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0:26

Welcome

0:28

to The Other

0:31

Hand,

0:34

a podcast

0:36

by Jim Power and Chris Johns that looks

0:38

at the major political, economic and

0:40

financial developments around the world from

0:43

a uniquely Anglo-Irish perspective.

0:52

All our podcasts can be found at our Substack

0:55

site and all good podcast platforms.

1:00

We're doing something a little bit different today. We

1:02

have a guest joining us from San

1:05

Francisco, Noah Smith. Noah

1:07

grew up in Texas. He studied physics

1:09

in college. He was an economics PhD

1:11

student at the University of Michigan.

1:14

He was an assistant finance professor at Stony

1:16

Brook University in New

1:19

York state. He was then an economic

1:21

columnist for Bloomberg Opinion,

1:23

left that in 2021 to become

1:25

a

1:26

full-time blogger. Although he had

1:28

been blogging, I think for about a decade

1:30

prior to that. The blog is called Noah

1:33

Opinion. I would strongly recommend to

1:35

all our listeners to check it out,

1:37

subscribe. It's absolutely fantastic.

1:40

He covers economics, politics,

1:42

finance, technology. An interesting

1:45

fact about Noah is that he believes that

1:47

rabbits

1:48

are an underrated pet

1:50

and he lives in San Francisco with two

1:52

rabbits, Cinnamon

1:54

and Constable Giggles. Noah

1:56

is also a self-described

1:59

techno.

1:59

optimist. And it's on

2:02

that note, no, I'd like to start off in

2:04

the economists today. There was

2:07

an interview with your Val Noah

2:09

Harari. Just throw a quote

2:11

at you. He said that AI

2:14

has hacked the operating system of human

2:16

civilization. And storytelling

2:18

computers will change the course of human

2:21

history. As a techno optimist,

2:23

how do you respond to that? Great,

2:26

let's, let's see what they can do. That's

2:28

pretty much my response.

2:29

It's, um, I don't know about the

2:32

metaphors of the operating system of human

2:34

society. I don't really know what that necessarily

2:36

means, um, which is not a criticism.

2:39

I do think that, you know, large language

2:41

models, chatbots like GPT

2:44

four or, or whatever, you know, they'll

2:46

change a lot of things because a lot of what we spend

2:48

our time doing is sort of talking to each other that

2:51

will, that will change. Also those,

2:54

those machines will provide a way for us to

2:56

tell computers and robots

2:58

and all, you know, mechanized systems what

3:00

to do simply by talking at them. So instead of

3:02

having you having to actually write code

3:05

and essentially write the instructions

3:07

of what the machine should do, you say, Hey

3:09

machine,

3:10

create a window on my screen that

3:12

looks like

3:13

this and you know, has this in it

3:16

and the machine will just do it. It'll understand

3:18

your language very naturally. And it will

3:20

be able to convert that into some sort of, you know,

3:23

computer code,

3:24

write that code and execute the code in

3:26

a way that you want. Or suppose you're using a robot

3:28

in a factory, uh, you can say, Hey robot,

3:31

you know, bring me that part from over there on the robot

3:33

just knows which part to bring you and knows sort

3:35

of how to do it. And I think that this is going

3:37

to change the way we use technology

3:40

because we'll be able to talk to technology

3:42

the way we are trained to talk to each other. So

3:44

I guess maybe if that's the operating system of human

3:46

civilization, you know, we, we talk to each other

3:49

to tell each other what to do. And we understand our

3:51

own

3:52

language and linguistic instructions, at

3:54

least some of the time. And I think computers will

3:56

now be able to do that. And that's a big change.

3:58

Uh, I think

4:01

one of the underrated possibilities that

4:04

people are not thinking about yet in connection with

4:06

this technology is that this will make technology

4:09

accessible to people who are

4:11

much less technically trained.

4:13

So right now you have to

4:15

use computers effectively or to use robots

4:17

or to use anything technological.

4:20

You essentially have to think like a simple

4:22

machine and you have to write lines

4:25

of code, you know, open your text editor, write lines

4:27

of code in a language and then compile it. And

4:29

that requires you to essentially

4:31

do machine part instructions in

4:34

your head before translating them onto

4:36

the page and telling the machine to do them.

4:38

So I think that has really given

4:40

a lot of advantage in our society to people

4:42

who have the capability to think like machines.

