‘This is Something that Traditional Economics Isn’t Prepared to Deal With’

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Speaker 2 Before we begin today, and this is a fun one, this episode discusses some charts.

Speaker 2 So if you would like to see them as we're discussing them, you can watch the episode on YouTube or you can find a link to all the charts in the show notes.

Speaker 2 I've covered the economy for a long time. I've covered the financial crisis.
I covered the pandemic. I cannot remember a stranger and more chaotic year in the economy than this one.

Speaker 2 A year where it was so unclear what the story was and how it would actually turn out.

Speaker 2 Other years, the economy is bad, it's good, but what is is the economy right now?

Speaker 2 From the tariffs and Liberation Day, and then the deals and the pauses and the carve-outs,

Speaker 2 what is our tariff policy now? To the giant AI buildout that is keeping the economy afloat, but is that a bubble? Does it herald massive labor market disruption? Is it good for us? Is it bad for us?

Speaker 2 Good for whom? Bad for whom?

Speaker 2 To the economic data, which has become completely divorced from how people actually feel about the economy.

Speaker 2 If you look at consumer sentiment, people feel like the economy is as bad as it was at the depths of previous recessions.

Speaker 2 And yet the economic data, the job market, wages, inflation, it kind of looks okay.

Speaker 2 So there is this divorce between how people feel about the economy and what we can see in the economy. How do you make sense of all this?

Speaker 2 So now as 2025 comes to an end, I want to do a show wrapping up the strangest year in the economy that I have covered.

Speaker 2 So I wanted to have on Tracy Alloway and Joe Weisenthal, who are at Bloomberg and co-host the excellent economic podcast, Odd Lots, to talk it all through with me.

Speaker 2 As always, my email is reclineshow at nytimes.com.

Speaker 2 Tracy Alloway, Joe Weisenthal, welcome to the show.

Speaker 3 Thanks so much for having us.

Speaker 2 Yeah, thrilled to be here. All right, so we're here almost to the end of 2025.

Speaker 2 Tracy, let's start with you. How would you just describe how the economy is doing right now if you knew nothing else?

Speaker 3 That's actually a really tough one, which probably says something about this moment in economic history, which is no one really knows anything.

Speaker 3 You know, we had these tariffs that came in and everyone was expect, not everyone, but many people were expecting those to have an inflationary effect.

Speaker 3 We haven't necessarily seen that, even on things like unemployment, but a lot of people have been concerned about a recession for ages now, and that just hasn't materialized.

Speaker 3 I think a lot of the sort of traditional economic thought that should dictate how things develop and unfold. isn't bearing out.
And so I would describe the economy as unexpectedly chaotic, perhaps.

Speaker 3 It's just not acting the way a lot of people thought it would in the current situation.

Speaker 2 Is it chaotic or is it unexpectedly normal?

Speaker 2 I kept thinking as I was looking at this data, that if you just showed showed me the macro dead of the year, if you showed me the jobs numbers like month on month, showed me GDP, showed me inflation,

Speaker 2 and I didn't know any storyline, I would say, hey, pretty normal year in the economy.

Speaker 3 Yeah, there's a layer of policy chaos built on top of an economy which seems surprisingly resilient to that chaos.

Speaker 2 Joe, what's your state of the economy, Gloss? Yeah, I mean, I want to echo basically the same thing that Tracy said. Look, there is clearly a labor market deceleration happening.

Speaker 2 I don't think anyone would dispute that. So now unemployment is, as of November, 4.6%.

Speaker 2 All that being said, you know, the temptation is to assume that, okay, you have this creaking labor market and then it snowballs and then you have like a proper recession.

Speaker 2 But people really have been talking about the imminent recession. for three years.
Yeah, I remember Joe Biden's imminent recession. There were so many imminent recessions.

Speaker 2 And I think everyone's just very gun shy, right, now about calling anything. We also have this sort of weird thing with understanding the economy is murky in the best of times.

Speaker 2 Then later on to the fact that data collection prior to the government shutdown has been getting worse and worse, response rates to government surveys.

Speaker 2 Then you figure, okay, for during the shutdown, that impaired the data collection process on top of that. So you have this other multiple, I don't know, error bands is maybe how you would present it.

Speaker 2 Then you have this very strange economy where we know there is this one sector of the economy that's doing absolutely phenomenally well, which is AI and other tech adjacent things.

Speaker 2 And then the other areas that probably are sort of stagnating, maybe a little like stagflationary vibes.

Speaker 2 So even if we had a very clear picture, let's say we had great response rates and all of the surveys and they had been running and we hadn't have a government shutdown.

Speaker 2 This is just a very strange underlying condition. So levels and levels and levels of uncertainty.
The ontology of the economy is unclear. Yeah, absolutely.

Speaker 2 So I want to go through some of these stories that you all have covered very closely, that we've covered some, and try to go through what happened at their start and where they've settled.

Speaker 2 And I want to start on tariffs. Trace, you mentioned the tariffs.
So take me back a little bit to the week of Liberation Day.

Speaker 2 There were a lot of emergency episodes of your guys' podcast, which were great.

Speaker 2 What happened then? And what has happened at a high level since then?

Speaker 3 Yeah, so that was a crazy week for obvious reasons, sort of capital H history being made.

Speaker 3 I think the surprising thing to everyone was the actual rollout of the tariff announcement and just how unstructured it seemed to be in many ways.

Speaker 3 And this idea that, you know, we were going to impose tariffs on small islands in Oceania whose only painlands. Right.
And whose only export is like Bat guano or something like that.

Speaker 3 It just didn't make any sense. And, you know, markets don't deal with uncertainty at the best of times.
And this was like a boatload of uncertainty being dumped onto the market.

Speaker 3 So you saw this huge reaction. What was even more surprising is that the market recovered so quickly.

Speaker 3 We spoke to a lot of businesses back in sort of April and May and asked them, how are you dealing with the tariffs?

Speaker 3 And we heard, for instance, from a women's clothing company saying, it's been absolute chaos. We don't know what's going to happen this year.

Speaker 3 I'm supposed to be putting orders in for the winter Christmas season. I don't know if I can actually do that with my suppliers in China.
I don't know how much to order.

Speaker 3 And yet, fast forward to now, and things seem to be ticking on relatively well. The big question is going to be whether or not that's an overhang from, you know, earlier periods in the economy.

Speaker 3 People have already bought a lot of stuff. You know, they stockpiled inventory coming into tariffs.

Speaker 3 So maybe at some point, all that uncertainty, which you would presume would cause businesses to invest less in their own companies, maybe eventually it'll hit.

Speaker 2 One of the reasons the tariffs were hard to cover is they kept going up and down. You know, then there would be these bilateral deals with other countries.

Speaker 2 Joe, I want to show you a chart from the Yale Budget Lab that tracks effective tariff rates. This is cool.
Isn't it? Yeah, lovely. The tracks effective tariff rates since the beginning of the year.

Speaker 2 So can you talk through what you see on the chart, just like what happened? Sure. And then what you make of it.
Yeah, absolutely. So this is a chart of the U.S.

Speaker 2 average effective tariff rate since the beginning of the year till now. And at the start of the year, the U.S.
was a truly like, it was an open economy. We had very few trade barriers.

Speaker 2 It was less than 5% on average. Probably looks like it was somewhere close to 2%.

Speaker 2 Then, obviously, when we started getting those initial tariffs on Mexico and Canada, and then, of course, Liberation Day in early April, nearly 30%.

Speaker 2 effective tariffs across the board. And then, of course, we started getting the deals and the carve-outs and the bilateral arrangements.

Speaker 2 And we've settled in this area that's a little bit, you know, somewhere between 15 and 20 percent. But we are now a very high tariff country.

Speaker 2 And I think if you had taken those first numbers seriously, people would have looked at them as like, no, we just can't trade at these levels. With the modifications, they became, I think, tolerable.

Speaker 2 But I think like the way I've been thinking about the tariffs is this, is like, on the one hand, you might say, okay, tariffs are inflationary, right? They raise the price of goods. That's inflation.

Speaker 2 Another person might say, tariffs are disinflationary. Tariffs are a tax.

Speaker 2 Historically, and most economists would say that when you raise the tax on things you're taking money out of the economy that's disinflationary so you could actually very it's kind of you know to add to this uncertainty you could make both arguments the way i conceive it it's disinflationary because it slows down economic yeah because you're taking money you're taking money out people don't have that money to spend exactly the way i resolve the tension in my head is not to think about inflation versus disinflation itself per se, but just to think about this idea, we have raised the cost of doing business in the United States.

Speaker 2 That I think we could safely say. So Tracy mentioned we talked talked to a woman's clothing retailer.

