Why the AI Revolution Could Make or Break the Economy — ft. Justin Wolfers

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What was your biggest win?

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Or the first time you beat your teammate in practice?

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Today's number, $12.8 billion.

That's how much American college students are spending on dorm room furnishings this year.

True story, my first year in the fraternity at college, I had literally 12 times the amount of sex I had through all four years of high school.

12 times zero equals zero.

Listen to me.

Markets are bigger than us.

What you have here is a structural change in the wealth distribution.

Cash is trash.

Stocks look pretty attractive.

Something's going to break.

Forget about it.

True story, I lost my virginity at 19.

I can say that now that I'm 100 years old.

I was trying hard, though.

I was trying hard.

I was practicing a lot.

How are you, Scott?

I'm good.

That's a good segue.

Get us out of here.

Or otherwise, Claire's never going to get an opportunity to get more free quince clothing if I keep this shit up.

She's not going to get any more Mongolian cashmere sweaters at a fraction of the cost as we cut out the middleman.

You've been reading a lot of ads today?

Hopefully, Vioria is still with us.

Or some...

Some hiring platform.

Jesus.

How does anyone not have a job with every hiring platform advertising on this podcast?

How can you not have a million job offers?

It's just incredible.

And yet, 11% of young people

are unemployed today.

That's the statistic right now.

Double the unemployment rate for men with college degrees as women with college degrees.

I thought you were going to talk about the average employment, but yeah.

Men versus women.

No, for me, it's all a gender thing.

I have the young person lens.

You have the young men lens.

That's the difference between you and me.

Okay, so

let me just throw out there just some quick observations.

One, you're late.

Two, you're like typing notes.

And three, now you're like, oh, I'm just going to have some tea.

I'm just going to sip some tea because somebody's feeling like they're very important to this podcast.

That's all I'm going to say.

I think I am.

That's right.

I have finally achieved it.

I can come in a couple minutes late and not be too freaked out.

But who knows?

Maybe I'll receive some wrath in this episode.

You were pretty chill with me being a bit late a few minutes ago, but maybe not.

Well,

I'm notoriously and terminally late, so I can't get angry at other people for being late.

Why are you so late all the time?

To be clear, I apologize.

I was late to this recording.

I take responsibility.

But it is also true.

You are quite late to things.

Why is that?

I think it's narcissism and me attempting to dominate other people with subtle, passive aggressive behavior.

Other than that, I'm really not sure.

I'm not sure.

The worst part is I kind of believe, I kind of believe you.

I think it's kind of true.

Four out of the last five years, my New Year's resolution has been to

not be as late.

Yeah, my view on being late,

I really try to be on time and

I'm pretty good about it, but it's because I

despise the feeling of being rushed and rushing.

Like that feeling of I know I'm late.

I'm feeling this mixture of guilt, shame, regret.

I'm like anxious that other people are going to be upset with me, that I disrespected their time.

Like that feeling is something that I just hate so much.

And I always, I was, I was often late in school and I'm just have like just PTSD from that feeling that I just never want to experience it again.

So my view on is I'm selfishly going to be early so that I I never have to feel that.

I'm obviously saying that, and I was literally late to this meeting today, but that's the idea.

The feeling of rushing is just so awful.

I never want to experience it.

So let's get to know a little about Ed Elson.

Let's get to know the real Ed.

Do you have, mostly because I want to talk about it, do you have any recurring dreams or nightmares?

Like, do you have the same dream over and over?

Recently, it's that it's just a classic.

I have an exam.

tomorrow and

I haven't prepared for it.

And crucially, need the I need to pass the exam to graduate yeah I have I'm not exaggerating I have exactly the same dream I show up I'm usually my underwear though for some reason but I'm late to a cost accounting or accounting course I haven't studied everyone's taking the test and it's too late and I'm gonna fail I think I think that is a fear of failure and things being out of your control the other the other one I have is is I'm I'm in a play and I I need to know all of my lines I have a speaking gig coming up so I think this has been happening for me for the for those reasons I need to know all my lines and I didn't prepare and I haven't studied my lines.

And so I'm just going to go on the stage and I have no idea what to say.

Those are my two big ones.

Just do what I do when that happens.

And when you get on stage, have a full-blown panic attack.

True story.

That's happened to me.

Not once, not twice, but three times at speaking gigs.

Really?

Three times?

What do you do?

in that situation?

I put my hands on my knees.

I start gulping for air and look out at an audience that's freaking out that I'm having a heart attack.

There's not a lot you can do.

I try try and work through it.

Genuinely, how in that moment did you work through that?

Because I feel like that's the nightmare that everyone thinks is going to happen, but never actually happens.

But it actually did happen for you.

Yeah, it happens to me.

I think it's because, one, speaking in front of people is nerve-wracking, but I haven't been able to correlate it to anything because it's happened to me when I've spoken in front of 50 people and when I've spoken in front of 5,000.

It happens.

It happens about, I don't know, 0.6% of the time, 500 speaking gigs happen three times, so 0.6%.

So I've done a decent amount of analysis trying to figure out what causes it.

The best I can tell, it's pretty random.

It's jet lag.

Something else in my life is bothering me subconsciously, but also I think some of it is genetic.

My father suffers from petite maul, which is mild epilepsy.

And I used to have feigning spells when I was a kid.

And so I think I might be prone to

some of that stuff.

But I think mostly

it's jet lag, lack of sleep, and something else is bothering me that I'm upset about or feel shame around.

And I get on stage and I look at all these people.

But what I do is, I generally, I just, I say, I'm not feeling well.

I put my hands on my knees, I bend over, I breathe deep, and I say, please be patient with me.

I'm having a panic attack, but I think I'm going to be fine.

And

I try and just get on with the presentation.

I go right to the slides and I just start reading off the slides.

And

yeah, but it's happened three times.

