311: Walmart’s Chief Economist on Inflation, War and What it Takes to Scale a Business

Buck: Welcome back to the show, everyone. Hope you’re having a wonderful day. We have a great show today. We have John A list who will get into is in a very unique position to discuss the economy right now. But before that, he served as a Tennessee Griffin Distinguished Service Professor in Economics at the University of Chicago and has also been the editor of the Journal of Political Economy. Now, what I was alluding to earlier in having his finger on the pulse of probably the global economy right now is that he was just named Walmart’s first chief economist. So Congratulations and welcome to the show, John.

Thanks so much for having me. And thanks for your Congrats. I’m super excited about talking to you and starting my adventure with Walmart.

Buck: Yes. This is great. And it’s interesting. As we were talking offline, we almost kind of did another show offline here. We started talking about your wife. She’s an Otologist. We have otologists listening to this, actually, I can think of at least two or three guys who do cochlear implants like your wife. It’s like talking to your colleague, your wife’s colleagues, pretty much awesome. We’re also going to get into a book he wrote in a bit. But first and foremost, what do you think of the economy right now here, John? I mean, we’ve got a few things going on. We’ve got inflation, we’ve got war. We’ve got interest rates following the inflation up, you’re going to be positioned at Walmart and dealing with a lot of issues with regard to supply chain. And I’m sure you’re not going into this without having some ideas about what’s happening already. So I would love to just get your take on what’s going on, where you think we’re headed.

John: Sure. So you are correct to point out that we have some headwinds. And when I think about headwinds, some of the most important headwinds are uncertainty. And we do have geopolitical uncertainty. We do have aggregate market uncertainty in terms of what are interest rates going to look like. We have supply chain issues, but I think those will be sorted out in relatively short time. I think in general, given those uncertainties, I feel pretty good about our economy, and I feel pretty good because the general infrastructure and the general, let’s say, wins. In terms of monetary policy and what we have in place in the private sector, I’m pretty bullish, actually. I do think that you could go south in a hurry with a few of the elements. I think inflation is real, but I do think that the Fed is doing a reasonable job in combating it or at least controlling it as well as they can. I’m confident in JPAL in that way. I do think we have a lot of arrows in the quiver to take on new problems that might surface. I think when you look at various sectors in our economy, we’re still the most innovative in the world. We still have the most human capital in the world. And when you have those two elements going in your favor for the long run, it’s a pretty good bet.

Buck: Yeah. So you make some really good points about it. I think we frequently forget that when we’re investing, when we’re doing things in the economy, we’re really doing things for the long run. Right. And I get this feedback sometime from investors right now. Rates are going up. What’s going to happen with multifamily? Well, we’re going to keep growing. Our population is still growing. They’re going to still need a place to work and they’re going to have more jobs and they’re going to still be paying rent and all this. So from what I’m taking from what you just said was, yes, we were at a war. Yes, we’ve got some inflation on the horizon. But the long run fundamentals and I think you’re alluding to some capital potentially that’s still waiting to be deployed into this economy. You’re bullish.

John: Oh, absolutely. I mean, when you look at the institutions that we have set up in our country, just think about the fabric of our institutions and our government and our laws. It’s very different than in many other parts of the world. So once you start with those ingredients and you add with it, you have a lot of capital on the sidelines. Let’s be honest. When you think about liquidity, but it’s not only financial capital, it’s also human capital. And when I say human capital, we have the best trained workers in the world, and these are high skilled workers that innovate and make new products. So when you put all of that together in the machinery that we have, it’s pretty hard not to be Polish, for sure. The long run now, the short run, you can wake up every morning and watch CNBC, and they have a different story every morning. If the futures are up or down 400, they’re talking about the world’s going to end or the world is taking off. I don’t think of the world that way. I think about do we have the fundamental features in place to have a high growth economy for years to come? And I think we do.

