good afternoon welcome to capital account i'm laurin the star here in washington d.c. these are headlines for one set of ever twenty eighth two thousand and twelve it's been more than a decade since argentina defaulted on its debt but this saga continues with creditors to this day a new york court ruling just last week came down pretty hard for the country according to the financial times and could benefit creditors like vulture funds in general but what influenced the economic development of latin american countries like argentina more broadly versus say their neighbors to the north james robert robinson author of why nations fail is here to discuss and here in the u.s. president barack obama reportedly speaks with corporate c.e.o.'s from firms like caterpillar and goldman sachs about fiscal cliff solutions here's what he said to

the public. and i'll go anywhere and i'll do whatever it takes to get this done it's too important for washington to screw this up. but it's washington and really once again the nation's economic fate may be held hostage by negotiations at the highest levels of government where does this properly we'll talk about it plus manufacturing is slowing and businesses are worried about the fiscal cliff that's according to the fed's beige book out today what is the beige book anyway and who cares we'll tell you why it matters and word of the day let's get to today's capital account. when we talk about economic development or prospects on this show we typically talk

about debt about private sector innovation we talk about monetary policy probably much of the time we talk about fiscal policy we don't often on this show talk about economic prosperity is primarily a function of political institutions but that's what our next guest thinks is the most crucial maybe we have it all wrong here at least if you believe political institutions play the role that james robinson does his research are a comparative economic and political development is the david lawrence professor of government at harvard university and is author of the book why nations fail so thank you for being on the show were excited to have you wanted to talk about things from this perspective and one pleasure. yes so what role do political institutions in your view play in economic growth why are they so crucial and why is this distinction between inclusive and extracted so crucial well let me let me start by saying that everything you mentioned before was absolutely really

important you know integration what could be more important innovation policy monetary and fiscal policy that's absolutely important but the thing is that none of that stuff comes in a vacuum but you know policy is an outcome of the political process and innovation and innovation in society you know which is fundamentally the thing which makes the united states so dynamic economically and it's been the world technology leader for one hundred fifty years when the hundred eighty years but also it's not a coincidence it's not a current since one some countries are more innovative in others and that's to do at some level looks very kind of basic stuff about people's incentives and opportunities and societies but our view is that you know where it why is it that some societies why is it was the united states has more opportunities and more incentives for people to innovate why does it have better monetary fiscal policy you're going to tell me how it was a good school. but big picture. here. so

i'm just kind of saying like. so we want to ask you know what lies behind that you know why use that as more innovation in the united states than there is in colombia or is it in congo. or what about what lies behind that and that's really the rules in society what we call the institutions that structure people's incentives in the opportunities but those rules themselves are chosen by the political system by political power is. fundamentally take those things that you mentioned and go back and ask why it is that very word of those things vary so much round the world it's to do with politics ok so then when we talk about the u.s. politics and you're saying that essentially the u.s. is what you are likely describe as inclusive in its political institutions is it becoming less so in the united states because you mentioned kind of the long trajectory of growth and innovation over one hundred fifty years but over the last

thirty we've seen wages really stagnate we've seen that culminate on the streets in occupy wall street we've seen big banks extract from the economy and be bailed out so is this kind of inclusive structure is this being eroded. i think that's potentially the case i mean i'm much you know in the book we are rather optimistic about the united states i mean i you know i'm you know in the sense that we kind of emphasize that you know if you look at the americas for example you look at the difference between a latin american country like argentina or the knighted states the differences between those two places in the way they get they got organized happens sort of historically a long time ago you know in the colonial period with very different types of societies emerged in north and south america and once sort of society gets set up in a particular way you know in the u.s. we characterize this as an inclusive society then there's lots of feedback loops that tend to keep it inclusive so in the book we're very optimistic we kind of talk

about the gilded age in the robber barons and how in the late nineteenth century there was this enormous increase in inequality in the united states and rockefeller and vanderbilt and carney you know all these people they wanted to capture the political system and they wanted to create a very different type of society but they weren't able to and i you know you could look at the thirty's and see the same thing so i would say you know that people are right to be concerned about this that there's been these very large increases in inequality you know there's economic growth which has been spilt down the income distribution you know there's all this evidence and capture of politics but i look around and i look at most of the private sector you know outside the financial sector i still see i don't see an oligarchy private sector like you see in mexico or argentina or colombia you know this is not a country full of monopolists and monopoly that is free and free that capital available that's far part of this enormous innovation and biotech in no in i.t. and so i still see the kind of innovation machine going in the us and i think but