It sounds terrible.

Doesn't that sound nice?

But good luck at your speaking gig.

um and what if people are just like okay that's fine like that i'm sure they're nice about it people couldn't be any nicer i mean unfortunately unfortunately it doesn't create a great vibe for the speaking gig everyone's like okay do we take this guy to the hospital how did you feel off after the speaking gig like you you you muscle through it i guess and then what are you thinking after it's done like i would want to probably never get on stage again if that happened to me well keep in mind i make about four million bucks a year speaking so the threat of a panic attack is like, it's upsetting, but it's not as upsetting as 4 million is awesome.

Worth it.

So it's kind of worth it, but good point.

An analogy here.

Navy SEALs, I think about 6% of the people who show up for Navy SEALs training, anyone can show up for the Navy SEALs training.

And I think that should be like college, where not necessarily everyone makes it, but everyone should be able to show up.

Anyway.

And they've done an analysis around who makes it through.

And the people who show up are pretty strong and pretty fit and pretty capable.

So it's not a joey bag of donuts random sample population, but it is exceptionally hard training.

And they did an analysis on how cohorts cluster around the ones that are most likely to get through and become Navy SEALs.

And one group stood out, specifically people from individual sports who demonstrate exceptional mental fitness.

So for example, long distance running, crew, water polo, swimming, things where you have to push yourself so incredibly hard that you realize, I've always said the best thing I got from crew, I was arguably, crew is a varsity sport at UCLA, UCLA is a Division I school.

So

technically, I was a Division I athlete.

I was easily the worst Division I athlete in the nation at that moment.

I barely made the crew team and I was awful at it.

Crew was not what I call a romance sport.

I was terrible at it, but I took away something really valuable.

And that is when you're rowing crew at some point,

the air coming down your esophagus feels like it's on fire.

You can't even feel your legs.

They're so exhausted.

And you have to perform mental tricks to stay conscious because you're starting to get black, flashes in front of your eyes because you're starting to pass out from exhaustion.

That's at 800 meters and you go 2,000.

And what crew teaches you that very few people ever experience is that just at the moment where you think you can't take any more physically, emotionally, or mentally, you think, God, I've just had it.

I can't take this anymore.

Or I'm so upset about this relationship.

I can't take it anymore.

When you really feel that way, it means the following.

It means you're about 40% of the way to your actual limit.

And that creates unbelievable confidence.

So it kind of goes back to the same thing.

And that is putting yourself in environments where something bad happens or it's really hard and then getting, figuring out a way to get to the other side, finish the talk, finish the race, you know, get up, dust up.

go out to a bar again, start applying for jobs, still continuing to save money and invest, even though an investment gets cut in half.

That's the key to success.

Because the ability to train your mind that you can push harder than you think you can and such that you keep pushing and you don't give up, you know, people overrate intelligence.

They overrate talent.

So much of it is just like you get up and you just won't fucking stop.

Anyways, panic, faint, get up, finish the talk, Ed.

Throw up, throw up, pass out, and get up and continue talking about Gen Z, how people need to meet us on our own platforms and all this other.

And my good friend Katie Tour and, you know, all this, I'll miss you MSNBC whore.

No, I'm sorry, MS Now.

MS Now.

MS Now.

Oh my God,

a bunch of women like, you know, getting out their glass dildo and they see Ari Melbourne.

They're like, MS Now.

MS Now.

Sorry, Ari.

Sorry.

What do we got going on, Ed?

Get me out of this.

We've got an interview coming up

and we have our guest who is in the lobby right now.

We've been talking about builders.

So let's bring him on.

Good segue, Ed.

That's why you're a pro.

That's why you're invited on MS Now.

Well done.

That's right.

Here's our conversation with Justin Wolfers, professor of public policy and economics at University of Michigan.

Professor Wolfers, thank you very much for joining us again on Profit Markets.

Pleasure, man.

Good to see you.

Good to see you.

We don't have that much time, so I want to get straight into it.

And I'm going to start with a quote that you said recently, which struck me.

You said,

We are at the very uncomfortable point where if one thing goes wrong, we are looking at a recession.

Let's start there.

What did you mean by that?

I meant that we're at the very uncomfortable point that if one thing goes wrong, we're at the start of a recession.

How do we we say that in different words?

In good times, an economy sort of just runs along in neutral.

Neutral, think Goldilocks.

You want the economy not too hot, not too cold, right in the middle.

That might mean for the U.S.

economy running at economic growth of about 2%.

And if that's what happens, then the unemployment won't start rising and it won't start falling and inflation won't start rising and it won't start falling.

What we've seen recently is a very sharp slowdown in the rate of economic growth.

Well, to be clear, we don't have growth data yet.

The growth data are distorted for a bunch of reasons.

We all prefer to look at non-farm payrolls.

Non-farm payrolls growth has slowed.

It's running at 29,000 a month on average over the last three months.

That's awfully close to zero.

So definitely it's slower.

Normally, that's so close to shrinking that we'd say we're right on on the cusp for a recession.

Let me put the asterisk next to this, which is there's been a big cutback in immigration.

And so the rate of population growth is lower.

And so exactly what it means to be in neutral is more unclear now than it has ever been.

Another way people talk about this is what does it mean to run in place?

Economists call this the break-even rate of payrolls growth.

How many jobs do we need to create per month to stop the unemployment rate rising or falling?

That might have been as high as 150,000 a year ago or two years ago.

And the economy's been creating 29,000 a month.

So that sounds like we're going backwards.

But that break-even pace has also fallen.

Whatever it is, we're moving forward, but we're staggering.

And when you're staggering home, Ed, you might know this.

It doesn't take much of a push to knock you over.

When did we start staggering?

And

why are we staggering?

A precise answer is difficult.

But if I stare at the data, and it'd be great if your viewers just go and look at monthly non-farm payrolls growth, you will see that the last four months have been dreadful.

