Secretary, thank you so much for making the time.
That's great. Great to be here.
I wanted to ask you what the free market means to you. It's a term that gets thrown around all the time on the right of center, but I think people have very different senses of what it actually is, what its strengths are, and where we need to worry about it. How do you think about it?
I'd say I'm informed by 35 or 40 years in the markets. My largest successes came in what you'd call market failures. In economics, there's equilibrium, but you never hit it; you're always moving toward or away from it. The free market can go too far and then trend back. How do you avoid a calamity? What guardrails do you put up to avoid market revulsion like in '08 and '09? Conventional wisdom is right 90% of the time in markets, but it's the 10% where things break. A lot of free market people forget we're in a political economy. I gave a speech at the Reagan Library about 'While America Slept' — for 25 years we had a slavish devotion to free markets that would recalibrate automatically, but they didn't. There was cheating. That's what's been great about President Trump: in a political economy, voting is what recalibrates. The market, or any complex system, can go non-linear and produce a cataclysmic outcome. We pretended the market is free when it's not. The Federal Reserve put leads to risk-taking; that's not a free market. Housing isn't a free market. Social sciences are like biology, not physics; markets involve emotions and visceral reactions. Often there's a mutation where everyone thinks it's a free market but it's not, like housing in 2005-2006 backed by Fannie and Freddie. So a lot of it is the illusion of free markets. You need to see what's really going on underneath the hood.
That's a helpful distinction between two problems with markets: the 10% non-linear extreme case, and the everyday market where you slice away layers — housing isn't free, healthcare isn't, education isn't.
Education has its own inflation index, 2-3% above CPI. Compounded over time, it eats the economy. On 'Why America Slept': I based it on Churchill's 'Why England Slept'. We brought China into the global trading system thinking they'd become like us, but Xi Jinping was different. We let consumption become more important than production. We don't need to reshore fireworks or whoopee cushions, but there are things where cheap and efficient is not enough. We were lulled into thinking prosperity doesn't require security. National security is economic security. COVID didn't cause supply chain problems, it highlighted them. We believe there are five to eight essential industries to reshore, and we're sprinting: semiconductors, critical minerals, precursor chemicals for amoxicillin, all from China. Our strategic pharmaceutical reserve is only four weeks. What would we do in a kinetic battle with no medicine? We've neglected this too long.
Your Reagan Library speech was fantastic. My favorite line: 'Manufacturing is not just an output on a balance sheet; it is a reservoir of practical capability.' That captures what we're trying to bring back. In critical industries, we think of outputs like chips and drugs, but also capabilities. I don't know the details of whoopee cushion or fireworks manufacturing, but...
And I don't need to.
I didn't think I needed to know about critical minerals. Are capabilities just synonymous with those critical outputs, or are there capabilities we need to build here not because the product is high value today, but because if we needed to shift to a war footing, maybe the whoopee cushion factory also makes tourniquets?
Maybe. It's about preparedness and skilled workers. The people who can make a latte may not run a rivet machine. Jeff Bezos attributed his success to growing up on a ranch, tinkering with his grandfather. We came to think we could separate research from production, but you can't. That's why China can't replicate jet engines despite taking them apart. Boeing is a case study: they separated corporate from manufacturing, moved to Chicago, then Washington, bought back stock. Senior defense leaders know little about manufacturing. In the UK, the PLC/operating company split contributed to the loss of their industrial base, along with bad tax policy. We've got to admit when we were wrong. Ronald Reagan said a great country can admit its mistakes.
Doesn't have an industrial base anymore, that and some bad tax policy. So I do think it's very important. We've got to admit when we were wrong. That was the topic of my speech — Ronald Reagan said a great country can admit its mistakes.
You only gave Ronald Reagan credit for saying that great countries can admit their mistakes. We're clearly doing that now. The Boeing example is fascinating because the problem wasn't being undercut by China; something else is going on. It seems to be a prevalent phenomenon in the US and UK. Is there a policy response? Ultimately it must come down to incentives. What do we change to move back toward making things and having management where production is, rather than extracting short-term cash?
President Trump issued an executive order here; the DOW is going to give you production targets, and if you don't meet them you can't make more than $5 million. So there's a lot of incentive there.
That's great for defense contractors. Does it apply more broadly?
More broadly, there are incredible companies like 3M and Honeywell that constantly innovate. I'll tell a story: early in the administration, I walked into a meeting with President Trump and Bobby Kennedy and seven pharmaceutical executives. Trump asked why drug prices are so much higher in the US. They gave excuses about PBMs and pensions. Trump said no, he had a friend who went to London for a fat shot that costs 10% of the US price. He pushed them to bring prices down and make other countries pay more. That's happening now. It took one executive order. If we think about the Strait of Hormuz closure, or the Strait of Taiwan, we need to bring semiconductors here as quickly as possible.
