Optimism and Future Dynamism

Support for the show comes from BCX, the public ticker for private tech. The US stock market started history's greatest wave of wealth creation from factory workers in Detroit to farmers in Omaha Anyone could own a piece of the great American companies But today, our most innovative companies are staying private longer, which means everyday Americans are missing out until now, intntroducing VCX, a public ticker for private tech, now available wherever you buy stocks Visit getvcX. com for more info. That's getvcX. com Carefully consider the investment material before investing, including objectives, risks, charges, and expenses, this and other information can be found in the fund's prospectus G vCX. com. This is a paid sponsorship Hi, Ran Reynolds here for MintMobile. Are you looking for a beach read this summer? Man I suggest your big wireless build? It's got suspense, mystery, a slightly flat, emotional arc, and a shocking twist where you realize you've been overpaying the entire time. Fortunately though, Mint' story is better. Every plan fifteen dollars a month. Even unlimited. That's it. happappy ending, zero teiars. Give it a try at MintMobile dot com slash switch up pay forty dollars for mons,y doll for six month, and,y doll forel month, reireredty dollars for fromth equivalents tax and these extra. finish plan for, great thanty gigabyes slow and work is busyerm. When you need to build up your team to handle the growing chaos at work, use Indeed spponsored Jobs. It gives your job post the boost it needs to be seen and helps reach people with the right skills, certifications, and more. Spend less time searching and more time actually interviewing candidates who check all your boxes. Listeners of this shel will get a seventy five dollars sponsored job credit at indndeed dot com slash podcast That's indeed d. com slash podcast. Terms and conditions apppply. Ne a hiring hero? This is a job for indeed sponsored jobs. Today's number five. That's how many cups of coffee per day are safe for most adults and may even have health benefits, according to the American Heart Association, Ed What do you call sad coffee? What's up? Despresso A lovely joke to start our Friday episode. How are you doing? I'm doing. I'm in LA, which I absolutely love. I would turn the camera around, but I'm worried Tim much freak out Um But I'm overlooking the Hollywood Hills and I absolutely love it here. I love California. I love Los Angeles It is eighty degrees, but it's dry out so it just feels I mean, when you and I were in Miami and it was eighty nine, it felt like we were in an air fryer. suuffocating Yeah. at eighty feels pleasant. It feels That's very nice. It's yeah, I love it here. so I'm happy I'm a little bit jetlagged, but and unfortunately podcasts that start Youd think I'd figure this out at two PM in London. started six AM in LA. so I was up at I was up at ODark hundred hours This morning. How are you at? Eough about me? E have enough about the espresso part of this. What's going on with you? I'm doing very well. I'm very excited because tonight I'm gonna to go see the Aldyssey. so. I've been waiting for over a year. Have you seen it? No, I'm the same. I want to see it in IMAax. I want to see it with my boys. so like all of these things get in the way of actually going and seeing it exxactly. I just sort of cut losses. We're not going to go see IMAax. We're going to go see it regularly, but that's okay. I just want to get out there and see it. So I will give you my review. But I mean, the reviews have been ular ninety eight percent rotten tomatoes Citics calling it a flawless masterpiece so'm I'm very excited about it. Yeah, well,m I'm refusing to see it because a black woman is is Helen and a transgender man is a warrior. Thats just that's just that's the line. Nhing accurate to how you cast a myth, which to me is an oxymoron. You get to do whatever the fuck you want. It's a myth, folks. Anyways. I would like to know the percentage of people who are upset about the Odyssey casting and who believe that the Odyssey is a factual historical story. That would be a very interesting statistic that we should get get some survey data on, but u Yeah, that wasn't enough to keep me away. I will be Watching itet And I'll be very excited to see See how it is. Who knows? Maybe I won't even like it. I think you're going love it. My Yeah, I've heard nothing. I go in with such a bias because two of my favorite films are from Christopher Nolan, Oppenheimer. and I think the perfect perfect movie, at least for me whose favorite star of any movie is Hitler is Dunkirk.. I you're gonna to say Instello, That's my favorite. Really? I think I need to dibles and watch Interstellar again. I didn't watch it again. I kind of didn't get it. I rewatched it recently and then I rewatched it again because it was so good and I had forgotten how good it is Uh, that is profound and moving on multiple dimensions. So that's my favorite. Dunkak's great too Um The Dg Knight is up there for me. Great movie Great movie. Memento Yeah Mento is good. one of his early ones. That guy has a bright future in Hollywood, although I still am very upset. The thing I didn't like about In Stellar and it stuck in my craw. What about the dude on the spaceship who was up there for twenty two years or twelve years just roaming around waiting for Matthew McCony and Anne Hathaway to get. I mean think they're on that wherever they were and they come back after twenty eight minutes and he's been there twelve years and they're like, Hey, dude, what's going up? What doing? What the fuck do you think is up? Nothing I've been here for twelve years I found that very upsetting. Very upsetting. That's kind of the point, but yeah, I agree Well, we have a very good An exciting interview to to get into today. We recorded this conversation live on sububstack earlier this week. If you'd like to catch the next live stream, we will be doing plenty more live streams. then go to proftymedia. com where you can subscribe. We do a lot of these live streams there A lot of fun. I thought it was fun to do this live with an audience as well So without further ado I'm going to transition us into our conversation with Noah Smith Now that we are past the halfway point of the year, we wanted to take a step back and look at some of the biggest forces shaping the economy And to do that, we have invited someone we are a big fan of. He is a prolific writer whose work spans everything from AI to inequality and demographics. and he has a way of explaining very complicated economic trends in a way that is both insightful and accessible, and that's why we really like his work. So we wanted to ask him Some of