4:45

And now through the magic of

4:47

large language models, I think we are able

4:50

to, we will be able to skip

4:53

that step of forcing ourselves to think like a

4:55

machine. I think people who are not very

4:57

good at thinking like a machine will still be able

4:59

to use machines. And I think that

5:01

early evidence already points to this happening. So

5:03

I think that's a big underrated change

5:05

that people aren't talking about. That there is obviously

5:08

a lot of debate and disagreement. You know,

5:10

I've seen you write about Noam

5:12

Chomsky, Tyler account, people like that who

5:14

are very different views. Jeffrey

5:16

Hinton, who's just stepped down from

5:19

Google, has been saying a lot of

5:21

negative stuff really about

5:23

AI and chat GPT over the last

5:26

few days. You are very much on

5:28

the positive side of the debate. I

5:31

actually do agree

5:31

pretty strongly with Tyler Cowan on

5:33

this one. And he has also been on the positive

5:36

side of the debate and been fairly harshly

5:38

critical

5:39

of the people who want a pause in

5:41

AI research. I think that his

5:43

arguments are persuasive and the arguments of people who

5:45

don't want a pause

5:47

are persuasive to me. And, you know,

5:49

I don't want to put words in people's mouth. But to summarize those arguments,

5:53

I think

5:54

the first argument is that many people

5:56

will not pause. So if you make a pause,

5:58

that simply seeds the field to the people who

6:01

refuse to pause,

6:02

which in this case is China. Researchers in

6:04

other countries, these people aren't going to follow the U S

6:06

if, if we declare a pause, even if

6:08

we have an ability to do that. I think

6:10

the second, the second argument is that

6:13

we don't actually know what these technologies

6:16

are capable of yet. So to pause

6:18

simply delays the day when we find out. And

6:20

if we pause for six months, AI

6:22

research, we won't necessarily be able to

6:25

figure out things that would help us make AI safer

6:28

within those months. Because after

6:30

the AI research resumes, changes

6:33

will happen that will invalidate the findings we

6:35

found during the pause. And so I don't think,

6:37

I think a pause is not particularly effective in

6:40

this case because it will

6:42

essentially just delay the day

6:45

when we find out what the new technology is

6:47

capable of and are thus able to design

6:49

effective, you know, safeguards on

6:51

the technology.

6:52

Also, I think there has been a great

6:55

model

6:56

in terms of what the danger

6:58

is from AI,

6:59

I think that most people, when you

7:01

talk about AI, including Jeffrey

7:04

Hinton has talked about this. They will

7:06

talk about the danger in, as in terms of

7:09

replacing human jobs. I don't

7:11

know so much about the details of the technology

7:13

of AI, only the basics, but I do

7:15

know a bit about the economics of, of,

7:18

you know, job replacement, things like that. And I

7:20

think that

7:21

not only is that threat overblown,

7:24

but it also is not the kind of thing

7:26

that's amenable to a pause. So if you pause, if

7:28

AI is destined to make humans obsolete, which

7:30

I don't think it is, but if it is, then

7:33

pausing for six months and

7:35

giving humans an extra six months before

7:38

they go obsolete

7:39

is not going to do a damn thing.

7:41

And so I think that

7:44

is effectively useless. Now, the other

7:46

danger that people talk about

7:48

from AI is, you know,

7:50

sort of the technology going haywire

7:52

and inflicting harm upon humanity

7:55

via, you know, nuclear launches,

7:57

bioweapons, financial fraud.

7:59

sewing social division, you know, there's

8:02

a bunch of ideas that people

8:04

have for how this could happen. And I think

8:06

that a pause there would,

8:09

that would, you know, I mean, preventing the destruction

8:11

of humanity for six months is a useful thing

8:13

to do. And I don't actually know whether

8:16

or not, you know, AI will destroy humanity.

8:18

I think the current crop of AI will

8:20

definitely not

8:21

destroy humanity. That's not a thing that could happen.

8:23

But I think that we might reach relatively

8:26

soon an AI that could by

8:29

adding a bunch of stuff that the current AIs do

8:31

not have, such as the ability to act

8:33

as a perpetual agent that's always sort of on

8:35

and thinking and acting. Various other things

8:37

we need to add in order for it to be able to do that,

8:39

you know, we need to connect it, have APIs

8:42

to connect it to the financial system. And we'd have it

8:44

have to be able to like synthesize voices and

8:46

make calls and basically have to be extremely

8:48

multifunctional. I think that

8:50

we can see that it can do those

8:52

things. But the question is, would a pause

8:55

make us safer from that? And

8:57

I think what makes us safer from

8:59

AI trying to screw with our

9:01

systems, our, you know, technological

9:04

and weapons and finance systems and these things,

9:06

what makes us safer from that is having it done

9:09

in a small way and building safeguards

9:11

to it. So if you if you watch the Terminator

9:13

movies where the AI wakes up and launches

9:16

nukes and destroys humanity, it's the first thing

9:18

it ever does.

9:19

When the AI, the minute the AI comes online, it

9:21

thinks, oh, my God, humans are threatening me. And

9:24

the first thing it does is launch a global thermonuclear

9:26

war. We must absolutely not hook up AI

9:29

to any sort of weapon systems, especially

9:31

weapons of mass destruction. You know, if it's like some

9:33

little drone or something that could just cause

9:35

an accident as the worst thing or kill a civilian

9:37

or something, maybe I don't know. But then

9:40

I think that hooking up AI to the nuclear

9:42

weapon systems is a very bad idea. And

9:44

we should there seems to be a high

9:46

likelihood that AI will do small bad things before

9:49

it does the big bad thing that kills everybody. And

9:51

we'll see it do that. And we'll understand how it does

9:53

that. And we'll come up with countermeasures for it.

9:55

We'll know not to, you know, we'll have

9:57

we'll have changed the way our phones work so they don't.

9:59

just trust, you know, voices from

10:02

trusted people or we'll, we'll have some way of verifying

10:04

that a phone call comes from the right person,

10:07

or we'll have some way, we'll just add

10:09

verification systems for communication so AI

10:11

can't

10:12

deep fake its way into tricking people to do things.

10:14

We'll implement stricter controls on biological,

10:16

you know, synthetic bio kits that you can get at home. We

10:18

should be doing that anyway. But I think one

10:22

pretty consistent thing we've seen is that human beings

10:25

as a group, not individually, but as a collective

10:27

group are very, very, very good

10:29

at finding ways to destroy other human beings

10:31

and doing that for stupid, crazy reasons

10:34

of our own. We're very good at that. If

10:36

Ted Kaczynski

10:37

mailing bombs because he's concerned about the environment,

10:40

I mean, that's crazy.

