The Business of America - Frederick W. Smith and Dr. Daniel Yergin

Well, I wasn't involved in SAFE at its inception. I got a call from General P.X. Kelly. General Kelly had been Commandant of the Marine Corps, and I had served four years in the Marine Corps. I can promise you when the Commandant called, I took it. He said, 'I think that after nuclear proliferation and bioterror, our dependence on foreign oil is the greatest national security threat that we have. And there's this great group in Washington called SAFE that has fantastic scholarship, has done all of these simulations with a lot of real former cabinet members that shows that this vulnerability is quite significant.' Well, he was preaching to the choir because when I had first started operations at FedEx in 1973, the business plan was perfect. I had three separate marketing analyses, but what I didn't count on was the Arab oil embargo. The price of oil went up four times and it almost killed us in our cradle. So I was very familiar with the vulnerabilities of importing oil. And so what General Kelly asked me to do was to be his co-chair, working with SAFE and Robbie Diamond, who is the, I guess you would call it the public policy entrepreneur, still at the helm. I can't say enough about Robbie and how he brought this issue to the forefront and has continued dealing with these critical issues. So I signed on to be the co-chairman with General P.X. Kelly. I was a civilian co-chair. I recruited about eight business executives including Herb Kelleher, my friend from Southwest Airlines, Mike Eskew from UPS, and on and on. General Kelly did the same thing with generals and admirals who had spent a lot of their careers protecting the oil lanes, the oil trades, Navy, Air Force, admirals and generals. And so we developed as our mission, a mandate called for a national energy security policy. And it was pretty straightforward. One, produce as much oil and gas in the Western Hemisphere as possible. This was pre-fracking, of course, this incredible technology that changed everything that you have so brilliantly written about and articulated in your recent article about the transition in foreign policy. So the first was to produce as much oil and gas in the Western Hemisphere as we could. That of course made every environmentalist in the country mad at us. The second was to use less of it. So we advocated the reimposition of fuel efficiency standards and that made every pro-oil person mad at us. And the third was to develop alternatives. Our scholarship at SAFE indicated to us the only real alternative to internal combustion engines and using fossil fuels was electrification. So we set up a subordinate unit called Electrification. Our group was very influential in getting the Bush 43 administration to pass legislation in 2007 in support of all three of those.

No, of course not. FedEx was started... In interest of full disclosure, he and I went to Yale at the same time. He was in the smart side of the university. Oh, stop that. Oh, it's true. He was in the class of 68, I was in the class of 66. And I think you'll agree, the school completely turned upside down in those two years because of the Vietnam War. It was really amazing to watch that change. So the company was started to move high-tech and high value-added items from the burgeoning high-tech industry that was centered in New England in the days we were in college. I flew these parts and pieces around. I already knew how to fly when I was in college. And increasingly I was hired to move these parts and pieces around from Burndy, Sperry, RCA, General Electric, IBM, Xerox. People forget they were making IBM 360 computers, manufacturing them 50 miles north of New York City in Poughkeepsie in those days. So that's the genesis of the idea of FedEx. I went off in the service and came back. Then the company was formed to solve the logistics problems which were quite unique because when you automate things with these high technology items, you can't just call in part-time people and make up the work. You're out of business. So Federal Express was started to provide overnight service from any point to any point in the United States with its own air and ground units. And we solved the logistics problem for high-tech business.

Yeah. So your point is did I know it was going to be a 90 billion company? Of course not. But we just followed the technology industry is what it amounted to, Dan. So of course FedEx has innovated at every step of the way.

Well, our customers are very interested in FedEx being as efficient as possible and to create the fewest emissions in our business. That means to reduce fuel consumption in the pickup and delivery operations. You have now reached the point where electric vehicles have a positive ROI and profit accretion replacing internal combustion engines in buildings and the other infrastructure. You know better than I all of the technologies that are making us more efficient. Natural gas, geothermal is coming online. But the problem is aviation. There is no solution that can make aviation the center really of the global commons these days carbon zero carbon. So we asked Yale if they thought they could solve the problem and come up with natural processes to mitigate the emissions of all commercial aviation in the United States. We gave them $100 million. Boeing gave them money. Southwest and their scholarship has come to the point I believe it is possible to do that and they've got three initiatives that they are working on that I think have a high possibility to permanently sequester enough emissions to offset all of aviation.

