. This is the elephant in the room. It's been running around the room for the last four years. We need to deal with this elephant. In Europe, it's embrace labor market reform. Neither of these are going to be popular policies to implement. Both of them are necessary policies. Putting these issues behind us will reignite growth in the Western Hemisphere in a profound way. It's time we do it for the benefit of our citizens.

So, Ken, when we look at some of these issues that are raised—back in 1965, I scribbled down this formula after the Watts riots, and every time I see you, I hand you my little formula here—but as we think about your statements on human capital, that the largest asset class is human capital, and I think, as you pointed out that day, essentially, as the cost of capital is reduced, large companies reduce employment with technology and other types of things. And I think the concern that you addressed there, that maybe we could talk a little bit today, is that people have been out of work for a long time. We're destroying their human capital, and what is that going to do to our society? How do you view that today?

Well, I think the loss to our society from what has now become an almost structurally unemployed group of Americans is tragic. It's shifting the conversation away from a country that's built on opportunity to now a variety of debates around equality. And if we want every American to have a really high standard of living, we need to get ourselves focused back on equality of opportunity. We need to create the incentives for people to take on difficult careers, to succeed in those careers, and to be rewarded for taking on those risks. And I worry that we're losing the important essence of what makes America America, which is the ability to pursue your dreams as people become disenfranchised and disillusioned.

And the rhetoric that comes from Washington that our country is no longer a fair place is really destructive to the young college graduates who face a very different workforce environment than any of us faced back when we graduated. We need to bring hope back to our country. That's really important.

You know, it's interesting, Ken, that you used that word, hope. A number of years ago, we were giving one of our National Educator Awards in Detroit to a principal who had achieved the largest reduction in teenage pregnancies in her area. And she was receiving an award, and she commented that she had found the best contraceptive for the young girls in Detroit. So one of the reporters raised their hand. She said, 'Would you mind telling us what that contraceptive is?' And she said, 'Hope.' Hope and opportunity. And to me, the American dream always meant a chance to succeed based on your ability, not your religion, not your race, not who your parents were, and not even if you went to Harvard. Both Ken and Steve had stops at Harvard along the way.

Steve, what do you think the American dream is today? What do you see the American dream today?

I'm a little obsolete. I see the American dream as the ability to achieve a better life. And I think elements of that are intact, but elements are really discouraged. We live in a, a world where, you know, it's global and it's technical and it needs skills. The chart that Mike put out in 1950, that 60% of workers were unskilled, really was because, among other factors, after World War II, the US had 75% of global GDP. Now, think about that, okay? We basically had to make everything. And we worked with the technology of the time, and we helped rebuild the world. Our GDP is now down to 23%, or 22, depending upon how you measure it. And so to get your share of that dream, you've got to be trained differently.

You've got the advantages of the internet, which is almost a no-cost kind of entry. It's pretty porous. You can do all kinds of things, but you have to basically be educated to take advantage of that. We're doing entrepreneurial things with our business. We're giving money away to facilitate college students coming up with business plans and other things. So we're doing it all over the country and we're getting a really good reception because you don't have to be a business student to be an entrepreneur. But I find that we've sort of lost our way from an objective, from a visualization point of view, from a positive perspective. It's sort of like, as a society, we've more or less somehow given up

in terms of achieving these things, and I think that starts at the top, and you have to have a positive vision or else people can't achieve things. So that, you know, I—I'm struggling a bit as to why we can't reclaim that. If we declare it's sort of half dead, you know, you have a lot of people who listen to that and—

Well, I think one thing we know, we all travel a great deal around the world, and the American dream is alive and well in most other countries. And as they perceive America today, they perceive it as a place they'd like to come to. Now, before we close on this topic of education and switch to another topic, a lot of people say things; not too many people have their actions speak louder than words. So, Ken, let's talk about a recent gift you gave to Harvard University. And when I saw it, well, I had called you and told you how magnificent and how proud I was of that gift you gave. What shocked me somewhat was it was the largest gift in the history of Harvard University. Talk to us a little bit about that gift and what you hope to achieve with that gift.