Speaker 2 We're also in Alaska this summer and we talked to this guy who runs, who owns the biggest furniture chain in Alaska, which is really fun.

Speaker 2 And he was talking about how, okay, we are going to find a company in India that manufactures this couch or chair instead of in China.

Speaker 2 So they find workarounds, which is why trade hasn't come to a halt.

Speaker 2 But that company in India, maybe they don't take as many orders as previously because they're worried that by the time that couch gets to the port, that maybe the tariff schedule is going to be be different.

Speaker 2 And then the person doesn't want to take the import or doesn't want to take delivery of it at the new tariff rate, et cetera.

Speaker 2 When it all shakes out, like inflationary, disinflationary, we don't really know, but you like add up all of these factors. It's going to make uncertainty about sourcing decisions.

Speaker 2 It's going to change your pricing. You don't know about how consistent you're going to access your goods.

Speaker 2 And so I think in the end, it raises the cost of doing business or, you know, it throws sand in the gears, so to speak, of the economy in ways we may not feel for a long time, but which may over time sort of degrade the economy or degrade our standard of living.

Speaker 2 It settles high. Yeah.
Right. That is a big, it's more than half as high as it was right after Liberation Day.

Speaker 2 And I feel, Tracy, like I listened to a lot of a lots in that period, as in every period. And I was listening to the Flexport CEO

Speaker 2 tell me that global shipping was going to collapse. I was hearing people say that kids were not going to have Christmas toys.

Speaker 2 And then Donald Trump said, well, what are these kids that need all these toys toys for anyway? Which is right. Which is right about it.

Speaker 2 It's the anti-materialist turn in Bloomberg here.

Speaker 2 And

Speaker 2 I was hearing that things were just going to break down if tariffs held at high levels. And then they held at high levels.
And things did not break down.

Speaker 2 Why?

Speaker 3 It's an excellent question. So one thing I would say is, first of all, a lot of that hyperbole that we heard about empty shelves and things like that was right after the tariff announcement, right?

Speaker 3 And so there's still a debate. Had you stuck with those levels, maybe we would have seen that.

Speaker 3 But even where they settled at the higher rate, actually, if you zoom out on that chart and go back to the 1930s, we're at the highest effective tariff rate since the Great Depression, basically.

Speaker 3 So you're right. This is really surprising.
I think one of the things that's happening here is there's a tendency to oversimplify, I guess, the business environment.

Speaker 3 You know, people think there's a company in the US that imports stuff from a supplier in China, and that's all that happens. That's like the way things actually get into my house.

Speaker 3 But of course, there are all these middlemen entities in between that process.

Speaker 3 And so what that means is you actually have a pretty diverse cushion to absorb some of the tariff costs and maybe even some of the operational issues. So, you know, you'll have the shipping company.

Speaker 3 Maybe the shipping company lowers some of their rates in order to encourage business. You'll have an actual importer who's bringing that stuff and then selling it wholesale.

Speaker 3 Maybe they'll start reducing their prices to offset some of the tariff rate.

Speaker 3 And so if everyone is sort of giving up a tiny slice of that value chain, then the impact on prices can end up being a lot less than you expected.

Speaker 2 One thing I

Speaker 2 appreciated or really realized after COVID, after the COVID shock specifically, American businesses are really good. Like they're really well run.

Speaker 2 And I think this is an important point because I remember you think back to like March 2020 and so many people, like no idea what's going on. And some people sort of retreated into their homes.

Speaker 2 I will admit that I was one of them. It's like, all right, I'm just going to like stay on my computer, et cetera.
And then you look at like the creativity of American corporations.

Speaker 2 They're like, oh, no, we're going to like figure out a way to turn this restaurant into an overnight commercial kitchen for delivery.

Speaker 2 And we saw this incredible amount of like resilience during that period.

Speaker 2 We saw a tremendous amount of like companies figuring out, okay, what do we have and how can we keep operating during these extreme conditions?

Speaker 2 And I don't know, like I have come out of the last five years.

Speaker 2 with a greater admiration for the creativity and resilience of corporate America to like withstand these shocks and management and executive teams essentially finding a way to very quickly pivot and figure out how are we going to keep running our business under this new uncertainty.

Speaker 2 But not just us, right? I mean, one thing I think about

Speaker 2 when we were hearing from all kinds of people who had line of sight on global shipping data and port data

Speaker 2 that one reason the predictions of collapse felt so vivid was that it was so inhumanly complex you would think something that intricate could not possibly be as flexible withstand a shock of that magnitude this many shocks like shock after shock after shock i mean there have been wars in this period you know that that was sort of my realization after the COVID shock.

Speaker 2 I mean,

Speaker 2 that was such an extraordinary impact. Every corner of the globe restructuring life almost overnight, or maybe in like the span of a couple of weeks.

Speaker 2 And of course, there were like tremendous shortages everywhere and all kinds of disruptions, but somehow like the machine kept ticking in a way that I think would have, you know, looking back would have surprised a lot of people.

Speaker 3 But I do think we shouldn't downplay the impact on productivity, right?

Speaker 3 Because there are a a lot of man hours being devoted to figuring out the tariff schedule, maybe figuring out how to game it a little bit, and then filling out paperwork at the docks and stuff like that.

Speaker 3 And I don't know about you, but I shop a lot. I bought something from the Netherlands in September and I never got it because the shipper said they couldn't figure out how to mail to the U.S.

Speaker 3 and who would actually have to pay the tariffs. I ended up getting into a credit dispute.
It took up a lot of my time.

Speaker 3 Yeah. So many of I still don't have the item.

Speaker 2 We get so much content from Tracy.

Speaker 2 We get so much.

Speaker 3 From my daily life.

Speaker 2 Yeah, from Tracy's daily life, we got a tremendous.

Speaker 3 So imagine this multiplied by millions of things across various companies. It's a lot of hours, a lot of manpower.

Speaker 2 But let me ask you about the other side of this, because we're talking about the catastrophes that either didn't or only sort of happened.

Speaker 2 And I take your point that there was a, there, there was real disruption here, even if it wasn't economy shattering.

Speaker 2 But obviously, the point of the tariffs, which were a chosen policy in the way that the global pandemic was not,

Speaker 2 was to create benefits.

Speaker 2 And as I would listen to the Trump administration, I would hear a few. I would hear that it was going to bring a ton of manufacturing jobs and capacity back to the U.S.

Speaker 2 I heard a lot about how much income it would bring in, revenue. Maybe we wouldn't even need income taxes anymore.

Speaker 2 I would hear a lot about the security benefits of this.

Speaker 2 So, the tariffs are a policy meant to create a gain for America. Did they? This is the funny thing.
I know it's so funny.

Speaker 2 We're talking about tariffs for all these minutes or for so long as if it was just something that happened.

Speaker 2 But to your point, there was ostensibly the idea was that it was going to make the economy better. It chose to do that.

Speaker 2 It makes it very different than the pandemic obvious. Hey, I have seen no evidence that we have seen some gain from it.
None. There has not been some great boon for the American workforce.

Speaker 2 It's like, okay, we have to, you know, we know that unemployment has been ticking up. Yeah, it is true that they're collecting a decent amount of revenue from the tariffs.
That is real.

Speaker 2 But like the idea that that is somehow obviously redounded to the benefit of the American consumer or home buyers or something or whatever made the, you know, our deficits more sustainable per se.

Speaker 2 I haven't seen any evidence of it. So like in terms of the good, I don't know.

Speaker 3 Well, there's also a major policy tension, right? Where Trump was claiming that this isn't going to have an impact on prices. Your prices are going to stay the same.

Speaker 3 It's not going to slow down the American economy, et cetera. But then he was also arguing that this was going to be a huge revenue generator for the U.S.
government. You can't have both.

Speaker 3 You can't charge people a bunch of money and raise a bunch of money and expect not to be taking the people's money, right? It has to come from somewhere.

Speaker 2 I didn't mention one other policy aim here. So we had Liberation Day.
We

Speaker 2 tariff a bunch of penguins for a while. They begin to sort of remove some of them.

Speaker 2 And then there is a really big policy pivot that makes a lot of people on the right happier, which is they settle down the tariffs on our more normal trading partners and they jack them up on China.

Speaker 2 And the new policy rationale we are given is that this is a trade war with China. We are going to isolate China.
We are going to take our manufacturing capacity back from them.

Speaker 2 We are going to reverse their manipulation of world markets. Now we're here at the end of the year and we finally have a deal with China.

Speaker 2 Tracy, what's the deal with China and how does that fit or not fit

Speaker 2 the sort of China theory phase of the trade war?

Speaker 3 Yeah. So it is true that competing with China is one of the few areas of bipartisan agreement at the moment.
I think everyone feels the sense of competition.