Four months ago was April.

April began with April 2nd.

April 2nd was the day of the so-called Liberation Day tariffs.

It was a day when we ratcheted the crazy up to a whole new level.

So one could say April.

And if one were anti-tariff, one would find a lot of support in recent economic data.

Now that's not proof.

It just says the timing was roughly similar.

So what I think is unquestionable is the rate of at which the economy is moving forward has slowed dramatically.

And now we can talk about some of the suspects.

So tariffs is obviously one.

The timing fits perfectly.

A second possibility that I think is worth taking very seriously is uncertainty, because these weren't everyday tariffs.

These were chaotic tariffs.

They were on on on April 2nd and off on April 9th and then on a 90-day break where we were going to get 90 deals and then 80 deals, then 60, then it turns out none and then a 24-day extension followed by getting back on the horse announcing the same set of tariffs once again, only to discover that the federal appeals court says they're probably illegal.

They might all get called off by October 18.

So extraordinary levels of uncertainty.

That would be another thing that would freeze one in place, and that's what the labor market looks like.

And then I want to propose another economic shock maybe we've had and it's not one that's in a traditional textbook, but it's a competence shock or a shock to our confidence in the competence of economic administration.

That through that period we had a chaotic tariff policy, we had Bescent and Trump attacking the Federal Reserve Chair, we've had an attempt to kick probably illegally a member of the FOMC off the board.

We've fired the head of the Bureau of Labor Statistics.

We've had a proposal that a wildly unqualified ideologue be put in charge of our national economic statistics.

And then we've also had a whole new interventionist turn from the administration as it tells Coca-Cola to use real sugar, as it tells Cracker Barrel what logo to use, and as it decides that it wants 10% of Intel and it's completely unclear if it likes paying for stock or just taking it.

That's a very different economic model.

People are calling it state capitalism, whatever it is.

It's a movement away from market forces and the model that led to American success.

So that's a competent shock, maybe a confident shock.

I'm not quite sure.

But some of that may cause you to change how you feel about our long-term future.

Is there any

way to argue that the staggering in the economy that you are describing here has not been in some way a result of decisions made in the White House.

Absolutely.

There's a time series chart.

Line goes up, line goes down, and we're all just trying to figure out why.

Well, one thing you could do is read the newspapers and figure out what happened in the papers on the days that the line moved down.

That's essentially what I just did.

Could there be something else?

Yes, but then that raises the question, what is it?

It's not a slowdown in the global economy.

It's not an oil price hike.

It's not a productivity slowdown.

It's not any of the things that we're used to causing it.

So you can push back and say it's not the administration, but then takes a theory to beat a theory.

That's sort of my point is I've been looking for that theory,

theory of anything else, because of course, when you start saying things like this, then the accusations come in that you're being political or you're being biased.

And what has struck me, and I don't know if you feel the same way, is how predictable

the numbers have been post-April 2nd, post-Liberation Day.

And you wouldn't, I mean, there are maybe some people who expected that the tariff impact was going to happen literally that month, but those of us who have read a very simple economics textbook, perhaps your economics textbook, anyone who has studied very basic theories of economics would have literally modeled this out.

This is exactly what's going to happen.

You're going to start to see the inflation start to tick up in the fall.

That's exactly what we're seeing.

You're going to start to see the jobs growth is going to decline.

We are now seeing that.

This is literally, I mean, you could not have written it up

more predictably.

This is exactly what you would expect, is it not?

Largely.

I think everything you said is right.

I also remember doing a lot of interviews in June with people saying, you guys have been saying, this is bad economic policy.

Why aren't I seeing it in the numbers?

And I remember saying in June, a couple of things you just alluded to, Ed.

One, in June, the most recent data we had was for May.

In June, it was unclear what the new tariff regime would be.

And subsequently, the June data that forced people to say, why are things so good, were revised down.

And we learned that the early estimates of the data were not quite right.

And in fact, things were much worse than we were seeing at the time.

I want to agree with you, Ed.

It looks like it's something to do with the new administration.

It feels like the economy changed.

It's hard to argue otherwise.

Everything, I mean, the dominant character on the front page of our newspapers every single day since January 20th has been President Trump.

But I think what's an open question is, what is it that Trump did that led to this?

So is it tariffs?

Is it uncertainty?

Is it encroachment into economic life?

And I think that list is much longer.

We'll be right back after the break.

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We're back with Profit Markets.

I realize there's a lag, but I've actually been surprised that the economy has held up as well as it has for this long.

You know, markets touching new highs, granted, it's mostly an indicator of how 10 companies are doing, but the markets have been hitting new highs.

And while unemployment is

job creation isn't where we'd hope to be,

it's not historically very high.

Interest rates are creeping up, but not historically high.

Have you been surprised that

the economy has been, quote-unquote, as robust as it has been?

Or is this kind of playing out as you would expect it?

I want to separate the real side of the economy, how much we make, what we're doing, all of that, from the nominal side, which is what prices are we seeing out there.

On the real side, yeah, it's just a little engine that could.

It's kind of striking.

If you look at consumer confidence, if you look at business confidence, if you look at any sense of the vibes, the reality is we're not in a recession, even as consumer confidence is at recessionary levels.

And we have whacked the economy as hard as we can.

with, I think, bad policymaking.

And it kept going.

That's kind of remarkable.

Now there is this sort of deeper question, how much do presidents matter for the economy?

One answer is most of the time they don't.

Another answer is most of the time they don't, but sometimes they're tested,

say on the cusp of war, on the cusp of a great recession, or during COVID.

And I think COVID really sorted out good from great.

from terrible leaders.

And it could also be that most leaders doesn't make much of a difference if you elect Obama or Romney because they're both going to be basically looking for sensible, coherent economic policies, albeit that benefit different groups to different degrees, but neither of them is looking to turn the table upside down.