Well, I really do hope that I can change the lives of thousands of students over the course of my lifetime. And that children from all across our country, whether it's the inner city of Chicago, it's rural Arizona, can understand that Harvard's doors are open to them. And if they have the talents, Harvard has the means to make sure that they can have one of the best educations in our country and in the world. And I do believe it goes back to some principles that I hold very dear, which is this country is built on equality of opportunity. And to the extent that our greatest university's doors are open to all, we ensure that we as a nation embrace that fundamental belief in equality of opportunity in everything that we do.

So it's interesting, and we've done a lot of studies on early childhood education and the fact that you can pretty much identify at five or six with 70% accuracy of who's going to be successful. So Ken, before we leave Harvard and your gift here, I noticed that when you were at Harvard, you had a satellite dish, at least the folklore is, installed on the dorm roof so that you can get accurate, timely market data. How did you do that? And tell us a little bit about starting to invest when you were an undergrad.

Wow, this is a great question from Michael Milken. So first and full disclosure, Michael was like one of my absolute heroes when I was in college. So to be sitting here next to you is really, it's like a dream come true. I did start my career in finance in college. I managed a small partnership for friends, family, engaged in convertible bond arbitrage, a pretty esoteric strategy, and did have a satellite dish on the dorm, which was at the time not approved. The building supervisor I was very kind to, and he let me put the satellite on the roof, pulled a cable through the fourth floor window, down the hall, down an elevator chute that was unused, out into the second floor and into my room. Now, just so we all can sort of level the playing field here, Drexel was one of the first firms that I called to trade with.

And for what it's worth, I didn't get a very polite response to my phone call. The colleague at Drexel said, "Well, when you have $5 million, not $265,000 to trade with, give us a call back." In all seriousness, it was a great story of what we can do in our country because although the first person at Drexel I called really didn't take my call, the second person did, and the third person did, and the fourth person did. And not just at Drexel, but at Merrill Lynch, at Bear Stearns, all across the Street. There's one thing that Americans really believe in more than anywhere else in the world, which is the duty that we have to help the next generation. And individuals in their 40s and 50s, in the peak of their career, would take time out of their day to mentor me, to teach me, to show me the ropes of finance as a kid in college.

I mean, that's part of the reasons that I have such fond memories of Harvard, and frankly, such a strong view of Wall Street. Wall Street is portrayed in the press as crass and greedy and self-interested. I can tell you, the thousands of hours that people spent with me when I was in college and right out of college, it's a lie. Americans really care passionately about helping the next generation, and as much on Wall Street as anywhere else in life.

You teamed up with a former partner of mine, Frank Meyer. How did that happen?

That's a, wow. It's like memory lane today. So Frank was one of the best things that ever happened in my life. I was in college. I managed money mostly for a few wealthy individuals down in Palm Beach, the law firm I used there.

When you say the best thing, I'm assuming we're going to put Frank behind your children. You know, your children are probably better than...

We don't know who's watching this. I just want to make sure we have it said correctly.

So I interviewed, and I didn't know it was an interview, with a trading firm in Palm Beach. And they thought they couldn't afford my salary as a college graduate from Harvard. I would have worked for them for free. But they introduced me to Frank Meyer, who had been a business partner of yours. And Frank interviewed me when I was in college. And I went to work for Frank at Glenwood Partners. It was an unusual arrangement. I'd manage money for Mr. Meyer, his firm. If I did well, I could start my own business down the road. If things didn't go out, didn't work so well, I'd go back to business school. That was the understanding that we had. And, well, to Frank's credit, gave me a million dollars to trade.

It was a good first year with Frank, and I started Citadel about 15 months later with $4 million of equity capital. And today we have about $20 billion of assets under management. We employ about 1,250 people around the world and have generated for our investors over the years about $15 billion, give or take, in gains. So it's been a really good story, and Frank was instrumental in that. He had the faith that somebody out of college was worth backing, put his reputation on the line to help me raise money when I was young, and all's well that ends well. He and I are good friends to this day.

So did you ever go back to business school?

I did not. Not that I didn't seek out the possibility, but Harvard requires you to attend class. And so that sort of took business school off the possibility list.

You know, I just wanted to follow up on that for a moment if I could, Ken, because I think this is an important element. You know, the business schools in America and around the world have encouraged students to go out and work for two, four years, and then come back to business school. But the most successful, these most entrepreneurial, like Ken, can never go back. Because after two or four years, you've built your own company, you've started your own company. And so really, to capture them, you need to get them to kind of go straight through. And I think part of that entrepreneurism is lost by that 5% to 10% of the most successful students who aren't going to go back to school. Now, Steve, let's talk a little bit about yourself and this commitment to education also before we change topics.