Speaker 3 But what China has actually been really good at is creating ecosystems for certain products and industries.

Speaker 3 So for instance, on the rare earth side of things, you know, we hear all the time that rare earths are a major choke point for the U.S. and there are worries that China is going to cut off supplies.

Speaker 3 The way China has approached that industry is they have mining extraction.

Speaker 3 again, probably benefits from a lack of environmental regulation, but they've also built manufacturers and then they have a very vibrant, you know, EV industry, computer industry that's built around that rare earth supply and is there to off take the supply to actually consume it.

Speaker 3 It's very hard to replicate those types of ecosystems on a short timeframe.

Speaker 2 So I buy that. We went from 100% plus tariff on China as an effort to make them less competitive to I believe now it's going to be a 20% tariff on China.

Speaker 2 So it seems like we're not.

Speaker 3 Well, we don't know. That's the thing.

Speaker 2 Like, we don't really know where the White House stands on the

Speaker 2 question you posed is the entire trade war about isolating China? Because that was sort of one view. The U.S.

Speaker 2 is not the only country where people have very serious concerns about manipulation or the effect that Chinese manufacturing has on their own national champions and so forth.

Speaker 2 Like all the anxieties that we have in the U.S., they're shared by plenty of other countries and not just Europe, elsewhere in Asia, South America, so forth.

Speaker 2 But like we don't really know, like there are China hawks in the administration that clearly feel like, oh, this is like an existential threat.

Speaker 2 Trump, who arguably more than any American of the last decade or whatever, is responsible for the sort of massive national turn on China, may be one of the least hawkish members of the administration when it comes to China.

Speaker 2 He clearly has a lot of admiration for Xi Jinping. I think he likes him.
He may think it's unfair, but he clearly does not hold it against China.

Speaker 2 He clearly sort of admires the fact or appreciates the fact that the various strategies that the country has undertaken were done in pursuit of the national interest, which he seems to think.

Speaker 2 So I don't think we actually know. And again, if you're going to do this isolate China strategy, then you really...

Speaker 2 or I would say intuitively, you want to have as much trade as possible with the non-China world, really like destroy any barriers. But we haven't done that.

Speaker 2 So I don't think really we know where this administration views these sort of tensions with China in part because I think it's divided.

Speaker 2 Does this get to a reality that I think a lot of us suspect, but it's inconvenient to talk about? We are used to covering

Speaker 2 White House policies like they are highly connected to White House goals, that there is a legibility to the connection between means and ends.

Speaker 2 The Trump administration often seems to me to have different levels operating completely separately.

Speaker 2 And so there are policies that come out of highly ideological members of the administration, sometimes in conflict with each other.

Speaker 2 And then there's Trump, who sees the world through deals and relationships.

Speaker 2 And what I see happening in the tariffs, if you sort of track the year, is a series of policies that are then overtaken by a series of deals and relationships.

Speaker 2 And Trump will, you know, there will be a kind of standard policy. We're going to tariff everybody.
We're going to tariff China, you know, 100%, 110%, 165.

Speaker 2 And then slowly, Trump will get worked on by the person, some kind of tribute maybe that we can see, or I suspect more often that we can't see is going to get paid.

Speaker 2 And all of a sudden, the tariffs are down.

Speaker 2 And there's no policy that comes through clearly because there never is a policy. There are only, in the end, deals.

Speaker 2 Tell me if that's wrong, if you have a better narrative than that.

Speaker 3 I mean, I think there's definitely an element of erraticism. Is that a word? Erraticism when it comes to the Trump administration's policy.

Speaker 3 And it gets back to that tension, you know, between alleged policy goals. Again, if you're really worried about the U.S.
deficit, are tariffs the best way to actually generate money for the U.S.

Speaker 3 government? Probably not, which then begs the question of, well, why are we doing this?

Speaker 3 I guess if you were going to be very, very cynical about it, you could argue that Trump really likes deals because it gives him those short-term wins and those short-term headlines, right?

Speaker 3 People forget things fairly quickly when it comes to the news flow. And so if all they see is the U.S.
strikes a deal with China, um, you know, the U.S.

Speaker 3 is bringing China to the negotiating table, people forget all the chaos that it took to actually bring us to that moment.

Speaker 3 I do think with China in particular, the rare earths thing was really important. I think there was a sort of

Speaker 2 describe what happened there.

Speaker 3 Sure. So, basically, China said, Okay, you're going to tariff us at 50% or whatever.
We're going to cut off the supply of magnets that are used and lots of batteries, computers, things like that.

Speaker 3 And I think that sparked an element of panic among the type of people that Trump listens to, right?

Speaker 3 So we're talking business executives who are thinking, well, this is an incredibly important component for my particular business.

Speaker 3 I can maybe get some of it from elsewhere in the world, but certainly not at the cost and scale that I've been getting it. from China.

Speaker 3 So China has done a phenomenal job of basically putting itself right in the middle of a crucial choke point for the entire global economy.

Speaker 3 And they were able to use that to their benefit to reduce the tariffs. They didn't get them all to zero, but they brought them down a lot.

Speaker 2 So did we fight the trade war with China and lose? Look, I do think, Tracy is absolutely right.

Speaker 2 The rare earth specifically, to some extent, because of our vulnerability there, may have undermined the entire prosecution of the trade war, so to speak, because it's so specific. So arguably, yes.

Speaker 2 I think to your, you know, your question, though, I think that offers such an important insight into how he thinks. The idea of like a strategy or a policy is abstract.
Whereas a deal is him.

Speaker 2 A deal is something that he could shake the hand of someone else. That is real.
That is tangible to him. That's good TV.

Speaker 2 Whereas, yes, whereas all this other stuff, what we call what is our long-term strategy, it's abstract, it's depersonal. It's not the way, I do not think this is the way Trump conceives of government.

Speaker 2 But he's got people around him.

Speaker 2 This is, I actually find what just happened with the AI chips shocking. So background of this for people who've not been following it as much.

Speaker 2 We have had since the Biden administration, pretty tough export controls on forms of chips that are very, very useful, creating frontier AI systems.

Speaker 2 And Trump just cut a deal on the urging of the CEO of NVIDIA

Speaker 2 to ship some of the more advanced NVIDIA chips to China. And it is just on some level to me

Speaker 2 possible to, having covered a number of White Houses, you just normally have a bunch of advisors around being like, sir, that's not our policy.

Speaker 2 Like everything you have said, everything we are trying to do is trying to maintain dominance on this specific frontier, AI, against this specific competitor, China.

Speaker 2 So you can't give them the chips just because one of the CEOs who've, you've now taken a cut, you've had the country take a a cut in his company wants to.

Speaker 2 Them giving China the NVIDIA chips just struck me as like the final collapse of the China policy, at least at any level of intelligibility in the Trump White House.

Speaker 2 I just didn't have a way of reading it aside from that.

Speaker 3 If you're going to ask us to explain it, we're going to struggle.

Speaker 2 See, you know, the David Sachs argument is that the important thing is that NVIDIA, the American chip company, remains the dominant infrastructure for the development of AI.

Speaker 2 And I don't find that to be completely unreasonable. I don't find that to be a completely absurd argument.
So there's the, on the one hand, dominance of AI.

Speaker 2 The question is, like, who is at the edge of developing models, right? That's certainly one way of measuring who is at the frontier of AI.

Speaker 2 But I think it's totally, it does not strike me as per se crazy to redefine the question of the AI race as

Speaker 2 on whose chips and on whose software architecture will all AI models be built in the future. I don't have like a view on like which is right or wrong.

Speaker 2 I'm just saying it does not strike me as necessarily absurd, that view that it is a win if everyone is using the chips of an American design.

Speaker 2 On some level, I disagree with the view, but I don't think it's absurd.

Speaker 2 What I would say about it, though, is I guess what you could say is the Trump administration spent a year evolving on the question of China.

Speaker 2 I would find it genuinely interesting if a member of the Trump national security team would come out and give a speech being like how we rethought everything on China. But nobody did that.

Speaker 2 I mean, we just went from one policy to the other without anybody really explaining how the theory of the policy changed.

Speaker 3 I mean, I think that's right. And I doubt anyone in the Trump administration was like, okay, we need to change our approach right now.
We've had this big, you know, realization.

Speaker 3 What I would say.

Speaker 3 If you think about how China views the sort of technology competition with the U.S., the thing that comes up quite a lot domestically in China is: have you guys read The Three Body Problem?

Speaker 2 Yeah, or okay, I never read it. Okay.

Speaker 2 There's a pretty good Netflix series. I'll watch the Netflix show.
The Netflix series.