And what we have is a once-in-a-lifetime

six standard deviation shock in leader quality, leader ambition, and so on.

So that's the real side of the economy.

On the nominal side, I think there's something very different and very interesting going on.

So tariffs have gone in.

We know that.

Most consumer prices haven't moved very much yet.

And there's a yet.

And Ed is exactly right to say when you look at models that pass through, everything takes a few months.

Whereas so economies move in months, newspaper headlines move in days.

And so that causes a disjunction that we saw a lot of through May and June, where the economy hadn't moved, but the headlines had.

And that, I think, is a very important point you make there, Ed.

But there's something else going on with prices and tariffs, which is it's still unclear what the tariff regime is

because it's all about to maybe get knocked down by mid-October.

And the thing is, companies don't like changing prices.

It's long economics literature on this.

It's think of it as being impolite, breaking the contract, the implicit contract with a customer, think of it as menu costs, think of it as whatever you want.

And if you hit a company with a permanent cost shock, it realizes it has no alternative but to respond and so it'll change its prices.

If you hit it with a transitory cost shock, its costs are going to rise for a day and then fall again the next day.

It'll just keep its prices the same and absorb that.

If you hit it with an uncertain shock,

it might wait.

The simplest thing to do is collect more information before making a decision.

And the

thought experiment I invite your audience to think about is if you were running a company right now, what would you do with your prices?

Would you be raising them because your costs have gone up because of tariffs or would you be lowering them because we have the prospect of the Supreme Court ruling the tariffs unconstitutional just around the corner and I've seen some survey evidence on this by the way and it turns out the main reason companies are giving for not passing on the tariffs is the uncertainty about what what happens next so as soon as this becomes certain then I think you're going to get the full weight of the tariff impact through to inflation in graduate school i was a graduate student assistant for uh professor christina romer and one of the things that do you know professor Romer?

Christy's a dear friend and a wonderful economist.

I can say one of those things.

I wasn't her friend.

She taught a class of like 400 people and there were six of us.

Anyways,

one of the things I remember her saying was that people are obsessed with the CPI, the consumer price index, but they don't pay enough attention to the PPI, the producer price index, and that the PPI is sort of a a leading indicator that gives you a sense of what's about to happen in terms of overall consumer prices, which are two-thirds of the economy.

So it's kind of a forward-looking indicator.

And I've been following the PPI, and the PPI has substantially notched up.

And then I look at what's happening with what feels like very anemic job growth, and I'm reminded of a word that you understand because of your domain, Ed has absolutely never experienced, and that is stagflation.

To me, as I look at the chessboard here, Professor, I see the most

real likelihood of something we haven't had in 50 years and most people, I think, have forgotten about and just

how terrible it is.

And that is stagflation.

Your thoughts?

First of all, are we calling each other professor now?

Well, you're legitimate.

You're the real deal.

I just show up and kind of fake it.

You're the real deal.

Hey, so your other co-host, Cara, is now a colleague of mine at Michigan.

So she's now a professor, too.

Kara's in Michigan?

She's teaching a little class out here.

She's Team Go Blue now, man.

this is when when when famous people show up and tell war stories about how awesome they are and buy a couple michigan sweatshirts and then head out i have absolutely no comment to be clear that's what scott does at the aspen ideas festival

anyways stagflation back to back to our regular schedule program stagflation okay so stagflation first of all two words stagnation that gives you the stag inflation that gives you the flation stagflation so it's stagnation at the same time as inflation

lots of people are not i want to teach a little economics here.

We're often not used to thinking about stagflation.

Why is that?

Because most of the shocks we're used to thinking about, economic shocks are what economists call demand shocks.

People wake up and they want to buy less stuff.

And if people buy less stuff, then what you're going to get is both less stuff being produced and the stuff that's getting produced, even if its prices don't fall, they rise less quickly.

So we're used to getting, in that case, that would be a slower economy and slower inflation.

Or if we have a positive demand shock, faster economic growth, and because more people are trying to spend money but production hasn't kept up, that forces prices up.

So faster economic growth going with higher inflation.

So usually there are two bad flavors in the world, unemployment and inflation, and usually you get one of them but not the other.

That's what a demand shock does.

There's also a supply shock, and that's what we're in the midst of right now.

A supply shock is when you raise the costs of doing business.

Historically, we would think about something like an oil shock coming from OPEC or the Middle East, a war, a natural disaster, or you could self-inflict one if you really like them by imposing tariffs that raise the cost of doing business for American companies.

And so what they do is they both,

the most important thing is they raise costs and therefore they push inflation higher.

And

having to rejigger all of your supply chains doesn't make life any easier.

And so it can often also cause the economy to slow.

So now what you're getting is two bad flavors at the same time, stagnation and inflation.

So if you, so two ways of making Scott's point.

Scott, I'm just translating what you're saying into economics.

One way is

you can take Scott's point as being if you happen to see inflation and stagnation at the same time, that tells you there's been a supply shock.

Or the other way is if, like Scott, you look out the window and you see a supply shock coming, and boy, tariffs look like a supply shock, then you should forecast.

both inflation and stagnation at the same time.

And so we have seen that before.

The most prominent example was in the mid to late 70s during the OPEC oil crisis.

By the way, you can also have a positive supply shock when things start to go right.

That would be something like the tech boom that occurred under Clinton, where inflation was kept low and

inflation was kept low at the same time as the economy boomed.

And you might even hope, if you're an AI optimist, that we could or should be on the side of a

positive supply shock sometime soon.

Okay, so Scott, I happen to agree with you.

I think we're in the midst of a supply shock.

That supply shock is obviously tariffs.

That would lead to stagnation and inflation.

I think we're also in the midst of a second supply shock, which is immigration.

And so if you take a bunch of workers out, that's going to make it harder to

indulge the caricature of get the crops picked.