So I was sitting there and across, I'm reading about Tsinghua University and that there's a $300 million commitment to Tsinghua, 350, and 45% for US students, 25% for China, 35% for the rest of the world. And it was somewhat modeled after the Rhodes Scholarship. What caused you to think of this idea? Why Tsinghua University? What do you hope to achieve from it?

Well, this was a real adventure. And it started with the president of Tsinghua soliciting me to do something with a student exchange. And that was because I was on the board of their business school after we went public in 2007, and the Chinese government bought 9.9% of our stock, which was the first time that their government had bought equities in a company outside of China since World War II. So we were somewhat of an unusual company. By the way, they didn't have a vote. It was non-voting stock. And they wanted to do something for their 100th anniversary, and would I give them some money for a student exchange? You know, sort of it was the middle of the financial crisis, so I had some other things on my mind as opposed to a student exchange.

Well, let's take a look for a moment, Steve, at that announcement, if we could run that video.

If you look at the Rhodes Scholarship program as an example of being able to attract people who already have been very successful as younger people, where the probability is they're going to be great stars in the future, not every one of them, but a high percentage of them, then if we can do that in relationship with China and defuse tensions, create a feedback loop from these 200 people a year, which will be 45% from the U.S., 20% from China, and 35% from the top 20 economies in the rest of the world. If we can get that group interfacing on a long-term basis, those will be 10,000 stars. And their impact in an Internet age, where with people my age, if you went to college, you kept two or three friends and everybody else went their own way.

In the Internet world, you can stay in touch with people really easily.

Look pretty good there, Steve.

Yeah, geez, that was good makeup. I don't know. But what's motivating me is, as I look at China growing, whether it's 7% or whatever it's really growing, and the Western world pretty much stalled out, dealing with populism and other kinds of problems, that you could have a scenario with a rising country like China and the rest of the Western world not creating jobs, that you're going to have anger—and you can see it happening now; it's part of our lives. And I think that anger at some point's going to be directed to the winners of the game. It goes to the 1%, it goes to the financial community, and that doesn't make people's lives better. And I think there's a really good chance that at some point in the next decade or two, that anger and frustration is going to be directed at China.

And China is a rising power, and also the way they operate, they don't like being attacked and they really respond. It's their nature. And if that happens, we could find ourselves in a very difficult situation with the two largest geopolitical forces in the world, in effect, in a very difficult situation. And so the reason I started the Schwarzman Scholars program is to develop this cohort of 10,000 stars, if you will, who go to China, who learn China, meet the leaders of the country, travel around a bit, get a mentor from the real world so they can—you know, somebody like Jack Ma, for example, I talked to said, 'Look, I'll take two or three students at Alibaba, and they can come and visit us and go to my home, and they'll know more of what China's like.'

So when they go back with this highly unusual experience—we're building our own college. It'll look like Harvard or Yale or Oxford or Cambridge. We'll have—half of the faculty will be from around the world, half will be Chinese. When people come back from this, they'll be able to go back to their own countries and interpret how the Chinese are thinking about something. If you happen to be American, we actually make a whole variety of mistakes that impact the rest of the world, and we get people really angry at us. You're not aware of it if you live here. And usually when I go to a dinner party, whether it's in Saudi Arabia or some other place, and we've done one of our 'what were we ever thinking' type things, and people are really getting angry, there's usually somebody

who in the middle of the meal says, 'You know what? I went to Georgetown, or I went to Yale, or I went here, and the Americans really didn't mean that. That's ridiculous. Don't get excited about them. It'll just go away.' And those ambassadors, if you will, of understanding—not whitewashing, understanding—really make a huge difference with the elites in other countries. So that's why I did it. And it's really fascinating. If any of you have ever started a major educational enterprise from scratch, think twice. This is not easy work in your spare time, particularly when it's cross-cultural and English is not the first language on the other side. And it's been a fascinating, fascinating experience.