the biggest questions that we are wrestling with right now For example, are we in an AI bubble? And if so, what happens if it bursts? Is rising inequality becoming a threat to economic growth? And also has America officially reshuffled in the global order? So without further ado Here is our conversation with Noah Smith, writer of the No opinion blog Noah Thank you so much for joining us on Profperty Markets. and thank you so much for joining us on a live stream. Very exciting stuff. Thanks for having me on. So I want to get started here with some recent AI newews, which is the release of the Chinese model Kimi K three, which has caused a lot of concern in the AI world. I mean What we know about this new model is that it's open source It's very cheap and it also outperforms anthropic and open AIs models on a variety of benchmarks, which has a lot of people worried and thinking about this idea of is China about to supersede the US when it comes to AI. Are they about to steal America's lunch Let's start with that question. what do you make Kimi Ki three and what do you make of the China versus US. AI race at this point? So with Chinese model so far The pattern has been that they test very well in benchmarks and then that their capabilities are very brittle uh, when you go beyond just, uh sort of teeaching to the test if you will That's one issue. This has been a very consistent thing. So when we've seen You know, more sort of more comprehensive tests of Chinese models abilities, they've been increasing more slowly than the American models There's also a question ofh, you know, at So what degree this Chinese model is simply, you know, an American model that was You know, so in terms of whether export controls are working, the overall story has been again and again that export controls do work In addition, China has far less compute available for inference So you know, most of what differentiates these models right now is on their performance is how much compute you can use for inference. You know, not how much you used to train the thing. It's how much you You know, you can let them think. Really. And so China has a lot less compute there and AI and export controls have been very important in limiting China's compute on inference on the capabilities, despite so, you know, even if you Exactly steal the weights for Claud which maybe they did Wh knows I'm not a technical expert, so I can't say whether they how likely that is. or maybe you use a distillation thing. so it's very similar to claud So even if you do that You can't run a cloud's capability most of the time if you don't have the inference compute So export controls have been extremely effective in terms of, and that's not even counting the export controls on chip making equipment which have been very effective in keeping the Chinese chip making industry well behind the, you know, the Taiwanese Korean, etcetera and U S. industry. And so I think export controls are still quite effective. And this may turn out to be another deep seek moment where we find out that the uh, you know, reports of of extremely advanceced, you know, like world beating capabilities turn out to be very exaggerated. When you look at the AI landscape today, which are the issues or the topics that you think are not getting enough attention that matter more than the media or the conversation online Um G credit for Well, I mean, obviously, I have biosecurity Like Humans are vulnerable to viruses. And so there are, you know, viruses that kill know most of humanity or all of humanity don't naturally tend to evolve because those viruses will burn themselves out. but maybe you can make one if you intentionally design it. and We our controls on bioabs are very weak know we need to implement stronger controls on the places where these things could actually be made and disseminated in the physical world. It'll be a while before we get these fully automated robot labs, but humans can make stuff and humans who make you insert some genetic mutation into a virus and then email it to you or not email it to you, just mail it you through the post offffice. They don't necessarily know that the mutations they inserted into, you know common COVID nineteen are going to turn it into a virus that just kills all humanity. They don't know that because they don't They're not AI. they can't understand. So we need to deploy a defense in depth against doomsday viruses. And that's just not being done yet, although people are starting to talk about it more. But if you're not scared about this, you should be more scared about this than you are So one of our big themes or predictions is that China is engaging in modern day dumping, but instead of steel this time it's with AI And I think there is evidence that token usage from Chinese models has exploded Any thoughts on the notion of AI dumping? China could absolutely subsidize you know subsidize inference so that its models are temporarily cheaper. And then this throws a wrench into the profit you know provent loss of anthropic and open AI. And there's, you know, they cause a crash, open AI and anthropic go of business, or don't have enough money to like train the next generation of models. and then you know, then then China has eliminated some American AI advantage uh there. It's absolutely possible that could happen. at the same time We have seen andthropic prorofitability is expected to be positive on an operating basis this year That's amazing for a company with that amount of growth. Like usually if you're investing that much, you do not, you're not profitable. Like how long did it take for Amazon to be profitable many, many, many, many, many years. Anthropic' doing it much more quickly. Usage is exploding. I think open AI will probably get there. And then so far the profitability of these companies doesn't necessarily seem to be under threat If we see anthropic and open AIs struggling to find the capital to invest in the next generation of models, then we should be worried Until then, there's nothing that AI dumping really does except for attack open AI and Mthrop Now maybe you can make an argument that it's hurting some of our players further down the line like Google could be getting hurt or you know, maybe meta has been driven out of the AI race by the fact that they can't, you know afford to keep up with Chinese inference because of dumping So that's something that deserves to be looked into. but so far, if open air anthropic are still, if their profitability is still improving rapidly, I'm not so worried because that's the mechanism by which dumping would hurt us. I mean, it appears another theme we've seen is that we've gone from worrying about a supply crisis where there's not