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FAREED ZAKARIA GPS

Karzai's Not-So-Crazy End Game; U.S. Ambassador to Russia Resigns; The Great Fall of the Chinese Economy; Local Leadership Key in Arab World

Aired February 9, 2014 - 10:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


FAREED ZAKARIA, CNN HOST: This is GPS, the Global Public Square. Welcome to all of you in the United States and around the world. I'm Fareed Zakaria.

We have a terrific show for you today starting with Sochi. I will talk live with Michael McFaul, the outspoken U.S. Ambassador to Russia who has just announced his resignation.

We'll talk about the games, the security threats and, of course, the mastermind behind it all, Vladimir Putin.

Then, a seasoned investor warns of the event everyone is worried about, the great fall of China, or the Chinese economy, something that will slow growth across the world.

Also, the Tiger Mom is back. She tells us why some ethnic groups succeed much more than others. Racism or research? We'll talk it over.

Then, technology seems to be moving ahead at warp speed, self- driving cars, computers playing chess and more, but where are the jobs? Two MIT experts explain the paradox.

And, Syria is a calamity, Egypt is a mess, but I will bring you one bright spot in the aftermath of the Arab Spring.

But, first, here's my take: Is Hamid Karzai crazy? That's what many Americans thing and on the face of it, the Afghan President has said lots of odd, inflammatory and contradictory things.

Over the past year, he has wondered whether the American presence in Afghanistan has done any good at all, refused to sign an Afghan- U.S. security pact and called members of the Taliban his brothers.

This week the New York Times revealed that he has been conducting secret negotiations with the Taliban. What can he be thinking?

Well, maybe Karzai is looking at what happened to one of his predecessors. In 1989, the Soviet Union withdrew from Afghanistan. The President it had backed, Mohammad Najibullah, stayed in power, but within months a civil war broke out, forcing him eventually to seek refuge in a U.N. compound. In 1996 the Taliban rode into Kabul, captured Najibullah, denounced him as a foreign puppet, castrated him, dragged his body through the streets and then hung him from a traffic light. For good measure, they did the same to his brother.

Now, there are many important differences between the past and present, but Karzai is probably looking at the evolving geopolitical landscape. The U.S. has tired of its longest war, debating only the size of the small force it will leave behind, mostly for training purposes.

The Taliban continue to have many strongholds in significant parts of the country. Pakistan continues to support the Taliban from across the border support that is likely to expand as America withdraws and Islamabad seeks to fill that power vacuum.

So Karzai might be playing an erratic game of brinkmanship in his negotiations with Washington, but he might also be trying to navigate a post-American Afghanistan. While American troops might well remain and some American aid will continue, Afghanistan is going to look very different in 2015 than it does today.

Consider these facts from a highly intelligent forthcoming book, "War Front to Store Front," by Paul Brinkley: In 2009, Afghanistan had a nominal GDP of $10 billion. Of that number, 60 percent was foreign aid, 30 percent was the cultivation of poppy and the production of raw heroin, all of which is informal and underground.

So that leaves 10 percent of the economy, $1 billion, of self- sustaining, legitimate economic activity. During the same year, the United States military spent $4 billion per month to protect a country with a real annual economic output of $1 billion.

"Kabul is a metaphor for the country," Brinkley said to me. "It is a city sized for 500,000 people. It has grown to 8 million, who have been drawn to the city by the massive influx of foreign money, military and nonmilitary. But that money is going to slow down very significantly soon. What happens then?" he asks.

Brinkley worked for the Pentagon to start up build companies in Iraq and Afghanistan, fascinating experiences he recounts in the book, and he came to the conclusion that the single most important task in both countries was to create a self-sustaining economy, which the U.S. paid little attention to.

He is pessimistic about Afghanistan's prospects, and he said the national mood there is worsening.

"Imagine living in a nation," he writes, "In which your national government was totally dependent on charitable donations from other countries. "Would you respect that government? Would you not assume they were puppets of the international donors who were propping up the government?"

Hamid Karzai might be pondering just these questions as he plans his next crazy outburst. For more, go to cnn.com/fareed and read my Time column this week. And let's get started.