10:41

You'd have to work to get an AI that crazy,

10:43

or you have, you know, terrorists doing 9-11

10:46

or whatnot. And we already have, we've

10:48

been implementing safeguards to, you

10:50

know, guardians, nuclear terrorism, theft of nuclear

10:52

materials, things like that for a long time. And we

10:54

probably have to update those safeguards in the age

10:57

of rogue AI. We'd also know

10:59

AI doing small bad things would also tell us where

11:01

the rogue AI is coming from, who made it, how

11:03

to, how it works, how to stop it. You learn

11:06

about bad things by bad things happen. And that's just sort

11:08

of an unfortunate fact of the world. You know, it's,

11:10

you can't learn about bad things by having

11:13

a few internet enthusiasts sit

11:15

around and dream and ponder ways that

11:17

things could go bad. You don't learn much because

11:19

there's so many possibilities that they can dream

11:21

up that you don't know which possibilities are more likely. The way

11:23

you know which possibilities are more likely is by having AI

11:26

do some small bad things and figuring out, oh

11:28

my gosh, a small bad thing happened. Like

11:30

crashing car,

11:32

right? You know, you can sit there,

11:34

I can sit there and think of ways that a car could

11:36

crash or that AI could accidentally crash a car.

11:38

But that's essentially useless compared to

11:40

testing AI at low speeds,

11:43

we're in a non-fatal situation or in a safe situation,

11:46

watching it crash and then saying, okay, why did it crash?

11:49

That's how engineering works. A pause just

11:51

makes a delays the day when we will start

11:53

that process of learning how the machine

11:55

can crash. Thank you, Noah. I'd like to move

11:57

the discussion on from tech in the interest of time.

11:59

we could talk about it all day and

12:02

ask you to briefly comment

12:04

on a piece that you wrote recently about

12:06

the slow banking crash,

12:09

I think you called it. We've had three

12:11

banks now fail in the United States,

12:13

the second, third and fourth largest in

12:15

US bank failure history. Each

12:18

one has been described as a one-off, it's

12:20

self-contained, it's not going to happen again,

12:23

everything's okay, we are told. It

12:25

strikes me that from

12:27

a behavioral point of view, the business model of these

12:29

banks, which was to essentially, and I

12:32

oversimplify a little, to bet on

12:34

low interest rates, staying low forever

12:36

was clearly wrong. And if three of them

12:38

have done it, there must be more surely, aren't

12:40

there? They all have to some degree. Yeah, that's

12:42

right. So the way they did this primarily

12:45

was to pay, was to do

12:47

two things. Number one, they bought long-term

12:50

bonds, and the banks that failed bought

12:52

many more long-term bonds than other banks. So the

12:54

large banks that we have like Chase

12:56

or Citibank, their

12:59

ability to buy a lot of these long-term bonds is reduced

13:01

by the regulation that we implemented after the global

13:03

financial crisis.

13:05

And after those banks almost failed

13:06

because they're systemically financially important. But

13:09

during the Trump years, we changed that

13:11

law so that banks of

13:14

a slightly smaller size, the size of Silicon Valley

13:16

Bank and First Republic, both of which just failed, are

13:18

allowed to do a bunch of risky stuff. And unfortunately,

13:21

we changed that regulation at

13:24

a very inopportune time. And

13:26

so

13:27

those banks bet heavily on interest

13:29

rates staying low by buying long-term bonds. Because

13:31

remember, when interest rates go up,

13:33

the price of bonds goes down and the price of long-term

13:35

bonds goes down a lot. That is why those

13:37

bond portfolios took a hit. The second thing

13:39

they did was in order to keep making a profit margin,

13:42

they did not pass along higher interest

13:44

rates to their depositors. So that if you

13:46

had a savings account at Silicon

13:48

Valley Bank or at First Republic, it

13:51

was still only paying you 0.2% interest in

13:53

an era of 4% interest rates.

13:55

So you were losing, they were setting your money on fire. That

13:58

is an invitation to deposits to leave. Remember

14:00

that banks collapse when their deposits leave and when you can't

14:02

pay them out. So when your value

14:04

of your assets goes down, because

14:07

interest rates went up, so bond prices went down, it means

14:09

that you can raise less cash to pay your

14:11

deposit. So that makes it more likely for a bank to collapse.

14:14

And in addition, having depositors

14:16

want to leave, not because of panic, but just because

14:18

they're not getting a good rate of return on their deposits, is

14:21

another incentive for depositors to leave. So

14:24

the era of high interest rates created

14:26

these incentives for depositors to leave. And in March,

14:28

we saw that happen very fast to three banks. The

14:30

idea that first Republic Bank, so first

14:32

Republic Bank officially failed this week, but

14:35

really it failed due

14:37

to deposit outflows that happened in March, because

14:39

it acknowledged those deposit outflows in its quarterly report.

14:42

The first quarter does not include

14:44

April. Really, when we're talking about, you

14:46

think it's one after another because the news stories

14:49

come one after another, but in fact, these all happened at the same

14:51

time. When we talk about a one-off, we don't mean a

14:53

one-off in terms of one bank doing bad business

14:55

models. We mean there was a big

14:57

outflow and then the Fed and the FDIC

15:00

and the Treasury came in and basically backstop

15:03

deposits. And so we haven't seen, we have

15:05

not seen banks fail since that event.

15:07

We may, there's two banks that are quite

15:09

wobbly, Western Alliance and Pacific West

15:12

Bank Corp. And those two banks are

15:15

much smaller. They're about $40 billion in assets

15:17

each compared to $200 billion for both Silicon Valley

15:20

and first Republic. They had some deposit

15:22

outflows, not as bad. They may also fail.