enough inference, compute and energy to potentially a demand crisis because it feels like a lot of the initial demand creators who are supposed to create demand, whether it's Lama or XAI, they have not created the demand they'd initially anticipated on the front end. so they've taken all of their infrastructure build out and now are running it. appears to be a narrowing group of the demand side, specifically open AI and anthropic. Do you think there's any fear that we're moving or do you see any evidence that we're moving from a supply side crisis to a demand side crisis. I haven't seen evidence of that yet, but it could happen. have not seen evidence of a demand side crisis yet. u demand for all these things continues to explode That demand is you know, going to and companies Um a lot of that. you know, we've seen, we've seen demand for for You know, sort of cheap substitute from China also rise That's inevitable You know, like I said, you might say that like Gemini isn't as good, Google's falling behind because there's not enough demand their for their products because they're being, you know, as a slightly lower down the hierarchy slightly behind the frontier model, they're being outcompeted by Chinese models with subsidized inference So so you could see that. I think the bigger danger on demand is you know, sort of a collapse due to over temporary overuse. So if you have every company It says we need token max guys, We need to just use AI as much as possible to figure out what we can use this for And then they just token max, token max, token max. and then this drives demand up And then, you know, open AI and Anthropic and Google and whoever make reckless capital budgeting decisions based on idea that that growth curve will continue. And then it doesn't continue and it collapses because people are like, wait a second, we're not actually building shippable software. We're shipping profitable software with this with all these tok with all these tokens what are these tokens going to produce? And Then we could see a crash, right? And Um Chinaeses companies might be better able to weather that crash than us because of state subsidies. you know, keeping them alive. and keep in mind, by the way that most of these state subsidies are delivered through below market rate bank loans, not through the government mails you a check. And so that's how most of these subsidies are actually getting done The United States has the capability to match that if we were to use modify the Dodd Frank legislation to get our big banks. lending to AI and also to manufacturers, by the way. if we want to do industrial policy, if we want to fund it, if we want to subsidize It's not by mailing I mean, mailing government checks like we did with the ChIPsS Act can be effective, but I think the most effective and durable way of subsidizing things is actually through bank loans. And we already have the legislation in place. that's Dodd Frank to be able to do that All we have to do is say, hey guys Uh Hey, JP Morgan Chase If you lend to this these strategic industries, whatever, you can get you can loosen your tier one capital requirements. And then they do. the loans start to flow And then so we can do that. We've already done the repression part of financial repression. We just have to do the lending channeling part. If we want to do the kind of subsidies China does, we can actually match that pretty easily. There isn't evidence that there is no demand. I mean, we've seen the demand, we've seen how much money is flowing into this ecosystem. If I could kind of T tweak it would be there is a concern that the demand that we are seeing or at least the majority of the demand that we are seeing is artificial And you kind of hinted at it with the token maxing where these companies are like telling their employees like it doesn't matter about the ROI., It doesn't matter how you do things. like you need to use as many tokens as possible. We had the issues with the circular financing stuff where you had these kind of circular deals where investors turned out to be various AI companies, customers at the same time You have the fact that you know a lot of the revenue that's being plowed, a lot of the business model is predicated on the spending of open AI andanthropic, who are currently money losing businesses And so the money that they're spending, it's not their cash flows that they're spending. They're spending their investors' money. And then to your point There's also the subsidy side of it. if you have uh companies in China who are receiving subsidies through whatever mechanism and if we're going to start thinking about doing the same thing over here in America translates to me as yes Tens, hundreds of billions of dollars in demand demand that doesn't feel quite Organic. and that feels in a lot of ways forced or artificial, which makes me think, well, if we were to take our foot off the pedal here, then something might collapse, something might break in a big way What do you make of Z argument and that view, do you think there's merit to that? Explain to me artificial demand? Circular deals where you have Nvidia and open AI investing in each other and then being each other's customer. How does that create demand for the end product? I don't understand. Well, it creates demand for Nvidia's chips. That's investment., you know, so that's like Yes, it's demand for the, you know upstream stuff. So right now, it appears like a lot of the usage companies are because of these metrics around such as we're tracking how many tokens you're using as opposed to tracking or putting in place real ROI. And the thought is some of that demand might fall off. I think the more puncturing issue is can they maintain this level of demand once they moveved to pricing system that sustains I use Cld I think it's called Cld Pro or the one that's two hundred bucks a month. Supposedly it's costing them a thousand to two thousand dollars to service me And the question is at what point does this demand can it sustain it anything resembling the growth that it's been that that the street wants to see to support these private valuations once it's priced to its actual cost In other words, does this business model work Do you think this business model works? I don't know Fair enough, I don't have a way of tracking that. I don't know that other people do either I think u You know, I wrote about that, I wrote a post about that like called How much software do we Re N Like you, I hear anecdotes about token maxing Tken maxing being the term for the benchmarks u you know, the usage based benchmarks that you're talking about instead of like profit or, you know, based benchmarks justust how much input can we