Transcript: Government as Shareholder: Proactive Competitive Strategy or Last Resort?

Opening Video: Government as Shareholder: Proactive Competitive Strategy or Last Resort?

Bob Pozen (00:00:00):

Donald Trump Jr. backed an investment fund, which bought shares at Vulcan. Three months later, Vulcan got huge funding from the Department of Defense. Was that on the economic merits, or was that because of a political connection?

Richard Falkenrath (00:00:15):

If you’re at the last resort, you’ve already screwed up and you have to break glass and take emergency measures to deal with it. It’s very expensive.

Yasheng Huang (00:00:21):

Government ownership leads to more failures than successes, and this is a sovereign reality that we need to pay attention to in order not to repeat the mistakes.

Laura Taylor-Kale (00:00:33):

This is not about giving the government a blank check. The real question here is, when a strategic industry is too important to lose, will we act early or only after the damage is done?

The Debate Begins

John Donvan (00:00:50):

This is Open to Debate. I’m John Donvan. Delighted to be on stage in New York at the headquarters of the Council on Foreign Relations, our continuing partner in a series of debates that examine the implications of decisions being made at the highest levels of government and power. One such set of decisions making a lot of news right now is the burgeoning pattern of the US government taking stock of private American companies, buying stock into those companies. It’s all over the headlines. We’re seeing it covered by the Wall Street Journal, Bloomberg, The Economist, Foreign Affairs, and many more. Companies that are being bought include the chipmaker Intel, an array of mining enterprises.

Now, this is not the first time, of course, that the government has bought pieces of private business. It has happened in wartime, it happened during the financial crisis where Uncle Sam ended up with stock in banks and General Motors and Chrysler and the insurance giant A- AIG. But those were always in response to an emergency, and by design they were temporary. Now, it’s more about national security and competition with China and technological supremacy, a contest that is built around microchips and rare earth minerals. So that’s different this time. Also different in the sense that this is not temporary, that the US government may be in the chip business and in the mining business indefinitely.

So what about this? What do we need to be aware of about these moves that perhaps is not so obvious until we hear the pros and the cons argued out? That’s what we intend to discover with the debaters on this stage who will hash it out around this precise question, government as shareholder, proactive competitive strategy or last resort? Let’s begin by meeting our debaters.

First, I want to welcome Bob Pozen. Uh, Bob, you are the former president at Fidelity Investments. You are currently at MIT Sloan School of Management and the Brookings Institution. You also worked with, uh, George W. Bush, Mitt Romney, you were at the SEC. Uh, you wrote a book called Extreme Productivity. Bob, I wanna welcome you to Open to Debate.

Bob Pozen (00:02:55):

Thank you.

John Donvan (00:03:00):

And my, my question for you, uh, with your book, Extreme Productivity, why does productivity need to be extreme?

Bob Pozen (00:03:05):

(laughs) Well, it’s a wordplay on extreme sports, and my editor thought the title would appeal to readers who are modestly productive and wanted to become much more productive, so...

John Donvan (00:03:18):

(laughs) And did it all work out?

Bob Pozen (00:03:20):

Uh, we sold a lot of copies-

John Donvan (00:03:22):

All right.

Bob Pozen (00:03:22):

... and it’s now translated into 12 languages, so something good happened.

John Donvan (00:03:27):

Congratulations to you for that. Your, your partner I wanna welcome is Yasheng Huang, who also is at MIT Sloan. Um, Yasheng, you taught at Harvard, you are a consultant at the World Bank. You have written 12 books. That’s a lot of books. And you’ve also debated with us before about the Tech Cold War with China. I remember that debate well, but I’m curious, will you be using anything you learned from that debate in your arguments today?

Yasheng Huang (00:03:49):

Yeah. One thing I think is the size of the action is no guarantee for the results of the action.

John Donvan (00:03:56):

Okay. Preview of the argument you’re gonna make. Thanks very much for, for that thought.

And, um, on the other side of the debate, I wanna welcome Laura Taylor-Kale. Laura, you are the first assistant secretary of defense of industrial base policy. You’ve also worked at the Department of Commerce. You’ve worked at the World Bank. You have your own advisory firm. You’re a senior fellow here at CFR. Welcome to the program.

Laura Taylor-Kale (00:04:16):

Thank you.

John Donvan (00:04:17):

Uh, you began your state department career, uh, as a diplomat in India and the Ivory Coast and Afghanistan. Which was the most challenging?

Laura Taylor-Kale (00:04:26):

Ooh. Um, I think I will say that Côte d’Ivoire was probably the most challenging, um, in part because they were going through a very tough democratic, um, transition, and seeing a country dealing with the fragility of its institutions really up close, really, um, uh, you know, brought to mind how, how, how challenging it can be to maintain a democracy.

John Donvan (00:04:54):

Interesting and powerful lessons.

Last, I wanna welcome Richard Falkenrath. I wanna welcome back Richard Falkenrath, because you are, this is your fourth debate with us? You’re a four-timer?

Richard Falkenrath (00:05:03):

Yep.

John Donvan (00:05:03):

That’s, that’s a lot of debates. Um, you have worked in counter-terrorism and the world’s largest hedge fund. Uh, you advised, uh, George W. Bush on Homeland Security. Uh, you’re now a senior fellow at CFR. You’re teaching a new course at Johns Hopkins about the American presidency. Just curious, which president do you feel is the most underrated?

Richard Falkenrath (00:05:22):

I think James Polk. Uh, Polk is an interesting president. He, he came into office, he said, “I have four things I’m gonna do,” and he did them. Said, “I’m gonna serve one term,” and he did, and then he left.

John Donvan (00:05:33):

And that all worked out for him.

Richard Falkenrath (00:05:34):

Yeah. Well, he died very quickly after. He’s the shortest post-presidency of any president, but other than that, he was a pretty good one.

John Donvan (00:05:40):

Wow. This would be a great trivia contest.

Laura Taylor-Kale (00:05:42):

(laughs)

John Donvan (00:05:44):

Well, thank you everybody for being here. I, I wanna point out to people who are listening and watching that our live audience here at the Council on Foreign Relations is playing a critical role tonight. We have asked for their opinion on this topic. We’ve asked them to vote to tell us where they stand on the question, and we’re gonna ask them again after the debate, and we will get those results in real time and see which side has changed the most minds tonight. So that makes this a competition, a friendly one. Uh, but it also means we have some rules, no personal attacks, stay on topic, listen to what the other side is actually saying. The debaters here are here to show that we can disagree with each other in good faith. So let’s do that and let’s get started.

We’re gonna go to our opening statements, and first up making an opening statement on the question that’s up before us, uh, government shareholder, proactive competitive strategy or last resort. Laura Taylor-Kale is arguing proactive competitive strategy. Laura, the floor is yours.

Laura Taylor-Kale (00:06:34):

Thank you.

Thank you, and welcome tonight. Uh, this debate is about more than just economics. It is about whether the United States will act with urgency to protect its security, its supply chains, and its future. Yes, the government has tools. We have loans, we have grants, we have purchase commitments, but sometimes these tools are just a bit too timid for the challenges that are ahead of us. When a critical industry needs hundreds of millions of dollars to survive and scale, taxpayers should not be expected to write the check and then surrender all influence over the outcome.

And national security waiting for government becomes the last resort. Becoming the, uh, being the last resort is really not prudent. Uh, in fact, it is failure delayed. By the time, uh, strategic weakness becomes a crisis, the cost is higher, the, the options are fewer, and our adversaries have moved far ahead. So, I understand the instinctive objection that we have to the government being the shareholder and company. America believes in markets. We believe private capital is usually smarter, faster, and more efficient than government, and most of the time that’s true. But national security is not most of the time. Markets do not automatically invest in resilience, markets do not automatically protect strategic capacity, and markets do not automatically move at the speed of geopolitical competition. When the return is uncertain, the timeline is long and the stakes are national, the market can hesitate precisely when the country cannot.

So let’s take a look at rare earth processing. China did not build dominance in that sector by accident and it’s not a niche issue. Rare earths are inside all of our advanced weapons systems, in medical technologies, and the devices that power our everyday life, including all these iPhones that we have to turn off to be here at the Council.