15:24

It's not clear. Since the Fed and

15:26

the FDIC and the Treasury backstopped

15:29

uninsured deposits, we haven't seen

15:31

other bank failures. So I think that the

15:34

idea that, oh, they backstop the deposits

15:36

and yet we're still seeing one after another of these

15:38

bank failures. No, those happened at the same time. However,

15:40

that said, the incentives

15:43

for deposits to flow out of the banking system

15:45

remain. And the only way that banks

15:48

can keep money, keep

15:50

deposits in the system and

15:52

strengthen themselves by

15:54

keeping deposits in the system.

15:56

The only way they can do that is by raising interest

15:58

rates that they pay to depositors.

15:59

And the easiest way to do that is

16:02

to simply make the depositors more aware of

16:04

the high interest rate savings account alternative

16:06

that they already have called a money market account.

16:09

So they can do that, which is also FDIC

16:11

insured. It's basically just better than a traditional

16:13

savings account in every way. And banks have been frankly

16:16

a little

16:17

dishonest in letting people keep their money. And traditional

16:19

savings account, when the money market account is what the traditional

16:22

savings account used to be, it does pay you

16:24

interest. So banks can do that. That

16:26

just weakens the value of their business because that

16:29

means they don't make as much of an interest rate spread. The spread

16:31

between their bonds or their loans,

16:33

whatever their assets are, the interest rate that those pay

16:36

the banks, and the interest rate the banks have to pay their

16:38

depositors goes down. So that difference goes down.

16:40

And then banks get weaker in terms of profitability.

16:43

So banks have to sacrifice profitability in order

16:45

to survive. That will happen. And it will also

16:47

reduce lending because that will make

16:49

them cut back on risky long term loans.

16:52

And it'll just make them cut back on loans in general to sort of

16:54

preserve their cash, just

16:56

in case depositors want to take money out. That

16:59

decrease in loan activity will

17:01

cause

17:02

either a recession or something like a recession

17:05

in that it will decrease aggregate demand. It

17:08

will decrease lending. It will decrease the amount of money flowing

17:10

into people's pockets and

17:12

businesses' pockets. And it will decrease the amount

17:14

that people in businesses spend on things, which will

17:17

hold down inflation, but will also cause a slowdown

17:19

in economic activity, which is probably

17:22

what the Fed wanted in the first place when it raised

17:24

interest rates. In other words, this is kind of

17:26

just how monetary policy works. This

17:29

is this is how we slow the economy

17:31

in order to quash inflation. Is it not the

17:33

case that, yes, the deposits

17:36

flowed because they

17:37

weren't getting any kind of return on those

17:39

deposits and they had a good alternative for the first

17:42

time in a long time? But

17:43

it was also the case that perhaps slightly

17:46

smarter depositors worked out that

17:48

the losses on those bond portfolios

17:51

had on paper

17:53

technically maybe rendered the

17:55

bank's capital ratios skinny

17:57

to the point that they were technically insolvent. there

18:00

was actually a solvency worry as

18:03

well as a chase for yield. Sure.

18:06

Yes, absolutely. So the chase for yield

18:09

is the thing that is still in

18:11

action. So the solvency worry

18:13

was there. It's no longer there because if your

18:16

bank is 100% insolvent and if your bank's assets go

18:19

to zero tomorrow,

18:21

it doesn't matter a bit to you because the

18:23

government has guaranteed

18:25

your entire deposits now.

18:27

You will not lose a penny of your money. Your money is

18:29

fine. Who is responsible for maintaining

18:31

the

18:32

paperwork that gives

18:34

you your money will change as

18:36

it changed with First Republic being acquired by JP

18:38

Morgan, but as a depositor, you're in

18:41

zero danger from your bank going and solving.

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19:18

So why wouldn't the feds just simply

19:20

say, okay, rather than going through all that rigmarole

19:24

complicated stuff of

19:26

the deal that was done with JP Morgan because

19:28

there are all sorts of cross guarantees

19:30

and loan loss sharing

19:33

potentially going forward. It was a pretty complicated

19:35

setup. Why didn't they just shut First Republic

19:37

and give everybody a check?

19:39

Because that is annoying and disruptive.

19:41

I mean, if your bank account vanishes and then you get a check

19:43

and then you have to go find another bank, open another bank

19:46

account and deposit that check,

19:48

that is annoying and disruptive, possibly

19:50

even scary,

19:51

but certainly would disrupt normal economic

19:53

activity. Whereas if instead now you just have

19:55

a JP Morgan account and your account just switches

19:58

to a different bank.

19:59

That is very... easy and smooth transition.

20:02

So you think that today's Federal

20:05

Reserve interest rate rise is probably

20:07

the last one? That's

20:09

my guess. I think that they will raise

20:11

interest rates to the level they

20:13

said they would raise interest rates to, and I have to go check

20:16

to see if this gets them all the way there, if they need one

20:18

more hike. I think this gets

20:20

them all the way there.

20:21

Where other they're close, and the

20:23

point is that the Fed places an extremely

20:26

high premium on its credibility,

20:28

and people who want to predict the Fed need

20:30

to understand that fact first,

20:32

is that the Fed credibility over

20:34

everything, if the Fed goes back on what

20:36

it says, then it feels rightly

20:39

or wrongly that that will crush

20:41

its ability to make monetary policy work in the

20:43

future. So it places a huge premium on credibility.