use? That doesn't sound like a great benchmark for profitability I hear anecdotes Um, I don't, you know, I I've I don't have hard statistics on how much this is being done, who's doing it. This is all internal. None of the state is public Um And anecdotes don't equal data. And we I think we should resist drawing excessive generalizations from anecdotes Um, I don't know how much value is being produced because Value first of all could be that lots of value is being produced, but it won't be realized for a while. So If a lot of this is learning, if the value of using this stuff is learning how to use it We won't see that for a while. It's not going to show up like I use this many tokens and I ship this much profit worth of software. this I get this much profit from the software I ship with the tokens that I used. that won't necessarily be that clean You know, if if you look at how productivity is measured Chad Syverson does a good job of measuring this productivity, but it's really hard you know, like you can look at V established industries like ready mix concrete or something And you can look at how you can Really, you know the production process, you know the use cases, you know exactly how uh, this stuff is, um, turned into value. You know, inputs are turned into value But for AI, you don't. And so there's a lot of learning. So U The classic example here that everyone cides is electricity When electricity was first introduced to manufacturing byy this time everyone is using it to like light their homes But when electricity is first introduced to manufacturing in like the nineteen you know, nineteen hundreds, early nineteen hundreds. They just they had these vertical factories that were turned with these big crankshafts or the entire conveyor belt moved at the same speed because it was driven by a steam booiler, they ripped out the steam boiler, put an electric dynamo and drove the same thing, found out, wait, that's lessergy efficient. Electricity sucks. They electricity maxed They use an improper benchmark as there, you know, and then they tore out the dynamos, put back in the boilers and ignored it. And then Aout twenty years later, people figured out, oh, if we completely reorganized how the factory worked and ran workstations in parallel instead in series, we could increase productivity a lot. and then you got a very rapid increase in productivity by a factor of to five or something like that, J this massive, massive burst of productivity growth with the reorganization of the factorory. And so we got modern looking factories, not these like ancient looking, you know multi floor factories that now are part of like old Mickey Mouse cartoons And so Um was the initial use of the But of the electricity to try to replace steam directly was that wasted money I don't know. I can't tell you that that was waste of money because there was learning here. where you learned what didn't work And that was probably an important input into the You know, people who redesigned the factory later on and got this huge increase in productivity, they had to see what didn't work and think about what you could and couldn't use electricity for And so I'm not sure that token maxing iss wasted because all these people are learning what you can and can't use AI for, what it does, what it doesn't do. It's forcing a lot of people to think about AI first production processes. Now we're Everyone's already talking about building AI first businesses and AI first business models. maybe a couple people have, you know, my friend Edmund Zagarin has this company where he's trying to do this We're getting on this much faster than the people did with electricity because information travels, you know traravels much faster So we know we need to do this faster than they knew that with electricity. We are already on this. And so whether or not going take us twenty years this time or maybe only five or something to build AI first business models that realize enormous productivity gains can't say And whether that's even possible, I can't say. Like there may be inherent limitations to AI technology once you scale things up from ask one AI some questions to have all these AI agents interact and do business together There may that may not scale up as well as I think it does as people think it does. I would guess it does scale up, but maybe it doesn't. We don't really know yet. And I think Um If and when, suppose we do end up finding massive ways to massively increase productivity with AI. Bind alleys and dead ends that we spent all those tokens on before may have been an integral and important part of that And so that productivity may be realized in a bit Now whether in the interim there's a big crash and what that implications are for producers like OpenA and Anthropic, like upstream producers like Nvidia, I can't say and you know, like That's beyond my ability to predict, I think, but it could happen. We'll be right back after the break. and if you're enjoying the show so far, send it to a friend and please follow us on YouTube, Spotify, or wherever you get your podcasts Report for the show comes from BCX, the public ticker for private tech. For generations, American companies have moved the world forward through their ingenuity and determination. And for generations, everyday Americans could be a part of that journey through perhaps the greatest innovation of all the U.S. stock market It didn't matter whether you were a factory worker in Detroit or a farmer in Omaha, anyone could own a piece of the great American companies. But now, that's changed. Today, our most innovative companies are staying private rather than going public. The result is that everyday Americans are excluded from investing and getting left further behind while they select few reap all the benefits. Until now Introducing VCX, the public ticker for private tech, now available wherever you buy stocks. VCX by Funrise It gives everyone the opportunity to invest in the next generation of innovation, including the companies leading the AI Revolution, space exploration, Defense tech, and more Visit getvcX. com for more info. That's getvX. comot Carefully consider the investment material before investing, including objectives, risks, charges, and expenses This and other information can be found in the fund's prospectus at getbcX. com. This is a paid sponsorship Supp for the show comes from Upwork. One of the biggest breakthroughs for an entrepreneur is realizing that you don't have to do everything yourself. This workork helps growing teams quickly bring in specialized freelancers so you can move faster and take your business to the next level Upwork is a one stop platform to find hire and pay expert freelancers