Speaker 3 A very brief synopsis, but aliens are threatening Earth and basically all of humanity comes together at some point and develops technology to get rid of the aliens. Good.
In a domestic context,

Speaker 2 apparently that does some violence to the plot as much.

Speaker 3 It definitely does, but you know, we don't have that much time. So I'm shortening.

Speaker 3 But like in China, there's this idea that if the U.S.

Speaker 3 completely cuts off the country from global technology, then China is going to accelerate its own technological development and basically do everything that the rest of the world does.

Speaker 3 probably more cheaply and at better scale. And so that was a concern that we saw starting to bubble in the Biden administration when they toughened up the initial restrictions on chips.

Speaker 3 We saw China start to, you know, allegedly produce some pretty advanced things.

Speaker 3 So I think there is a concern there that if you press too hard, China is just going to double down on its own development.

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Speaker 2 So I think we should move to talking about another major economics for the year, which we've begun to back into here, which is artificial intelligence and the huge AI build out.

Speaker 2 And I want to start here, Tracy, by showing this chart from JP JP Morgan. Walk me through what you're seeing here.

Speaker 3 Yeah. Okay.
This is a U.S. real GDP growth contribution from Tech CapEx.

Speaker 3 And as you might expect,

Speaker 3 technology related, AI-related CapEx has become a much more important driver of GDP growth. I can't tell on this particular chart, but I heard 40% of U.S.

Speaker 3 growth in 2025 is estimated to be coming from AI, which is more than the growth we're getting from consumer spending, which is pretty phenomenal in the context of the US economy.

Speaker 3 I would also just add, right before we came in here to record, I saw a number from Standard Chartered. They were saying two-thirds of US growth this year is coming from AI.

Speaker 3 And, you know, you never want to be too dependent on one particular industry. You especially don't want to be too dependent on

Speaker 3 an as yet unproven technology in a highly cyclical industry for your growth.

Speaker 2 What is all this money buying? You all have had a bunch of episodes this year on the sort of AI build out. What is being built out? Yeah, gigantic computers, basically, you know,

Speaker 2 in huge complexes that are as large as Central Park somewhere in like near Abilene, Texas, or whatever, where it's these mammoth.

Speaker 2 data centers that are these assets that are a combination of real estate. So they're a real estate play.

Speaker 2 They're high-tech plays because they're filled with those NVIDIA chips or other chips and so forth. They're huge energy consumers or increasingly energy producers in their own right.

Speaker 2 So whether, you know, because it takes a while to get anything accessed to the grid, they'll have a natural gas facility producing energy on the campus directly.

Speaker 2 And so it's this extraordinary build out all over the country of these data centers, which of course become very political and very important to the economic growth, et cetera.

Speaker 2 You know, the really important thing is since basically 2008, 2009, 2010, this handful of tech companies have been where a lot of the action is for growth, particularly for growth and income and making money in the U.S.

Speaker 2 economy. These companies used to just spend on labor.
Their main cost was their software engineers, et cetera.

Speaker 2 And everything else was like pretty cheap because cloud compute was pretty cheap, et cetera. But they're famously like asset light, as they say.

Speaker 2 So the other big story of this chart, setting aside the sort of US GDP component, is the degree to which these very important companies for the U.S.

Speaker 2 economy have suddenly become like big spenders on stuff in a way that they never had any history before.

Speaker 2 And so, you see these companies, they're taking out more debt, or they're coming up with these special financing vehicles where there's sort of this, you know, it's off-book, these off-balance sheet arrangements to finance these things.

Speaker 2 So, there is this fundamental restructuring, I would say, of like the P ⁇ L and the balance sheet of these big companies that is novel in their corporate history.

Speaker 2 And that's really a story of the last two or three years. I was watching this interview with Sam Altman.
So I think the single biggest question I've heard all week and hanging over the market is,

Speaker 2 how can a company with 13 billion in revenues make 1.4 trillion of spend commitments?

Speaker 2 And you've heard the criticism, Sam.

Speaker 2 We're doing well more revenue than that. Second of all, Brad, if you want to sell your shares, I'll find you a buyer.

Speaker 2 I just enough.

Speaker 2 The argument he's making there is there are so many investors of every different level piling into this, piling into if you could buy, I mean, OpenAI remains a private company, but if you could buy OpenAI stock, people very much would.

Speaker 2 But these are, as Joe was just saying, banks and private equity players, and they're all kinds of highly sophisticated financial players and companies coming in behind these investments to make them.

Speaker 2 That means there are all these board meetings and shareholder meetings where an argument is being made about how these huge buildouts of these giant computers will lead to profits that justify the buildouts.

Speaker 2 When Meta and Microsoft are making these arguments to their shareholders, to the other investors they might want to work with,

Speaker 2 what is the argument? What does this look like if it pays off economically?

Speaker 2 You know, there's a lot about the AI boom, the AI race that, you know, probably intuitively sort of reminds me in many dimensions of the sort of race to build a nuclear bomb.

Speaker 2 Okay, so first of all, I'm- I'm not sure where that was going, but I didn't quite see that.

Speaker 2 So, you know, someone once described to me open AI as being like the Manhattan Project, except the goal is not to build the bomb. Cause, you know, the big fear is that AI, as many

Speaker 2 people in the space fear, is like, you're going to have this like runaway AI that kills us all, right? So it's like, how do we like build something that doesn't kill everyone? It's very existential.

Speaker 2 It's very existential. Yeah, for example, it's very existential, right? That's exactly it.
So there's that. There's this fear of like, who is going to get there first? There's the U.S.

Speaker 2 versus China, et cetera. I think there is something going similar going on with the way companies feel about.
buying into AI as products, et cetera. That this technology is going to be so powerful.

Speaker 2 It's going to be so important that even if you can't articulate why you need to be adopting it for your company, you better like have an AI project.

Speaker 2 You better have an AI experiment going on because the stakes are so high for whoever figures it out, a way to like plug AI into their business, reduce labor costs, get more productivity and so forth, that the gains are going to be so great that you literally just can't afford to not be investing in it from a consumer experience.

Speaker 2 You know, you like listen to someone like Mark Zuckerberg. He clearly thinks that.
I think you look at every other company, it is this fear.

Speaker 2 And I do think it's worth pointing, there are examples, you know, clearly engineers use AI coding all the time. Other companies are figuring out a way.

Speaker 2 We did an episode with the CEO of a firm and he was talking about how AI allows them to see like companies that are misstating what they do in their terms of service.

Speaker 2 So it is true that already companies are figuring out way to deploy these tools, but I really do think there is a tremendous amount of fear driving this at both the hyperscaler level and the customer level that someone else is going to figure something out.

Speaker 2 Let me zoom in on that because, I mean, I've covered these AI companies for a long time. I covered the Anthropic guys when they still worked at Open AI.

Speaker 2 And that is how they all used to talk about it, that it is a race to build the super intelligence, the one AI that will rule them all.

Speaker 3 To build God.

Speaker 2 Yeah, to build the machine God.

Speaker 2 But I think if you believe that version of it, that there is a race, there's like a piece of tape at the end of the race, and one of the companies is going to pass first.

Speaker 2 And then, you know, second place is a first loser. That actually implies something very dangerous about this build out, which is that it only matters for one of them.
Right.

Speaker 2 And the assets are going to be not useless, but not that useful for the others. And I believe they believe it or certainly believed it.

Speaker 2 It has been strange watching these people turn into like SaaS businesses. You know, it seems to me more like what you see is Anthropic is trying to own coding.

Speaker 2 Meta, you know, is going to try to own social relationships and AI and, you know, use it to kind of manipulate you into buying things.

Speaker 2 Open AI is going to be a layer in enterprise software like Microsoft. You know, then Google has everything in Google.

Speaker 2 I mean, what you're getting at is actually my fear about it, that there are two stories

Speaker 2 that they're sort of acting as if it's a race to the finish line, as all that matters is being in front.

Speaker 2 But if that's not true, then actually there's like way overinvestment.

Speaker 2 And then there's this phenomenon where it's like, while we're on the race to create super intelligence, we're going to create these sort of, you know, slop apps that everyone has searched.

Speaker 2 Like, so Meta has the Meta AI, which is sort of like Instagram, except it's all AI generated garbage. And ChatGPT is Sora, which is a little bit better, I think, but, you know, whatever.

Speaker 2 It does not feel like a way station on the path to super intelligence when you see them rolling out these things.

Speaker 2 And as you mentioned, starting to look more and more like traditional software businesses that just sort of like plug into various layers. So I agree.
I think it's like very muddled.

Speaker 2 And I don't think we know yet whether these, I'm sure there's a mix within the companies, right? I'm sure there are people who's like, no, we are here to build super intelligence.