But also staffing throughout the economy, every time you force everyone to play a big game of musical chairs, that's like a form of a supply shock.

That's what we saw during the COVID pandemic.

And so this is like, you know, if you think about what the COVID pandemic did, it forced a whole lot of musical chairs.

We all were in one job and then we all got up and changed chairs.

While we were changing chairs, we weren't working.

And that pushes prices up and the economy down.

That's what the COVID pandemic did.

You could imagine an immigration shock operating in much the same way.

And there's probably also a demand shock going on.

an adverse demand shock, which is that people are down on the economy.

They lack confidence

in the administration, and they're holding back.

You know, we'll talk first world problems here, which is I wanted to buy a second car for a long time and I'm holding back.

As a result, that spending is not in the economy, that's a demand shock.

So

it could be, let me try and draw all the threads together.

Scott, you're a super pessimist.

You're like, hey, we got stagnation around the corner.

because of this adverse supply shock.

Another possibility is actually we may not see much inflation

because if we get hit with a negative demand shock at the same time,

that will push inflation down even as the supply pressures are pushing inflation up.

This is not an optimist view, by the way.

This is two bad things happening at the same time.

They both would raise unemployment, but they may cancel out to some extent on the inflation side.

I have a follow-up question along those lines.

A big friend of the show is a guy named Josh Brown, who's on CNBC and co-hosts with that all the time.

And he said something that really stuck with me, and that is, and you're right, I'm a glass half empty kind of guy and,

you know, predicting nine out of the last three recessions.

But

he said you should always ask yourself what could go right.

Yes.

And he looks at economic history and says, economists have a tendency to look at the data pretty overly sober.

And the optimist and the person who says what could go right is more, oftentimes, more right than wrong.

It's not clear to me that everyone is born a pessimist.

So people who work in sales, they're trained to think about what could go right.

Because the only way you wake up every day and make a sales call, only to have the door slammed in your face yet again.

That's right.

They like me.

Right.

Exactly.

Is to be excessively optimistic.

I also think the same is true of politicians.

But my tribe, we're economists.

Our job is to worry about what might go wrong.

That's right.

But that doesn't mean, and the fact that we spend so much time talking about what might go wrong doesn't mean there's not a huge chance of things going right.

Well, the definition, I think of a decent definition of risk is what could go wrong after you think you've thought of everything that could go wrong.

So

AI, technology is deflationary.

We have this technology boom that helps keep costs coming down.

That AI, I don't want to call it bubble, but exceptional valuations of which American companies and consumers and shareholders are disproportionate beneficiaries is being funded by the whole world.

Capital flows into this massive

I don't want to call it bubble, but extraordinary increase in shareholder gains.

And while some of that creates income inequality and a small percentage of people get really rich, it is funding one of the greatest Capbacks Lollapaloozas in history that will create a ton of new jobs, whether it's people building data centers or finally a need for a new American grid.

That we will have a surge in employment, that the immigration problem will bring up wages among the people who probably overdue for an increase in compensation, and the technology keeps inflation at bay.

And we have this massive vocational boom, and the markets stay high.

And we essentially have this AI excitement funding this new age of infrastructure spending that pays off in technology, which creates more productivity, some short-term job destruction, but then all kinds of additional margin.

Margins on the S ⁇ P have gone from 5% to 11%.

They keep going up.

And all the catastrophizing that I am guilty of just never shows up.

Your thoughts on that scenario?

I happen to think that AI is the most interesting technology of my lifetime, and we may be on the cusp of one of the great technological revolutions.

I also might be wrong.

That's fine, too.

That debate

is arguably the most interesting and most important economic debate.

How to regulate AI, what role it'll play in our lives, how to cushion people for its impact, how to turbocharge it so that we get everything we want out of it.

May be the most important economic debate of our lifetimes.

And instead, we're sitting around talking about tariffs.

So

no one in Washington is having a serious discussion or across the country, because this has got to be a debate that brings everyone in.

We need to hear from mums and dads and working class folks and middle class folks about their anxieties, their fears, their hopes, their dreams, so that we can shape this incredible beast that may be difficult to shape.

And it's been 100% crowded out.

So when we screw this up,

it's because either either we blame the White House for dangling shiny baubles in front of us or we blame the media for staring at it rather than staring at the most important thing that's in front of us.

And I'm guilty of staring at the White House rather than this.

But I wish we had more time to dig into this because I think it's really important.

That's sort of just a prior statement.

You talked about the incredibly high valuations of AI companies.

Those valuations are essentially a bet that those companies are the backbone of the future of the economy.

So therefore, they're a bet that yours and my life will be transformed by AI.

It's less clear it's a bet that it'll be tomorrow, but

that's market prices screaming, there's something intensely important over here.

Let me now give the simplest possible way of describing why I'm an AI optimist.

And then that'll get to the policy problems that come up.

This, by the way, is so interesting.

I wish we'd.

Can we do two hours next time?

We'd love to.

No one wants to listen.

That's fine.

We'll listen.

But

if I came to you and I offered you a robot

that could do your job for you,

does that make you better off, Ed?

I vote yes.

Yeah, it's not hard, right?

You would let it wear the headphones.

You'd shave the robot's head.

And you, Ed, Ed could be doing something else right now.

You could be at the beach and I would have sent a long-haired robot in to do my half of this interview.

Scott looks a bit like a robot already

and we'd all be at the beach.

I love the beach or whatever it is, whatever our higher passions were.

Well that robot more or less exists and it's called AI.

What an extraordinary moment we're in where we'll be able to get the robots to do our work for us and you and I can engage in finer things.

We'll take up opera singing and poetry and

body surfing.

Now, let's take the same scenario.

I invent a robot,

but I sell the robot to your boss.

How do you feel now, Ed?

The robot can still do your job, but your boss owns it.

Not as good.