of course that's tough to be worried about and i think people are worried about it people are conscious of it and i think that's very healthy so i'm not such i'm still a kind of i still kind of having a freight and. u.s. system but it can the political system can kind of bounce back and just as it did in the late nineteenth and early twentieth century i think what's interesting is you qualify the financial sector you kind of exclude it from the other sectors that you were talking about i want to ask you about that because when you talk about the robber barons they were monopolistic but you could argue hey at least they were creating something they've got railroads they built things that the economy that the country needed now you have big huge banks these too big to fail banks that are extracting wealth you could argue as opposed to financing the economy and financing production financing these businesses and the engine of growth what you have them doing is financing speculation and they're doing this with cheap money from the fed they're benefiting from an implicit bailout guaranteed by the government so how do

you and your framework analyze the impact on a society of an extract is not a political institution but banking system yeah i mean i think that's i mean are you i agree with a lot of what you say i mean i do i mean i think it's i mean i think financial set financial system is crucial for successful economic development you know you need a financial system to channel credit wealth to people with good ideas but no capital so you know one can have integration in the financial system as well but i completely agree with you and you know in some sense the financial system. recession in even worse shape because it's even more concentrated than it was before you know because of all these things going on but i would say you know the political system has to get that under control but there's lots of you know there's lots of ways not to do so for example this business so if you think about it is an example you know if you think about the problem is fundamentally political but the problem is that the financial sector because it has so many connections in

washington or because it's too big to fail is too powerful too powerful politically regulation is not the obvious solution to that because regulation can be captured. to intervene to try to undermine the political influence of the financial sector no matter how that's being exercised so you know there are some important lessons for thinking about the politics of this which are contrary to a lot of the discussion you know regulation won't work with those so powerful you know they capture the regulators all they get to write the regulation so so i yes i mean i support once a political problem but needs to be. solved and i don't think it has been solved by any stretch of the imagination so then would you see kind of the key to protecting the political institutions that you think have been responsible for u.s. innovation are reigning in the employment of entrenched interests in politics because it's not just to big to fail banks you have the insurance sector which

heavily lobbied for obamacare and essentially you have americans needing to buy insurance it didn't rain in medical costs you have the military industrial complex you have any number of multinational corporations in fact some c.e.o.'s are meeting with obama right now on the fiscal cliff so would you name this is kind of the key thing and protecting the sanctity of political institutions here i think so but you know i'm i'm an outsider you know i'm i'm british you know and i tend to think for us to mock received still being pretty vibrant you know there's a very nice study which i like very much about dick cheney. and the columbia business school. he wrote to frame a study about president suharto in indonesia. when president soeharto started having heart attacks share prices of firms you know started tanking because the only reason they made profits was because of their connections to president suharto and he did the same exercise with dick cheney and. when dick cheney had

a heart attack absolutely nothing happened with the price of the share price. and i think that's very significant because it shows the politics and us is not as capture those people might think you know people make these comparisons to third world countries but it's not that i. but yes that's absolutely right but people should be concerned. you know i would wonder what would happen if and i this is a horrible thing to say i would never wish this upon ben bernanke i wonder what would happen if he had a heart attack what would happen to the blood pressure of the the c.e.o.'s of major banks but we're going to learn more about this in an international context in just a minute and we're going to go to break we'll have more with james robert robinson researcher of comparative economic and political development professor at harvard author of why nations fail in just one minute also still ahead the district's voiced concern over the u.s. fiscal cliff in the beige book but what exactly is the beige book anyway we'll break it down and word of the day and show you our best hope for talk space and loose change but first your closing market numbers.

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dot com. submit. all right we're talking to james robinson author of why nations fail before the break we were talking about the role of political institutions in the u.s. in terms of innovation economic growth and development now let's look at a little bit more broadly at some other regions of the world so professor robinson i do want to really quickly before i get go more global i want to ask what you think the fiscal cliff is symptomatic of because this is probably capturing the country in terms of symbolic of government dysfunction in the u.s. what do you think it's a dramatic in your view. i mean i i mean i don't want to belittle the problem of the school but i guess i would say you know it's a sort of game of chicken you know that people want to settle the problem different