So when we allow a strategic dependency like that to deepen, we’re not choosing efficiency, we’re choosing exposure. That is, that is why I believe minority government stakes in private companies should be on the table, not as a default, not as ideology, not as a last resort, but as a strategic tool for strategic problems. If the, if public is in- investing massive sums to secure a critical industry, then the public deserves accountability, visibility, and a real seat at the table. Loans help, grants help, advanced purchase commitments help, but sometimes they’re not enough to build the market to anchor production and keep a vital capability alive, but equity can do that. It allows government to move earlier, act more decisively, and stay engaged long enough to make sure that the investment actually pays off.

So let me be clear, this is not about giving the government a blank check. It’s not an argument about favoritism or opacity or permanent government control. The real question here is, when a strategic industry is too important to lose, will we act early or only after the damage is done? In defense of national security, um, government can always- cannot always afford to be the lender of last resort. Sometimes it just has to be early and it needs to be organized. Thank you.

John Donvan (00:10:28):

Thank you.

Our next speaker is gonna be Bob Pozen. Bob is taking the opposite side saying that government as shareholder should be a last resort. Bob, the floor is yours.

Bob Pozen (00:10:39):

Thank you. So, my position is that the government should be a shareholder only as a last resort. In 2008, for example, the government had to take some shares in big banks in order to avoid an economic collapse. But not, that’s not the situation now. The government is buying company shares in an attempt to pick winners. The Trump administration has made at least 10 equity investments without an economic plan, without an exit strategy, without transparent procedures. In my view, this is discretionary state capitalism, discretionary state capitalism, which is bad for the economy and worse for our democracy.

Government bureaucrats cannot, do not have the skills necessary to pick economic winners. For example, the government made a big investment in a company that claimed to have a new approach to energy storage. Within three years, that company went bankrupt. And it’s especially difficult for the company to pick economic winners in industries with fast-changing technologies. Who in this room can predict with confidence the winners in the race for self-driving cars or AI bots?

Moreover, the process of government investing is highly problematic. The president of Intel met with Donald Trump, and Donald Trump demanded that the government get 10% of Intel shares. A few days later, he personally bought millions of dollars of In- Intel bonds. Now CEOs are reportedly afraid to meet with the president. What will be the next target of equity investment? Will it be software, hardware, biotech? And will the government insist on having a veto over company decisions, as it did in the US steel, uh, transaction?

My opponent invokes the term national security to justify equity ownership by the government, but national security has become a meaningless term. National security is the premise for the new tariffs on baby strollers and golf carts. Why? Because they contain aluminum and a little steel. Under that crazy logic, the president could deem any industry to be a national security threat.

John Donvan (00:13:50):

Bob, I’m sorry, your time is up.

Bob Pozen (00:13:51):

Okay.

John Donvan (00:13:52):

Thank you very much.

Our, our next speaker is swinging back to the side arguing for proactive competitive strategy in terms of government shareholders, Richard Falkenrath. Richard, the floor is yours.

Richard Falkenrath (00:14:05):

Thank you, John. Thank you.

Um, look, this, the, this is a complicated topic. This is not a topic that’s easy to distill to a simple conceptual presence, and it’s easily distracted by what the Trump administration is doing. So if this were a referendum on the sensibility of the Trump administration’s economic policies, we’ll just throw in the towel right now. Like, that’s not what this is about, right? What this is about, I mean, this is a, this is a higher-level proposition about the use of equity, which is an instrument o- of economic policy proactively rather than reactively at the very end in a crisis. Um, it’s been, it was started, it’s happened under many administrations, and yes, the president, the current president is using it, there’s 15 or 16 deals underway without a clear legislative framework, and there’s undoubtedly lots of problems in that.

That’s not what we’re here to defend. We’re here to ask a sort of different question, which is, given what the United States is up against these days and the challenges we face with AI and space and chips and all these other things, do we really wanna leave this instrument off the table as an instrument? I mean, think equity, first of all, sharehold- you hold shares for different reasons, right? There’s an economic reason. Most of you have a 401(k). It has stocks. You hold that because you’re getting an economic return for it. That’s not what we’re talking about here. There’s another reason you hold share. It’s for governance rights. If you’re in private equity or venture capital, you hold shares as a means to get access to the inside information going on in a company and to influence its decisions before they are made.

So then I ask you, how many of you are completely comfortable that the public right now has enough foreknowledge of what the most important companies in the world are doing with their products and the decisions? And that the public, through its elected officials, has an ability to influence those decisions in a way that makes sense for the national interest.

And now, if you’re comfortable with that, if you say, “Yeah, we’re good. We know enough and we’ll just take whatever decision they make in their boardroom without telling anyone who’s been elected,” uh, if you’re good with that, then you, you’re not, you’re, you’re, you’re not really in this debate. You’ve already made up your mind. It’s unnecessary. You’re not in favor of economic intervention on these things. But if you are thinking, “Well, maybe. Yeah, no, I’m not entirely comfortable with what Palantir is doing, or SpaceX is gonna do when it’s the largest IPO of all time, or what Anthropic is gonna do, and that I’m not entirely comfortable with that.” Then ask, “Okay, what instruments are at our disposal to do that?” And I’ll tell you, they’re not very good. They’re not fit to purpose. Regulation in these cases will not work. It comes after the decision’s already been made and the product’s been deployed and is litigated forever. Any trust will not work. We do not want to break these companies up for that. Um, tax incentives and loans are just moving in at the margins. These, these are companies with multi-trillion-dollar capitalizations.

And so you have to say by process of elimination, what instruments work? And by getting an equity stake in a company, you actually have the ability to get an inside track on what’s really happening there and pr- in principle, influence it. And the best example that we have is a steel company where there’s a golden share, uh, that permits US steel to continue operating, but it’s not the only example. So that’s, I, what I think is the essential conceptual premise of this is do you think we have enough influence over these vast companies? And if so, are you open to using this as one of your ec- uh, one piece of your economic toolkit?

John Donvan (00:17:24):

And rounding out the opening round, I wanna welcome to the stage, uh, Yasheng Huang, who is, uh, arguing on the side of last resort. The floor is yours.

Yasheng Huang (00:17:35):

Responding to China doesn’t mean that we have to copy China. During the Cold War, we didn’t copy central planning from USSR. During the height of competition with Japan, we didn’t copy the keiretsu organization of firms in Japan. And a accurate knowledge of China is very nec- is necessary for us to do it right, to answer this question right. You may be surprised to learn that the most competitive firms in China, such as DeepSeek, BYD, Alibaba, are not state-owned. In fact, there are massive state-owned failures in that country. One example is that the Chinese government created a search engine, and embarrassingly for that search engine today, it has a lower market share than Google, which is banned in China.

State ownership is just unbelievably inefficient. We shouldn’t confuse the size of the Chinese economy, the infrastructure, the highways with efficiency. If you want to triple the cost of capital to produce one unit of GDP, you copy China. If you want to create technologies that don’t translate into productivity, you also want to copy China. But I would argue these are not the results we desire. Worldwide, the evidence is super clear. Government ownership leads to more failures than successes, and this is a sovereign reality that we need to pay attention to in order to not to repeat the mistakes.

If a government in a democratic society makes wrong investment and ownership decisions, it damages the credibility and the legitimacy of the government. I believe that kind of damage has far s- more severe consequences on our political system, on our government system, because it undermines the credibility and the legitimacy of our government to do other things that are absolutely necessary for the government to do. Unlike China, we have very high standards for accountability, and the standards and credit, and, and if the credibility is damaged, and this entire economy builds on credibility, rather than on command and control by the government.

Government has and is needed to provide many valuable and important functions, such as mitigating against risks, regulation, social protection, and supporting basic research and providing basic public goods. But owning and running enterprises is not the best capability on the part of the government, and we should leave that to the private sector. And let me end-

John Donvan (00:20:46):

I’m sorry, I’m sorry. Hit time.

Yasheng Huang (00:20:48):

Yeah. Let me end by saying, I’m not a libertarian and I’m not opposed to government doing anything in the economy, but we should do it as a last resort. Thank you.

John Donvan (00:20:57):

Thank you very much.