You're out of a job, brother.

Penniless.

Nothing to do.

By the side of the road, right?

The point here

is these two scenarios have the same technology.

A robot that can do your job.

One of them is a land of plenty and beauty where we're called to our higher callings, and the other is one of misery for many of us.

What we have here is not a robot problem or an AI problem, but an ownership problem.

So there's two things I want you to see here.

One, the upside, if AI works, is just enormous.

And two, the policy stakes, the difference between a miserization and going to the beach.

It's just one rule, one thing.

Who owns the bloody robot?

And in this metaphor, the robot is AI, obviously.

So this is why I think this is the policy issue of our age.

Now, by the way, when we talk about things like GDP, it doesn't matter who owns the robot.

It's still adding to GDP either way.

That's not a critique of GDP.

It's just saying saying we've got all these other issues, distribution to think about as well.

But if we do have robots that can do yours and my job, and Google's got something that produces podcasts now and all this stuff,

it frees us up to do incredible things.

I love this conversation because it bleeds into social policy.

And I think the incumbents have a tendency to layer on complexity as a means of deflecting from what are common sense solutions.

But what I think of this notion of ownership, what this implies is is what I see is a fairly realistic future where a smaller group of very talented, very lucky people aggregate, continue to aggregate an even greater proportion of the spoils.

But in the 60s, 70s, or World War II, the top marginal tax rate was 90%.

We're very good in America at letting these technologies, our thoroughbreds, run and creating prosperity.

We just don't then want to...

tax it at a real level that gives the people who are shit out of luck after Ed has been displaced by the robot.

All I have to do to replace Ed is use one of those character generators, automatic character generators from a video game.

They all look like him.

No, no, no, no.

Scott, Scott, look at those dimples.

You could not get those dimples out of a computer.

He's very handsome.

He's very handsome.

Anyways, anyways,

Justin, you've lost your professor title.

Anyways,

but isn't this really,

aren't we really good at this part of the program?

But what we're really bad at, effectively, if if America's strategy could be summarized, economic strategy over the last 40 years, wouldn't it be to cut taxes?

And quite frankly, that has resulted in a lack of social services and safety net that creates huge fear and anxiety for the people who get replaced by robots.

And some of the solutions here are just a more progressive.

a more progressive tax structure that reinvests, redistributes UBI, retraining.

But we want to place more complexity on these issues such that the incumbents just stay wealthy.

I realize that was a mouthful, but I'd love to get your thoughts.

I'm just going to tease you lightly, Scott.

I think what you just said is I'm a center-left Democrat.

Dingo.

All right, brother.

That's great.

But we can have that conversation very quickly, which is I believe in fairness.

I believe that

the

womb you happen to be born from should not determine your life outcomes.

So do I.

Let me challenge.

one of your observations and then come back and say, I agree with you and it's worse than you think.

The early studies on AI in the workforce show actually that it has the biggest effects helping the less skilled.

So less skilled workers can become pretty highly skilled and pretty highly skilled workers can become pretty highly skilled.

I can't be sure at all that this will be true in later generations of AI, but so far this actually, you know, you said what could go right?

There's this term economists use skill bias technical change.

Is this a technology that helps those with a lot of skills more than those with less skill?

And through most of our recent history, we've had skill bias technical change.

That's actually because most of it's been mechanization and mechanization is a substitute for broad and muscle.

So it's been really bad for folks who sell broad and muscle, you know, factories and tractors and steam engines and all of that stuff.

If you're a guy who has a lot of muscle, machines can now do that.

Whereas if you're a guy who relies on his or her brain matter, machines haven't been able to do that.

So historically, we've had technological change that has screwed the working class.

This is a form of technical change that's primarily cognitive in nature.

And you and I have cognitive jobs.

In fact, it's slightly worse than that for me.

If I think about the only skills that I have as a human being, it's that I'm really good at reading a lot of economics and then turning it into simple words.

What is a large language model good at?

Reading a lot of economics and turning it into simple words.

So I feel right now like a Detroit steel worker felt in the 1970s when robots were coming for their jobs.

But if what you care about is equality, I'm somewhat above the median wage, then that would actually be a force for equality if guys like you and me got paid less.

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We're back with Profit Markets.

I'm so glad that you bring up the ownership question when it comes to AI.

I am completely with you on this.

AI is going to do wonders for the economy.

And the question is, how can we have it such that all of us can have a participation in the massive wealth that is about to be created?

And if we look at what has happened over the past several decades, it doesn't look great.

The fact that the top 1% controls $25 trillion in equities, it's half of the entire S ⁇ P 500.

The fact that the top 19 households own 2% of household wealth, up from 0.1%

40 years ago.

So I look at it, I'm like, this is, this, is history would tell me it's not great.

But then I look at what's happening in AI right now.

And one of my biggest concerns is the fact that the most ascendant AI company that is now worth half a trillion dollars is a private company.

It is owned by a pretty short list of institutional investors.

Many of them are basically the investment arms of big tech companies, and that is OpenAI.

OpenAI is the company.

If you want to participate, you should probably own a share of OpenAI, but you can't because it's not going public.

And we're seeing this with all of the other AI startups too.

We're seeing it with Anthropic as well.

We're seeing it with Mistral.

We're seeing it with even companies like SpaceX, which I think is going to be

a big propeller of the economy.

That to me is a concern because it very plainly says you cannot have this.

Why?

It's a complex reason.

Private markets, institutional investors, et cetera, et cetera.

But the reality is you can't participate in this.

You can use the product, but you can't own the shares.

Are you worried about that too?

Profoundly.

So this idea that the role that AI plays in shaping our economy depends on ownership is central to what I was arguing and central, I think, to the story you just told.

So if instead of someone giving either you or your boss a robot,

someone invents a robot, but then three other competitors spring up that have equally good robots.

Let's call them AIs.