Joining me now, live from Sochi, Russia, is Michael McFaul, the U.S. Ambassador to Russia, who on Tuesday announced he will be leaving his post to return to Stanford University.

Over his more than two-year tenure in Moscow, McFaul has, at times, been deeply critical of the Putin administration. In return, he's been accused by the Kremlin of arrogance and undiplomatic behavior and he's been hounded by pro-regime media outlets.

McFaul is in Sochi as part of President Obama's official delegation.

Welcome, Mike. Let me ask you, do you think at the end of the day it was a mistake ...

MICHAEL MCFAUL, UNITED STATES AMBASSADOR TO RUSSIA: Thanks, Fareed.

ZAKARIA: It was a mistake to hold the games in Sochi? This is essentially a war zone, or very close -- perilously close to a war zone and Russia could have held the games anywhere. This is literally the southernmost part of Russia. Was this a mistake?

MCFAUL: Well, that decision was taken long before my time in government. Whether it's a mistake or not is for others to judge. I do know that we've been working closely with the Russian government for the last two years, since I've been here, in preparation for these games.

Our focus, number one, of course, is security. As of today, we have about 150 people from the embassy and from the United States here working closely with the Russian to focus so that we have a safe and secure games.

Mike, when you look at whether it's Syria, the Magnitsky Law, Snowden, American adoptions, it feels like Russian-American relations are in bad shape and that the reset really hasn't worked. Why are they so adversarial?

MCFAUL: Well, I wouldn't put it that way, Fareed. I would say we did reset relations five years ago with just a basic premise that if we engage with the Russians, we do have some common interests and, through cooperation, it can be good for Russia, good for the United States.

And when you think about our national security interests, whether it's Afghanistan, Iran, chemical weapons in Syria, trade and investment issues or reducing nuclear weapons in the world, those are all areas where we cooperation with the Russians.

ZAKARIA: But let me ...

MCFAUL: Now, it doesn't mean we don't have our disagreements and the list -- go ahead.

ZAKARIA: Let's take a look at one of those. In an interview last week with Kommersant you said that one of your two failures that you admitted to was that you couldn't get the Russian media, particularly I think the pro-regime media, to stop fomenting the rumor that the United States and Washington were trying to foment regime change in Moscow.

But Henry Kissinger, on this program recently, said that he thought on Ukraine, Washington should be much more or at least more sensitive to Russia's interest and its concerns. And he said, "Putin is probably assuming that we in Washington think that Kiev is a dress rehearsal for Moscow."

Was that a fair -- Is that fair that we should be more concerned about Russia's interests?

MCFAUL: My job here is to explain our policy and to be as transparent as possible about our support for civil society, about our engagement with regimes around the world, but most certainly Russia.

To say I failed, I said that, is because if I look at public opinion polls, most Russians still believe that we're seeking to foment regime change in Russia.

Having said that, I'm glad you added regime-oriented media because there is a real debate in this country and if over the spread of the country, that may be still the case, when asked to evaluate my work in Russia, 91 percent of those polled on a liberal outlet, Echo Moskvy, approved, only 9 percent disapproved.

So, in that respect, I think we've made some progress in trying to explain two the Russian government and to the Russian people exactly what we do and don't do with respect to support for civil society, democracy and human rights. Transparency is our policy.

ZAKARIA: Do you believe that the Russian government leaks the phone conversation between Victoria Nuland, the State Department official, who said, "F the European Union" with regard to their passivity on Ukraine?

MCFAUL: Well, I haven't seen any confirmation that it came from the Russians. I've been down here in Sochi during this period. I can say that the Russian government does have tremendous capacity when it comes to listening to conversations.

I've had one of mine put on the web before when I was -- a couple years ago and most certainly we respect their capacities. We don't respect what I consider, if it's true, to be a real breach of diplomacy. That's just not the way we do business between countries.

ZAKARIA: Mike, before you were a diplomat, you wrote an article in Foreign Affairs in 2008. It was a very tough piece on Putin's Russia, really tough. Now, is it easy to understand, in that context, why the Putin government and why Putin himself probably mistrusts you? MCFAUL: I don't want to make it about me personally. I think my record as an advisor to President Obama, which really goes back seven years, not just the five years. I've been with the government for five, but with him for seven.