Speaker 2 And there are probably others who are like, we are here to build enterprise software and build a subscription.

Speaker 2 Well, what you're watching happen inside the companies, this I feel more confident talking about, is the very normal thing that happens in politics and in companies, which is that you talk yourself into the story.

Speaker 2 that your bottom line needs you to believe.

Speaker 2 And so the way to build super intelligence is through building SaaS software. Yeah.
Because that's going to get you the scaling. It's going to get you the investment.

Speaker 2 I think the most striking thing to me in covering this for years now, covering like the things I have heard from people building AI are just wild.

Speaker 2 And they were really wild in 2022 and in 2021, like truly like the wildest things I've ever heard in my reporting in terms of like what people believe to be true in like 10 years.

Speaker 2 I'm not even sure they're wrong about what will eventually be true.

Speaker 2 But then watching them end up running these totally normal-looking businesses, except for scale of the investment, you know, how much of your Slack should be written by AI kind of thing, it is amazing.

Speaker 2 I mean, I guess it's true for religion too, right? You're, you're trying to tap into transcendence, but also you need to fund the real estate investments for the church.

Speaker 2 But there is this incredible mixture of the sci-fi and the mundane.

Speaker 2 And watching the companies have to bring those two things into alignment has been, to me, sociologically very interesting and a reminder of the incredible power of capitalism to persuade people of things.

Speaker 3 I was just about to say, first of all, if you couch everything in existential terms, then the limit on your capital expenditure is basically infinity. So that's

Speaker 2 part of what's happening here.

Speaker 3 There are two approaches to building out AI at the moment. And I call this the coffee pod theory of AI.

Speaker 3 America is building really expensive cappuccino machines that it thinks are going to produce the most amazing cup of coffee that the world has ever known.

Speaker 3 And because of that, everyone in the world is going to want to buy one of these cappuccino machines. That is not the only way to approach AI development or the AI business model.

Speaker 3 China has taken a very different approach. Again, China is doing the Nespresso coffee pod version of AI technology.

Speaker 3 They're producing something that's relatively cheap, something that's pretty standardized, and something, again, that it sees the entire world being a market for.

Speaker 3 I don't think we yet know the answer, which particular model is, business model is going to win out. But then you mentioned capitalism.

Speaker 3 On the customer side, we're also seeing this narrative dynamic where, you know, late stage capitalism, it's kind of hard to boost returns forever. And so now this new lever has appeared.

Speaker 3 It's called AI, AI. And all you have to do is pull it or at least put out a press release saying that you're pulling the AI lever and, you know, cutting workers and saving a bunch of money.

Speaker 3 And you'll see your share price go up. And I think that's pretty important.
Like investors are still responding very well to any utterance of AI in a business press release.

Speaker 3 There may come a moment where people are actually like, wait a second, we want to see the cost savings, but it's not happening yet.

Speaker 2 I'm just going to take a point of host personal privilege and we're going to wander down an alley for one minute and I'm going to not keep us there.

Speaker 2 But in terms of questions, I would like to ask the odd lots hosts, what is late stage capitalism and do you believe in it as a conceptual

Speaker 2 tool? I'm going to put, it's all on Tracy. It's not the odd lots.
It's high on my list.

Speaker 2 Tracy's the one who mentioned it.

Speaker 3 I mean, okay, it's a little bit of an intellectual crutch. I will give you that because we're always living in late stage capitalism, right? Late stage capitalism is now.

Speaker 3 But I think you if you look at our existing situation, it's a relentless search for growth. And a relentless search for growth is also something that is in many ways very unique to America.

Speaker 3 Other countries, I hate to keep talking about China, but other countries take a different approach, right?

Speaker 3 So in China, we've seen China take the lead in a number of strategic industries, which, you know, counts as growth, but that growth hasn't translated into huge returns for investors.

Speaker 3 So if you you look at a line of the Shanghai composite, it's been going sideways for many, many years. China is willing to make that trade-off.

Speaker 3 You know, we're going to develop important industries and give people jobs and maybe, you know, shareholders just aren't going to make that much money off of it.

Speaker 3 In the U.S., it's pretty much all about shareholder return and getting that line going up forever.

Speaker 3 And our political economy is basically built on that entire system of if you put your money in the S ⁇ P 500, you'll probably have a decent retirement. And so everyone will be fine.

Speaker 2 So it's not so much that the way you understand it is not so much that there's something specifically late about the stage of capitalism, so much as this is, you know, financialized growth capitalism.

Speaker 3 Yes. And also late stage capitalism implies that there's an end at some point.
And I'm not sure there is.

Speaker 2 Well, that actually is a better segue to this next shot I was going to show you than I thought it would be, which is there's some suspicions going around that this whole thing has become a kind of circular money machine, that the hunt for growth, the hunt for justifying share prices and investment and valuations is leading to just money constantly passing hands to create the almost appearance of activity.

Speaker 2 So, Joe, I'm going to show you this chart, which is a Bloomberg chart.

Speaker 2 I recognize it from a distance. I know this chart from a distance.
It's extremely hard to parse, including for me. But we're just going to need to part.
Like, the point is almost not to parse it.

Speaker 2 The point is to change it. This chart is a vibe as much as it's a vibe.
It's visual more than just to gaze upon this like incredible level of interlinkage.

Speaker 2 This to me is the most almost interesting chart to look at in AI. So why don't you like

Speaker 2 it all out

Speaker 2 for those just listening? You know, here we have, it's a chart with NVIDIA at the center and basically everyone is invested in everyone else.

Speaker 2 So NVIDIA invests in OpenAI, then has an investment in Coreweave, which is one of these neo-cloud data center companies. And Core Weave buys chips from NVIDIA, so the revenue gets recycled.

Speaker 2 So it's basically everyone is linked to everyone else. And again,

Speaker 2 bi-directionally, right? Bi-directionally.

Speaker 2 You pay someone and they pay someone else. It's like you pay them and they pay you.
Yes. You invest in them and they invest in you.
So I'm going to invest in you.

Speaker 2 And then not only are you going to buy chips from me, you're going to make an equity investment. So obviously.

Speaker 2 There is the web of complexity, which I think we associate with 2007, 2008, which is just like the sheer volume of the web of relationships and so forth and how hard that is to decipher.

Speaker 2 But then there's the other element that go back to like the dot-com bubble. And if you looked at a lot of the companies that were riding high in the dot-com bubble, they had real revenue.

Speaker 2 The poster child for this was Yahoo.com or Cisco. So these, you have these companies that say, okay, maybe they're like a little rich on the stock market.
But look, we know they're real businesses.

Speaker 2 The issue is that underneath these real businesses, there was a lot of financialization going on. By that, I mean specifically, there was a host of startups and they were raising money in IPOs.

Speaker 2 And then that IPO money that they raised would immediately be put into either ads on Yahoo or purchases of Cisco equipment.

Speaker 2 And when the IPO market closed down, when there was a little bit of risk-off appetite in the stock market, suddenly then the revenue collapsed at those giants.

Speaker 2 And so, yes, well, what looked like sustainable, healthy businesses were actually really being funded by financial markets.

Speaker 2 And I think that the concern when you look at the AI boom is you have all these companies doing very well. And Vita is absolutely a real business.
It absolutely has real revenue.

Speaker 2 It absolutely has real profits. No one is denying it.
Is there some richness in the valuation? Sure, maybe. I don't know.
But very plausibly, they're real businesses. So I think that like...

Speaker 2 When we talk about a bubble in the AI, sure, there may be rich valuations, but the fear would be that these are not sustainable revenues and therefore not sustainable profits.

Speaker 2 So let's talk about the question of a bubble, Tracy. You all have done a bunch of episodes talking to different people about this.
Make for me

Speaker 2 the best case you can both against the idea of a bubble and then for it.

Speaker 3 Oh, man. Okay.
So against the idea of the bubble is very simple. It's this idea that we were talking about earlier, which is this is basically a winner takes all.
strategy.

Speaker 3 And if everyone develops the products that they say they're going to develop, if they develop AI models or systems that magically solve every business or person's problems in the entire world, then perhaps you can justify some of those valuations.

Speaker 2 Shut a bubble if magic occurs. That's right.
That's right. And that's what a lot of these companies are promising.
They're promising magic, right?

Speaker 3 That's the way they talk about it. So I think there's a concern as AI becomes an even more dominant force in the U.S.
economy.

Speaker 3 If the bubble bursts or even if the promised revenue and savings doesn't materialize to the scale that people think it's going to, then you're going to have an economic impact that potentially feeds on itself, which would be similar to what we saw, again, not to be too pessimistic, but similar to what we saw back in the run-up to the great financial crisis, housing became an incredibly important driver of U.S.