All right, that concludes our opening round, and now we move into a round of more free-flowing conversation, discussion where the debaters can question one another, challenge one another, in fact, politely interrupt one another. Um, but we kick off with questions from me. In the beginning, as I’ve listened to the opening statements, I just want to say what I, I have heard the arguments shape up as. Uh, we’ve heard this, this, this, uh, side that’s arguing for, uh, government ownership as a strategic move, um, th- that this is really about national security. This is not like, uh, past situations in which the government has become involved in, uh, ownership that, um, uh, markets are, uh, everybody appreciates markets, but markets are just not good or incentivized, good out or incentivized to de- deliver security, that tools like grants and loans simply have not been enough, uh, that, uh, not to do this now would be failure delayed because the pace at which technology is moving.

They also make the case that shares, uh, share ownership gives the taxpayer, gives the government an insight into what these companies are doing. So there’s a little bit of a sense of distrust of the companies, the tech companies themselves in a sense that they need to have some kind of guidance from the inside and that traditional regulation, uh, is not a solution for that. The team on, on, on the other side arguing, we just heard the case made, uh, that China as an example of, um, uh, examples were cited of companies that, uh, have been state-controlled in China and have been done very, very poorly, um, that there have been severe consequences for those companies, um, and that, uh, in general that the government doesn’t have a very good track record, uh, with bureaucrats trying to pick winners, that they just don’t have the skills for that, that it’s, um, a- all in all it would be disc- discrediting, uh, to the, uh, United States, to the government, uh, to its, uh, economic system to start to go down this road.

So that’s what I heard from all of you talking about this, but I wanna, um, I wanna go to, uh, first to Laura. Um, your opponent making the case that going down this way would lose credibil- the U- United States would lose credibility. Can you respond to, to that argument that, uh, Yasheng just made?

Laura Taylor-Kale (00:23:01):

Sure. Thank you. Uh, I think it’s important to, to realize that it’s not that the United States is completely isolated in this area and that it’s the only country that’s, that’s facing these questions. It’s actually the entire world. Um, a recent World Bank report even showed us that, uh, the use of government minority stakes in companies is actually far more prevalent, um, around the world than we previ- pr- previously thought. Government has been taking an, uh, strong role in business, particularly in the defense sector since the beginning. This actually goes back to Alexander Hamilton and the report of manufacturers. So the idea that we just don’t do this and that, uh, you know, even for national security is just false, and that we-

John Donvan (00:23:52):

Let, let me take that very point, very sharply argued points to the other side.

Bob Pozen (00:23:56):

Well, the government has been involved with companies for- in different sorts of ways. It’s regulated them, it’s subsidized them, it’s given them tax credits, uh, it’s brought enforcement actions against them. Uh, there actually hasn’t been a huge amount of government share investments in companies historically in the United States. This is a new phase. And let me say this, I think the, our opponents misunderstand what are the rights of a shareholder. Think about this. The index funds hold over 30% of most publicly traded companies. Do they have access to inside information? Do they have ask- access to company’s secrets? The answer is no. And there’s a regulation, an SEC regulation, FD that says, “If a company gives an analyst a piece of material information, it must post it on its website in order to make sure that everybody has it.”

On the other hand, the government has lots of ways of getting information early other than share ownership. It can demand reports, it can meet with executives, it can serve subpoenas. So it doesn’t need share ownership. Share ownership doesn’t add anything to its ability to extract information early if that’s the critical point.

Richard Falkenrath (00:25:33):

When you define the purpose of this the way I did, uh, you would never say the government should get common stock. Like, that’s what we’re talking, that’s what our opponent was just talking about. Yeah, yeah, common stock, you get no information, you just have some economic benefits maybe. What we’re talking about here are particular kinds of rights that come from different classes of shares. And there’s plenty of those. There’s lots of them. There would be no VC industry if it weren’t possible for founders and equity investors to get access to the inner workings of those companies. A golden share is exactly this, and there’s lots of practice on it.

John Donvan (00:26:03):

Des- describe golden share for-

Richard Falkenrath (00:26:05):

A golden share i- it’s just a, it’s a term of phrase, it’s, it’s a governance share that essentially can trump others on particular issues. And so the only reason now that US steel is still, you know, capitalized the way it is is because the US government now has a golden share in US steel, which is otherwise owned by Nippon Steel.

And so there are many different ways to do this. I, I will readily acknowledge it would be far better if we had a legislative framework that governed this so it was clear rules of the road and we could see the categories of things for which the government should be involved. Completely agree. I think that’d be a great thing for Congress to work on, and we don’t really have that. But there’s plenty of different share classes that can accomplish this that aren’t just common stock.

Bob Pozen (00:26:41):

Can I respond to the golden share argument? So, the golden-

John Donvan (00:26:45):

You don’t need- you don’t need my permission.

Bob Pozen (00:26:46):

Yeah. The golden share, uh, gives the government an incredibly intrusive role in the company. Uh, it can make any decision and overturn any decision of the company. And just think, the government used its golden share already to stop a plant closing. That’s a pretty micro decision. So, the golden share is exactly what people worry about when they talk about government ownership-

Richard Falkenrath (00:27:13):

I- I... W- some people worry about that. There’s a lot more people who worry about Elon Musk having sole control over some of the most strategically important companies in the world. Sole control, being unfireable in the terms of his new IPO. But I’d say SpaceX might be one of the most strategically important companies that have ever existed on time, and nobody has a golden share or any influence on that except him on that. And so, what do you re- like, yes, there are problems with the government being intrusively involved in corporate decision making. It might not do layoffs, it might not do lots of other things. There’s some problems. The, but the test is not what is the perfect solution. It is what is a better solution than the status quo.

John Donvan (00:27:48):

Laura, your, your opponents are also making the case that, um, uh, it’s, it, putting aside the national security question, it’s a bad, it’s a bad economic and financial situation that, that, as they put it, “Government can’t pick winners.” Um, and Yasheng has gone through some examples of China, despite its reputation for being successful at state capitalism, of companies that have been disasters when, when the government got involved, that you, you, you’re, you’re saying the market can’t deliver security, they’re not incentivized, but they’re saying the market can’t figure out, uh, the government is not as good as the market at picking winners.

Laura Taylor-Kale (00:28:20):

I don’t think that this is a question about the government picking a winner. I think that this is a question of the government helping to shape the market in a way that, uh, benefits, uh, the national defense and national security in particular sectors. So, you know, the question, the, the example that I think, Bob, you mentioned of a company that went bust after receiving a loan from the government was Solyndra, and, uh, that’s sort of the case that’s always used to talk about, you know, the worst thing that can happen. But there have been plenty of other examples of the government intervening and putting in smaller amounts of capital grants, loans, things like that, and have the, the companies have not gone bust.

I think in the case of, that we’re talking about now where the government is take, is, is proposing to take, take shares is really also about the fact that we’re looking at larger sums of money. You know, we’re not talking about a million dollars or two million dollars in a grant that could be, uh, used to catalyze other, other capital. We’re, we’re talking about companies getting 400, 500 million, a billion dollars in, uh, in concessional loans or grants from the government, and it really needs to be a sense of accountability for it. I think the issues that the other side raised about how the government, um, acts, the bureaucrats, these can all be dealt with in terms of creating a real, uh, set of guardrails and having institutions in place to govern this. Right now we’re acting like it’s the Wild Wild West.

Yasheng Huang (00:29:54):

I, I think it’s very important to be precise about what we’re talking about. The debate in front of us is about the shareholding role of the government. It is not about a general role of the government. Government has been involved with the companies in terms of regulation, in terms of information disclosure, in, in, in terms of supporting the early grants and subsidies, but taking ownership share of companies, that is a substantially different step from all the ones that we are familiar with, and that has many, many complex implications down the road that we should be very careful about.

John Donvan (00:30:39):

So take us t- to one- for one implication that, that down the road we would need to be careful about?

Yasheng Huang (00:30:44):

Well, so government, for better or worse, is a much more complex entity as compared with a company. So Richard mentioned venture capital, and venture capital has a very straightforward objective function. We may criticize their objective function, but they are going in for profits and profits alone. Government, by its very nature, cannot focus just on one objective function. They have to take care of many, many other things. When you have such a complex objective goals for the government, it is very hard for them to judge the performance of the management on the basis of a single metric, right? Once you have multiple metrics, you kind of dilute the corporate nature and the managerial, managerial nature of the company.