20:45

It will raise interest rates a little too high

20:48

if that means, not a lot too

20:50

high, but it will raise interest rates a little too high, even

20:53

if that means hurting the economy a little too

20:55

much, just to preserve its own credibility. Noah,

20:57

could I just ask you about,

20:59

Sam, you've written a lot about globalization,

21:02

free trade, industrial policy, as

21:04

Chris mentioned in recent days. Since 2016,

21:08

I guess, we've seen Trump,

21:10

we've seen Brexit in the United Kingdom. There

21:13

has been a definite backlash

21:16

against globalization and the impact that

21:18

free

21:18

trade has had. How

21:20

do you assess the globalization

21:23

agenda at this juncture? Is it

21:25

irreparably damaged or is this

21:27

just a blip in a long-term trend?

21:31

Globalization in terms of trade as a percent of the economy has been

21:33

going down at a gentle rate

21:35

since the global financial crisis of 2008, which is now 15

21:37

years ago. Weird

21:39

to think that, right? It was such an apocal event and now

21:42

it's 15 years in the past. So the global financial

21:44

crisis

21:45

happened a long time ago, and

21:47

globalization has been shrinking slightly since then. What

21:50

has happened

21:51

in the last decade is

21:53

an increasing series of steps to

21:57

break up some of the specifics of the

21:59

old trading regime.

21:59

that prevailed during the 2000s and early 2010s. So

22:04

people think this started with Trump

22:06

and his tariffs on China, but in fact it did not. It

22:08

started with China. In the early 2010s and

22:10

mid 2010s, Xi Jinping starts, although

22:14

the plans were laid out in the Hu Jintao administration,

22:16

but Xi Jinping comes in and basically

22:19

decides to execute all these plans to

22:21

move China up the value chain by onshoring

22:24

production of high value components and building

22:27

brands, which is just good for

22:29

Chinese companies and value capture, et cetera, and

22:32

also to start securing

22:34

supply chains for the purpose of national

22:36

security. The idea that we don't

22:38

want our supply chains to get disrupted in the event of a war

22:41

is something that Americans are thinking of now and that

22:43

China was thinking of long ago because

22:45

they were actually thinking about the possibility of war

22:48

much earlier and much more seriously

22:50

than we were. And so China,

22:52

because they would start it, and

22:55

so China started making

22:57

efforts toward decoupling long before. Of

22:59

course, everyone knows the story of Trump coming in and slapping

23:01

tariffs on China and all these sort of sometimes

23:04

haphazard attacks

23:05

against China that were then

23:08

kind of refined by the Biden administration. The Biden administration

23:10

kept many of the tariffs, kept and

23:13

expanded export controls a lot and kept investment

23:15

restriction through CFIUS, the

23:17

committee that reviews Chinese investments. The Biden

23:19

administration

23:21

preserved or extended many of the Trump

23:23

administration's efforts toward decoupling

23:26

and then added on a lot of its own.

23:29

And now is adding another layer,

23:31

which is industrial policy. Trump didn't have really

23:33

industrial policy beyond yelling at companies

23:36

to put factories in the United States, which didn't work.

23:38

Biden has passed the CHIPS Act, the

23:40

Inflation Reduction Act, and those two

23:43

bills together basically promote two

23:45

industries, the semiconductor industry and the

23:47

clean energy industry. And those

23:49

two

23:50

industries are the focus of our new industrial policy,

23:53

and that's going to add a layer. And in addition,

23:55

on top of those things, Biden has come up with this

23:57

concept called French shoring, which in practice...

24:00

This is going to mean putting factories

24:02

anywhere but in China and this concept

24:04

of de-risking. So I know we don't

24:06

have that much time, but let me take a minute and say why

24:09

de-risking is the right word for this. Companies

24:13

that put all of their manufacturing in China are

24:15

in an existential danger from a

24:17

war over Taiwan or a war over anything,

24:19

South China Sea anywhere. The minute that the United

24:22

States and China start shooting at each other, the

24:24

value of direct investments in China,

24:26

of factories in China

24:28

goes to zero. It goes poof because you won't be able to get

24:30

your stuff out. You certainly won't be able to get your capital out,

24:32

but you won't be able to even get your stuff out.

24:35

Maybe even not your people out. If

24:38

all your manufacturing is in China and there's a war, which

24:41

is not something ... And because the war

24:43

would be started by China, that's not something

24:45

that American business people can even ... They

24:47

can yell at America to be peaceful and reasonable

24:50

and blah, blah, whatever they want all day, but

24:52

Xi Jinping is just not listening to them. If

24:54

he wants to start a war, he'll start a war and the United States

24:56

will fight if we get attacked.

24:59

And that's just how ...

25:01

There's no way that's not going to happen. Everyone

25:05

now realizes that being in China poses an existential

25:07

risk. The idea of de-risking

25:09

is basically to take your stuff and put some

25:11

percent of it in India, in Vietnam, in Indonesia,

25:14

in Malaysia, or in rich countries, Japan,

25:17

Korea, the United States, Taiwan,

25:19

et cetera. Maybe not Taiwan because it

25:21

could be blockaded. I don't know. But essentially

25:23

to take some portion of production

25:26

out of China, put it elsewhere to lessen

25:28

the existential risk so that even if half of your

25:30

stuff goes poof, half will not and you'll

25:32

survive.

25:33

One of the things that strikes me about the

25:36

extraordinary post that you put up on your

25:38

sub-stack earlier this week

25:40

on all of this when you explained

25:43

this new industrial policy, there were so many

25:45

things that I could talk to you about.