We have, like, a terrific advisory board of a bunch of people who are speaking here today and 17 academics, including the former head of Oxford and all these Harvard professors and Yale and other things, and dealing with curriculum and other things, student life, and admissions. It's a real production to do this. We're looking for 350 million. We've got 275 raised. The thing keeps getting more expensive. Who knows? Maybe I'll get to 400. And the key is developing a great quality program. Well, one thing I'd say about education also, my wife and I send hundreds of kids to parochial schools just because they have great outcomes. I happen not to be Catholic, which may surprise you. This also isn't the Golden Globes.

The difference you can make in people's destiny, which is what Ken was talking about, you can change their lives. They can live in different places. They can place out of crime. They can be taxpayers. They can have better family lives. And it's really possible to do that. And one of the things of being guys like us, and many of the people in this audience, we're the lucky people who've made it through the system, that there's enormous pleasure, forget obligation, of giving back to the society and giving other people that kind of opportunity that people in this audience have had. And some of the letters you get are almost heartbreaking from parents where the kids get that opportunity because they know it's gonna change their outcomes, right?

When you can take a system where the public high school system is, you know, kids are graduating 50%, and you go to institutions like this—and they can be charter schools, they can be private schools, parochial schools—and they graduate 99%. And if you look at any of the numbers of what happens to kids who graduate, 99%, and they all go on to college, almost all of them, the outcomes are stunning, stunningly different.

So, Steve, let me follow up on just a couple things you said here. You know, I think the goodwill and the understanding that you've spoken about in your objectives here. I was having dinner in Jeddah a few years ago, and at the table, I would say 75% of the people over 50 went to college in the United States. And they were essentially U.S. ambassadors throughout Saudi Arabia that you spoke about. What was interesting is only 5% of their children were going to college in the United States, with many of the challenges after 9/11 that occurred here in the country. And we won't necessarily have the same ambassadors. I know when I was at Berkeley, a few years before Ken was born, one of the things that really bothered me, and I had sleepless nights over it, was looking at the Chinese Cultural Revolution and teaching all the children that the United States was the Great Satan,

and realizing that someday China will rise and maybe be the number one economic force from that standpoint, just thinking about all that hatred being taught and children being separated from their parents, and this re-education. But those children today are the leaders of China. And I think their knowledge and that experience will serve them well as ambassadors for the world, I think, because of that. I'd like to put up one slide, I think, that gets back to some of the things that Ken was talking about. And this relates really to the concept of social capital. So if I put up this little—my formula in 1965 from Berkeley—the largest asset class was human capital, the productivity of the people.

And one of the great professors, Nobel Prize winner Gary Becker, who Ken has provided significant support over the years, who won a Nobel Prize, stated that human capital, HC, in this formula was about 90% on the high side and 70-some-odd percent on the low side. But it's really the social capital thing that I think in many ways Ken has been talking about. I want to look back at that, SC, and these are different issues of social capital: rule of law, education, healthcare, property rights, protection for creditors, and other types of things. And when this recent poll in China came out where more than 60% of the people of wealth in China would prefer to leave, would prefer to live in the United States or live in Europe, it really is somewhat symbolic

of that social capital, I think, that Ken is talking about. And this enormous asset, it doesn't appear in financial dollars, but it attracts everyone from around the world to want to come here for a chance to succeed. So let me switch to a different topic, Ken, and let's talk a little bit about the role of the central bank. We all know that central banks, particularly in Western Europe and the United States, have substantially increased their balance sheets. And it's kind of unusual when you see the Treasury borrowing and discover that the Federal Reserve is buying a large percentage of whatever they're borrowing. And it has really had a major effect in markets. Obviously, interest rates are very low today, not just for government bonds, but all the way through the credit spectrum.

I know you have some pretty strong feelings on this issue, and maybe you'd like to share a few of them with the group today.

I think it's very important to understand that the U.S. Federal Reserve is in a very different position than the European Central Bank, both in terms of the mechanisms by which they can affect monetary policy and their role within their government hierarchy. The central bank of the United States is effectively under the control of Congress and the White House. An act of Congress approved by the President ends the Fed as we know it. And the Fed has a very clear mandate, which is price stability and employment. They view the policies that come out of Washington as exogenous to their job. They don't view that they can control what Congress does, what the President enacts as law or regulation. They view that their mandate is all they can address.