across more than one hundred and twenty five categories, giving you fast access to specialized talent without committing to full time headcamp t Business plus, you can access the top one percent of talent on Upwork and with AI powered shortlisting, you'll get matched to the right freelancer in under six hours, no endless searching required Upwork also cuts down operational hassle by handling things like contracts and payments in one place So you can spend more time running the business. Thousands of growing businesses already trust Upwork to hire flexible. High quality freelance talent for everything from one off projects to ongoing support It's free to sign up and posting a job is easy. Visit upwork d. com slash markets right now and post your job for free That is upwork. com slash markets to connect with top talent ready to help your business grow. That's UP w o rk. com slash markets upwork. com slash markets Running a business shouldn't feel like surviving a software group project, one app for accounting, another for inventory, another for sales, and somehow, none of them talk to each other. That's where Auto comes in, an all in one business management software that brings every part of your business together. From sales and accounting to inventory and marketing, all in one powerful platform, no messy integrations, no bouncing between tabs, and best of all, no spreadsheets Stop managing software and start managing your business with one unified system. Try for free today at odoo dot com slash boox. That's Odooot com slash boox We're back with prorofty Markets. somethingomething we've been covering a lot related to this is just the public perception of AI as more the more dollars we plow into this technology, the more we roll ahead, it seems the more pushback we're starting to see in the general public and at the political level we have obviously seen Kathy Hole, thek the goovernor of New York who has issued pause on data center production Um, And it seems like that is growing as a form of AI regulation is like just hit the pause button on data centers But it also seems to be related to some of the wealth inequality issues that we keep on Um, seeing a It K kind of getting worse everyvery passing year in America, the top one percent of Americans control roughly all a third of all US household wealth, which is an all time high today To what extent do you think that these two issues are linked Um, and How much of a problem Do you think wealth inequality really is in America What does it mean for the US economy? When wealth inequality goes from you know, when the top one percent has like this many trillions of dollars versus that many trillions of dollars, it's not a number humans understand. You know, regular people you know, who are just trying to make their credit card payments. Don't understand that You know, you need data by, you know, and then you have you can have like economists who gather data on this and then argue about how much is really happening because it's hard to measure this top well And then you have people arguing but I don't think The sheer number is like, oh my God, look at how much these people have. I don't think that's the way that wealth inequality becomes a problem in normal people's minds I think instead people think about inequality of power And people think about the companies that these people control and are these companies being run in our best interests? Everyone knows these people are getting rich. Small changes in exactly how much they're getting rich or even large changes in how much they're getting rich don't affect the basic idea that You know, people are being squeezed at their jobs. and they're being squeezed on their finances and they're being squeezed in their consumption And they don't necessarily see like and then they hear, o, all these stories about how fabulously rich the people who own these companies are getting That's the way in which I believe wealth inequality comes home to real people That's what we need to address The idea of can the rich guys continue to do things that make them get richer while other people' struggle. And I think we need to attack that from two sides. Number one, we need to makeake sure that normal people don't struggle Okay If people can make their like if people have less credit card debt and if people have, you know, more wealth in their houses and, you know, which is where normal people have their wealth by the way Normal people have their wealth in the real estate market, not in stocks But if people, you know, but also we can give people like, you know, u wealth in terms of like a sovereign wealth fund what Alaska does with the perman fund But the other thing we need to do is to make sure people know that these rich guys are ultimately under the control of the people through the government that the government, although the government doesn't necessarily tell you what to do with all your businesses, central planning at some sense, these big corporations are serving the interest of the nation. And I think that during World War II and the early Cold War, people had a very strong sense that big companies like Ford U.S. Steel, AlcoOa, GM and all Boeing and all these companies were serving America. These were American companies working for America and working for the people of America through the nation state. We need to reestablish that. So So Sam Altman floated the idea of a government stake in open AI He's right Ands how that's how this has to happen. And so sovereign wealth fund is really the best policy we can do to do all of this. So sovereign wealth fund says Uh so Alaska has the Alaska Permmanent fund. You know what that is, right? The oil, right? So it takes Alaskan oil revenues and natural resource revenues and redistributes the money. The people of Alaska Um We need to do that with with you know, tech and AI and these strategically important industries, where we don't you know, have might have the government micromanage the central plan and control business decisions, but we redistribute some of the capital income And if necessary, we could If companies were going rogue and doing stuff that was against the interest of the nation we could you know, the government as a shareholder cons ses one of the shareholders meetings instead of just regulation and law in addition to that, in addition, We can have someone go to the shareholders andet and say, Hey guys. You need to act in the interest of Amera The people of America And that's what we need. We need people being reassured that they have some sort of stake in this, not just financially, but also in terms of power. I think that solves the problem I would push back on a no. I think sovereign wealth