I'll stop using the robot analogy, right?

And the marginal cost of producing more AI is close enough to zero.

And these are in a competitive market.

Now we're at a point that either you or your boss could buy someone to do your job for you, right?

Price equals marginal cost, marginal cost is zero.

So basically, all the work's getting done.

And the AI companies aren't getting rich, which means it's either you or your boss.

And that's going to depend a lot on policy, which of those two it is.

Okay, now let's tweak things.

Let's say that this is a winner-take-all market, that the best model is better than the second-best model by enough that OpenAI, for instance, becomes a monopoly player, much the same way Google has in search.

Well, if that's the case, now OpenAI can charge a very, very high price for the AI.

It will charge, if, Ed, you earn currently $500 a week, it will charge Scott $499 a week for the Ed robot.

And Scott will buy that because it saves him a dollar.

That means Scott doesn't, the employer doesn't get rich, the worker doesn't get rich, but the stockholders of OpenAI come to own the entire universe.

And so that then says it's not just that it's an ownership problem, now we also have a competition problem.

If we don't have competition in the space for LLMs,

then one LLM will come to own close to all of GDP.

And I'm mildly overstating the case, but

there's a lot of truth there, right?

So that then says we need to maintain competition between LLMs, which is very hard because at the same time, you need to maintain an incentive for innovation and markets don't naturally deliver a large enough incentive for innovation.

Let me make it more complex.

Imagine you even succeed at getting OpenAI, Google, Microsoft, Anthropic, all to continue competing.

So then they're selling AI services at a very low price equal to marginal cost.

But in order to train their models, they all need NVIDIA chips.

That now makes effectively NVIDIA the monopolist.

Now NVIDIA can quadruple the price of its chips and it will effectively extract all of GDP.

And so now not only do you not get rich and Scott doesn't get rich and OpenAI doesn't get rich, the only people who get rich under this world now is NVIDIA.

And so now it's not just a competition problem, it's a market structure problem.

I hope that I've avoided what Scott talked about earlier of wonks and nerds over complexifying this.

I'm trying to make a very simple point, which is what's on the table here is enormous.

It's potentially transformative.

But who it delivers for,

very small details can have very, very big effects.

And that's why this is the most important conversation in economics that we're not having.

This is such an important point because

as you said earlier, this is the big story that is happening and that everyone should really be talking about.

And yet, we're spending the majority of our time arguing whether tariffs raise prices.

And the fact that we even have to debate that from the get-go is a concern because, as I said at the top of the show, you can read it in a textbook.

But the reality is we are having to do that.

And we are having to have these conversations and go through.

Yeah,

if you increase the tariff by 20%, that could pass through to consumer prices, blah, blah, blah, which is such a ridiculous conversation to be having when the biggest moment of our lifetime is happening right before our eyes.

It's right there.

And if we don't wrap our heads around it, then you're going to get caught flat-footed.

You're going to get screwed.

And so my question to you is,

part of me thinks that this is all intentional.

That

there's someone out there who says, you know what?

I'm in a position of power.

I need to control things.

I need to control the wealth.

I need to control the influence.

So the fact that we're all squabbling out there and going on CNN and MSNBC talking about tariffs is actually a good thing.

And meanwhile, AI rolls on.

I wonder if you subscribe.

I know that's a kind of tin hat view, but I wonder if you subscribe to that.

And I wonder if you believe that this administration has any part in that.

I believe one way of describing everything you just said is that economic illiteracy destroys enormous opportunities in this country, that we're distracted by straining objects rather than hard truths.

And that's why, Ed, since you and I have been talking,

I have figured out what is the second act of my life.

I say second act because I'm losing some hair.

And the second act is to teach the world economics.

And that's what you guys are doing.

And I think that's intensely noble.

So when you go home at night and think, I've been squabbling all day, no, you haven't.

I believe you've been doing something intensely important, which is teaching the world economics.

And so I just want to give you an adapt

and to keep at it.

I need that.

We all need it at times, mate.

And then I want to come back to what you called your tin hat theory.

I don't believe in the strong form of conspiracy theories.

There's a bunch of guys in a room smoking cigars.

It's always guys.

It's always cigars.

Saying, let's keep them distracted over there.

But what is true is we are all distracted, and there's a bunch of people who are not bringing our attention back to the center.

And it's very hard.

The interests we're talking about are the interests of working and middle-class Americans.

It's their future and their kids' future.

And there's no one out there saying, hey, guys, pay attention.

And if this was somehow to line the pockets of some super rich guy, he would find some way of creating a civic organization that got us all aligned around this.

And so by my version of your conspiracy theory, it's just a sin of omission instead.

There is no great profit opportunity from teaching the broader swathe of Americans to keep their eye on the ball.

And therefore, this persists.

I think that's right.

And I think there's a standard economic and political logic to that.

And when you see this Silicon Valley dinner that we saw last week with Tim Kirk and Sam Outman, and they're all saying, thank you, thank you, thank you for the privilege of interacting with the president.

Does that have an impact on your views of this issue?

Makes me not want to go to those dinners.

I think that's, look,

if I'm a good lefty, I say, yes, they're all pricks, I hate them.

And

if I also understand that they're the leaders of complex organizations and they have tens of thousands of people working for them and they're looking out for the careers of the folks who they care very deeply about.

I understand it.

And if I were to moralize for a moment, I would also ask them to think about their deeper obligations to society.

And I think that is one of the things that we lost in the 50s.

In the 50s, the idea was the CEO was a leader in their community, not just of their corporation.

And, you know, we have many, many instances of that.

And so the way they debased themselves certainly suggests they're not taking that leadership role seriously.

You write economics textbooks.

You gather economic history and you explain it to people.

When the economic history books are written, I'm wondering what you think they will write about Trump 2.0.

What will his economic legacy be?