you know the republicans would like you know we're going to settle it one way the democrats would like to kind of in another way and i guess i would sort of you know it's symptomatic of a particular type of political group more at the moment in the united states which is we could you know because of changes in the policies of the different parties but i you know i don't i mean i don't want to belittle that as a problem but i guess i would sort of say you know this is small relative to the big picture about you know why things you know work and the way they do in the united states so i would guess that the politicians will you know they'll sort of. pressure on them to come to a reasonable agreement as a writer when you look at such a big scope of history of the country i know yeah you know i spend most of my time studying places like haiti your columbia or the congo and you know i'm from the kind of point of view point of view of our theory you know the united states is a terribly well functioning society ok all right i'll give you that i take it quite

regularly. but let me know ok it's like the optimism here let's look a little bit more globally then i want to ask you to apply your view your lens to a country that has kind of disparate results based on region so looking somewhere like italy where the north is quite productive the south isn't there the same country same political institutions how do you describe something like that has somewhat attribute those differences to things like geography well like you know i mean. same political institutions at some level but the way the institutions work depends on their interaction with many other things in society you know people say you know you ok the legal system is the same it's only but the way the legal system functions in the south of this is completely different because you have the mafia if you want to think about the institutions that it's really you have to think you have to go back and think historically about the fact that in the south of italy the state historically was very weak it was very different it formed in

a very different way from the north of italy because the state was very weak in the south of this really these massive appeared to enforce contracts secure property rights and those mafias became ingrained in the system it's very much like a country i said the myself a lot which is colombia you know half of colombia is run by you know groups mass you know our military rulers you know who are the state and the local level and that and of the extractive force so then let me ask you one other question let me ask about that the resources you that some people look sorry to analyze a nation's economic prosperity or plant looking at it somewhere like saudi arabia would you say that their their economic fortune has been driven by society and political institutions because look at them producing ten million barrels of oil a day i would say come on it's good you got to look at a lawyer right yeah i mean you know i think i think we will simpleton but i think it's also very important think about you know what was society like in saudi arabia

when oil you know was sort of discovered and the fact is that you know saudi arabia was a very you know it was a tribal society without strong kind of centralized stable pharmacy you know if you go back to one hundred twenty one like in first season i was in abu dhabi giving some lectures in naples you know the shaikh of abu dhabi you know in the one thousand sixty's and have electricity in its power you know i mean these were very poor kind of underdeveloped countries with very traditional political and social structures and then they just discovered this in the. most part in the well so you could say you find look at saudi arabia you could say well you know that this is an absolute this moment key and things like that well you know but it was not salute smartly without oil in one hundred twenty and now it's not salute the with the will and much most roads and things like that so you know i don't think oil because it will hasn't helped the most annoying is will change the society you know you could say it kind of truck the society in some kind of suspended animation but i don't think the society was not created boy. if you want me interesting yeah it's

interesting to talk i really appreciate you being here today we're going to leave it there that's all we have time for but that was james robinson is researcher of comparative economic and political development harvard professor author of why nations fail thank you very much. all right it's time now for word of the day where we break in a financial term or concept for our smart viewer but just not the expert and today it is based book given the federal reserve released it now it sounds like a bit of a yawn but it certainly has jim cramer excited take it take a listen people constantly underrates reports that the fed puts out i scrutinize every single one and actually go to all of the websites of the original report of the regional banks. they always downs' excited so what is it exactly see if you get

excited it's a survey of the economic conditions in each of the twelve federal reserve banking districts it's also known as the summary of commentary on current economic conditions by the federal reserve district so i guess beige book is a little more concise now it's published eight times per year two weeks before each of the eight annual federal open market committee meetings now the report contains several sections of main summary of followed by the breakdown of the twelve federal districts now each district report will highlight the regions major industries so not all the reports mention the same sectors in the atlanta region for example there is a particular focus on tourism of course you have florida there where as the energy industry is highlighted somewhere like dallas and kansas city and that region you'll hear a lot about farming so staffers at each of the twelve regional banks all these banks you see here they compile the information after contacting businesses economists and other financial experts by phone through questionnaires and just plain old e-mail now the businesses range from retailers and home builders to

hotels and restaurant owners and the questions if you want to know what they call up and ask here are some examples from the atlanta fed that we've got so please describe the proportion of your workforce that's part time or temporary compared to this time last year what's your outlook for growth in your business over the next three to six months now the fed staff produces a number of books for the f o m c that are known by color so you should know it's not just the beige book the beige book was originally the red book and the red book discuss specific companies and it actually wasn't made made available to the public so i wonder about dole down when i went to beijing but regardless it was made in an agreement with congress members who wanted more fed openness and the fed publicly released the report in one thousand nine hundred three change the color and the name now f o m c members also receive a book and this was first produced in two thousand and ten to put together the blue and green books and these provide internationally. make analysis also monetary policy alternatives and these books are released to the public not for five years

and i should note even though these books sound colorful they are not take that metaphorically as you will also the findings in the beige book are anecdotal there are no numbers for example today's beige book announced among key sectors consumer spending grew at a moderate pace in most districts wall manufacturing weak and now many people analyze the reports in detail scrutinizing changes in verbiage shut says this john carney was asking what is the beige book change from moderate to modest growth mean which is why to effectively read the beige book and many other fed statements you must become accustomed to bed speak or measured remarks designed not to reveal much information which former fed chairman alan greenspan was famous for. tax to structure. britain for said mark.