funds are used when a nation that's blessed with an inormate amount of natural resources has excess capital beyond They're spending commitments. The sovereign wealth fund in the US would be nothing more than issuing debt that Eds going to have to pay back to fund the sovereign wealth fund such that A current administration could pick winners and losers, which governments usually aren't very good at. I understand the need to invest structurally in certain industries that have defense implications But generally speaking, when the administration decides we should buy five percent of open AI with debt fueled capital that will create regulatory capture and parriage or diminish the other competitors. I just can't find evidence of where that makes any sense and ultimately doesn't just end up with a warehouse full of unsold Doloreans or air France. A sovereign wealth fund, I just think is indefensible at this point in picking winners and losers Biden administration, many of whom have no experience in business or their experience in business is bankrupties and failed subcontractors. So Again, sovereign wealth fund. I think it's a terrible idea. Where am I wrong If you don't want a sovereign wealth fund to pick winners and losers, you can just have it by index funds I invest in stocks, but other than You know, I invest in friends startups, but I don't I don't sit there thinking, I think ord going to do well this week You know I I don't do that. I don'tick I don't pick winers and losers I buy the index. you know, and then I'd buy the, you know Vanguard Vanguard Iex fund And you can have the government do that too U the only winner you're picking then is America itself. You're making a bet on America. you're not betting you're betting on American stocks over foreignocks. That's fine but then you're not picking winners in terms of industries or companies or things like that. So if you don't want your sovereign wealth fund to do that, then You don't have to have it do that. It's really easy to not have it do that. In fact, The sovereign wealth fund proposals that I've heard invvolve explicitly buying the index, don't, you know, So I think that ad hoc stakes in companies like like openen AI. um, are are Dangerous for this reason But then you can easily solve that just by buying the index. So if you look at the labor share of income, It's going down. down by any reasonable measure And so if you buy a very broad index of stocks All you're doing is buying some of the capital share of income and then redistributing it You're doing that. So so that fear, I think, of picking winners and losers. I also think that picking winners actually has a much better track record than people think. I think that the idea that this always Picking winners always fails Um It doesn't. It has some pretty predictable failure modes that we see a lot, sure But it's not like the simple easy nostum of, oh, picking winners always fails, guys. if I can label something picking winners, then it's something we shouldn't do ' been proven wrong again and again But Um That said, we don't have to pick winners of the sovereign wealth fund. We can just buy the index. So that's not a That's not a worry. I think You worry about or it should be a reason to encourage broad sovereign wealth fund that buys index funds rather than the kind of policy Donald Trump is doing with ad hoc stakes, individual companies, which do have very strong misgivings about I think that makes sense. You're saying, as opposed to picking winners and losers, support the U. S. economy and also give You have Cumer or American citizens similar to that. I think it's the super return fund or whatever it is in Australia, a chance to participate in what has been largely compounding I guess the issue is Or the caution I would throw out there and I want to get your response is that We don't have surplus. So any any investment, any incremental investment in an index fund or a company is going to come from debt. which will ultimately be taxes on either current or future generations why not just try and maintain lower deficits and let individuals decide what companies In other words, ultimately that's saying that the government is a better stock picker and indexes have effectively become stock picking. When you buy the S andP index, you're buying forty percent of it's going to going to seven or ten companies Isn't this isn't this taking Isn't this me saying and fantalizing the public saying, I'm going to run up your kid's credit card and then I'm going to pick I'm going to invest in index funds rather than just getting government out of the way and letting you buy your own index funds. The main difference there being that most people don't have the money to bu index funds, they don't have the liquidity to borrow money to buy indexed funds. And so if the government does it, how does the person who doesn't have money?s a redistribution. Okay, so it's a redistribution because then you would have some sort of mechanism for returning the gains to citizens. Yes, that's the yes That's the point redistribute capital income to regular people. So you got some person who works at a gas station person could theoretically you know, like scrimp and save and buy a tiny bit of index fund, but the transaction costs are high, the information costs are high. They don't understand how to do it And Practically, they can't borrow What does the government borrow at a couple percent Even in now that interest rates have risen a ton, what's what's the what's the twenty year? treasury rate I don't know.s it's like a few percent. Do you think the gas station worker can borrow it a few percent to buy an index fund? You're crazy This's absolutely not two pieces here Number one, is it's redistribution areary because if you If you have the government buy services, you know, like pay for old people's health carere or something or maybe build highways or whatever, or provide for the national defense, if you have the government do those things that benefit the gas station worker just as much as they benefit a rich guy Okay, that's redistribution area And it's And so that's the first benefit. The second benefit is insurance. So if you Debt is unconditional. you know, it's like you pay the same interest rate back whether or not AI takes over our economy If you buy the AI company, part of the AI company, and then you're able to redistribute that income in the future, it functions as insurance. becausecause in the state of the world, it's a state contingent asset. in the state of the world where AI takes over the whole economy Normal people get a piece of that. But the amount of debt that taxpayers have to pay back doesn't change. it's state uncontingent. It