‘Covid’s Dirty Secret’: Scott Galloway on Post-Pandemic Economic turmoil

Early on in the pandemic, he began writing a book looking at crises from 1945 to the present day in an effort to explain the dramatic changes in our society and economy. Ahead of the fall release of the book, “Adrift: America in 100 Charts,” DealBook spoke with Mr. Galloway about what he found out about America during his research, and where he thinks we’re headed.

The conversation has been edited and condensed for clarity and length.

Your book suggests that the depths of a recession can be a great time to start a startup. With all the warning bells from the markets and the Federal Reserve, should people be thinking entrepreneurially?

What the evidence shows is that it really is the right time to start a business. When you start a business in a downturn, it’s cheaper – everything from real estate to employees to technology costs less. It may seem counterintuitive, but building a company during a recession is a test of the quality of work early on. It’s as if you want soldiers who have gone into battle – a business that starts in a slump, if it survives a slump, it’s kind of a battle test that it’s a viable business. Then you have healing winds in your back.

And after emerging from the recession, businesses and consumers are reassessing their purchases and becoming more open to new ideas and new suppliers.

Speaking of the recession, how do you think Silicon Valley would look on the other side of this?

What you have in the bull market, like we’ve had in the last 13 years, is that the market has responded positively to the growth and as long as you can increase your top streak in a consistent segment, the market, basically modeling Netflix and Amazon, said we liked this and continued to drive the company value.

Two things have happened now: When companies like Uber look like they’re hard to imagine making money in a sustainable business — even as they grow, and they’ve grown, they’re still far from profitable — the market doesn’t like it.

Twitter has lost more money in its history than it has. And because of the increase in interest rates, the cost of financing – companies that are losing money or not yet making a profit – goes up because you have to borrow money at much higher rates. In addition, the profits you were expecting in the future are discounted at a much higher rate. In some growth companies, it costs to finance what will eventually be worthless cash flow. The value of their equity here and now is completely affected.

What do you advise these companies to do?

There is no magic wand. Cut costs. They will have to cut costs and, in some cases, adopt a business model so that they can reach significantly higher prices and lower costs. And quite frankly, convince the market that they can reach profitability sooner, because the costs of financing this path to profitability are much greater. So they need to show how much distance, the runway required to reach profitability, is shorter. They basically have to trade growth for a shorter path to profitability. This is what the market tells them.

In your book, you look at how during every economic recovery there is optimism that we will solve the problem of inequality. But we always seem to miss. why?

We mistake prosperity for progress. We have achieved a tremendous, amazing and unprecedented prosperity. I think the mistake or myth we are convinced of – that whenever there is an economic boom, the GDP grows, that will translate into progress for the nation.

What do we mean by progress? I believe the heavyweight—which is my first chapter in the book—is a healthy, thriving middle class. A nation’s geopolitical strength, welfare, and democratic strength are usually a function of how prosperous its middle class is.

The issue now in America – and Europe makes it less – is that either America has believed this myth that the middle class is a natural being of a free market economy, which it is not. The middle class is an accident. It is an aberration in economics.

There is a consistent idea that if the economy does well, the middle class will recover. this is not true. What happens over time in all of economic history is that the wealthy government arms the government, lowers taxes on it, resists competition – bigger and stronger firms fortify themselves, and you end up eroding the middle class. You end up with income inequality. It gets worse, and then the same thing happens with income inequality. The good news is that income inequality, when it reaches these levels, always corrects itself. The bad news is that the mechanisms of self-correction are war, famine and revolution.

Unless you provide and invest in a strong middle class, be it minimum wages, union support, vocational training, access to free education or low-cost education, the middle class, as an entity, disappears. We have fallen for this idea that as long as the economy is doing well, the middle class will do well. The two are not necessarily related.

I was early on warning about a lot of the pandemic era stimulus having a bad effect on the economy. What should we have done differently?

We spent, at a minimum, $7 trillion – but it was only a cloud cover as we threw some loaves of bread at the poor and their carers so that we could stimulate the economy significantly. The majority of the money ended up in the market, and who owns 90 percent of the shares in real estate by volume in dollars? top 1 percent. The PPP, the small business rescue, was nothing but a boon to the wealthy. The richest group in America are, wait for it, small business owners. The millionaire next door owns a car wash.

This is the dirty secret of Covid. If you’re in the top 10 percent, you’re living a better life. For you, Covid means more time with family, more time with Netflix – and you’ve seen your inventory speed up.

When you inject $7 trillion into the economy and then couple that with war and supply chain eruptions, it now seems clear: We have too many dollars chasing too few products. And of course the people who will be hit the most by inflation are the people who don’t have pillows. We definitely overdid it.

I have long been skeptical of cryptocurrencies, and now we are witnessing a real crash. What do you think will happen next?

What we found was this whole mantra of an unreliable economy, and we didn’t have to trust many of these new actors.

Even in ’99, there were a lot of Internet use cases – you could buy CDs and books from Amazon. You can get real-time news on Yahoo. It is difficult to find use cases of blockchain that affect consumers every day. I think you’re just seeing a massive de-leveraging or de-leveraging — and I think we’re kind of in the midst of a potentially unprecedented crash in terms of asset class.

If you look at the bubble – if you compare it to previous bubbles, whether it’s tulips, Internet stock 99, housing, Japanese stocks – the increase here was extraordinary. Running here makes others appear shy or humble, which means the collision will be just as or more violent.

There will be more lawsuits. There will be more calls for additional regulations. You will see investors say: Where are the regulators?

This is the bad news. The good news is that it probably won’t have much of an impact on the real economy. Keep in mind, even if all cryptocurrencies go to zero right now, that’s still less than half of Apple’s value.

what do you think? Do you agree with Mr. Galloway’s expectations? Tell us: dealbook@nytimes.com.