Speaker 3 economic growth. Everyone was buying houses, houses were being built, we saw the share of housing construction in the U.S.

Speaker 3 economy go up, and eventually it got so big that housing became the source of wider problems in the US economy. That wasn't always the case.
It used to be that there were problems in the U.S.

Speaker 3 economy and housing would get hit. What happened was housing got so big that housing became the proximate source of problems in the wider U.S.
economy.

Speaker 3 And the concern now is that we might be on the same path with AI. So, you know, you showed the chart of the circularity of a lot of these businesses.
I always think about that,

Speaker 3 it's Sunny in Philadelphia meme of the guy standing in front of the board with all the red strings connecting everyone. It feels very much like that once you start to untangle these relationships.

Speaker 3 But the other concern is just the opacity of how AI is actually getting financed right now. There's a lot of stuff going on in the private credit market.

Speaker 3 The private credit market is where businesses get loans from, you know, sometimes banks, but mostly other types of investors.

Speaker 3 And these loans and bonds are not publicly publicly issued, not publicly traded. So normally if, you know, IBM or Microsoft or whoever issues a bond, it would come with a big prospectus.

Speaker 3 There'd be a lot of information available about it online. You could see the terms.
Anyone can buy it and people would trade it after. Private credit is something much more bespoke.

Speaker 3 It's sort of a customized loan between a business and an investor. It's very hard to get much insight on that particular market for obvious reasons, right? The clue is in the name, it's all private.

Speaker 3 And so, I think when it comes to financing, it's pretty difficult to get a sense of the scale of what's happening right now, but also to get a sense of who is actually financing what.

Speaker 3 We hear stories, you know, you hear big private credit investors like in Apollo who will say something like, oh, you know, we're really into data centers at the moment, but it's hard to get a sense of how much.

Speaker 2 So, I want to look at this not then from the market's perspective or the financier's perspective, but from the workers' perspective. You were talking about how they're promising magic.

Speaker 2 And that's one way to put it. The other way you might put it is a promising replacement.
Yeah. That the thing that would make these companies extraordinarily valuable is if in fact

Speaker 2 you are suddenly, you being other companies, able to replace human labor like accountants and paralegals and HR workers with tireless chatbots who never want to join a union.

Speaker 2 And one thing I have wondered about a lot is

Speaker 2 not in the case where they invent superintelligence, which has its own set of possibilities and problems, but in the place where the more direct economic bet pays off, the bet I hear CEOs talking about and investing in.

Speaker 2 Is that good for workers? Is it like, if we are not in a bubble, does it mean we are in a labor substitution world, which in some ways is going to be much tougher on normal people, Joe, than a bubble?

Speaker 2 Yeah, the way I like to think about it is either the AI, if the AI bet fails, then we're going to have a recession, a bunch of people are going to lose their jobs.

Speaker 2 And if the AI bet succeeds, then a bunch of people are going to lose their jobs because AI will be able to replace labor.

Speaker 2 So either way, bet or succeed, it feels like it ends in a bunch of people losing their jobs. I mean, I have very mixed feelings about this question, though.

Speaker 2 I mean, economists are very sort of strict on this idea that like there is always demand for labor, that yes, of course, sectorally, you're going to have the historically, you're going to have an invention that from time to time puts an entire class of workers out of business, or that there is no longer need for this because we've developed a technology, but then that means savings from someone else, and then they spend it somewhere else, and that creates new labor demand.

Speaker 2 Furthermore, they would say that's literally what economic progress is, is that, you know, we're not toiling in the fields the same way because we've gotten so much more productivity.

Speaker 2 They would say, This is by definition what progress is.

Speaker 2 What feels different about AI, obviously, is just the sheer range that's all happening at once and the sheer range of potential vocations that AI could disrupt, whether we're talking about lawyers, whether we're talking about accountants, whether we're talking about coders, et cetera.

Speaker 2 So, again, progress is labor-saving technology. The ability to get more with fewer man hours is what economic growth is at its core.
But it is weird to talk about a technology, I just think.

Speaker 2 I just think what makes AI different or why it raises anxiety in the way that other labor-saving technologies might is just the sheer range of professions.

Speaker 2 Let me combine your two scenarios there into the one that I actually worry about the most on the labor market side, which is you could have this thing where the AI bubble pops at some level.

Speaker 2 This creates some kind of recession, which leads to firms wiring themselves for AI in a way they haven't before and bringing in the technology in a way that's actually much worse for labor.

Speaker 2 And then you have a scenario where there's been an acceleration of labor substitution.

Speaker 2 And yes, in the long run, according to The Economists, the labor markets will adapt, although, again, AI is a bit of an unusual technology because it's meant to mimic us.

Speaker 2 But

Speaker 2 markets adapt over time.

Speaker 2 People

Speaker 2 don't like that. I mean, we know that we have so much time here.
Our productive years are very limited. And we know that to be fired during recession

Speaker 2 scars

Speaker 2 for life. Yeah.
So I'll just say two quick things. One is

Speaker 2 an interesting twist in the story of the last several years is that in 2021 through maybe 2023, for like the first time in decades, firms realized or learned that they couldn't just put a helpline inside in the window when there would be a line of labor.

Speaker 2 And so I think actually we've already seen the beginnings of this setting aside AI, where where there's been this catalyst for labor-saving technology that started even before ChatGPT, because for the first time, I think it was sort of taken for granted that there would not be an endless supply of labor.

Speaker 2 And I think there are further developments since then that have driven this besides AI. So obviously there's the change in flows of immigration is one.
And then you have demographics.

Speaker 2 So we know that an aging population is going to put an incredible amount of strain on the productive population because we have to care for the elderly and so forth.

Speaker 2 So already there are these catalysts for firms to feel like we have to get more productivity out of our existing labor force, even before we get to the AI question, even before we get to the recession question.

Speaker 2 But to the point, it's like, yes, recessions are catastrophic. They're really bad.
I think economists and policymakers are too comfortable with the inevitability of recessions.

Speaker 2 That it's like, no, recessions are natural. Recessions are healthy.
This is like what clears out the brush. They ruin lives.
They impair earnings forever. They're terrible for workers.

Speaker 3 I would just add that also what's different about AI this time is, you know, we're not talking about industrial automation.

Speaker 3 We're talking about automation that's really centered in the knowledge economy. So things like writing, filling out forms, podcasting.

Speaker 3 I would describe it as a lot of the fun stuff, like writing music and doing art and things like that. And that's really where AI is dominating.

Speaker 3 Meanwhile, we're still waiting for the robots who can, you know, fold our laundry or, I don't know, serve us a burger or something like that.

Speaker 2 Watch our children during the day.

Speaker 3 Yeah, something like that. So it's kind of, you know, I think that's also why there's a lot of nervousness around this.

Speaker 2 So there's been a lot of talk about, first, whether or not we are seeing any evidence in the labor market data that AI is doing anything.

Speaker 2 But then also there's been more and more evidence that there's something strange in the hiring and firing side of the economy where things seem more frozen than normal.

Speaker 2 Can you sort of walk through both of those questions? Do you think that there's an AI effect on the labor market? And then what is the frozen labor market that people are talking about?

Speaker 3 Yeah, okay. So, first of all, whether AI is having an impact on the labor market.
I mean, it's hard to tell, right?

Speaker 3 You know, people, you know, if people or businesses are cutting or adding workers broadly, you don't necessarily always know the reasons.

Speaker 3 I will say that I remember very clearly a moment, I think it was last year, when the Challenger jobs report came out and there was a little anecdote.

Speaker 2 The Challenger jobs report? Yeah. So there's a company called Challenger that produces their own layoff tally.

Speaker 3 Right. So they're counting up the number of layoffs in the U.S.

Speaker 3 And there was a tiny little bit of text at the bottom of this report that said, a bunch of companies said they were laying off workers because of AI.

Speaker 3 That was the first time I ever really saw job losses being attributed to this new technology.

Speaker 3 But going back to our earlier point about the narrative, it's hard to to tell whether businesses are actually doing this because they're replacing workers with ai or whether they've just figured out that if i say i'm cutting people because of ai investors like that and my boss really likes it so that's what i'm gonna say and then in terms of the broader employment environment especially by the way culturally a little bit grim yeah well

Speaker 3 yeah incentives matter right like a lot of the world works because people are doing what their boss wants them to do beyond that though broader employment the way everyone's been characterizing it is that low hiring, low firing environment.

Speaker 3 So we're really seeing companies basically stick with the workforce that they have. Two things to say on that.
I think it gets back to Joe's point about the scarring from the pandemic.

Speaker 3 Everyone found themselves caught short. of labor supply in 2020.
No one wants to repeat that process. So they're actually holding on to people.