And they have embarked on a great experiment over the last couple of years to try to move the United States out of an incredible financial crisis. I think we could spend hours debating the pros and cons, the merits of what they've done. What is clear is we're moving away from, at this point in time, some of the radical experiments that were undertaken by the Fed. Quantitative easing is starting to wind down. The period of low interest rates that we've experienced for the last several years is expected to come to an end shortly. Now, one of the reasons that the Fed was so focused on quantitative easing is that in the United States, capital formation happens in the capital markets. Companies borrow about 80% of the money they borrow

as bonds and other debt issuance issued into the capital markets and not from the U.S. banking system. And Michael, you played a huge role in that transformation of creating the high-yield market and creating markets that were robust for corporate issuers away from the banking system. Now, the European Central Bank has an incredibly different role.

Let's take a look at the points Ken is making here. If we put up the slide just showing the change in the United States that Ken has addressed, looking at the blue line over the years as the percentage of non-investment-grade loans, non-investment-grade debt that is held by the banking system, considering 99% of all the companies are non-investment-grade, I think the point Ken was showing is how this evolved in the public and private markets financing the country.

And that's exactly right. And as the Federal Reserve buys Treasury bonds and agency mortgages, they encourage end investors to buy riskier assets like high-yield debt. Now, the Europeans have struggled with a different set of problems. Their market is dominated by the banking system. If we were to put up that slide for Europe—in fact, slide 13 looks very much like that—you can see that in Europe, the banks provide almost all the credit. It's the inverse of the United States. And so, the European Central Bank has used its LTRO facilities, where they lend money on an almost unlimited basis to banks, to encourage banks to continue to provide capital to their corporate base. The European Central Bank also views itself as having a very different role in the economic evolution of Europe than the Fed does in the United States.

The European Central Bank is created by treaty. All 17 countries must agree to change the mandate of the ECB if they so choose. And so, one of the things the ECB has been very involved in is trying to push for reform in Europe. They view themselves as having a seat at the table in advocating and forcing reform to take place, and in particular, reform of the labor markets. So, the ECB and the Fed have very different political heritages. The Fed views its role as being, in a sense, a bystander to Congress and the White House. The European Central Bank views itself as almost, in some sense, above or distant from those bodies in each of the respective countries and in a position to effect structural reform.

One of the things that you hear a lot from the American financial press is, why doesn't the ECB do more to try to ignite growth in Europe? It's because the issue in Europe is not about monetary policy; it's about fiscal policy, and it's about structural reform. And the ECB views that, if they provided too much easy money, countries like Italy and Spain and Greece would not have made the reforms that they have been making that have been successful in driving down the cost of labor and increasing productivity in peripheral Europe.

So, I think that's a brilliant analysis, Ken. And I think, as we take a look at what Ken's addressing here, the other fact in Europe is that the banks are very large relative to the size of their economies. So, the three largest banks in France are as large as the three largest banks in the United States, even though the economy of the United States might be seven times larger than France. In 2008, 2009, 2010, 2011, maybe even 2012, they didn't have the flexibility. But due to the price increase in their assets today, they have the ability to shrink. And I think if we just look at that slide on Europe that Ken was referring to, you can see the opportunities that exist for people in the financial marketplace here to work in Europe, to create the same opportunities here in Europe that occurred in the United States so that the countries and the economies are not dependent on the success of a few banks.

Those, if you look back to the Asian crisis, you'll see it started in Thailand. And in Thailand, there was five banks that really were providing the capital. If we take one look again, maybe, Steve, at China and look at how China is being financed today, it's a very unusual situation in that China is helping to finance the U.S. government, but the Chinese small and medium companies are coming to the United States to issue. And you can see here that the number of enterprises that make up small businesses is 80 percent in China, 88. Number of employees is approximately half. And if we put in median, it would make the vast majority. Yet bank loans are primarily to the large companies. And so the challenge is the US has had an advantage.

You can see that the UK was ahead of the rest of Europe with our financial system, I think, as Ken has spoken. And one of the great opportunities for growth in the world and creation of jobs lies in the ability to reproduce these financial systems in other countries around the world. Steve, let's go to a quote that really struck me the other day. And one of the areas I want to switch to is job creation. Ken and Steve, how do you create jobs? And at the end of the day, that formula I wrote down was really focused on prosperity, which really was how do we create jobs? And when I saw this quote from a farmer in China, it really struck home. He's 45 years old, and he commented that older people like us—now we're talking about 45.