Buck: Let’s talk about some of those short term issues, though. I think people are kind of feeling some of these things on a day to day basis, whether it’s energy prices and inflation and that kind of thing. I spoke to an economist last week, and it was really I think, driving home that inflation had a lot to do with not only the supply chain, but the energy crisis and stuff. But this has sort of been brewing for a while now. Right. I mean, how much of this is really from the crisis in Ukraine and how much is this, again, supply chain issues, supply and demand, Imbalance. What exactly is driving all of the inflation, in your view?

John: Yeah, it’s always important to separate these different factors, and it’s difficult to separate the different factors, but I think these inflationary pressures were in place for months before. What has gone on in Ukraine. So did that help? No. Did the uncertainty that it invoked geopolitically help? No. Would have we had inflation without that? Absolutely. When you look at the fraction of energy provided by this region of the world, it’s not enough to cause such inflation. So it has to be either in place before or it had to change our expectations or beliefs about where the world economy is going. And I think it’s hard to guess, but I would say a large fraction of what’s going on now was already in place before what happened in the Ukraine.

Buck: Yeah. So I guess part of why I asked you asked that is that this idea that what was happening with inflation was transitory, and that was what the Fed was talking about early on is that the inflation that we’re seeing is transitory. Do you think that maybe it was transitory and now the energy crisis and some of the other issues that we’re having now may have really solidified that as a not a transitory issue, permanent issue?

John: No, I think that they were wrong and guessing that it was all transitory. Let’s be honest. When you have these forecasts, these are guesses and these are difficult guesses to make, but I think that sure a portion of it was transitory, but I don’t think all of it was transitory. And I don’t think that the events made it permanent. I don’t believe that. I think an element of it was permanent. The labor market was changing dramatically from covet and the supply chain was changing dramatically before these struggles happened. So these are elements that will change inflationary pressure dramatically. And they were there were hints in the economy already.

Buck: When you look at taking over as the chief economist of Walmart, a lot of the issues that I would imagine that you’ll be really looking at closely are related to supply chain issues. What are you seeing there are things starting to free up a little bit. Is that starting to become less of an issue? Because certainly that seems to be a significant contributor to the inflationary environment that we’re seeing.

John: So I haven’t started at Walmart yet, but what I’ve learned is they control their whole supply chain. They control the ships, they control the ports. But what they might not control, I don’t know about their long term contracts is, let’s say the goods put on the ships. I don’t know how they control labor costs, but the supply chain itself, with a big company like Walmart, as far as I understand, it, is not as susceptible to other supply chain issues that other firms have talked about. That doesn’t mean there won’t be inflation. There can still be inflation pushed by labor and goods and let’s say raw input changes, which is what is happening. But the supply chain itself, as I understand, Walmart is in very good position to continue to leverage the supply chain that they have set up for themselves.

Buck: How about outside of Walmart, just in general, people just thinking about what we’ve been told about some of these issues that are driving inflation. We hear about supply chain all the time. Right. So have you gotten a chance or have you been able to see any evidence that in general, outside of Walmart who’s maybe in a different, more protected situation, that things are starting to loosen up a little bit, that things are coming back to a new postcoded normal?

John: Slowly I would say so in my limited experiences. What is with the book? We have supply chain issues with my book. In my book. My book was published in February and it was difficult cult to secure production and shipment and storage of the book. And I know that’s simple, even when you think about it, these are simple chores. But if this is happening with my book, that gives you an indication of what can happen in the broader economy. Now, is it lessening from my experiences and talking to people? Yes, it is lessening. Is it gone? No, it’s not gone. And I don’t think it’s gone and will go away until we have the labor market situation figured out. And when the labor market situation comes to, let’s say, a new equilibrium, that’s going to give us a pretty good indication of the supply side and how marginal costs have increased because of the last few years events.

Buck: Can you just for us noneconomists. When you talk about the labor market coming back, how does that affect the supply chain?