so clever because everyone talks about it now now there isn't any new empirical data or statistics released in the beige book it's mostly a chance for investors to see how the fed thinks and makes conclusions from anecdotal data and surveys but now you know what the beige book is so. let's wrap up with loose change dimitri thank you for being in the hot seat to talk about something that really i think i need to add to my christmas list so we've heard some americans getting a bit nutty about botox remember that mom who gave her eight year old injections. she started giving the injections to keep up with the beauty take all world of the pageant circuit an idea she says was planted by other pageant moms. ok now

that is terrifying but botox is getting creative not just with with young folks which is horrible but some poker players are getting poker talks so i think it's a manhattan dr is offering poker talk so that these players can keep their poker face without giving away any facial expressions i ask why limit this to poker players i can see bankers politicians a business men lining up for this i want to line up for this ok i would love to not reveal what i'm thinking with my facial expressions for the what you just said on word of the day who better to get it than a central banker yes talk about. botox yes what we call that i don't know but i can imagine greenspan going before congress and in addition to his destructive syntax also having botox his face yeah so you can even tell

a thing i've been going to pretty much has that cold he was out only i don't really have all of our talks you have any really you know what would he not giving away any excuse to try to i mean he's and you could tell when he gets angry but it's because of those this there's actually more i think a credit to human beings ability to take a small change of facial features because when he gets angry you can't really discern if you have to go up to a monitor because see a little bit there maybe they're going to get a spatial expression or i think it may be just his moral. spirit you're getting really good at this fred speak to me too you can tell ben bernanke is all right here to tell it to you thinking very it's ironic so you know because ben bernanke you said that he wanted to have a more open federal reserve and he came in after greenspan and in many ways he's actually more closed off i mean greenspan was like human there was a human element a greenspan there was a narcissism there was a humanity but bernanke is like an empty suit yeah the guy's completely monotone spiritually not just you know. his verbiage it was

a little bit you know i don't want to beat up on bad. i don't know i don't think you yeah well i don't want to guys don't think i have enough poker talks is going on my christmas list for sure so you'll know when you see it i think. for now let's move on because president obama could have a secret weapon to help the u.s. avoid feeling the effects of qana rhea which is what we're calling the fiscal cliff it was renamed by one of the oh and it is us treasury secretary timothy geithner. different things doesn't work and we've had several periods now where there was a choice made to defer. and this political system again. with all the to say for america decides to defer again in the hopes that americans give us more time to come together i think you. are mistaken. i think timothy geitner could use some poker talks he was hardcore on the furrow but i used to be the guy

who has to speak no one that's what i was just like getting back to defer yeah we'll so be it with the president i know i think yeah not a good idea well turbo tax what he. what he can do if he so chooses if it comes to this if the president and congress fail to come to an agreement is he can ever gently affect what is withheld from people's paychecks you know what even if we go off the fiscal cliff of a deadly timothy geitner can say oh you know what don't withhold as much from their paychecks as these tax cuts just to expired would have us typically do but he doesn't want you don't you know what i mean this is interesting because it's a sorry i just have to say though that this is an example given as like a look we're not totally in trouble if the us goes off the fiscal cliff i think we are in trouble if the treasury secretary is this much authority over what's with

like a good though the treasury this is the first close in all the stuff you want to like it's like turning your watch back two hours and you wake up in the morning oh my god only one point by half an hour oh wait nevermind i move my clock back two hours like this guys always have emergency parachute after my life ravings your first call but will no like for school like i don't know reverse daylight saving to go and visit in person i mean we learn we have achieved about our facebook page not forget the facebook page guys ok what do you like me. because that is all we have time for thanks for watching come back tomorrow in the mean time you can follow me on twitter at lauren lester you can go to our facebook page dimitri just told you to you can watch us on you tube you can get an extension on hulu and you can have a great night. it was not a military.