doesn't change based on whether or not AI takes over the economy. Sounds like you'd be a fan of Trump bonds or baby bonds. Yeah, baby bonds. I mean, that's been done in other countries and it' been it's been successful, yeah Absolutely. one hundred percent. And that's exactly what you do that's a thing you can do. So so you can choose to pay down America's debt if you think inflation iss a problem And you need to you know pay down some of the debt to reduce inflation You can use it, you can do baby bonds if you think it's better to just give people cash, do, you know, UBI, fund UBI. You can also just do public goods. You can use this for research and development spending You know, to improve productivity in a Paul Romer sense, you can use this to do national defense if we need to build up for big war. You can use this for building highways. If we need better infrastucture, you can use this to build trains. You can use this to build, you know, critical infrastructure And you can use this for in kind redistribution like buying old people healthcare, which is, you know not as broad based as baby bonds, but it's pretty broad based because everyone gets old and everyone gets sick. And so You can do a lot of these these redistributionary things so there's the insurance benefit, there's the redistribution benefit. And then there's the fact that the government's borrowing costs. you're talking about running up these kids credit card, but you're not talking about their credit card because the credit cardate credit card interest rates are through the roof where the government interest rates are a few percent Even after we raised interest rates to fight inflation, the government is the cheapest borrower Right? And unless you believe that there's a good chance that the government is going to get below treasury returns on its stocks over the maturity of government debt that it takes out to buy these things, which is a possibility. I mean, that's We haven't seen negative returns or we haven't seen below treasury returns, I think on twenty year Uh, you know, S and P, whatever ever , but we could see it for the first time. It's not out of the realm of possibility. We could take a bath. We could actually lose this, right? If you use state uncontingent debt to buy state contingent assets, there are states of the world in which you take a bath. You lose money Okay, the government can lose money. And this is the argument that people used uh to to stop Bush from investing social security funds in the stock market back in the day Had he done that? We would have either less federal debt or much larger social security benefits, a much more aboutust social security trust fund today than we do. It was actually the right idea and people use, you know, sort of the spectre of risk to to um dunk on it to stop it back in two thousand five And Yes, there is risk, but it's aggregate risk because if if corporate America is doing so bad that the stock market does really bad over a twenty year period or whatever. ten year period, but especially a twenty year period. thenen uh America as a whole has done badly. It's hard to see a case in which the stock market does crap. underperforms treasuries for twenty years in which the regular Americans are thriving. That's It's a weird st the It's a state of the world I'm willing to bet a lot against It seems like you and I, I mean, you would agree that the Trump accounts have been Good idea. I person, I've talked about this on our show It's one of the only policies that I've seen out of this administration that I really support and that I think is moving in the right direction for a lot of the reasons that you're describing Um One, I just want to confirm that you think that Trump accounts are kind of right idea. I wish we could just change the name because I don't see why we need to politicize this thing, but the idea of gifting a child at birth an investment account automatically buys them into the SMP into the aggregate capital markets of America. That to me seems like a very good thing and a step in the right direction. I'd like to just Gay reactions that and then two We're tackling like the biggest, most difficult, most unanswered question in economics, which is like, at what point is US debt unsustainable Bad is it really? I'll pose that question to you. I know it's kind of unanswerable, but I'd like to get your take. US debt is on a very bad trajectory right now That said if you takeake out debt to buy US stocks, to have the goverment buy US stocks, and you have the option to use the proceeds from those stocks to repay the debt if you structure the sovereign wealth fund that way then It is not it would be more sustainable than it is. And in fact, this is what Japan has done So Japan on paper has a higher debt GDP ratio than we do and, um But They've taken, you know, they've had the government invest like a hedge fund and made very good returns And because of that, their debt is less of a burden than ours is now, even though it's higher as a you, headline share of GP Um We would be the same. We'd be betting on us. I mean Japan often invests in foreign assets But sometimes in the Japanese market too, so that you know, the BOJ buys stocks and Japanese ason Things like that and the you know, the topics have done well So evenven if we took out more debt than we have in order to buy shares in corporate America That would in every state of the world except the long decline stagnation of America state in every state of the world except that, it would make our debt burden less of a problem Just like if you have a bunch of debt Okay and then you take out some more debt to buy stocks And you're able to hold that for twenty years Right? Um then your financial personal financial position actually just improved You can't do this because of liquidity constraints. The government doesn't have those liquidity constraints m curious to get your take on the controversy around data centers. Some of the local harms of data centers that people tout are real, for example, if you're very close to it, it's noisy It does draw power from the grid and that can compete power with local communities. Some of the things people worry about are not real like water. water usage, that's not a real thing Um data centers have some a reservoir of water that they run to cool stuff and They lose extremely little water and they don't pollute any water So the water thing is made up. the other harms that people tend to emphasize a little bit less are actually real Um If you don't want data center near your house, that's that's your right You can, you know, I don't becausecause I think data centers can go elsewhere, like You know, if if New York won't build the data