John: No. Absolutely. So if workers demand higher wages, who are throughout the supply chain, that’s going to have to be absorbed somewhere, right? And sometimes it depends on the elasticity of demand for the good or service, but sometimes it’s absorbed by the firm, sometimes it’s absorbed by the consumer, sometimes a little bit of each, sometimes the input provider. So what you have is many people leaving the labor force and what are they doing? Well, some of them are working at home and innovating, some are entrepreneurs, and some are trying their luck at a different trade or a different skill. And if that leads to a higher wage, whether it’s an Uber driver or part of the supply chain, that will have to be absorbed somewhere and in many cases, it ends up being higher prices.

Buck: Fascinating stuff. It will be interesting to see how this all ends up. But let’s change a little bit topic wise. I know you have this book that you’ve got a Wall Street Journal bestseller, The Voltage Effect, how to Make Good Ideas, Great Ideas scale. Why did you write the book?

John: You know, I’d been doing academic work for maybe five years on scaling. And when I say scaling, what I mean is if you have an idea and you try it out in the petri dish, what are the chances that that idea can make it big? And I had written a fair number of academic papers about this issue. And I decided to stop and take stock of what I had learned in the academic community and bring it to everyone. And I wanted to bring it to everyone because whether it’s government or a private firm or a nonprofit, everywhere where I’ve worked, we’ve talked about scaling, and we’ve talked about if it works in the small, will it work in the large. And what I have observed is that in nearly every walk of life, the decision about whether to scale something has been a decision about art. And there has been very little science that has been brought to this question. I have some science, and I want to talk scientifically about this problem. So that’s why I wrote the book.

Buck: So what are the variables that go into this? I’m just looking at this thinking, okay, you got this petri dish of ideas. You got mom and pop places. I have personal experience, and having started a few businesses myself that I always wondered if I could scale. So when you talk about the science of that, talk a little bit about the variables that go into that petri dish that may determine whether something is scalable or not.

John: Yeah, it’s a good question. So I break it down to five major reasons why ideas fail to scale. And the first one is something I call false positives or something we all know. You get a COVID test sometimes it says positive when it’s really not positive. So in many cases, we scale ideas that never had voltage to begin with. This happens a lot in government where government has a program like the Dare program is what I talk about in chapter one with they thought they had voltage. It never did. So your listeners will be very surprised by the number of ideas that people throw money at that never had anything to begin with. That’s vital sign number one. Vital sign number two is in many cases, we exaggerate the slice of the pie that our idea can pick off. And when I say that, I mean it in a sense that think about McDonald’s. A story I talk about in this chapter is this new burger called the Arch Deluxe. Do you remember the Arch Deluxe or did you ever try the Arch Deluxe?

Buck: No, I don’t remember that. I remember many different McDonald’s thing, but that one I don’t remember.