We have developed a very, you know, clear strategy for how to engage with Russia. We've achieved a lot through cooperation and mutual respect.

And I would hope that President Putin understands that in the same why that I wrote that Foreign Affairs piece, I also was part and, you know, an intimate player in developing that strategy which I think has made Russia better off and the United States better off.

ZAKARIA: Thirty seconds, Mike. Did Putin say anything to you in what was your, what I assume would be your last meeting with him?

MCFAUL: I haven't seen him yet. I'm sure -- I've exchanged conversations about these very issues with him personally and I hope I get to see him before I leave Russia to thank him. I've had a fantastic time here as a U.S. ambassador. It's been -- I'm very proud to represent my country here.

ZAKARIA: Michael McFaul, thank you so much for joining us. We look forward to hearing from you when you're back at Stanford.

Lots more ahead on the show including a dire warning about China. One very prominent forecaster says the world's second biggest economy is going to have a sharp slowdown and he has data to prove it.

(COMMERCIAL BREAK)

ZAKARIA: Financial markets around the world have been tumbling, most dramatically in many of the emerging markets that were once considered superstars, Brazil, Turkey, South Africa, Argentina.

Think emerging markets don't matter to you if you don't live there? Think again. My next guest says another emerging market is on the verge of crisis, China. And if it's bubble bursts, your wallet will surely be lighter.

Ruchir Sharma is the managing director and head of the emerging markets at Morgan Stanley. He is also the author of "Breakout Nations." Welcome, Ruchir.

RUCHIR SHARMA, MANAGING DIRECTOR AND HEAD OF EMERGING MARKETS, MORGAN STANLEY: Hey, Fareed.

ZAKARIA: Now, you have a very powerful presentation on China that you've made in the Financial Times and other places. And I want to just take you through it and we have your charts here.

The first point you make is if China slows down, this is going to be a big problem because if you look at it, China's contribution to global growth, which used to be 10 percent only a decade ago, is not 36 percent, which is essentially almost twice that of the United States. So it is the single country that has been powering the economy.

So if it falters, you say watch out for everyone.

SHARMA: Exactly. And like that old saying used to be that the U.S. sneezes, the rest of the world may catch a cold, I think that now we have to watch out that if China really has a major stumble, then the rest of the world will be impacted by that.

And that's what's really even been impacting U.S. stock markets and the developed world, that if China really slows down, they know that this is going to have an impact out here as well in the U.S.

ZAKARIA: And the reason you think China's going to have an impact on this, you have a great chart on this, is that China went through a huge debt binge. You know, basically it accumulated a lot of debt.

And if you look at the -- your chart, what you see is, you know, we think that the United States' deficits went up after the global recession because we had stimulus. Well, China had stimulus on steroids.

Look at what happened is -- the chart almost goes vertical these last five years, right?

SHARMA: Exactly. As you know, I used to be very optimistic on China and I was a bull on China for much of the last decade. But something began to shift out there after the crisis in 2008. I think they really panicked. They really figured out that the need to put a lot more government spending to work, a lot more stimulus to work and we saw this result.

ZAKARIA: So it used to be that with $1.4 of debt, they could produce $1 of GDP growth. Now, they need $3.4. So this is also highly inefficient growth now.

SHARMA: Yes, that's right because the level of GDP growth is falling, the level of investment remains very high and yet it's throwing more and more money after the problem to try and grow.

ZAKARIA: So you're thinking more and more highways, more and more shopping malls, more and more hoping that this will generate economic growth.

SHARMA: Yes, that's right. And I think that's the real problem (inaudible) China's concerned which is that it still wants to grow at 7 to 8 percent, but it's a middle income country now.

It's at a level of development and at a level of urbanization with more than half the people now live in cities and urban areas and not in rural areas where it's difficult to get growth rates of 7 to 8 percent.

If you look at the other (inaudible) economies, Japan, Korea, Taiwan, at a similar stage of development, their growth rates slowed down to about 5, 6 percent or so. So I think it's this unrealistic growth target of trying to grow at a very fast pace which is what is getting China into this trouble of too much debt.

ZAKARIA: So what you're predicting is that China's economy will not just decline to 7 percent, which is what a lot of people are saying, but a good it below that.