The best one is the fact that basalt is the most prolific rock in the world. When it's striated or pulverized, it absorbs carbon at an extraordinary rate. And if it's then used as fertilizer, it runs off in the hydrological table back into the ocean and is sequestered for eternity. Right? Marshes and alkalinity manipulation of the oceans are all promising but I think the use of basalt rocks as a carbon sink is probably the most likely. That program really is very analogous or complementary of course to what SAFE does solving this problem. And as I think you're suggesting, sustainable aviation fuel would be as now envisioned, a challenge. Well, we felt from the get-go and have been quite an outlier in the aviation industry that the chemistry or the input-output equation on sustainable aviation fuels is very tough. Right? And today sustainable aviation fuels is only about 1% of the fuel burned by worldwide aviation. So I think the probability is Yale Center for Natural Carbon Capture is more likely to solve the problem than SAFE.

Well, I think you have to recognize, as I said in that Coolidge Foundation speech, that since 1934 when Roosevelt and Secretary of State Cordell Hull passed the Reciprocal Trade Agreements Act of 1934 to try to reverse the protectionism and the collapse of trade in the previous four years, it has been United States policy to promote global trade. And the reason the United States wanted to promote global trade is three-fold. Number one, as Cordell Hull famously said in his memoirs, Roosevelt believed, and Hull particularly after the end of World War II, and this is Hull's quote, "When goods cross borders, armies rarely do." So Roosevelt and Hull believed that by expanding trade and the relationship between nations, they did in fact ink 39 trade agreements before the world went into catastrophe in World War II. Second reason they wanted to do it is they felt that the peace of the world depended on other countries becoming more prosperous. And lastly, these more prosperous nations around the world would be better markets for US goods. That was the basis of US support for open trade and it was supported by Truman, of course his great secretary of state George Marshall, whose Marshall Plan rehabilitated Europe and laid the basis for the European Union. That's where the European Union came from. It did indeed. And Eisenhower, Kennedy, Reagan, Bush 41, Clinton, Bush 43, who was very much distracted by the Middle East. And then of course, President Trump has a contrary point of view. His belief is that if we put tariffs on imported goods, we will reindustrialize, create more manufacturing jobs here. And this is an arcane argument, but I would recommend to the audience, Dan, last weekend. You had former Senator Pat Toomey, a Republican, on the Journal Editorial Review interviewed by Paul Gigot, the editorial editor of the Wall Street Journal, that articulates brilliantly the reason that he was a pro-trade proponent. On Sunday, Mike Froman, a Democrat who was USTR under President Obama, does the same thing. On also on Sunday, Peter Navarro, the head of trade and manufacturing, the president's adviser, lays out the president's case, which is increase tariffs. And as those taxes incentivize American manufacturing to reshore, we can use these revenues to lower taxes and thereby benefit the blue-collar community. So that's where we are. The president believes one thing, he's elected and he gets to implement his policies. Our job at FedEx, we transport $2 trillion worth of goods. We made 18 million customs entries around the world in December alone. I believe the largest port in terms of customs entries is Memphis, Tennessee, which is the site of our largest hub. No coincidence. No, of course. And because what trade is about, 40% of the value of trade is moved by air, but it's only 1% of the tonnage. And I think that's one of the things that people do not understand. If you go into a FedEx hub, you'll see a shipment from Poland to Hanoi. You'll see a shipment from Singapore to Madrid. You'll see a shipment from Guadalajara to Amsterdam. Semiconductors, auto tech, aviation, ethical pharmaceuticals, surgical instruments, all kinds of things. And this is a worldwide system today. It is more diversified away from China in the case of the United States than it was because of President Trump's tariffs in the first term. But the trade is still prolific otherwise.

Well, the Peterson Institute, which is a very good think tank here in Washington, estimates that by 2022, the trade policies favored by Roosevelt and all the people that I mentioned had created a benefit of about $20,000 per year, maybe $22,000, one of those numbers, I can't remember, but it was just huge. And all you have to do is to look at a hospital room or a broadcast facility or your home and the products in there are from all over the world and they are much less expensive than had they been made in the United States. So as I said at the onset, that was one of the rationales for global trade: more competition and less cost for American consumers. There's no question that worked. But the benefits are diffuse. The pain of de-industrialization is very localized. When you lose a plant that's been making auto parts for years and years and it moves to China and then to Mexico, that pain is very real. So that's been the problem for support of trade forever. And it's very well addressed by Milton Friedman. You can watch him on YouTube. And Adam Smith in his famous book talks about this exact issue.