John: Yeah, it’s good you were in your healthy years back then. So the CEO of McDonald’s has this idea to create a sandwich called the Arch Deluxe. Great. So what they do is they set up some focus groups in the focus groups, they bring them in and they give them the Arch Deluxe. And they say, what do you think? Do you like it? Everyone says, yeah, we love it. And then they say, would you pay $5? Yes. $7, yes. $9, yes. And two problems with this. One problem is the people who will actually come to your lab. Your focus group are probably not representative of those who you’re selling into. Most people kind of know that although McDonald’s, they didn’t adjust for that back in the 90s. The second thing is think about the incentives that a focus group responded has, okay. You know the stock market. Well, we tend to invest in assets. Either we buy them like we buy a share of stock or we buy an option. Of course, that option gives you the right in the future to buy the underlying asset at a certain price. We pay real money for options. Think about the respondent in a focus group. Oh, would you buy the hamburger at $5? Of course I would. You’re buying a free option. Right. Because when McDonald’s introduces it now I have a free option to actually buy it. If I don’t like it, I won’t buy it. No skin off my back with the new God on the menu. Great. So I’m going to over emphasize or over exaggerate my preferences every time. We have techniques to help overcome that. But typically the business or the government doesn’t understand those techniques and understand how to use them. So that’s number two and one of the running examples I have in this chapter is about Lift. So I used to be the chief economist at Lyft, and we talked about a membership program called Lift Pink, and I’ll leave it for the listeners to go and read it. But I think this is another perfect example of over exaggerating the slice of the pie that your idea can capture. Ok. So the third vital sign is what I call is it the chef or is it the ingredients? And this analogy gives you a sense about what you need for ideas to work. So I did a lot of research on restaurants. There are a lot of restaurants that try to scale. What happens is they’re killing it with one restaurant, they’re making a million dollars. And they say, well, if I would have 50 of these things, I’d make $50 million. Right. So they scale. Here’s what happens if the initial success is due to the chef, it will never scale. If the initial success is due to the ingredients and you can buy those ingredients at scale, now you have a shot. You still have to execute. My book is about what are the signatures of ideas that can scale, you still have to execute. But in this case, it teaches you that unique humans don’t scale. So if your initial idea is based on a super unique human and you need that unique human to keep performing, I’m not talking about make a commercial. I’m talking about has to continue to produce in that restaurant or in that shop, wherever that will never scale because unique humans, even though they’re unique, they have a hard time teaching others what they know. Nearly impossible. Right. The idea here is make sure that your initial success is done with ingredients and in situations that are scalable. That’s the general lesson about this particular vital sign. Vital sign number four is about understanding spillovers. So there are some ideas that have great spillovers. Think about social media or something like Facebook. The more people who use Facebook, the more valuable that service or product. Is that’s something that might not look so great in the petri dish, but when you scale it, it ends up being great. Uber and Lyft also have these things called network externalities. So these are types of ideas that are really high voltage at scale. Other ideas aren’t so high voltage. And I talk about those in this chapter in the book. There are four kinds of spillovers that we should always look for in our ideas. Now the fifth vital sign is the supply side of scaling. So what I mean by that is some ideas have great supply side considerations. Some have terrible let me give you one that has terrible supply side. I started a pre K school for three, four and five year olds in Chicago Heights. So the idea was hire some good teachers. And I had to hire 30 teachers. And I gave these three, four and five year olds a good program. Great. It worked perfectly. Now if I want to scale that idea, what I have to do is I have to hire 30,000 good teachers. So it’s all together different story. To hire 30 good teachers around Chicago versus 30,000, what’s going to happen? I have to go up the supply curve and I have to pay people more and more money as I hire them. That’s called dis economies of scale. So some ideas just invariably have dis economies of scale. And some ideas have economies of scale. And what’s interesting in this part of the book, whenever I was talking to firms for profit firms where they typically start is they say, does my idea have economies of scale where the government doesn’t start there? The government says, what will the benefit profile look like? Right. They’re not even concerning themselves with the supply side. So those are the five features or vital signs of an idea that I talk about in the first half of the book.

Buck: When you think about some of the case studies that you talk about successes and failures, it sounds like we have probably a pretty good idea of what doesn’t work. How about things that are particularly seem to work particularly well?

John: Yeah. So I will start by saying any idea that has these five vital signs in place, as long as you have somebody who can execute that idea will work. Now what I can’t predict is the number of competitors who come in. But what I can say is if you have economies of scale, it’s much, much harder for a competitor to come in. So what I mean by that is if you grow big and your cost per unit to produce goes down and down and down. It’s really hard for an entrance to come in and compete with you because you have such a low cost of production. Now you can say, what are some ideas that seem to work like this? One idea I like to think about is what we do at Lift. So we have pricing, and in the pricing mode, we think about what are the best ways to price so we can get a lot of consumers to come in to lift. Now we have elements that number one, it’s not a false positive. People like rideshare, so it checks off bucket number one. Number two, a lot of people like rideshare. A large portion of our economy uses ride share. Number three, what are the situations that people like ride share? Well, we need to have a good driver. So we’ve scaled to a certain extent, but we will not be able to fully scale until we become completely autonomous. And what I mean by that is the constraint right now to even bigger and bigger growth is a labor supply. So it shows you that the idea can scale, can work, and can work up to a certain level. But to get to the next level, you’re going to need to do something about this labor input because it’s taking 80% of the revenues and that’s not going anywhere because the Commission’s roughly 75% of drivers. And then the other part of that is insurance cost. So those two components come with having scaling with humans. So to go to the next level, you’re going to have to do something about that input. And then when you look at the spillovers, spillovers need to be better. And what I mean by that is right now there are congestion, spillovers. We have a lot of Uber and Lyft drivers and cars around cities that’s putting a load on our traffic system in congestion. So we need to do a better job with that as well. Otherwise the product isn’t as great as it can necessarily be.