Speaker 3 And then secondly, it goes back to this uncertainty as well. No one really has a good handle on how the economy is going to unfold.

Speaker 3 And so if you're sort of unclear on what's going to happen, then you're basically frozen in terms of your investment choices. So people are just choosing or having to stay where they are.

Speaker 2 You know, there's a third option.

Speaker 2 We did an episode with our friend Connor Sen, who writes for Bloomberg, where he said, you know, look, you could say going into 2026 that every company has to make decisions about allocations.

Speaker 2 And if the view is we are definitely going to spend more money on AI technology, then we're going to just shift some of our spending plans for the year from hiring to capital investment.

Speaker 2 And so maybe there is like a direct link, not so much that the models themselves are good substitutes yet for an employee, but just from a sort of capital planning standpoint, 2026 is the year we spend more on AI.

Speaker 2 Therefore, we don't post as many job openings this year.

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Speaker 2 So for a couple of years now, economics types have debated this idea of the vibe session, which is a term from Kyla Scanlon.

Speaker 2 And in one of her recent newsletters, she had this chart that of every graph I've shown you guys, this is one I have been thinking about the most.

Speaker 2 I'm going to give it to you, Tracy, to just, this is her chart of the vibe session and how you know it's real. Okay.
Walk me through what you see here.

Speaker 3 Okay, so there's two lines on the chart. One is real disposable personal income per capita.
So how much people can spend individually.

Speaker 2 Accounting for inflation.

Speaker 3 Accounting for inflation. That spiked in the years after the pandemic, and then it started to dip.
And now it's sort of flatlining.

Speaker 3 Meanwhile, we have the University of Michigan consumer sentiment, which is very volatile, but in general, had been going up in the years from, let's say, 2010 to 2020.

Speaker 3 And since 2020 has been on a broadly downward plunging path with occasionally tiny, tiny bits of recovery, but not really.

Speaker 2 I mean, what I see on the chart is those two things used to kind of track each other a bit. Yeah.
Right. They orbit around each other.

Speaker 2 And basically, since the pandemic,

Speaker 2 a chasmic difference has opened up.

Speaker 3 This is the late stage capitalism thing, right?

Speaker 2 It's a niche.

Speaker 3 That's right. Eventually, you know,

Speaker 3 if you want more and more growth, then it takes more and more to keep people satisfied.

Speaker 3 And I think one of the things that's happening now is, you know, it used to be that money was in some senses shameful. You know, being too rich was a bad thing.

Speaker 3 And if you were a billionaire, you were expected to give some of your money to charity or, I don't know, contribute to the world in some other way.

Speaker 3 Now.

Speaker 3 We're seeing this sort of grifting culture take over the world, right? Money is the point.

Speaker 3 Even on the religious side of things, we have prosperity gospel now, which basically says, if you're rich, it's because God loves you. And so it's good to be rich.

Speaker 3 There's no limit on how rich people want to get anymore. And I think that's part of the reason that we're seeing a broad dissatisfaction, let's put it that way.

Speaker 3 But then, you know, realistically, I think a lot of people also are just. desperate about their future.

Speaker 3 They see house prices, they see insurance costs, they see, you know, retirement programs diminishing and they think like, well, the only way for me to get out of this hole that's been dug for me is to do something like gamble or bet on a meme stock or something like that.

Speaker 3 So I think, you know, money itself is becoming more and more an important part of not just, not just the way our economy functions and the businesses that get built, but also on our culture.

Speaker 2 What is your explanation of the vibe session? I mean, clearly, like, COVID kind of broke. a lot of society, but I don't know.
I'm like sort of, I'm an it's the phones guy.

Speaker 2 Now, granted, the problem with my theory, that chart specifically, is obviously the smartphone has existed for long before COVID.

Speaker 2 But I still think that like there is to some extent, because the important thing, the other important thing of that chart is like that there has not been some major change in affordability.

Speaker 2 There's not been some major change in the cost of living. Yes, there was an inflation spike.

Speaker 2 Yes, the cost of living has gone up, but in such a dramatic way that could massively explain why people are so pessimistic. I don't think you'd like see it on the chart.

Speaker 2 Real wage growth has generally been positive and it's been trending up lately. And it looks more or less along that same trajectory that was pre-COVID.

Speaker 2 So I do think like something is going on that I would say economists themselves are not equipped to answer. I think we're in a point in the world in which economists only have some of the answers.

Speaker 2 But I think there are things going on in the way people perceive the economy that I would say logically precede economics. And they have more to do with cultural status.

Speaker 2 So they have politics or just the amount of times that people are spent, like, you know, scrolling their phones and alternating between doom scrolling rage bait or doom scrolling slop.

Speaker 2 I think these are real things. And so I sort of put myself in, I definitely put myself in the it's the phones camp.

Speaker 3 I think economists have also historically underestimated the importance of relative relationships and relative gains.

Speaker 3 So, you know, most economists would look at that chart and focus on personal income and say, well, everyone's been getting better off on an absolute basis.

Speaker 3 Everyone is, you know, doing slightly better than before.

Speaker 3 Realists would probably not look at that chart, but they'd look at the actual tails of the chart.

Speaker 3 So like, how much has personal income been going up for the wealthiest segment of society versus the poorest society? and would say, well, what actually matters here is the relative gains.

Speaker 3 Even if you are slightly better off yourself, if you see someone who's doing much, much, much better than you, you're going to be annoyed and depressed, which is what that consumer sentiment line says.

Speaker 2 Connect those two theories, right? Which is to say, you could say, what you're talking about is to some degree,

Speaker 2 we might be having very unequal wage gains.

Speaker 2 Although I will say that if you look at median incomes are going up too, this is not just a factor of, you know, Bill Gates or Sam Altman is getting all the money and nobody else is.

Speaker 2 Like you look at down-the-income quintiles and it doesn't, we have been seeing gains since the pandemic.

Speaker 2 On the other hand, to the extent people are on their phones all day, looking at viral videos, looking at Instagram,

Speaker 2 the comparison dimension of just human life has really changed. Yeah.
There's that famous phrase, comparison is the thief of joy, which is a phrase that people have known about forever.

Speaker 2 And now we have the ultimate comparison engine and no one's happy anymore. Well, that phrase predicted it all right there.

Speaker 2 Well, there's also, isn't there a line that wealth is when you have more money than your brother-in-law? Yeah. Right.
That that's like the.

Speaker 2 Well, so there's the other thing which that chart does not capture at all, which is the effect of wealth because this is an income chart and so what we know is that like it's been incredible times for people who already have assets and if you're lucky to have like really special assets if you had been you know someone in your family had gotten interested in crypto at some point in the mid 2010s you didn't work harder probably than anyone else but you're like you happen to be standing on top of a gold mine etc and so there is this distribution of wealth in this country that not only is it unequal, it feels arbitrary in many respects.

Speaker 2 Why did that person get crazy rich such that their bloodline never has to work again? They're just standing in the right thing.

Speaker 2 It feels disconnected in many ways from the effort or time that someone put into labor income, you know.

Speaker 3 And also, this is something that traditional economics just isn't prepared to deal with, right? Traditional economics is all about those absolute gains and we're talking about relative differences.

Speaker 3 And then, do you remember I wrote about this in the all bots newsletter? Shout out for the all bots newsletter. And someone actually wrote into me saying, well, if the poor owned more assets.

Speaker 2 I know.

Speaker 3 If the poor owned more assets, then they would be in a much better position, which I should say. Yeah.
You know, have you tried not being poor? Yeah.

Speaker 2 I guess one way of thinking about what's going on here is consumer sentiment is a tricky thing to measure.

Speaker 2 I mean, you can word the question in different ways, but I do think you're getting at somebody's story about the economy.

Speaker 2 And

Speaker 2 I think something happening in people's stories about the economy right now is, so one, Trump came in and he disappointed even his own people. I mean, this tariff policy is terribly unpopular.

Speaker 2 Things are very chaotic. Trump himself is unpopular.

Speaker 2 It doesn't feel like there are people with their hands on the wheels of the economy who have a vision and a theory and competence and you trust them.

Speaker 2 So your story that you're living in a period when the line is going to go up is weakened. The AI story is threatening to people.

Speaker 2 And then you have the comparison stories and precarity and just like, I think things just feel

Speaker 2 like both not good in the moment. But there isn't a story that people believe, either because there is a leader

Speaker 2 or because there is a plan or because the thing that seems right around the corner seems good.

Speaker 3 There's very little sign of things getting better.

Speaker 2 I mean, yeah, layer into the fact that we've had a few massive crises in a short period of time. And we have the added, you know,

Speaker 2 the way the phones mess with their heads. And yeah, what is the thing that's supposed to make you happy? And it's supposed to be AI.
It's got everything that is here to replace you. Yeah, right.