25:48

First is the extent to which over here in Europe,

25:51

I don't think the body politic,

25:53

I don't think policymakers, I don't

25:55

think the business community fully

25:58

gets what Biden done with

26:00

these two acts, I think that it

26:03

is all so new and so

26:05

counter

26:06

many deeply ingrained beliefs, not

26:09

least the belief that free trade is good

26:11

and that we must do everything that we can to protect it

26:13

and anything that we do that might damage free

26:15

trade is a bad. The old free

26:17

trade orthodoxy seems to be much stronger

26:20

here in Europe, particularly the UK, than

26:22

it is in the United States. The

26:25

narrative that economists or some

26:27

economists had about the issues that

26:29

were raised by the consequences

26:31

of the free trade that you talk about in your article,

26:34

in particular, the destruction of

26:37

jobs that went to China and elsewhere.

26:40

The first

26:41

narrow technical question I would ask

26:43

you is, was the destruction

26:45

of all those smokestack industry jobs,

26:48

industrial jobs, as much a function

26:51

of automation as it was going to China? That's

26:53

very difficult to tell

26:54

because when

26:56

China comes here and starts out

26:58

competing you, one way that you stay alive is to

27:00

automate. Those things are hopelessly entangled

27:02

in the data and we can't really tell the difference. Our

27:06

general best

27:07

impression is that up

27:10

through the early 2010s, automation

27:14

maybe was half the size of China

27:17

in terms of this shock to jobs, in

27:20

terms of from 2000 to 2012, for

27:23

example. But then you

27:25

run into periodization issues

27:27

like what period you're talking about. The

27:30

big China shock is generally reckoned to

27:32

be the 2000s mainly, probably

27:34

ending in around 2012 or 2013.

27:37

My bigger question is over

27:39

the consequences of all of this, the disappearing

27:42

jobs, which as well, particularly

27:44

the UK, either to automation or to China

27:46

or to both. The consensus, as I

27:49

understood it, amongst some economists

27:51

was that

27:52

all of that at the very macro

27:54

level was still a good thing. Countries

27:57

benefited from the free trade, from the

27:59

globalized

27:59

from the rise

28:02

of China because we were able to import

28:04

a whole load of cheaper stuff than we were before.

28:07

And that what we messed up was the distribution

28:09

of those gains.

28:10

I sense from you that you disagree

28:12

with that consensus. I

28:15

don't know because it depends on

28:17

what you care about. So I think

28:19

that the lifting of a billion

28:22

Chinese people out of poverty

28:24

is such a good thing for the world

28:26

that I would feel morally

28:28

bankrupt saying that we should not have done this.

28:31

At the same time from a narrowly nationalistic

28:33

interested national interest perspective,

28:36

I think that

28:37

there were a lot of you know, overall, this was probably

28:40

a net negative for the United States and probably will find out

28:42

for Europe as well. It

28:45

not not only destroyed those those smokestack

28:47

jobs or whatever, but you know, I think

28:49

more importantly, what was ultimately more important

28:51

is that it created a superpower competitor

28:54

that does not like us and was never prepared to like

28:56

us. And so national

28:58

security is what is what is driving these things.

29:01

If you tell people, well, now your stuff

29:03

will be slightly more expensive.

29:06

That carries almost no water.

29:08

Economists, you know,

29:10

who do like the IMF

29:12

recently did estimates of consumer surplus

29:14

from losses, consumer surplus losses

29:17

from friends shoring and decoupling or all these things. These

29:19

are all just like in valued in dollars. Americans

29:21

do not think of national security in terms of dollars

29:24

and economists do not think about national security period. And

29:26

no one's listening to economists. And so this

29:28

is something that people need to understand. In 2006, a lot of people listened

29:31

to what economists had to say. And

29:34

now very few people listen to what economists had

29:36

to say during the pandemic. They were completely

29:38

ignored on environmental stuff and climate tech.

29:41

They've been completely ignored. And so

29:43

really very little of what,

29:45

you know, economists have no influence with

29:47

either party right now. The

29:50

people driving economic policy are are

29:52

people at think tanks who may have an economist

29:54

background or may not. And

29:57

so that that is a thing that needs

29:59

to be understood.

29:59

that no matter what economists think about

30:02

free trade now, or no matter what their papers or models

30:04

say, no one's listening to them at all.

30:06

And so- Does that worry you? Do

30:08

you think that economists, even though they're not being listened

30:10

to, still have something to say?

30:12

That's a very good question, and I'm gonna write

30:14

about that soon. But I think that economists

30:17

are fairly behind the curve

30:19

on thinking about these things. No one has,

30:22

only a very few researchers have bothered to think about

30:24

industrial policy, and it's all been in the context

30:26

of developing countries, whether or not,

30:28

say, Indonesia can get

30:30

richer faster by promoting this

30:32

industry or that industry. Very few economists,

30:35

if any, have thought about industrial

30:37

policy at the, for

30:39

rich countries, in terms of national

30:42

security competition and things like that. It

30:44

is just not a thing that economists have thought of. They're

30:46

incredibly behind the curve, and if they're smart,

30:49

they'll scramble to catch up. And if they're not smart,

30:51

then they'll simply keep doing whatever, retreat

30:53

into the ivory tower and do whatever useless theory

30:56

that they're doing that no one cares about, or

30:59

just continue to focus on other issues

31:01

where they do have more clout, like minimum

31:03

wage or some welfare

31:05

policies on which some people still

31:07

do listen to economists. But no one's listening

31:10

to them about trade and about

31:12

national security and these issues. Am

31:15

I worried about this? No, economists,

31:17

it is incumbent upon economists to do the

31:19

work that forces me to worry that no one's listening

31:21

to economists, because so far, there's nothing to listen to them

31:24

about.