Buck: It seems to me that one of the common themes in what you talked about. And actually, even in my very small experience, my own business ventures is the most difficult aspect often ends up being people. Right. Like scaling people and employees and all that. But then you have this issue where automation also creates problems with jobs. How do you see in the future? I’m just curious, this sort of tension between machines and jobs. You probably have dealt with that a little bit at Lift. You probably talked a little bit about those issues and some of the pressures that are coming from both sides.

John: Yeah, absolutely. And I think we always need to concern ourselves with man versus machine or woman versus machine. What have you. And when you look historically, many technologies have been both labor saving technologies, but there have also been a fair number that have been labor augmenting technologies. So you have technologies that come on board, they make everyone better off, they make people richer, but they also lead to more labor opportunities. And when I think about technology in this way, I like to think about it through the lens of scaling. So I was at MIT the other day and we were talking about a new AI feature that can actually code better than humans. So on my team at left, I had ten coders, ten programmers at Walmart will have the same. And what I’m being told is that the machine is as good or better at many coding chores than humans. Okay, so I see the bright spot of that by asking, have there been ideas in the past that we’ve scrapped is unscalable because we can’t get the unique humans to help us with it that now are scalable because of machines. Now, if that’s true, we should be looking back at the trash heap and saying, where are the ideas that actually have a chance when you think about new technology and new AI? And I think there will be a lot of them. And in that case, this is bringing forward a completely new suite of ideas and innovations that were never possible before because of human constraints. But now they are possible. And when those new market opportunities are made possible, that leads to more opportunities for humans. And you can push that a step further. You might remember when Nevada, Nevada made a run years ago, Las Vegas, Nevada made a run years ago to be the new Silicon Valley. And their problem was they didn’t have Stanford and Berkeley right down the street. Yeah, right. So they didn’t have the human capital that was being inputted into the local economy to be workers. But with the new work at home that we have and the new technology, you might also now open up new cities that can be hubs of innovation in production in ways that they never had the shot before. So I’m kind of an optimist on this sense. I think that many technologies are labor augmenting rather than labor saving. You have a little bit of each, but I’m bullish on humans will always have a shot. People who want to work, I think in our economy, more or less are going to have a shot. And I think new technologies even open up newer opportunities.

Buck: John A. List John is the author again, of The Voltage Effect, how to Make Good Ideas Great and Great Ideas Scale. He’s also the new chief economist at Walmart. John, this book is already Wall Street Journal bestseller. We can just get it everywhere. I’m assuming Amazon, every bookstore. Is there an Audible book?

John: Yeah, there is. In fact, the Audible book is probably doing better than the physical copy. But if you’re nervous about having it be my voice. It’s not. So I promise you don’t have to listen. I’ve got this Midwestern nasally voice so I promise it’s not my voice. It’s actually a real professional doing it.

Buck: I kind of liked it. It’s probably because I’m from the Midwest as well.

John: Where are you from in the Midwest?

Buck: I’m from Minnesota.

John: Oh, man. I didn’t hear the Fargo. I didn’t hear you. Don’t you know where are you from in Minnesota?

Buck: Where are you from?

John: I’m from Madison, Wisconsin, right outside of Madison, Wisconsin.

Buck: It’s pretty close. It’s pretty close. Not that far at all. I heard it. I heard I was going to ask you offline as well, but now we know it. So all those cheese heads out there, you got one of your own.

John: I hope I bring you in some new cheese head listeners.

Buck: John, great to have you on. Thanks again for joining us.

John: Thanks so much for having me. I can’t wait to come back. It’s always a pleasure.

Buck: We’ll be right back.