Speaker 2 That is right.

Speaker 3 And drive up your electricity cost.

Speaker 2 Yes, right. That's a really important part of it, which people perceive that AI is a combination of it's going to make electricity more expensive and you're not going to have a job.
It's not great.

Speaker 3 It's a tough sell.

Speaker 2 Let's put it that way. Do you think there's anything as we turn the corner into 2026, like if this chart looked much better at the end of 2026,

Speaker 2 either because personal incomes went up or because just sentiment went up, why do you think it would be?

Speaker 3 I think it would probably be because asset prices keep going up and our, you know, broad consumer economy is more levered to asset prices than it ever has been, arguably.

Speaker 3 I also think that consumer sentiment doesn't matter that much for the overall economy because frankly, even though consumer sentiment's been going down, people keep spending on stuff, right?

Speaker 3 And that's been another surprising aspect of why we haven't seen a recession emerge from the Vibe session.

Speaker 3 And I think part of the spending story, ironically, is that, again, people are kind of desperate.

Speaker 3 And so if you're not going to be able to afford a house, then why not, you know, just buy that extra lipstick or, I don't know, phone or whatever and make yourself happy in the short term.

Speaker 2 Another interesting thing about AI is that If you think about the technologies that emerged in the early 2010s or the late 2000s, like they had several years of, wow, this is really cool.

Speaker 2 The smartphone. Wow, I love, this is amazing.
What can it do? Oh, I love sharing pictures with my friends. I love being able to like talk to fellow reporters all day on Twitter, et cetera.

Speaker 2 So what it seemed like, the trajectory with past technologies is that something new emerges. People are very excited about it for a while.
It seems to make people happy. It's sort of fun.

Speaker 2 And then only after years do we sort of look around and be like, oh, God, this is like creating all these like headaches in my life.

Speaker 2 AI is weird in that it's from day one, the head, like the three of us could sit here all day and just talk about why AI is going to be bad, right? We'd talk about electricity prices.

Speaker 2 We'd talk about how it's going to put us out of a job. We'd talk about how music is going to be garbage.
Like we just come up with the list.

Speaker 2 It's almost a waste of time. Any person could come up with a million negative stories about AI, et cetera.

Speaker 2 So I guess my optimistic take, which is not grounded in something specific that I could point to, which is that if you assume that the first snapshot of any technology is wrong, that we're sort of like mistaking on, maybe then like something emerges with AI that's like, wow, our lives are like, so I can point to things that are better in a way we can't articulate it yet.

Speaker 2 Basically, that in many different areas of our lives, we experience the equivalence of a Waymo, right? Because people get into a Waymo and they're like, oh my God. This is insane.

Speaker 2 This is genuinely incredible. And this car is like so smooth.
And it is so clean. It is so awesome.

Speaker 2 And that like the promise would be that that there turns out that there are implicitly the seeds of many other Waymos and we just can't see them yet.

Speaker 2 But whether we're talking about medicine, whether we're talking about whatever, that there are other things like that that AI will enable. We just don't quite know what they're going to be yet.

Speaker 2 But if you could just roll out Waymos everywhere tomorrow, which you can't,

Speaker 2 but if you could, that would actually put a huge number of people out of work.

Speaker 3 It's very hard to navigate that trade-off, right?

Speaker 2 If I were asked to answer my own question about why might you see a different feeling at the end of 2026, it would be if something has shifted in people's sense of the politics, right?

Speaker 2 There's a lot of uncertainty, and people want somebody to have a plan. And right now, it's like you look around the world, it's like China seems to have a plan.

Speaker 2 And people didn't trust that Biden had a plan, you know, and he certainly was not able to articulate that, even if his economic policy was quite like coherent in what it was attempting to do.

Speaker 2 And Trump is all over the place. And so I do think there's something about times of uncertainty.
People want clear leadership and they just don't have it and haven't had it for some time.

Speaker 2 We need a Jed Bartlett. You know, that's the point you're talking about.

Speaker 2 The Nobel Prize-winning economist. Someone who like

Speaker 2 sort of is like what people feel is like statesmanship, right?

Speaker 2 That there is like somehow a merge, and it seems very hard to imagine given the environment, but that somehow you could have like someone who like has some pretense of statesmanship, purpose, unification, coherence.

Speaker 2 I think that's sort of like, if that somehow emerged in this environment, it's very hard to see. That might change the way people view the trajectory of the country.
I think it's a good place to end.

Speaker 2 Always a final question. What are the books you recommend to the audience? Tracy, why don't we begin with you?

Speaker 3 Okay,

Speaker 3 well, this is very pertinent to our conversation, but Dan Wong's new book, Breakneck, is excellent for comparing the political economy of the US and China and a lot of the things we just discussed.

Speaker 3 This idea of like, why is China able to do some of this faster and seemingly better than the US? That one's great.

Speaker 3 Best fiction I read this year, new fiction, is Northwoods, which is the sort of surreal story about an old house in New England. And Joe knows that I won't shut up about my house in Connecticut.

Speaker 3 It's really good, though. And then historical fiction.
This one is actually for Joe. I just started reading it actually.

Speaker 3 Marriage at Sea, which is a true story of a couple in the 1970s that get shipwrecked by a

Speaker 2 whale.

Speaker 3 Oh, that's great. And survive at sea.
It's really good.

Speaker 2 I really had a hard time thinking about which direction I was going to go because I read Moby Dick this year and it changed my life. And I've read a bunch of sort of whaling related books.

Speaker 2 But for the first time, it changed your life.

Speaker 2 Oh, God. I mean, all I do is think about whales.
So that's all I know.

Speaker 2 All I talk about is Moby Dick now. And every single.
This is true. This is true.
And every single story in the economy or whatever. I was like, okay, that's the Captain Ahab.

Speaker 2 So like everything I just frame into Moby Dick. But I'm going a different direction than the whales.
It's a strong Moby Dick recommendation there, though. Yeah, it's implicit.

Speaker 2 Just read Moby Dick, people, if you haven't. But so we talked about, you know, I mean, it's the phones guy.

Speaker 2 I truly think that the new media environment is fundamentally restructuring and altering society. So there's a fairly recent book.

Speaker 2 Andre Muir is the sort of independent journalist and writer like based in Toronto who like self-publishes his own books, which is usually a huge red flag, but they're phenomenal.

Speaker 2 So people should check out his book, The Digital Reversal, which is about the way digital media like sort of like flips a lot of things on its head, but also this idea of like, it seems to be happening at a faster and faster pace, the sort of pace of crises.

Speaker 2 That's great.

Speaker 2 And then there's two books written several decades ago that I recommend to almost everyone, Walter Ong's Orality and Literacy, which I've been talking about a lot, which is basically the way like our communication environment is such that we're like an oral society.

Speaker 2 increasingly, not just by the fact that we literally talk more as in a, on a podcast, but that everything is back and forth in this.

Speaker 2 And therefore, you don't have this sort of logical contemplation of the person sitting alone in a room, actually reading text and judging text on its own merits.

Speaker 2 He anticipated a lot of changes with social media and the phones decades ago.

Speaker 2 And I think it's a lot better than reading a lot of contemporary stuff because it doesn't try to shoehorn contemporary events into a theory. It's very predictive.

Speaker 2 And then another book that I recommend on the same level, it just celebrated its 40th anniversary.

Speaker 2 So another one that's sort of pre-this moment, which is Josh Meyrowitz's No Sense of Place, which anticipates the way electronic media would like dissolve the walls between, you know, this is where you work and this is where you live, or this is a type of conversation that's appropriate for one environment, but not appropriate for here.

Speaker 2 This sort of obliteration of norms from one place to another, I think, has a lot of explanatory power. So, yeah, no sense of place by Josh Meyerowitz is my last one.

Speaker 2 Joe Isenthal, Tracy Elloway, thank you very much. Thanks for having us.
Thanks for having us. That was a blast.

Speaker 2 This episode of the Azure Clown Show is produced by Roland Hu. Fact-checking by Annika Robbins with Kate Sinclair.
Our senior audio engineer is Jeff Geld. Our executive producer is Claire Gordon.

Speaker 2 The show's production team also includes Annie Galvin, Marie Cassione, Marina King, Jack McCordick, Kristen Lynn, Emma Kelbeck, Michelle Harris, and Jan Koebel.

Speaker 2 Original music by Marion Lozano, Dan Powell, and Pat McCusker. Audience strategy by Christina Similuski and Shannon Busta.
The director of New York Times Pinning Audio is Annie Rosstrasser.

Speaker 2 Special thanks to Kimberly Klausing, Natasha Surin, and Kyla Scallon.

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