Richard Falkenrath (00:31:37):

I, I readily agree this will be unusual, and we certainly don’t want it on all companies, we don’t want state-owned companies, we don’t want the Chinese economy, uh, but I’d say that thing that the government has a broader set of interests in a VC firm is a feature, not a bug. It’s actually a good thing. Like, we need someone in these, in these rooms, uh, affecting these companies because they are so impactful on American society and American national security. And we need some mechanism that it, and that to influence and shape that that isn’t just jawboning them, or calling them up, or regulating them after the fact, or trying to break them up in an antitrust case that never works, or taxing them, or whatever.

The thing is, I, I, our claim is not this is a perfect instrument that should be used on all companies all the time. It is for select strategic industries, as Laura explained, to be used as part of the toolkit for government to deal with the second-order effects of the power and impact and importance of these companies, which is extreme. And what we’re mostly saying is there should not be an ideological refusal to consider it proactively.

John Donvan (00:32:40):

So right, right now, Richard, would you like to see the US take a share in Starlink, Elon Musk-

Richard Falkenrath (00:32:45):

Well, Starlink is just a business line in this massive IPO-

John Donvan (00:32:49):

I’m sorry, this, this-

Richard Falkenrath (00:32:50):

So let me, let me phrase it a little bit differently. So I, I do think there are extensive public interest in Starlink, SpaceX, uh, the AI companies. Extensive. And I do think that we have to ask ourselves seriously, “What is our, what are our tools for influencing them long term?” And within that, and I, I’m not, I’m not proposing this sort of, this, just flippantly, is I do think we have to fl- look at the full range of possibilities. And, uh, some sort of governance rights, the likes of which the early-stage investors actually do have for the government, I think, is a reasonable thing to consider.

Bob Pozen (00:33:24):

Yeah. Can I respond to that? SpaceX is a government contractor. Almost all of its revenue comes from the government as a contractor. As a government contractor, the government can impose any conditions it wants, including all information rights, much more extensive than a shareholder. And they can impose those conditions before SpaceX gets the contract so that they can get the information as early as they want. So, buying 10% of SpaceX doesn’t give you any more rights for information-

Richard Falkenrath (00:34:00):

If- if I wanna buy-

Bob Pozen (00:34:00):

... than you would have as a government contractor, because you have total control over the contract.

Richard Falkenrath (00:34:07):

You, you don’t have total control.

Laura Taylor-Kale (00:34:08):

You don’t have total control.

Richard Falkenrath (00:34:09):

I mean, you look at what RTX, I mean, the, like, RTX is a ma- only exist because of government contracts, former Raytheon, and they’re doing share buybacks. Like, the government doesn’t want them to do share buybacks. So SpaceX, it is true, it is mostly from the government, they would have a hard time operating their business without government, but there are other companies that do not. Anthropic doesn’t get any revenue from the US government.

Bob Pozen (00:34:26):

If, if the, if the-

Richard Falkenrath (00:34:28):

(laughs)

Laura Taylor-Kale (00:34:28):

And I also... I also like to redirect this-

Bob Pozen (00:34:30):

Yeah.

Laura Taylor-Kale (00:34:30):

... because I think it’s easy to get focused on these, some of these big companies and big names. And really the issue that we’re, that I’m arguing and that we’re trying to really resolve is there are certain industries and areas that are so important for national defense and national security, they cross different lines. So again, I brought up the rare earths example. If we had, uh, been able to, say, 15 years ago to, uh, use equity authority to be able to help, you know, spur the market and be able to, to, to move things along much quickly and using larger infusions of cash, we probably wouldn’t be in the same place that we’re in right now in terms of our vulnerabilities with respect to rare earths. The United States used to be, uh, a number one exporter of rare earth, rare-earth magnets, and now we’re, we’re really trying to, we’re playing more than just, you know, catch-up. We’re trying to deal with the strategic vulnerability. So it’s not just about some of these-

Bob Pozen (00:35:25):

Can, can I respond to that?

Laura Taylor-Kale (00:35:26):

... big companies in space like an Anthropic.

Bob Pozen (00:35:27):

15, 15 years ago, we could have subsidized rare earth companies. We could have given them tax credits. We could have given them loans. We could have reduced environmental regulation so they would have an incentive to do that. We didn’t do any of that. So, it’s not that we didn’t have share ownership 15 years ago. We didn’t use any of the tools, and since we didn’t use any of the tools, we have a problem now, and that’s not because the government didn’t do some, didn’t have share ownership 15 years ago. It’s because we didn’t do a whole range of things, and those are the things that we need to do.

Laura Taylor-Kale (00:36:07):

And, and again, these tools are... What you’re mentioning, you’re, you’re listing out the range of tools that we have. That’s what we’re saying is that equity should be part of the set of tools in, in that toolkit that the government has to be able to intervene.

Yasheng Huang (00:36:18):

I think Bob is absolutely right on this issue just historically and empirically. 15 years ago, 20 years ago there was no intention for this country to keep the rare earth industry in America. It was considered incredibly dirty.

Laura Taylor-Kale (00:36:36):

Right.

Yasheng Huang (00:36:36):

It was considered as incredibly environmentally damaging. We were overjoyed 15 years ago that industry migrated to other countries. And so, I think that’s a totally different debate.

Richard Falkenrath (00:36:51):

It’s really, it’s really, I think the, the essence of the rare earth point is not a historical one, like why this happened. It’s going forward, how do we have patient capital to recreate an industry which we need strategically that wouldn’t, the market will not produce on its own, full stop. And that, in that, that’s a hard strategic problem that is our, lots of people’s fault for having, but is a hard real problem, it would be foolish to leave equity off the table as you try to solve that problem.

Yasheng Huang (00:37:15):

So, but you have to be prepared to argue that reversing history requires this particular step, right? So I think you have... Rather than using other instruments and tools that we have. And one unintended consequence of government taking ownership in this industry is that it may impede innovations in new materials that there are companies working on new materials now. In Japan, Japanese government is encouraging by supporting basic research on new materials by having government take ownership in this industry may im- may have this adverse implications for new players coming into this indust- to completely revolutionize this industry.

Laura Taylor-Kale (00:38:02):

Yasheng, we’re actually seeing the absolute opposite happen. If you look at a report that my colleague here at the Council on Foreign Relations put out, Heidi Crebo-Rediker, where she talks about, uh, innovation and leapfrogging and the critical minerals and rare earths issue, there’s actually a lot of innovation happening in the technology sector with, with res- with respect to this. And some of the actions that the government is taking with equity are in these, some of these innovative areas. It’s not just about looking at old, old, old ways of mining and old ways of doing things, but it’s actually innovating in the, it’s actually funding and looking at ways of, of, uh, innovating and building up new types of technologies and new ways of processing.

John Donvan (00:38:43):

Laura, one, one argument-

Laura Taylor-Kale (00:38:44):

So this is happening.

John Donvan (00:38:44):

... that your opponents did not put in front of you, but I know it’s part of this conversation would be the moral hazard, conflict of interest.

Laura Taylor-Kale (00:38:50):

Yeah.

John Donvan (00:38:50):

If the government is, is o- both owns and regulates an industry, that sounds like the beginning of a problem.

Laura Taylor-Kale (00:38:57):

I think that there’s, uh, conflict of interest is even beyond that. So you have, you know, a, a particular problem where questions about transparency, about political influence, about whether or not, um, family members are benefiting from it. Look, these are all institutional problems and issues that really Congress should be willing to step forward and, uh, create the set of guardrails that are necessary and that the American public should be demanding it as well. In order for this to work, and it’s ideal, Congress needs to do its job. We should have transparency and anti-corruption monitoring. There should be absolute statutes that really outline and, and push back on any conflicts of interest in these companies.

But moreover, uh, I referred to earlier World, World Bank reporting on, you know, the extent of government minority states around the world, one of the best practices that they note is having an independent agency that’s at arm’s length from political influence. That’s the actual opposite of what we have right now. So, if we look at the Federal Reserve and its resilience, even if it’s, uh, been under siege for a year or more, but it is withstanding the pressure, the political pressure that is being put on it, that’s actually the kind of steps that Congress needs to take in order to make this, uh, create the guardrails that are necessary for this to be successful.

John Donvan (00:40:22):

Bob, Bob, you said in your opening that the, while your opponents are citing national security, that national security has become meaningless.

Bob Pozen (00:40:28):

Correct.