I'm not sure, Steve, you and I would agree that 45 is old.

I can barely remember 45.

There's nothing to do anymore. Up in the mountains, we worked all the time. Here we just sit around and people play mahjong. And I think this is a challenge. If you look at the history of the United States, in 1800, 98 or so percent of the people worked on farms. By the time we moved to 1900, we only had 42% in 100 years. And those 42% fed not only the United States, but the US became an export market. And if we look at, say, by 2000, a century later, less than 2% of the people worked on farms. So modern agriculture, modern technology—one person in the United States feeds 340. So as we think about the large populations, and we go back to that quote of this 45-year-old farmer, having a meaning and a purpose in life, the potential is, where do jobs come from?

How do we create jobs? And at the end of the day, in any society, it's based on people feeling that they had a productive life from that standpoint. Steve, how would you address that issue? Where are the jobs going to come from in the future?

Well, geez, if you look at that displaced farmer, you realize that what's going on is that China's been doing in 40 years what your chart took 200 to do in the United States. And when you put that much change on, you're going to have massive dislocation, which is what's going on. To have job creation, basically, it just depends which country you're talking about. I mean, I happen to live here probably half of my time—half of it's on an airplane someplace. But you really have to de-bottleneck the system. You have to be able to have capital flow. You can't have just one sort of sad story after another. I had a friend who needed some coal for coking in a project, and he bought a coal mine in West Virginia, and by the time he finished, he realized it was going to take him 10 years to get the permits to do this.

So he just went and bought a coal mine in Colombia in South America. He was up and running in two years. And, you know, I'm not talking about the goodness or badness of environmental issues, and you need appropriate protections. But I think in many cases we've reached the point where we've hamstrung our ability to execute. And the number of stories in that is legion. And I think that you have to have a different approach. You have to have more education. You have to have better financial incentives. And you have to have the ability to make it happen. If you look at a similar kind of chart of the thing you put up in education, we used to be able, from a getting-into-business perspective and lack of friction, to just start businesses much quicker than we're doing now.

Every indicia is of a society that believes it can pay massive attention to everything, sacrificing the creation of things, whether it's new medicines, whether it's new businesses. And we have the innovation capability, but we've basically handicapped ourselves. And now we're reaping what we sowed. And I view this as a political issue, not a business issue. And if we want to continue handicapping ourselves, we'll get what we're engineering.

Well, let's step over to Ken, because I think, Ken, you've been very concerned about the regulatory environment from this standpoint. You've been concerned about the rising challenges that the companies are facing in formation and job creation in our country. You know, why don't you give us a few thoughts on that?

Well, I think that, you know, to sort of play off of where Steve left off, in America we have one great asset compared to the rest of the world: it is completely acceptable to fail. Right? You can graduate from college. You can take a job like I did. If I did well, I'd start my own business. If I did poorly, I'd go back to business school. Could you imagine that conversation in France? Japan? That is the American story. And that really is a huge driver of the prosperity that we enjoy in our country. It's okay to fail. And I won't speak of the failures that you've had in your life—I've had more than my fair share. If you don't—if you never fail, you're never actually trying to get ahead. It's just part of life.

One of the real important parts of where I'm going with this is that—and this is Michael Bloomberg; I owe Mayor Bloomberg this really important, powerful insight, I need to give him credit—small business is where the person who didn't go to Harvard, Yale, Berkeley, Stanford, University of Illinois, et cetera, et cetera, it's where they get their first break. When a small company has to hire somebody, they put up the help-wanted sign. They put the ad in the paper. They post on the internet. And they're just happy to have somebody who's quasi-qualified walk in the door and say, 'I will work here.' And that person, it may be their first job, and they're happy to have their first job, and the employer is happy to have their first employee.

Small companies are the great job creation engine of America, because once you've held that job for a couple of years, many, many more doors open up. IBM doesn't take risk in hiring people. Citadel doesn't take risk in hiring people. Small companies in America take risks in hiring people. And so when we have this debate, for example, in Washington about raising the minimum wage, I cringe. Raise your hand if you worked for minimum wage. I did when I was younger. Most of the hands in this room go up. And I can tell you what, most of us probably hated a lot of aspects of those jobs. We wish we were paid more. And we would never have changed that moment in our life in the scheme of things. I worked at the Franklin Mint Gallery.