SHARMA: Yes.

ZAKARIA: It could be 6 percent, it could even be lower.

SHARMA: Yes because if you follow the historical template, the growth slowdown could be about 4 to 5 percent. That could be the average growth rate for China over the next five years if you just look at the 13 most extreme cases in terms of a credit boom. And China has had the most extreme case of other developing countries.

ZAKARIA: If that happens, Ruchir, I mean this is a real minority view.

SHARMA: Right.

ZAKARIA: I mean markets around the world, growth around the world will slow down because China, as you pointed out in this first chart, has been fueling global growth.

So I mean we will see a slowdown in the U.S. -- this is a global, this is will have seismic consequences.

SHARMA: Yes. I think it really depends on how it plays itself out. I think if China wants to keep growing at 7 percent and then next year or the year after that, you'll get a major abrupt slowdown to 3 to 4 percent, that'll have a huge effect.

ZAKARIA: So better to deal with it now than to push it off because you'll be creating a bigger bubble that will burst even more badly.

SHARMA: That's been our point that if the last three to four years had they settle for a lower growth rate, they wouldn't have accumulated this amount of debt.

Now, they have a new leadership, they talk about reform, but the single most important reform for them to focus on is to stabilize the level of debt otherwise they're going to have an even bigger problem going ahead.

I don't think they can avoid a major economic slowdown, but to really avoid a full-out crisis, they need to deal with this right away, accept a lower growth target and then sort of play for the next 5 to 10 years rather than trying to high 7 1/2 percent year-in, year- out. That is I think unrealistic.

ZAKARIA: Ruchir Sharma, you've been right about the other emerging markets. If you're right about China, we will all, unfortunately, notice.

Up next, What in the World. Amid all the chaos in the post Arab Spring Middle East, one country is getting things right. I will explain right after this.

(COMMERCIAL BREAK)

ZAKARIA: Now, for our What in the World segment. It's popular these days to say the Arab Spring has gone badly awry. I tend to think it's a bit early to make these judgments, think of what America looked like in 1779, three years after its revolution.

But if you were to compile a mid-term report, Syria would get a failing grade, Egypt's revolution has faltered badly, Libya is a mess. But there is one spark of hope for the revolutions of the Middle East, and it's a country that could be a model for all the others, Tunisia, which was the birthplace of the Arab Spring.

What has Tunisia done right? Well, let's start with history. Tunisia has been quite different from Egypt and its neighbors for centuries. It was the first Arab state to develop a modern constitution, all the way back in 1861.

Over time, Tunisia has developed stronger civic institutions than its Arab neighbors, including a human rights league that was founded nearly four decades ago.

And the demographics are largely homogenous. While Syria and Iraq are divided along sectarian lines, Shia or Sunni, some 98 percent of Tunisians are Sunni Muslims.

But perhaps more important than all of these historic differences are the choices that modern Tunisians have made.

Tunisia's military has stayed out of active politics. Contrast that with Egypt, where the military controls anywhere from 10 percent to 40 percent of the economy and business, four of Egypt's last five presidents came from the military And the one that didn't, Mohammed Morsy, was toppled by the military.

Another factor behind Tunisia's relative success is the foresight of its civilian leaders. Three years ago, Tunisia had a similar trajectory to Egypt. Both nations voted for Islamist leaders whose movements had either been suppressed, banned, or exiled.

Look at what happened next. In Egypt, when a fresh spate of protests began, President Morsy battened down the hatches and refused to reach out to his detractors. He was removed by force.

On the other hand, in Tunisia, the coalition government actually stepped aside of its own accord, handing power to a temporary government. Now that is how democracy is supposed to work, by making painful compromises.

In Cairo, people didn't make those concessions. Egypt's Islamists wanted to push through a constitution that would be unacceptable to liberals, and then to rule by presidential decree.

Tunisia's new constitution, which was approved overwhelmingly by a majority of Islamists, is being hailed as the most progressive constitution in the Arab world, with equal rights for women and minorities.

Last month I hosted a panel at the World Economic Forum in Davos, with top leaders from the Arab world. One of them, Tunisia's Rachid Ghannouchi, explained why his party, the Islamist party, willingly stepped down from government last year in Tunisia.