John Donvan (00:40:29):

But as you hear them making their argument, do you think they’re talking about a, a, a, a range of issues that are meaningless?

Bob Pozen (00:40:35):

Well, I think there are things that are national security. The problem is, we have allowed the government, and many governments to do it, not just Republicans, to redefine national security. So it’s so elastic and so vague that we’re letting the government do anything.

John Donvan (00:40:53):

So your argument is that if... I didn’t mean to suppress your, uh-

Audience (00:40:57):

(laughs)

John Donvan (00:40:59):

So your argument is that the, uh, uh, a trend towards, uh, government ownership and, and juries could, could go way beyond the, the, the realm that they’re talking about?

Bob Pozen (00:41:08):

Right. And I do want to mention-

John Donvan (00:41:09):

It’s a slippery slope kind of thing.

Bob Pozen (00:41:10):

Yes, correct. I do want to mention one other big negative about the government taking share ownership.

John Donvan (00:41:15):

Yeah.

Bob Pozen (00:41:15):

And that is, there is something that’s called in the industry the government moat, and by that means once the government anoints some company through share ownership as the national champion or the leader, other companies don’t want to get into that line of business. They’re afraid. They, they can’t raise capital. They complain of that. And so, uh, it’s not just what happens to that company, it’s the impact on the competitive, by the competi- by the government moat on competition.

Richard Falkenrath (00:41:51):

We, we’re certainly not arguing there are no drawbacks to government, and we’re fam- both of us are familiar with the literature. We, you know, this is classic kind of from Hayek. I mean, like, it’s well known that government intervention in the economy is problematic, often creates dead weight loss, not the best way to get total factor productivity, like all that stuff, right? We’re just saying it’s not the only consideration, and that it, we should not, for ideological reasons essentially, refuse to consider this instrument when we’re trying to solve hard strategic problems, and the rare earth thing is a hard strategic problem and we need to shorten that as quickly as we, we can, and it would just, we’re just arguing that we understand there are drawbacks to this. There are always drawbacks.

John Donvan (00:42:30):

So both sides are, both sides are saying there are trade-offs in, in this choice that’s being made here today. And you’re, you, you, where you differ is where the bal- where it balances out.

Yasheng Huang (00:42:38):

I think Richard is right that we shouldn’t just use one criterion to frame the discussion. National security is important, and the government should defend the national security. The question is whether or not the national security automatically implies government ownership as the best option to defend the country’s national security.

Laura Taylor-Kale (00:43:02):

We’re not arguing that.

Richard Falkenrath (00:43:03):

Definitely not our question.

Yasheng Huang (00:43:03):

I would argue, I would argue, I would argue-

Laura Taylor-Kale (00:43:03):

That’s not what we’re saying.

Richard Falkenrath (00:43:03):

We’re not, we’re not saying it is.

Yasheng Huang (00:43:06):

... definitely some- one of the biggest threats to our national security is social media, right? So, foreign influencers using social media to interfere with the election to create fake news, does that imply that the government should take ownership of the social media? So, I think we should have some discipline on the boundary conditions with which that we use to judge the government’s action rather than just throwing out a general broad argument to support anything that you advocate.

John Donvan (00:43:37):

I don’t think I’ve heard your opponent say that, that this is the solution that you...

Richard Falkenrath (00:43:41):

Yeah.

Laura Taylor-Kale (00:43:41):

Yeah.

John Donvan (00:43:42):

Am I correct that your position is a little bit more nuanced than that?

Richard Falkenrath (00:43:44):

Yeah. No, we’re, it, it certainly... And we, and we, by the way, I agree with, with Bob’s point that national security as a general excuse for lots of broad economic policies has been overused, and I hope we’re not doing that here tonight, and we are not saying that we should, we should have controlling interest in, frankly, any company. We’re talking about minority stakes with special rights.

John Donvan (00:44:04):

Okay, I’d like to go to some questions. Sir, uh, I’m looking right at you. If you could stand up, the person with the mic will find you. Thanks.

David Braunschvig (00:44:11):

Thank you. I’m David Braunschvig, Institute for Computational Hermeneutics. Uh-

John Donvan (00:44:15):

Could, could you hold your mic a little bit higher? Thanks.

David Braunschvig (00:44:17):

Yes.

John Donvan (00:44:18):

Thanks.

David Braunschvig (00:44:19):

Um, we are at the Council on Foreign Relations. I have heard, uh, examples cited regarding China, but that’s about it. And, um, I also believe, Laura Taylor, Taylor-Kale, you’ve mentioned that, uh, there are other countries in the world where government intervention is, uh, prevalent. My question is, how effective has been government intervention in shareholding elsewhere, particularly in Europe, okay? The differential of g- growth between Europe and America over the last 15 years has been huge.

John Donvan (00:45:06):

I’m gonna, I’m gonna stop-

David Braunschvig (00:45:06):

And in Europe you have-

John Donvan (00:45:08):

I’m gonna stop you there because you’re now making your argument, and I, like, you had a question-

David Braunschvig (00:45:12):

My question, my question is very simple.

John Donvan (00:45:14):

Yeah. Where, where-

David Braunschvig (00:45:14):

How do you assess the efficiency and effectiveness of government intervention elsewhere, in Europe in particular?

Laura Taylor-Kale (00:45:21):

I think it’s a great question. Uh, so how effective, uh, government interventions, particularly in equity it’s been around the world, really depends on the institutional structures that are in place. Um, in places where there’s weak institutions where the, for instance, the treasury department or the line ministries are the ones that are making the deals, that’s where you see the most inefficiencies. Um, in places where you have much more independence, uh, independent agencies that are in charge of this, that’s where it actually works better. And I think that this is where we in the United States need to be thinking about this particular moment that we’re in, where the administration is taking actions and doing so in an environment where our institutions are particularly weaker, where Congress hasn’t actually created any set of, uh, ground rules around, around equity.

Bob Pozen (00:46:15):

I, I think the evidence is clear. Look at the European telecom companies. They were owned by the government for years and they’ve been highly inefficient, ver- very low levels of innovation. Compare that to the telecoms companies in the US, it’s not even a close call.

And second of all, when you have lots of government intervention, uh, our colleagues can say, uh, they don’t have strong guardrails. Well, let’s look at Hungary, let’s look at, uh, Venezuela, let’s look at lots of places where they don’t have good guardrails. The, the reality is, when the government has ownership, it’s very vulnerable to political manipulation and cronyism. Yes, we can provide guardrails, but it’s not easy.

Laura Taylor-Kale (00:47:04):

I don’t disagree with that, but I also think what you’re talking about are places where the government has almost total ownership or majority ownership. We’re not talking about that. We’re not even saying that that should be the case, nor that, that it should be the case in most industries. We’re talking about specific sectors where there are real implications for national defense and the government having minority stakes in it.

Yasheng Huang (00:47:26):

Just, just on performance, I think the evidence is very super clear. Uh, the best-run state-owned enterprise is probably Temasek in Singapore, and this is run by a government that is incredibly meritocratic, that is focused on economic performance and GDP 100%. But if you look at their investment portfolio, it is overwhelmingly weighted toward less risky projects and late projects, extremely conservative investment portfolio, and their performance and the returns of the capital are relatively modest as compared with the private counterparts. So the, the state ownership, the evidence is very, very clear. I don’t think losing money is good for so- for, for national security, right? The US government has built up the most powerful military machinery in the world with this incredibly engineered combination of public support in terms of basic research, in terms of defense contracts, and with the initiatives-

John Donvan (00:48:31):

But is, is losing money inevitable? I mean, if we look back at the, uh, the TARP rescue for 2008, those were, those turned out to be profitable for, for the US government.

Yasheng Huang (00:48:40):

Yeah, but those are last-resort interventions, right?

John Donvan (00:48:43):

Mm-hmm. Okay.

Yasheng Huang (00:48:44):

And, and I think it’s very important to put that clearly, uh, the, the financial ha- uh- presence-

John Donvan (00:48:51):

Those were emer- emergency-

Yasheng Huang (00:48:53):

That’s our position. Yeah.

Laura Taylor-Kale (00:48:54):

They were la- they were last-resort in a crisis where t-

Yasheng Huang (00:48:56):

It’s a cr- induced by a crisis.

Laura Taylor-Kale (00:48:57):

... where the American people were the ones that were suffering. There were millions of people that lost their homes.