31:25

There are a lot of people in the UK who

31:27

would listen to

31:28

you and look at what Biden has

31:30

done, and you've must have seen, it's come out of Brussels

31:32

as well, people complaining like hell about

31:35

protectionism and subsidies and all of

31:37

the things that policy over here is

31:40

geared towards eliminating, trying

31:42

to reduce barriers to trade, the old

31:44

fashioned belief in free trade

31:46

is good. It may well be simplistic,

31:49

it may well be over, and is not being

31:51

listened to in the States.

31:52

But I gotta tell you now, it's still being listened to

31:54

over here. There's a big mismatch

31:58

of what people are thinking about on both sides of the world.

31:59

the Atlantic on this very issue. And

32:02

I don't think people over here,

32:03

they should read what you've written because it's

32:06

so big and it's so different to

32:08

the way policy is still thought about

32:10

here in Europe. Well, right. And I think

32:12

that for Britain, global Britain,

32:15

Brexit was all about free, buccaneering free

32:17

trade agreements all around the world. Britain

32:20

has much bigger problems than the question

32:22

of protectionism versus or industrial

32:24

policy versus free trade.

32:27

Britain just

32:29

has deep economic problems. It's

32:31

in a period of

32:33

potentially secular stagnation. And

32:35

I think that while industrial policy

32:37

might to some degree help it out of that,

32:40

I think that there are probably deeper things

32:42

that need to happen, including an improvement

32:44

in the leadership capabilities,

32:47

because I just saw Britain almost

32:49

select Jeremy Corbyn and actually

32:52

choose Liz Truss as prime minister,

32:54

who is not only outlasted by a head of lettuce,

32:57

but probably could be outgoverned by a head of lettuce

32:59

as well. And she immediately just grabbed

33:01

onto the most, you know, like

33:04

absolutely

33:06

dead 1982 level

33:09

Reaganomics dogma that economists

33:11

themselves would already have tossed out the window.

33:14

And so what they my point is, what they haven't

33:16

tossed out is this fundamental belief

33:19

that they took in with their mother's milk belief

33:21

in free trade, which you say has just

33:24

gone from the American agenda.

33:25

It's gone from the American agenda, but I think Britain

33:27

has bigger fish to fry, honestly. The people

33:29

who need to be thinking about the free trade versus, you

33:32

know, industrial policy kind of thing are primarily

33:34

in Germany and France right now. Those people

33:37

need to be thinking hard. And of course, that affects Ireland

33:39

because Ireland is sort of along for the ride in the EU

33:41

with that, though small. But Britain itself

33:44

is going to be a decade

33:46

digging out from the self-inflicted wounds

33:49

of Brexit and from the dysfunction of its

33:51

political

33:52

class. And I just, it's

33:54

almost daunting to me to tackle the problems

33:58

of Britain because I just.

34:00

Who's listening in Britain?

34:02

We have a strange psychodrama in Britain

34:04

in that what we must talk about

34:06

is anything but the problems.

34:08

I know. Ah, and then

34:10

when you do talk about the problems, the

34:13

vitriol is immediate. No

34:15

matter which side you take, you can even express

34:18

a point of view very reasonably

34:20

and mildly and the amount of vitriol

34:23

that people on social media will respond to is akin,

34:25

is

34:26

just beyond even what you

34:28

encounter in America,

34:30

which is already a very high level of vitriol. Let

34:32

me give you an anecdote. When I was younger,

34:34

I used to really enjoy

34:36

watching negative British

34:39

reviews of video games and books. And

34:41

I would look on YouTube just to find

34:43

people in a British accent trashing

34:46

a video gamer book. Even if I kind

34:48

of liked the video gamer book, it was just funny to

34:50

see it get trashed by a person in a British

34:52

accent because British people were just

34:54

so good at trashing stuff. Unfortunately,

34:57

that appears to have been applied as

34:59

a philosophy of government.

35:02

Noah, can I ask you, Donald

35:04

Trump is in Ireland tonight actually

35:06

visiting his golf resort? I'm

35:09

sorry.

35:10

Exactly. Thank you. I

35:12

just looking ahead to the next US presidential

35:15

election, I mean, how vitriolic

35:17

is that going to be? How divisive?

35:19

Very much, very much. My assessment

35:22

is that the popular unrest

35:24

in America has largely peaked.

35:26

Enthusiasm for

35:28

street actions, riots, insurrections,

35:32

fights with your neighbors, running down protesters

35:34

in a car. It has

35:36

intensified among an increasingly shrinking

35:39

tiny set of people, an ever tinier set

35:41

of people are going crazier and crazier

35:43

like they did in the 1970s and will be violent. While

35:47

the mass of people just think, oh my God,

35:49

is there anything else I can pay attention to other than

35:51

this? I've overdosed on this. I don't just

35:53

want to see people yelling about Donald Trump

35:55

forever and ever. Please make it go away.