"We had two choices," he said. "Either we stay in power and we lose democracy or we gain democracy and give up power." He chose the latter. It was a selfless choice, but also a savvy one. I won't be surprised if he and his party are back in power later this year.

The Tunisian model is not flawless, but it has powerful lessons for the rest of the Arab world. This is a country that has learned the most difficult lesson of democracy: how to be inclusive and how to compromise.

It has learned this lesson without the West, without aid money, without compromising on its religious ideas. Remember, the new constitution firmly enshrines Islam, but alongside women's and minority's rights.

So before we start blaming Washington or the West for not doing enough in the Arab world, let's learn from Tunisia that local leadership is the key and that right now there is little of it in the Arab world.

Up next, are some races superior to others? It sounds like an appalling question, but two (INAUDIBLE) professors say they have some very interesting data. Right back.

(COMMERCIAL BREAK)

CANDY CROWLEY, CNN CORRESPONDENT: I'm Candy Crowley in Washington with a check of the headlines. The Obama administration is expanding federal benefits for married same-sex couples. Attorney General Eric Holder says the expansion will include 34 states where same-sex marriage is not legal, but apply only to areas where the feds have jurisdiction. That means same-sex marriages will now be recognized in matters involving survivor benefits, bankruptcies and prison visits.

A U.N. convoy trying to deliver food and medicine in the besieged Syrian city of Homs was attacked. Some of the aid was not delivered because U.N. Workers were forced to flee shelling and gunfire during the Saturday incident. Syrian state TV says 65 civilians, all women, children and senior citizens, have since been evacuated from Homs.

The sister of an American man being held in North Korea says she is deeply concerned about her brother's condition. Kenneth Bae is back at a labor camp after being released from a hospital. Bae's sister Terri Chung says she is devastated by the news and that a new social media campaign called "Bring Bae Back" has been launched to help win his freedom. Those are your top stories. "Reliable Sources" with Brian Stelter is at the top of the hour. Now, back to Fareed Zakaria "GPS."

ZAKARIA: Are some ethnicities, races and religions superior to others, at least when it comes to worldly success? To some that sounds like an idea that smacks of racism. To my next guest, though, there is a serious argument to be made with serious research. Amy Chua first courted controversy with her 2011 book "The Battle Hymn of the Tiger Mother." She is a law professor at Yale as is her husband Jed Rubenfeld, who is the co-author of her latest book "The Triple Package." Or their latest book. Welcome to the show. So, what got you interested in this?

JED RUBENFELD, PROFESSOR, YALE LAW SCHOOL: Well, you know, we're both teachers at Yale Law School. And a few years ago we noticed some strange facts. We were looking around and we suddenly said what's up with all these Mormon students? And we noticed there were more Cuban- Americans than you might have expected and more Nigerian-Americans. We thought well, maybe Yale is unrepresentative. So, we decided to check. And sure enough, Asian-Americans, Indian-Americans, Nigerians, Cubans, Mormons, are quite a bit and a few other groups are disproportionately successful in this country.

ZAKARIA: And the numbers are staggering. So New York City has an exam for its selective schools, Stuyvesant and Bronx High, and last year, what were the results?

AMY CHUA, PROFESSOR, YALE LAW SCHOOL: It was astonishing. I think it was something like I don't know, maybe something like 177 whites and even smaller numbers for other groups and then I think it was 640 Asian-Americans and, you know, that's on a standardized test and even more stunning, many of those kids who got in are actually, you know, the children of restaurant workers or taxicab drivers. They're not all the kids of engineers. So it's quite startling.

ZAKARIA: So, you decided to look into this. And, you know, what's the basic finding?

RUBENFELD: I want to stress one thing we found that was quite surprising at the outset, that shocking success that Asian-American kids have today, 140 points higher on their SATs by average and, you know, many more admissions to schools like Stuyvesant, it disappears in the third generation. So research has been done on this and third generation Asian-Americans have no difference in their academic performance between them and other Americans. So, what we are saying completely debunks the stereotype of the model minority. It shows that the success is not innate, it's not biological. Instead, cultural factors are at work. And we decided to look inside those cultures, those groups, those families to try to see if we could see what was happening and try to learn from it.