Yasheng Huang (00:49:01):

Absolutely.

Laura Taylor-Kale (00:49:02):

Those people didn’t get a return, uh, because of that. So, we’re talking about, what we’re talking about here is protecting public interest here by using equity stakes, minority stakes, in a way that is not doing it at the last minute when there’s an absolute crisis.

Yasheng Huang (00:49:18):

Yeah. So, Laura, I agree with you that-

Bob Pozen (00:49:19):

Okay, here-

Yasheng Huang (00:49:20):

... the, the 2008 bailout was badly-structured. I agree with you. Yeah.

John Donvan (00:49:25):

All right. I’m, I’m, I’m a- what I’m pointing to asking folks to stand up is so the mic can get to you quickly. Thanks.

Ginger (00:49:30):

Hi, I’m Ginger. I’m a term member here at CFR. Um, I wanna broaden our conversation on national security to a time in recent memory when our society felt very much under threat and our way of life was extremely altered, which is, of course, the pandemic. And I’m curious if the side arguing for believes that we would have had better outcomes had the government had a proactive equity stake in pharmaceutical companies or, uh, the vaccine companies and if you think that we would be safer going forward if we had learned that lesson and maintained, uh, some sort of controlling interest going forward.

Richard Falkenrath (00:50:09):

Uh, um, this is a superb question. Uh, and I think honestly, the answer’s probably not. Uh, and the reason for that is the, the, the operation to produce these vaccines to COVID was extraordinary. By historical standards, uh, the vaccine industry has never seen anything like it. I mean, they, they went from a, a disease emerging in the world to a shot in people’s arm in like a year or something. Like, it’d never even been close to that. So, it’d be foolish for anyone to say that any particular change to that ecosystem would have done it faster ‘cause it’s never been done that fast before ever.

Laura Taylor-Kale (00:50:38):

But luckily the government actually had the tools to be able to, to, to intervene. And so, Operation Warp Speed, which helped, um, fund the, the, the vaccine, was one of the most effective uses of some of these, uh, equity, some of these authority tools that were, that were, that we’ve been talking about.

Yasheng Huang (00:50:56):

I think the pandemic case also illustrates another dynamic that, that is almost not known, uh, outside of, uh, outside of a few people. The Trump administration imposed tariffs on Chinese products. As a result, before the pandemic, hospitals under-stocked medical equipment and medical supplies. Of course, the pandemic didn’t happen yet, but they were caught extremely unprepared because of the action of the Trump administration to reduce the flow of the trade from China. So on national security ground, they imposed trade barriers. That action undermined the security of American society.

John Donvan (00:51:42):

You said they, they weren’t on... T- those tariffs are imposed on national security, right?

Yasheng Huang (00:51:46):

Yeah. So there’s a paper by the researchers at the Peterson Institute of Econo- International Economics that shows that hospitals under-stockpiled and th- therefore they were under-prepared even for the normal time, let alone the pandemic.

Richard Falkenrath (00:51:59):

Uh, the, the, the useful thing about this question for our, our argument, uh, is to show that we’re not claiming it for everything. Like, we’re not saying it should be... Every national problem comes along, every important company we should go grab a share, that we should have... We’re being very, very specific. We’re not making these big sweeping claims about state ownership, and we understand there are drawbacks to it.

John Donvan (00:52:19):

But you’re, but you’re also not saying it’s a last resort. You’re saying-

Richard Falkenrath (00:52:21):

We are not. We think that it should be-

John Donvan (00:52:22):

... do it now.

Richard Falkenrath (00:52:23):

... it should be proactive. It should be in the toolbox when you get to the table to figure out what to do with a serious national problem.

John Donvan (00:52:29):

Sir. Uh, mic’s coming to the front row, please.

Philip Ellison (00:52:32):

Philip Ellison. Um, when you talk about being proactive, and we’re talking also about spending taxpayer money, money which doesn’t exist because we’ve got a $38 billion, uh, deficit right now. Now, s- w- what about the question of governance? What about with things like social security and Medicare going bust? What if they were the, if those entities, those, those administrations were in, in fact the beneficiaries of any ownership of, of, of public companies? In other words, that if, if the, if any, uh, you know, in- profit, anything that would come to the government would go really to fund those things, which basically are, we’re, we’re, we’re in danger of, talk about national security, we’ve got a, a huge population that’s, that’s actually very exposed.

Richard Falkenrath (00:53:18):

It, it’s, it’s an interesting question, and then the current administration is talking about it. They seem to be very interested in the gain, the return on these investments when they do it for this purpose. It doesn’t move the needle. The number’s actually 38 trillion, not 38 billion.

Philip Ellison (00:53:31):

Right.

Richard Falkenrath (00:53:31):

So it doesn’t, it doesn’t move the needle, right? You didn’t have to have so much to, to actually do it. But it d- it is interesting to ask, like all the money we spent on the defense contractors, if we’d converted that to equity stakes and held onto them, the enterprise value would then be on the US government balance sheet. I’m not necessarily saying to do that, but I think you put an interesting idea on the table, which is thought of over the long term, are these things actually national assets in an economic sense? That was not the core of our argument. I, I want to be clear, but I’m glad that you raised it and put it on the table.

Yasheng Huang (00:53:59):

So when we say proactive, one implication is that the government should act early, should invest early.

John Donvan (00:54:07):

That’s what you’re saying, right?

Yasheng Huang (00:54:07):

So let’s, let’s look at the track record of early investors, and these are private sector investors, right? The VC industry is famous for having nine or 10 out of the 10 projects going bust, but one earning huge amount of, uh, uh, uh, profits to cover the losses of these other, uh, investment project. I don’t think a government should do that. Government should not play Russian roulette, because the money with the government is supposed to go to the people who can least afford the, the security, should go to the education, should go to the provision of the public goods. You don’t want to play with that kind of high variance when the public interests are involved.

Bob Pozen (00:54:57):

If, if you wanted to-

Laura Taylor-Kale (00:54:58):

So, I want, I want to, I want to respond to that.

Bob Pozen (00:55:00):

If you wanted to-

Laura Taylor-Kale (00:55:01):

I want to respond to that.

Bob Pozen (00:55:02):

... have government investment that helped social security, which I was very involved with, you would have the government invest in a broad-based diversified index fund. You wouldn’t have the government into venture capital. That’s the way various people who thought about this realized would be a much better deal for the government, much better return, much more diversified, not the sort of crazy risk that venture capital takes.

Laura Taylor-Kale (00:55:29):

I, I wanted to go back to the point that Yasheng raised about, um, venture capital and sort of the risks that are taken, um, and that the government is not in the right, the right per- the right entity to really take all those kinds of risks. And I don’t, I think that it’s important to note that for the purposes of a government having minority stakes in companies, I don’t think this should be about the financial gain and financial return. The money should eventually go back into the treasury, but, uh, we’re also talking about, you know, you don’t know how long it will take. It’ll take, may take, uh, you know, a couple of months as in the case, uh, supposedly with L3Harris, or it could take months, or it could take years, or it could take, you know, decades even.

But I think that, uh, you know, the argument that the government shouldn’t take any bets at all is one that just doesn’t make, it doesn’t actually make sense in terms of what we already do. We have a whole innovation ecosystem that relies on, uh, grants from small business administration, from DARPA, from ARPA-E. These are small bets that the government is making in terms of grants or loans into these companies without the expectation of any financial return. What I’m saying is that there are cases where now where the government has, is putting in hundreds of millions of dollars and even billions of dollars into one or two companies or into this particular sector. There should be more accountability there that the public has in these cases.

Yasheng Huang (00:57:04):

I, I think the money can only go back to the treasury if there is money.

Laura Taylor-Kale (00:57:09):

True.

Yasheng Huang (00:57:10):

And so, so that’s the, that’s the fundamental challenge. On average you lose money, then making money in these early invest- oh, on average you make money, but, but at any moment of time you lose money. That’s not the best way to manage public money.

John Donvan (00:57:32):

Okay. I’m gonna go to another question. Sir. Um, oh, somebody jumped up behind you, the person I was calling, but that’s fine. Go for it.