35:58

I think people

35:58

obviously have reservations about Biden. because of his age,

36:01

but I think that really very few people, relatively

36:03

few people in America would like to see a return of Trump

36:06

and the years of chaos

36:09

that he brought. And so I think

36:11

that the 2024 election is a big

36:14

danger, but if America

36:16

can make it past the 2024 election safely without either

36:20

electing Donald Trump or falling into some sort

36:22

of constitutional crisis or chaos, I

36:24

think that you will very rapidly see

36:26

a move toward

36:27

a relative amount of social

36:32

rest or peace or whatever the opposite of unrest

36:35

is in America,

36:36

because most people are just so

36:39

tired of it. And I think you saw this in the

36:41

late 70s and early 80s, you

36:44

saw, although there were still some

36:46

extreme crazies who were blowing stuff up and killing

36:48

people and tried to kill Gerald twice

36:51

in one month, you definitely saw this movement

36:53

of the mass of people of like, oh my God, can we

36:55

just stop this? And I think you'll

36:57

see that again, but 2024 is a big hurdle

36:59

that we have to make it past.

37:00

This is the last thing I will say

37:03

and leave the concluding remarks

37:05

and all questions to Jim. But one of

37:07

the things towards the end of your piece on industrial policy

37:09

that struck me consistent with what you're

37:12

just saying about things shifting is that,

37:14

you know, over here, we assume that America is fundamentally

37:16

divided, can't agree on anything, and

37:19

that it's going to be horrible. Whoever wins the election,

37:22

all this industrial policy stuff, with

37:24

one notable exception, which we won't

37:26

have time to go into, but most of this industrial

37:29

policy stuff, one of the jaw dropping

37:31

aspects of it that I hadn't fully appreciated

37:34

is that it's bipartisan.

37:36

That's right. And the entire reason is

37:38

national security because both Democrats

37:40

and Republicans have become freaked out

37:42

by China. Democrats more because

37:44

they're wedded to labor and they see the smokestack

37:47

job disappearing, but also because they're upset

37:49

about China's human rights abuses, Republicans

37:51

because they see a threat to, you know, Western

37:54

civilization and power and whatnot,

37:56

and also because Republicans increasingly draw

37:58

their political support for the world.

37:59

from the working class in America, a shift

38:02

that has happened in the UK as well, I know, with the

38:04

working class in general drifting to the right. They're

38:07

bipartisan because they both perceive

38:09

the same threat for some different

38:11

reasons and some overlapping reasons. And

38:13

as long as that threat is there, there

38:16

will be some amount of unity in policy.

38:18

And that's why these bills, the Inflation

38:20

Reduction Act was not a bipartisan bill.

38:22

It was passed by only Democrats

38:25

with a slim majority. And because the

38:28

Republicans and Democrats do not see eye

38:30

to eye on climate change yet, which is unfortunate

38:32

in my opinion. They also do not see eye to eye on

38:34

things like poverty reduction or whatever, but

38:39

they definitely see eye to eye on China. It

38:42

is an amazing unifying force in American

38:44

politics to watch everybody. And it's

38:46

scary to a certain extent. I've seen even

38:48

sort of national security hawks a

38:51

little freaked out by the degree to which there

38:53

has

38:53

been a sort of unshakable anti-China

38:56

consensus taking hold within our halls

38:58

of policy. And I think that it's

39:00

a dangerous thing, but

39:03

it presents opportunities for actually getting

39:05

bipartisan stuff done and building infrastructure

39:08

and building some of the capacity

39:10

to increase industry again, provide

39:13

broad-based middle-class jobs and things. So

39:16

it's a danger and an opportunity, this bipartisan

39:18

consensus about China. Jim, I'll leave the last word

39:20

to you. In 30 seconds, I

39:22

have a brother living in San Francisco. I visit

39:25

regularly. And when I travel

39:27

into the city,

39:29

I am appalled at what I see. I

39:31

mean, it seems like a city that

39:33

the whole liberal agenda

39:35

has really destroyed over

39:37

the last couple of decades.

39:39

Am I being harsh? Harsh but fair. I

39:41

wouldn't say that it's necessarily the same liberal agenda

39:44

as you'd find in New York, but I'd

39:46

say there are some things that are uniquely bad about

39:48

San Francisco and dysfunctional and have been that way for

39:50

a while and are just reaching a breaking point.

39:53

And I would say that there's other

39:54

ways in which progressive ideas that are

39:56

common throughout the country have not helped San Francisco.

39:59

So I think we...

39:59

We are heading for a reckoning.

40:01

We are heading for sort of a breakdown

40:04

in San Francisco over urbanist

40:06

issues and over how a city

40:08

can survive and thrive in the modern

40:10

world. And that breakdown is happening now. It'll

40:12

be interesting to see how it turns out. Listen, Noah,

40:15

on behalf of myself and Chris,

40:17

I'd like to thank you very much for that. It was fascinating.

40:20

You've been listening to Noah Smith, who

40:22

has a blog called

40:24

Noah Opinion. I would strongly recommend

40:27

people check it out. It's fantastic

40:30

stuff. You'll hear a lot more

40:32

of what we've been discussing tonight. So, Noah,

40:34

thank you very much. Yes, thank you, Noah. All

40:36

right. Thank you very much. It

40:38

was great. And one thing, the blog is Noah Opinion with Noah

40:41

in the middle.

40:42

Okay. And it's a sub stack. You can

40:44

find it on sub stack. It is sub stack. Please,

40:46

everybody, sign up.

40:57

You have been listening to Chris Johns and Jim

40:59

Power on the other hand. We

41:04

hope you enjoyed it. Our

41:07

back catalog of podcasts can be found

41:09

on our sub stack count, www.cjpeconomics.substack.com.

41:17

Or on podcast platforms such

41:19

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41:21

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41:24

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41:26

to our sub stack account. Comments

41:29

and feedback are much appreciated.

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