I convinced people to buy the Star Trek chess sets that they really didn't need.

And I think Lynda and Stewart Resnick were very happy that you were working for them.

And I'm very grateful for that job. In college, I actually did a bit of research on income mobility in America. The single most important factor to escaping poverty is securing your first job. It doesn't matter if it's flipping hamburgers at McDonald's or working at the Franklin Mint Gallery, your first job in America is the start of the ladder to the top. And when we start to reduce the ability for companies to form, for companies to hire people, for companies to create jobs, we're actually taking away what we also value, which is the ability for everyone to get ahead.

One thing that is different about the American style of creating things and operating creative process from doing business all over the world is we're about the only culture that will make decisions with 80% of the information you need to make it. Almost every other culture does everything perfectly. They plan everything out because there's a huge penalty, as Ken was saying, huge penalty socially for failure. In the United States, you sort of get to where you think you know the answer, and you go. And if it starts not working out, you change it. You look and you say, 'OK, where am I now? That isn't quite working out right. I'm going to mid-course correct.' And you just keep doing that. You never change, even when you become grown-ups like these three of us.

It doesn't change. You keep innovating. You keep fine-tuning. It's what you have to do. A lot of other cultures, it just doesn't happen. And you look at it and you say, 'Well, why don't they just go ahead? It's done. I mean, come on. Let's go.' You know, it's tick and tie. Everything's got to be done. From a human capital thing that Mike was talking about, this is so unusual on a global basis. And virtually every American would probably be bored listening to me now because they go, 'Yeah, so what? I mean, who cares? Of course, that's what we do.' But what you don't know, unless you travel around a lot, is that hardly anybody else does it.

Well, there are a number of countries, I think, Ken and Steve, Singapore, many of the countries in Southeast Asia have energy today that you're seeing this. Your story is so important, Ken, and I think one of the great things in America is the chance to fail. And it takes me back to 1988. I'm in the Russian embassy in Washington, D.C. with Dr. Hammer, Gorbachev, and their minister of industry. And things are changing dramatically. And the first thing they wanted to do is they saw the success of Evian, and they wanted to do water. This was shortly after Chernobyl. And I told him, 'I don't know if the world is ready for Chernobyl water right now, even if it was coming from Siberia.' So about a half hour into the discussion, he says, 'Well, we want to do venture capital.'

So OK, venture capital. It sounds interesting. I said, well, do you know that maybe 70% of the companies to fail that do venture capital? And he says, well, do you put them in jail? Do you put them in jail when they fail? So I told him, I don't think you're quite ready for venture capital. So I think this culture you spoke about, and if we look at those elements that make up social capital, I think one of the other one is property rights. now there was a time in the world that almost eighty percent of all the oil wells drilled were drilled in the united states because you knew if you found it you had property rights and i think this is a very important point that you've driven and sometimes we don't remember enough that the chance to fail what i found was always like the higher person already failed a few times

because, therefore, it would have been easier if it happened on someone else's watch, from that standpoint. Ken, let's step back, and it's a year from now. What are two things that you think could occur to help propel the world's economy and propel the U.S. economy? If we look back, what events, if you could help initiate them and they happen, that you would look back and see as things that could drive the U.S. economy and the world economy?

So I think there's two dimensions to that question. One is what can you do right here, right now to reignite jobs growth? And there's what can you do longer term? I'm going to focus on the first part rather than the second, all right? One of the incredible transformations that we're all very aware of is the transformation in energy in the United States. In fact, across all of North America. North America has the opportunity to enjoy energy independence from the rest of the world yet again. And we look at the just tragic decision, for example, around the Keystone Pipeline, where we've deferred making a decision yet again. There's about 25,000 jobs at play here. And I understand the environmentalist aspirations that they think they're going to help reduce global warming.