John Webber (00:57:38):

Thanks. I’m John Webber. Um, so the, using the rare earth, uh, example, it sounds like, uh, proponents argue that, uh, the government should be an investor of last resort, effectively investing in adverse, adversely selecting investments and, and- that won’t make money, so... And doesn’t- by doing that, it sounds like you’re advocating just making bad bets. Is that, is that the case?

Richard Falkenrath (00:58:02):

No. I mean, uh, who, who, you definitely don’t win a debate by just making arguments that are wrong. You, you, um, with- the rare earth thing is, is, is interest- it’s a very specific case. It’s something that the economy and national security industry really needs that we don’t currently have for lots of historical factors that, frankly, probably no one in this room had anything to do with. That’s just a fact. And the, the policy question there is, what is the shortest distance between two points? What is the ability to get from where we are today, which is problematic, to a point in the future where we have a degree of, of independence on these supplies? And I think, uh, it is the case that the Trump administration is making lots of equity investments in mining companies for this.

I, I, we think that’s, uh, reasonable that they’d be doing that, and creative. We haven’t, I personally haven’t studied them, maybe Heidi has or, or Laura has on it. I think our main point is that we should not, for ideological reasons, leave it off. The, the toolkit, we should think about this as an option and as one mechanism to have a say in the corporate decision making, maybe in this case, in fact, to win a fa- to, to identify the winner, say, “This is gonna succeed one way or another,” and improvise on capital.

Bob Pozen (00:59:10):

Yeah. We’re not taking it off the table. We’re saying it should be a last resort.

Richard Falkenrath (00:59:13):

Right, but that would not be today.

Bob Pozen (00:59:13):

And second of all-

Richard Falkenrath (00:59:13):

That would not be today.

Bob Pozen (00:59:14):

We’re not down- we’re not downplaying it for ideological reasons, we’re downplaying it because the practical problems involved, the risk-taking involved, the vulnerability to cronyism, it’s got all sorts of problems. This isn’t an ideological position, this is a practical position.

Richard Falkenrath (00:59:34):

I think, uh, when you think of, it is practical. Also, practically, what is the shortest way to get out of the predicament we’re in today with rare earths? And I think it would just be, there is a problem with cronyism, sure. It would be foolish to say that we’re not gonna think about equity just ‘cause we’re, we’ve read a bunch of books and studies and gone to class and economic departments that showed us about all the downturns or the downside effects of that.

John Donvan (00:59:53):

We have time for one more question. Yeah. If you could stand please? Thanks.

Carissa (00:59:57):

Uh, with respect to Dr. Taylor-Kale, uh, and your colleague, the rare earths situation... I’m sorry, I didn’t say my name. My name is Carissa. The rare earth situation is interesting because arguably we’re, we’re using equity as a last resort in that situation. We’re in a very dire situation and we have no way out. So, are there other industries where the government has or should take equity stakes that are not rare earths, that are not a last resort where it’s either been effective, or you think it’s-

John Donvan (01:00:25):

Well, I think Richard, I think Richard addressed, um, SpaceX and the, um, the AI companies.

Carissa (01:00:30):

But we don’t have equity stakes in those.

Richard Falkenrath (01:00:32):

We’re not talk- or defending the Trump administration. And we’re talking about a policy instrument and whether it should be in the toolkit for practitioners of public policy.

John Donvan (01:00:40):

Thanks. I’ll try one more, sir, in the back there. Second to last row.

Zach Weiss (01:00:44):

Um, I actually wanna reiterate this gentleman’s question. You still haven’t given any hard evidence of a, Zach Weiss reporter at Eurasia Group, I should say, of an example of a company or, or the government that has bought a stake in a company that it didn’t previously own and had some success. It doesn’t mean monetary success, but been, it’s been beneficial for national security. So, if you have any hard examples, I’m willing to adhere to your argument.

Laura Taylor-Kale (01:01:12):

Yeah.

Richard Falkenrath (01:01:12):

Well, I, I think we’ve got them. I mean, on, on this one-

Laura Taylor-Kale (01:01:15):

I knew you’re going with that one.

Richard Falkenrath (01:01:16):

Yeah. I mean, uranium enrichment, we wouldn’t have, we wouldn’t have nuclear energy if it weren’t for the government ownership of that industry.

Yasheng Huang (01:01:20):

Commonwealth Fusion? I mean, that’s a private-

Richard Falkenrath (01:01:24):

Fusion uses hydrogen. Enrichment is for uranium.

John Donvan (01:01:27):

I want to, I, I feel oxygen draining. I wanna take one more question.

Yasheng Huang (01:01:29):

No, no. There- you’re, you’re talking about m- military industry.

Audience (01:01:29):

(laughs).

John Donvan (01:01:34):

I... Come in with a fantastic final question.

Michelle (01:01:36):

I hope it’s fantastic.

John Donvan (01:01:37):

I do too.

Michelle (01:01:37):

Hi. Michelle Newlab. Um, so my last question is, what is the optimal institutional design for government as a shareholder?

John Donvan (01:01:44):

Okay.

Michelle (01:01:46):

Who should hold the authority?

John Donvan (01:01:48):

Can, can they, can I just go with that question? It’s perfectly phrased. You don’t, probably don’t need the rest.

Michelle (01:01:50):

Oh, great. I think they all know the, the key to-

Richard Falkenrath (01:01:51):

You are.

Laura Taylor-Kale (01:01:51):

Yeah, sure.

Richard Falkenrath (01:01:51):

You go.

Laura Taylor-Kale (01:01:53):

Okay. Uh, so optimal institutional design. Um, a independent agency that’s at arm’s length, um, not controlled by the White House. Uh, the head of the agency would be appointed by a board, not by, um, the political leadership. Uh, there would be a set of legal framework that included ground rules around transparency and accountability. I think our legislative branch would need to have a, um, um, a accountable committee right now. So, for instance, when I was in the defense department, I interacted with four or five different committees on the various industrial policy tools that we have. We’d have banking committee, financial services committee, armed services committees, c- uh, commerce committee, intelligence committees, the appropriators. Uh, that kind of, uh, muddled framework really leaves opportunities for things to get lost, and I think you’re starting to see that in this, in this current environment.

John Donvan (01:02:57):

Just a comment from the other side to finish this round, the, the, your opponent listed some guardrails. What do you think?

Yasheng Huang (01:03:02):

I, I think what Laura just described is a perfect system that it is difficult to imagine. I mean, talking about being realistic, right? So we’re trying to deal with a national security issue, we need to act quickly, and yet, the other side argues that we need to create this incredibly perfect system before we can do this correctly. So, just on that ground (laughs), I just don’t think this is really a realistic policy instrument. We have to rely on what we have. What we have is a system that supports basic research, and I, I believe that the government should do a little bit more in terms of prototyping. Because a lot of the technologies and knowledge coming from university labs have difficulties in commercialization in product development. Government should subsidize that part of the production process as well and our government doesn’t, doesn’t do that. So, there are, there are plenty of reasons to argue that the government should do more, but taking equity share proactively is not first option that, that, that belief that, that has, uh-

John Donvan (01:04:20):

I’m going to jump in because we’re going to go to closing statements and it sounds like you were just starting to make yours. So, that’s a wrap on our question-and-answer section. Uh, I want to thank everybody for their questions. They were great. Uh, and I’m sorry for all the folks that I didn’t get to, but we’re going to be lingering afterwards, so please feel free to, uh, chat with the debaters.

Now we move on to our final round, and in our final round our opponents each have 90 seconds to make one more time the case for the side that they are arguing on. Uh, Laura, you are up first. The floor is yours to make the case that, government as shareholder is a proactive competitive strategy.

Laura Taylor-Kale (01:04:50):

Absolutely. Thank you. First, I want to thank you all for, uh, participating in this debate and really listening and being part of the potential solutions. Our opponents are saying that the government is just, it’s too complicated for the government to be able to do this, that we don’t have anything in place that’s even possible. The truth is that we’ve already have insti- institutions that are in place that we could, all we need to do is elevate them and do a little bit better with them. So, for instance, using the Defense Production Act in a way that is more targeted and that also includes equity and, and some of the institutions around it.

At the heart of this debate really is a simple question. When markets move too slowly to protect the nation, should the government have the ability to act? And we’ve already said that it’s okay for the government to have loans, it’s okay for the government to have grants, it’s okay for the government to have purchase commitments and all these other solutions, and what we’re saying is, equity should be another part, another piece of that toolkit for the government to act when markets are moving too slowly. Thank you.