Yeah. I think as I said in that Coolidge speech, you have to look at the whole picture not just part of the picture. It's not just trade that's created the issues we have. It's financialization and socialization. In 1985, finance represented about 10% of the profits of American industry. It's now 23% going north. And on the workforce side, partially triggered by the loss of manufacturing jobs, which MIT estimates at about 1.5 million, but other related jobs when you lose a factory, their restaurants and so forth. So that's the pain that the president points to and it's very correct and very real. The benefits again were diffuse. So this whole thing about reindustrialization you have to look at it in the financialization and you have to look, in other words, people would much rather put their money in something other than manufacturing particularly the private equity folk. And secondarily on the socialization side, people do not understand we're the fourth largest social democracy in the world now in terms of transfer payments to individuals. Only Greece, Italy, and France are ahead of us. And Senator Phil Gramm wrote a fantastic book which I would commend to you that explores this exact issue. It's called 'The Myth of American Inequality'. So you can't just look at this issue as trade. You have to look at what's going on in the United States in terms of financialization and the increased socialization. We have 7 million men working age 24 to 54 that are sitting at home doing nothing but looking at screens. And Nicholas Eberstadt, the great scholar of American Enterprise Institute, wrote a book called 'Men Without Work' in 2016, which he updated between the start of the pandemic and today. There are four million more people on Social Security disability than there were at the start of the pandemic. So you can't just look at this issue of trade and we're going to bring the factories back. And then the final thing, Dan, is automation, right? I mean the automation that FedEx is employing today. I think if we do bring a lot of factories back, if that's what the president's policy and of course we move things from every place, Sousa City to Singapore and Boston to Mumbai, we'll move stuff wherever it's originating and going. But the problem is I don't think there will be a significant increase in employment because a lot of the manufacturing will be done by robots. And of course you've seen that in FedEx's own operation.

Well, services we have a trade surplus of $300 billion. We have a merchandise trade deficit of $900 billion. So our total trade deficit is $600 billion. The trade deficit in goods gets all the publicity. We're a huge contributor to American balance of payment surplus. But even more important than just looking at it in too broad a brush as you just pointed out is the fact that you cannot have a trade surplus as long as you have a fiscal deficit to the extent that we do. They are opposite sides of the same coin. So that is why when President Trump put his tariffs in in the first term, our trade deficit went up and our fiscal deficit increased. So you have to reduce a fiscal deficit in order to have a trade surplus.

Well, I think the president is trying to solve it with the DOGE, and controversially perhaps, but that's the purpose of the DOGE is to try to reduce government expenditures. The problem, Dan, is the federal non-defense civilian government payroll is about $250 billion. Not that that's not a lot of money, but it pales in comparison with the $7 trillion budget that we have. So it's the socialization issue that I mentioned, it's transfers to individuals plus defense that's the problem. So if you're just trying to deal with these issues with reduced federal workforce, including defense department, which is more than the 250 million, the civilian, you can't make a meaningful improvement. The DOGE folks listening to the presentations and the interview by Bret Baier and so forth, they believe they can find waste, fraud, and abuse and reduce employment to the extent of about 15% of the budget. But that is why President Trump is trying to address the budget because he has very good advisors like Kevin Hassett and the Secretary of the Treasury and so forth that know if you want to have a trade surplus or reduce the trade deficit, you must reduce the fiscal deficit.

Yeah. Well, I think at the end of the day, you've had people interested in and you've written about this, including the great article you just wrote in Foreign Affairs. And people want to reduce emissions. So my suggestion was simply to put a value-added tax on emissions or fuel production probably at the wellhead or downstream so it's not like a sales tax and then be able to deduct that from our exports like the Europeans and others are able to deduct VAT. And I think means testing of Social Security. I mean, quite frankly, it's absurd that I'm eligible for Social Security payments. And by the way, I've never taken a Social Security check because I think Social Security should be means tested. And we should probably have retirement programs where the money is invested and can compound as opposed just to be transferring from the working to the retired. That's the grand bargain. And certainly, I think if you look at Canada, that's what they've shown with their retirement program that you can do.