ZAKARIA: So, what is the cultural factor at work here that makes it so that these immigrant groups, that certain immigrant groups, succeed? CHUA: And it's not just immigrant groups. The Mormons are a non-immigrant group. What's amazing is that despite their enormous differences, you know, what do Mormons and Nigerian-Americans and Chinese-Americans have in common? They actually have three features in common that we're calling the triple package. The first is a deep sense of exceptionality. Now this exceptionality can come from many sources. It can come from a sort of your group that you belong to or your family, or just an innate talent or, you know, a parent that instills you with that sense that they are special.

ZAKARIA: So for Jews, may think of themselves as the chosen people or Mormons may think they have a special kind of - that kind of thing.

CHUA: Yes.

ZAKARIA: Or it could be very much a family thing where we're special.

CHUA: Absolutely. And - or, you know, the Nigerians who are here are disproportionately, Igbo and Yoruba, two very successful groups in Nigeria with a proud royal heritage. But what's interesting is that the second quality is insecurity, which seems like the opposite of a sense of exceptionality. And insecurity we mean, you know, a feeling that you haven't quite done enough, that you're not quite good enough, and the third is, impulse control.

ZAKARIA: And the third one, I know you know a lot about psychology, is it's based - you know, the most famous experiment that they've done with children is this one about the marshmallow.

RUBENFELD: The marshmallow test. Yes.

ZAKARIA: Describe it.

RUBENFELD: Famous experiment done 30 years ago. You give kids a treat, a marshmallow, a piece of -- something they like, and you ask them to see if they can wait 15 minutes before they eat it. You tell them if you do wait, you'll get a second one. And the question was, do they wait or don't they? And ...

ZAKARIA: And the ones who waited when tracked later on in life turned out to be more successful on almost every dimension.

RUBENFELD: It was a finding that we stumbled on. The Walter Mischel who originally did the marshmallow test just almost by accident decided to track them 20, 30 years later, and sure enough, on every measure, academic, occupational, income, staying out of jail, these kids who actually waited the 15 minutes, did better. And the question is, are there cultural factors that induce that. That strengthen that kind of willpower and impulse control and it turns out there are.

ZAKARIA: So, my question about this, first of all, it's very pleasing to hear that Indians are supposed to be part of this group because I'm an Indian-American, but what I wonder about, is if there is something within the culture that makes, you know, people of Indian origin succeed, how come India has been such a mess for so many hundreds, maybe thousands of years, the same could be said of China. If these are cultural traits, God knows China had these cultural traits for hundreds of years and until 30 years ago, China had no growth, was a totally dysfunctional country.

CHUA: Yeah. And that's a great question. I mean that's not how we're using culture in this kind of essentialist way. Like, you know, Confucianism in a frozen way. Obviously, culture in this country, you know, you have the heritage and then you come to America and it's suddenly this mish mash, interacting with American society. And one of the driving forces of the triple package is insecurity. Often the insecurity of being an outsider. You know, that feeling of being an outsider and also being insecure financially, you know, you're the one with a funny accent, you're the one - you don't know if you can survive, that's part of what generates drive. What's interesting about this -- these three qualities is that no one of them alone generates drive. You know, if you are just insecure well, that doesn't lead anywhere. If you're only feeling superior, that can be complacency. But it's this combination of a sense of insecurity with a sense of exceptionality that often generates this feeling of, you know, a drive, like I need to prove myself.

ZAKARIA: Do you think that there's some lesson people can learn? Can you learn these cultural traits?

RUBENFELD: Undoubtedly. We show in the book that there are many, many individuals, not from these groups that we discuss in detail, who also have all three of these traits. President Obama is one. Justice Sonia Sotomayor. These are individuals who didn't come from the groups we're talking about and yet you can see if you read their biographies they have all of these traits and it helped them succeed.

ZAKARIA: So, you're not saying be Jewish, be Chinese, be Indian. You're saying think of yourself as special, be a little insecure and driven and believe in ...

CHUA: More disciplined.

ZAKARIA: ... delayed gratification.