Let's be clear, Canada's going to produce that oil. It's just a question of where it goes and how it gets there. But Canada's going to produce it. And I'd rather have that oil in our country and our continent than going abroad. It'll allow the United States over time to be very thoughtful about its military influence around the world. It'll allow us to locate manufacturing back in America. We can rebuild our petrochemical base. We can rebuild a variety of energy-intensive businesses that have been shuttering and leaving our country for the last 50 years. And those are really high-paying jobs across a wider range of employment skills. So I would really re-embrace our ability to achieve energy independence.

That's first and foremost. The second is I'd go back to where I was a few years ago. We're in this false sense of security that the U.S. budget's doing better. People are saying, well, Obama raised taxes on the rich, and look where the deficit is, and this is all working out really well. It's going to work out really well until about 2025, 2023, when the bills start really coming due for Social Security, Medicare, Medicaid, Obamacare. And investors, when they think about the next five or 10 years, and you need to think in terms of 10 years, 20 years, 30 years, when you're building a plant, people are skittish about where's the U.S. going to be in 2025, when the bills start to come due for the entitlement programs that we have in place today.

And the longer we wait to transform these entitlement programs, the greater the promises that we need to break look like. Now, perhaps the fact that I live in Illinois makes me acutely aware of these issues. In Illinois, we have well over $200 billion of unfunded pension plans. What does this mean from a practical perspective? Cook County, Illinois, lost more college graduates to the rest of the country than any other county in America. The best and brightest are fleeing Illinois on the back of ever-increasing taxes in a state that is obviously on the path towards financial disaster. And Illinois is a microcosm of how the world will view America over the years to come if we don't put our fiscal house in order.

Unemployment in Illinois is still roughly just shy of 9%. It's the second highest in the country if memory serves me right. We really do need to address our long-term fiscal issues to encourage short-term investment. I'll leave you with this thought. Corporate America has never sat on so much cash, and corporate America has been deploying its cash abroad. Since '08, we have created, the U.S. multinationals have created millions of jobs in Mexico, in Canada, across Asia, and yet we're still several million jobs below our 2008 peak employment in the United States by U.S. multinationals. We need to make investors domestically and abroad appreciate that America's the country of choice for capital.

Thank you, Ken. Steve, let's take a different approach. You spent a lot of time outside the United States. What are some of the things that could really drive the world's economy outside the United States? What are some events that you think we could look back a year from now and see?

Well, I think part of it is what happens in the United States, just because we're such a big percentage of world economy. So I think one thing that could happen is you could elect Republicans in midterms. And the reason why I think that would be a good idea—and no one of these political parties is really perfect by any means—but if you had a group, because I think it's unlikely the Democrats will do it, that would control the House and the Senate, so you could get some legislation on somebody's desk to move the country along, and Ken laid out a few of those issues, that if you could do that and get some kind of arrangement with the president, I think this would be like terrific. And it would be a shot heard around the world because the world actually watches this comedy or tragedy of us being able to do nothing.

So I think that's a big deal. Second thing is, a year from today, I think it's important that China stay on track. And if China starts losing its growth rate, that'll reverberate through the emerging markets. It'll affect other things. And that's something to be avoided. So those are my two. I just wanted to end because I think we're getting close to out of time, and just thank Mike for doing this whole presentation, conference. Nobody has to do this with their life. It's really an elective course. And from just wandering around, it's pretty neat to assemble all these people. And some of the panels are really interesting, and there are a lot of people to see. And it's sort of—this is the entrepreneurial spirit directed at societal problems.

But, you know, not everybody does this. In fact, you know, in terms of convening power, vision, there are very few people in the world who could actually want to do this and pull it off. So I guess they'd say in France, chapeau. Thank you. Thank you.

I think, one, I have a great team. It's an honor to work for all those people at the Milken Institute that helped make this. But I want to wrap up our session, and I thank you for that, Steve, really on two things. We have two individuals here who I would hope you understand are seriously figuring out what they can do to change things. A lot of people say what should happen, and I think Ken's actions at Harvard and Steve's actions to try to change things both in China and for the world are demonstrating their efforts and their concerns. Also, the realization that America is a symbol, even though it's only low 20% of the world's economy, it's still a symbol. It's a symbol for all the entrepreneurs that are here from 50 countries and leaders that, you know, there is great opportunity, there's great promise in the world,

and that there is that concept of the American Dream, the chance to succeed based on your ability and the chance to fail and get up again and try again and succeed. So thank you very much for joining us. Ken, thank you very much.