I don't like using Hitler comparisons, but

don't you sometimes think, what the hell was the German population thinking during that period?

So this is not a statement about anti-Semitism.

It's not a statement about murder.

It's not a statement about war.

It's like, what the hell?

Crowds are overcome by madness sometimes.

And I think preventing that madness is one of the most important things we can do.

This is why I said I've changed my life because look, most years an economist can add or subtract a quarter of a percentage point to some number.

But there are also moments where we prevent tragedy.

And this could be one of those moments.

Justin Wolfers is a professor of public policy and economics at the University of Michigan.

He is also a senior fellow with the Brookings Institution and the Peterson Institute for International Economics.

Justin, thank you very much for joining us.

Thanks very much, Justin.

That was great.

Thank you, gentlemen.

Scott, what did you think?

Well, one of the, I mean, one of the nice things about this show is we get to speak to really talented,

thoughtful people.

And

Justin's becoming one of our regulars, right?

He has a way of breaking things down, and he seems very practical.

He also has a very strong, I don't know, a big heart, or he has a lot of empathy for, it feels like broader civilization and how to connect economics to that.

Economists are kind of, I don't know if you would call them the new rock stars, but they definitely,

people are very interested in what they have to say, right?

But the most famous person at NYU for the last 20 years was Nouriel Rubini, an economist.

But he's kind of this next generation of really interesting, talented people.

What I also respect about him, in addition to just being very smart, he does wear a little bit of his,

I don't think he's afraid.

Economists try to be almost like robotic, like emotionless.

And he's not afraid to kind of show a little bit of his,

I don't know, political views or wear them a little bit on his sleeve.

Anyways, I very much enjoy, Justin, and your thoughts.

On that point, I remember when we last had him on and I was asking him about what the economics of immigration are.

And I said something to the effect of, you know, remove the moralizing for a second, you know, remove the ethics or any ethical viewpoints.

What are the economics?

And he said,

you can't do economics without ethics.

He was like,

that doesn't make sense.

You know, the ethical implications, the moral implications are inherent to all of these discussions, which I think really foots to what you were just saying there.

I do agree.

He's not one of those people who gets so caught in the what aboutism and the both sidesism

to the point where he's not saying anything.

And that I think we're seeing so much of these days.

People are so,

it's almost like we've overcorrected.

We're trying so hard to not be political to the point where we don't even have opinions anymore on things.

Like, we're just so robotic and so steeped in.

This is usually what happens when this happens.

And it's like, well,

have you need to have a viewpoint here?

And

pointing out what the administration is doing,

it's terrible on so many levels to the point where it's just, I am sick of this obligation to go, oh, no, we're going going to be very neutral about this.

It just doesn't really make sense anymore.

So I think he does a good job of

that, too.

I wanted to get your reactions to his final comments there

on the economic legacy of Trump.

What will the history books write about him?

Do you have any thoughts on his response?

And would you have a response yourself?

I've been saying legitimately for a while that America is more like 1930s Germany than we want to think.

We're starting to attack our academic institutions.

We have private armies of people whose primary consideration is kind of this fail to our loyalty to

the president.

We have what feels like the weaponization and

private sector or of institutions, the Department of Justice, basically refusing to condemn violence against your opponents.

Hitler was very good at getting private sector on his side by destroying the labor labor unions for them, as long as they supported his agenda and were outwardly very supportive.

And then if you go darker, we're rounding up people and sending them to black sites such that they're not subject to the protection or habeas corpus of our own

region.

That's kind of the definition of a concentration camp.

So I feel like we're one really ugly economic shock away from where Germany was.

And people get very upset when you talk about Hitler.

So I think it's easier to talk about Germany in the 30s because if you were to pick a nation

that was the most progressive and enlightened over the last 200 years, you would probably pick Germany.

Germany had gay rights before it was cool, incredible appreciation for the arts, scientists,

incredibly receptive to immigrants.

They saw the power of human capital flowing into their society.

And then they had this 11-year descent into darkness.

And so to think that if you think of us as the most progressive society in the world, which I do for the most part,

to think that we couldn't descent into that type of madness is just naive.

It could absolutely happen here.

And I feel like incrementally we're a frog in boiling water that it's getting worse and worse.

Now, you know, the song doesn't have to remain the same.

It can just rhyme.

But I see a lot of the same fascist tendencies.

and echoes of 30s Germany.

And I'm not saying we're going to start rounding up a specific group and sending them to camps, but it can manifest itself in different ways.

Who would have thought?

I mean,

the Department of Justice has now basically been weaponized to be the Department of Grievance and Vengeance.

These are incredible institutions.

And

the

lack of concern for people's rights and his ability to reward his allies and punish his enemies is creating a very uncomfortable, non-democratic.

I mean, it's just, I don't, I think the analogy holds.

So

I like what he's saying.

And I'm, you know, I think it's good to ring the alarm bell because if you think about economic policy, economic policy is values.

And that is

money is nothing but the transfer of time and work from one group of people to another.

And so who you decide to take time and work from and redistribute it to others is a function of your values.

So So when you're saying to shareholders, I want you to have more time and work, and the people who work for the company, I want them to have

less time and more work,

that's values.

When you're saying to corporations, I want lower taxes and the very wealthiest, I want you to have more time and less work and people,

a bunch of people aren't going to have healthcare, that's a value system.

There's just no getting around it.

So to believe that we cannot talk about how this represents a certain viewpoint is just naive.

But this is, as someone who, the most impactful books I've ever read in the media that has impacted me is all on World War II.

I just don't think people realize

how much this smells like, kind of 1933 or 1934

Germany.

This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer.

Our research team is Dan Shallan, Isabella Kinsel, Kristen O'Donoghue and Mia Silverio.

Drew Burroughs is our technical director and Catherine Dylan is our executive producer.

Thank you for listening to Prof G Markets from ProfG Media.

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