John Donvan (01:06:00):

Thank you very much.

Bob Pozen, the floor is yours for your closing statement, please.

Bob Pozen (01:06:10):

Thank you. So, I think we all agree that if the private market is moving too slowly, the government ought to come in and move them more quickly. The question that we’re saying is, should the government take share ownership to do that? And we misunderstand that being a minority shareholder gives you access to inside information. It doesn’t. On the other hand, the government has lots of tools at its disposal to get more information, uh, and especially for a government contractor like SpaceX. So there’s no need for government ownership, uh, in order to get that information. There’s no need for government ownership in order to incentivize that company to go into the area.

On the other hand, think about all the negatives that flow from government ownership. Other companies are dissuaded from going into the area. There is a lot of potential for cronyism. Donald Trump Jr., uh, backed an investment fund which bought, uh, shares at a company called Vulcan. Three months later Vulcan got huge funding from the Department of Defense and the Department of Commerce. Was that on the economic merits or was that because of a political connection? We’ll never know. That’s the problem when the government is making these big investments. So I submit that government ownership should be a last resort, not for ideological reasons, but for practical reasons, that we can do these things without government ownership in most cases and we can avoid the lots of, uh, negatives that are associated with government ownership.

John Donvan (01:08:06):

Thank you.

Bob Pozen (01:08:07):

Thank you.

John Donvan (01:08:07):

Richard Falkenrath.

Richard Falkenrath (01:08:12):

So, the thing about these debates is there’s no clear one right answer and it, the truth is you hear great arguments all, all around on both sides of it. And I must say that our opponents, um, I think actually made superb points, and I agree with, uh, this may be surprising, I agree with most of the points they’ve made about the drawbacks and limitations, the risk of cronyism, the dead weight loss of these sort of things. I’m very worried about it. I’m very worried about it.

Um, I don’t necessarily agree with where they end up. Um, and to me it turns on the difference between being proactive and reactive in policy design. And I’m in favor of productivity and policy design. I think by definition, if you’re at the last resort, you’ve already screwed up. There’s a problem that brood and brood and brood and got to you and you have to break glass and take emergency measures to deal with it. It’s very expensive and problematic, and I’d like to get upstream of that and be open-minded and creative about the different instruments available to government as it tries to achieve the common good in one way or another, with full knowledge of the downsides of all the different instruments and the risks of how they can be applied. And, and I do think a lot of that knowledge actually has come up here. Like, there, there’s a lot of, there’s a lot of problems, uh, that can come with government ownership, but it also creates some capabilities that the other policy insurance we have don’t necessarily give us to the same degree.

And so, it’s really in that spirit that I’d urge you to think about this proposition and say, when you, when you come to the table and you’re working through a problem, should you just come in and say, “You know what? I can’t even talk about ins- uh, policy of equity because I had this point of view and all this history and these things we’ve studied in the past,” or should you come in and say, “No, let’s think open-mindedly and creatively about the different tools and the different things we could do that might work in, in this 21st-century economy we have”? Thank you very much.

John Donvan (01:09:57):

Thanks, Richard.

And, uh, rounding out our closing round, Yasheng Huang.

Yasheng Huang (01:10:03):

Yeah, so Laura already identified one reason that the government should be the last resort. She said that if we see that the market is moving too slowly, then the government should act. That logic already implies that the government should not be the proactive actor, it should be a last-resort, uh, actor. So she, I think, believes in what we are trying to argue. Government is incredibly complex and multidimensional, and I have a healthy respect that the government should be complex and should be multi-dimen-dimensional. I don’t want the government that does one thing and one thing only such as profits or another thing.

The last thing I want to say is that a lot of the problems that I have heard from our opponents are actually created by the problems of our political system. The oversized role of the money in our politics, the oversized role of the incredibly rich people in controlling the government contracts and controlling government regulations. I think that argument says... That diagnosis of our political system is all the more reason why we should not give an additional role to the government, which is the ownership role by the government in private enterprises, something that this government has not really done, has not really practiced on large scale. So I don’t have the confidence with the political system that we have that the government is going to do that job adequately and well. Thank you.

John Donvan (01:11:39):

Thank you.

All right. Um, that is, that is a wrap on the argument portion of the program. And now we want to involve our audience again by asking you to vote for a second time using your phones. I want to thank the Council on Foreign Relations for partnering with us and for hosting us here in New York. A big thanks to our audience for your questions, and I want to thank, of course, our debaters, Bob Pozen, Yasheng Huang, Laura Taylor-Kale, and Richard Falkenrath, for approaching this debate in the way they did with an open mind, uh, with respect for bringing thoughtful disagreement to the table.

And I want to ask you all f- just to f- as we’re waiting for a couple of minutes, let’s have a little chat. If you can stand in front of your table and if you come up in front of your table, um, just to talk through a little bit the experience of, uh, of the debate, um, that you had. I, I found it interesting, Richard, that you said that you actually agreed with a lot of what the other side said, which is a very risky thing to say during a debate.

Richard Falkenrath (01:12:31):

(laughs) No, it’s, it’s how you add it up. I mean, there, it’s very rarely is something that’s just flat-out wrong said in the debate, but how you synthesize it out adds up, how you weigh it against all the other objectives that you’ve got, you can reach different, your different endpoints, different conclusions.

John Donvan (01:12:45):

W- did you, uh, on the other side hear arguments from your opponents that you actually thought had some, some merit, made you think twice and...

Bob Pozen (01:12:52):

I think one of the arguments you make is that if the government is gonna pour, uh, I think Laura made it pour, uh, millions or billions into a company, there should be some economic return for the government, and I think that, uh, when the government bailed out the banks in 2008, they got warrants, and that was a good thing. If they hadn’t gotten warrants, then they just would have enriched the shareholders. So, I think that’s, uh, that’s, that’s an argument, uh, that, that has some, uh, impact on me.

John Donvan (01:13:25):

Thoughts?

Laura Taylor-Kale (01:13:26):

Uh, I, I would also add, I think it’s interesting, uh, talking about this topic, uh, because we all come from very different backgrounds and ways in which we’re doing things. And so, I’ve been in government, um, I first went into government, it was the Clinton administration, the very end of the Clinton administration, the Bush administration, then the Obama, and then, um, and then so on and so forth, and I think over time I, because of where I’ve sat in these agencies, I see that there are, there’s expertise and that there’s, um, real ability to be able to execute on a lot of these more complex ideas, economic policy ideas than perhaps someone who’s been, has not been inside, uh, would see.

But I think it’s really fascinating to be able to have this conversation, and I think the most important thing is that we’re actually having the conversation instead of just letting it, letting things happen and not thinking about the implications.

Yasheng Huang (01:14:24):

I often tell people when I go out and make presentations that I’m, uh, academic, so I’m used to being treated very rudely.

Audience (01:14:34):

(laughs)

Yasheng Huang (01:14:34):

I don’t mind people interrupting me. Yeah. Um, and unfortunately my children have learned very fast, yeah.

Audience (01:14:42):

(laughs)

John Donvan (01:14:43):

Thanks very much.

Laura Taylor-Kale (01:14:43):

(laughs)

John Donvan (01:14:44):

Um, all right. One thing I’d like to do before we sit down for the results, I just want to ask all four of you to shake hands with each other. We like to do that as a, as a wrap.

Laura Taylor-Kale (01:14:51):

Always.

Bob Pozen (01:14:51):

Hi.

Laura Taylor-Kale (01:14:53):

Thank you.

Bob Pozen (01:14:58):

Great to see you again.

Richard Falkenrath (01:14:58):

Great to see you.

John Donvan (01:14:58):

Okay, let’s go to our seats for the results.

Okay, so the way that we phrase the question, um, “Government as shareholder, proactive competitive strategy or last resort?” The way you voted beforehand, the side for competitive strategy had 26.7% of the audience, last resort had 53.3%, and undecided were 20%. Afterwards, competitive strategy dropped a tiny bit, 26.4% down from 26.7%. Last resort went up 14.6% to 67.9%. Undecided, uh, came in at 5.7%. It means that side arguing that this, it should be a last resort prove more persuasive with this audience, so our congratulations to them. And I want to thank all of you for being here at Open to Debate. We’ll see you next time.