CHUA: It's nothing genetic. Nothing about the superiority of one culture. These are underlying, almost like psychological traits. You could call them cultural traits, but they are accessible in theory to everyone.

ZAKARIA: Final thought.

RUBENFELD: I guess we would just say, let's not be afraid to look at facts. If we've reached the point in our society where setting a U.S. Census statistic gets you accused of racism and stereotyping we're not going to be able to learn anything. Our bottom line is that anyone can achieve and achieve at a high level and we're just hoping that some people might find something useful in our book to achieve what they want to achieve in their lives. ZAKARIA: Jed, Amy, pleasure to have you on.

CHUA: Thanks for having us.

ZAKARIA: Up next, why the new machine age is great for economic growth, great for innovation, but it might be bad for you unless you watch what comes next.

(COMMERCIAL BREAK)

ZAKARIA: The first machine age was the era unleashed by the industrial revolution. It was a period when great new inventions changed the world. Think of the steam engine, electricity, cars. Well, my next guests say there is a second machine age happening. Erik Brynjolfsson is a professor of management at MIT Sloan School, Andrew McAfee is a scientist at the MIT Center for Digital Business. They are the co-authors of "The Second Machine Age." This age they say is very different from the first one. Welcome both.

ANDREW MCAFEE: Thank you.

ZAKARIA: The second machine age begins, you say, 15 years ago. What happens?

ANDREW MCAFEE, ASSISTANT DIRECTOR, MIT'S CENTER FOR DIGITAL BUSINESS: One of our early indications that things are really different was when Gary Kasparov, the world chess champion, lost to Deep Blue, the IBM supercomputer, especially designed to play chess. We used to think of chess as one of the highest expressions of human intelligence and then the match with Deep Blue showed us something different. More recently another IBM super computer called Watson showed us that human beings are no longer the world's best "Jeopardy" players. It beat Ken Jennings and Brad Rutter by a factor of more than three to one playing their game of "Jeopardy." So, we just keep seeing computers able to do more and more.

ZAKARIA: And the point as I understand it is that the first machine age was all about muscle power, that you were substituting muscle power. It used to be that human muscle power or the muscle power of animals is what powered stuff. And, you know, the steam engine or electricity replaced that. But now you're saying, the second machine age replaces brain power.

ERIK BRYNJOLFSSON, PROFESSOR, MIT SLOAN SCHOOL OF MANAGEMENT: That's right. The first machine age was all about relaxing the limits on human muscle power, animal muscle power, the steam engine, the internal combustion engine. They allowed us to move the world, manipulate the world better than before. But the second machine age is much more about relaxing the constraints on cognitive power, mental power, and we expect that just as the first machine age this is going to lead to an inflection point in human economic progress.

ZAKARIA: And again, but the key difference here that you talk about is in the first machine age, you needed human beings to control these machines.

BRYNJOLFSSON: Right.

ZAKARIA: What you're now doing is the computer is replacing the human being. I talked to a CEO who I asked about this and, you know, I put your thesis to him and he said, they're absolutely right. The human being actually gets in the way when we need somebody to operate these machines, the computer has no sentiment, has no emotion, make - does the same calculation every time and doesn't sleep.

BRYNJOLFSSON: In many cases he's right. That the -- in the first machine age as we replaced muscle power, it was important to have a control system for that, and that meant having a human. As we augment and replace mental power, it's not as clear whether humans will be a substitute or a complement for these new machines and in many cases, it's the whole operation does run smoothly without humans. But I want to be clear --

ZAKARIA: Give an example before we get to the caveat. Let's give people the example you give in the book about tax preparation.

BRYNJOLFSSON: Well, that's a perfect example. With tax preparation, the folks at Intuit and other companies have taken that process and they've codified it and they've digitized that process. Once they've digitized the process of tax preparation they can easily make a copy of it. They can make ten copies. They can make 100 million copies.

ZAKARIA: And these cost $39. And they do tax preparation as well as a professional you would have paid hundreds.

BRYNJOLFSSON: Oftentimes better, more accurately. They don't make the same kind of mistakes. The copies can be made for virtually zero cost, although they do sell them for just $39. And each copy is a perfect replica of the original, each of them can be transmitted anywhere in the world almost instantaneously. So, they're free, perfect, and instant and that's characteristics we didn't have in the first machine age. They lead to some weird and wonderful economics.

MCAFEE: And in Erik's example of tax preparation two out of the three important constituencies are a lot better off. First of all, those of us as consumers in tax advice, have access to very good tax advice for about 40 bucks a piece. That's a big improvement for us. The team of Intuit has created a great amount of value so they've captured a lot of that value. That's great. The third constituency, though, is CPAs, is the army of people around the country who do tax preparation for a living, this is a challenge to them and it's putting pressure on their employment and their wages.

ZAKARIA: Sounds like they're going out of business.

BRYNJOLFSSON: Well, that's right. There are about 17 percent fewer human tax preparers than there were before because when you have a digital market it tends to be a winner take all market. One or two or a few companies will dominate those markets. You don't need hundreds of thousands of local operators. And what we're seeing happening with tax preparation is a microcosm of what is happening in lots and lots of industries. ZAKARIA: OK. So you guys end the book optimistically and I want to give you a chance to explain that, even though I think a lot of this will trouble people. So, what can you do when confronting this reality of rising productivity and machines that are replacing humans even at the very high-end of the food chain?

MCAFEE: Yep. So for now, we're still adding jobs every month to the economy, so we have not totally decoupled job growth from economic growth. That indicates that the right policies for right now are to stimulate economic growth, job growth will come along with it. So, let's get our infrastructure in great shape. Let's get our immigration policies correct, let's fix our educational system and let's create a great environment for entrepreneurship not because some entrepreneurs get rich and we love rich people, but because entrepreneurs are the great engine of job creation. That's the right econ 101 playbook for the short term.

ZAKARIA: Are you going to be out of a job?

BRYNJOLFSSON: No time soon, but we all have to keep reinventing the way we work together with computers and that's the part that's lagging right now. The technology is racing ahead. But our skills, our organizations, our economic policies are lagging behind. We want to change the conversation with this book and get people thinking about how to speed up that part of society.

ZAKARIA: I'm going to try and get back and get to know my digital cameras better. Up next, why bigger is better even when it comes to religion.

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ZAKARIA: This week marked the anniversary of what is said to be the first electronic message between two heads of government. That brings me to my question of the week. Who were the two leaders that exchanged that first email and what year was it? It was A, George H.W. Bush and John Major in 1991, Bill Clinton and Carl Bildt in 1994, Bill Clinton and Nelson Mandela in 1995 or George W. Bush and Tony Blair in 2001. Stay tuned and we'll tell you the correct answer.

This week's book of the week is the one we were just talking about, "The Second Machine Age" by Erik Brynjolfsson and Andrew McAfee. It combines a powerful understanding of technology and economics to shed light on one of the most important trends at work in the world. Even IBM's super computer Watson couldn't have written a book this smart, yet. And now for the last look, China is home to the world's fastest train, longest bridge, largest free-standing building, longest wall and it's the biggest source of tourists in the world. In China, bigger is most definitely better. Even when it comes to Buddha. Massive Buddha statutes have been built around the country over the past few decades. This 160 foot Buddha towers over crowds almost as much as this 300 foot Buddha in eastern China does. In 2002, the tallest statue in the world, the 500-foot spring temple Buddha was unveiled in China. It is almost 200 feet taller than the Statue of Liberty. So, why is Buddha on steroids? One word, tourists. Last year this Buddha reportedly brought in 3.8 million visitors and $200 million. Not every large statue has been met with appreciation, though. These two giant Buddhas in their birthday suits recently unveiled in eastern China were taken down after an uproar. Maybe someone out there thought a bit about the core teachings of Buddhism which are about a rejection of materialism, inner strength, meditation and mindfulness, not supersized.

The correct answer to the "GPS Challenge" question is B, Tuesday marked the 20th anniversary of an email message from then Swedish Prime Minister Carl Bildt to then President Bill Clinton. It was very formal, mostly a congratulations on the use of the global Internet system and Clinton's ending of the U.S. trade embargo with Vietnam. We've checked the emails pretty thoroughly and there is not a single emoticon or an LOL or an LMAO to be found.

Thanks to all of you for being part of my program this week. I will see you next week.