centers, Texas will Alabama, will places willill They bring benefits to the local economy that can then be seen in tax revenue local tax revenue can tax them. U So I'm not so worried about local about this data center nimbiism. First of all, that's my first take My second take is that I believe without solid evidence. so you know I don't have solid evidence for this one, but I believe that the the local Nimbiism over data centers is too some degree, to sububstantial degree Not all, but to some substantial degree an expression of broader fears over AI itself that people don't like that idea I will take their jobs You know, basically take their jobs. I don't think most people think that AI will kill them yet I think people are mostly scared of jobs. and that fear manifests as an instinctive opposition to AI that filters through to opposition to local data centers I think it's ineffectual opposition because banning local data centers in New York are whatever community won't actually reduce the amount of compute available to the i industry But I think that that's what's motivating it to some degree We'll be right back and for even more markets content, sign up for our newsletter at proftymarkets d. com This episode is brought to you by Google Chrome You think you know a browser, but Gemini and Chrome, that's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a fifty page restoration block, or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online makes sense? There's no place like Chrome. Check Rponses set up required compatibility and availability varies eighteen plus Cass it up with crocs. You know back to school is coming in fast? So why wait to find your new faake footwear? Step into a local croc store and step into your new look. Try it. Styyle it. makeake it yours. Because the right pair doesn't just show up, it shows off First a fix, handle. Walk out ready for whatever's next. Visit your nearest croc store today This episode is brought to you by Street Easy. Who do you want to be? That guy in Florida playing Backgammon or the Chelsea fixture still turning heads? And you know how the Chelsea guy did it? He never left With twenty years of NYC know how, StreetEasy has the tools, agents, and guidance to make you a forever New Yorker too. Visit streeteasy dot com to buy or rent in NYC. Street Easy is an assumed named of ZillowWink, which has licenses in all fifty states We're back with prorofty Markets. A trend that we have been watching and kind of following your coverage of is the fertility crisis. in America, the fact that the U.S. fertility rate fell to another record low in twenty twenty five U big of a problem do you see this, this fertility crisis? and what kind of impacts do you think this will have on the U.S economy, perhaps some impacts that maybe people aren't seeing or recognizing right now. It's going to be bad, but the bad is going to be is going to slowly trickle into our economy in ways that it's hard to notice. It's not like there's some cliff we fall off and like, a, you know, fertility is low. it's u You know, old people will clog the top ranks of companies and will be more less nimble, less able to invest in the future You know, less our companies will get just less creative and dynamic Um Slowly, you know, the debt burdens and tax burdens will go up and social seecurity benefits will be cut You know, there'll be the slow trickle of making it harder for uh, you know 'saturally harder people to live because you have fewer workers supporting greater number of retirees. People have to do more uncompensated elder care, peoplee have to pay more taxes to support. Elder care Um you'll see immigration become actually more contentious because on one side, you'll see people say we need to bring in more immigrants for labor shortages. the side you're going to see like Imigrants will go up faster as a percent of population because we're not reproducing local people As fast And so that's going to freak people out more. So you're going to see immigration become more contentious even than it already is. So that's going to be difficult. There's just all these these problems you get from a low TFR that trickle in slowly uh, and subtly And you don't see them like like, oh my go Disaster M It's corrosive. Do you think that this is the kind of thing that will force us to sort of rewrite how we think about Social security How we think about taxation, like is this one of those era defining events that may change the way we organize our entire economy?. Yes, but I think it's less of an event than a trend It It's going to happen slowly. We already should have realized there's something very wrong with the pay as you go method of Social Security because as, you know, Paul Samelson famously proved in his paper about dynamic efficiency back in I think the fifties or early sixties. Social seecurity at payays ecosystem like social seecurity is efficient You know, if and when you have a growing population When you have a very slowly growing population or a shrinking population, in the long term, social seecurity is dynamically inefficient. you just it has big economic problems. And so so that's that's hitting already, that's hitting already. And so so pay we needed to shift to a fully funded system can't now because expensive one time shift Um, And instead, we're going to have to have constant bruising political battles over benefit cuts and retirement age raises and you know lifting the cap on on taxes and making the system more redistributionary. And all these things, we're going to have all these fights over. There's no way to avoid these fights And it's baked into our system And so yes, it's happening, but it won't be a thunderbolt that happens all at once is Best solution in your view some form of redistribution. Do that is that what we need to all get on the same side on when you describe these kind of political debates that are inevitable. is that the main thing It's absolutely part of what we need because when you have benefit cuts, that hurts. you know, I mean, if you're rich and you get your Social seecurity benefit benefits cut, do you care? No. But if you're poor and you get your social seecurity benefits cut, you starve. Like that's all you had And so Obviously, the more we cut benefits, which we'll need to do to maintain the solvency of the system the more redistribution we'll need to do to prevent human suffering So it insolvency of social seecurity creates a greater need for redistribution across income gaps Um And so I think that's absolutely one thing we need to do Um We obviously need to be looking for ways to boost the fertility rate and to continue bringing immigrants without, you know freaking out freaking people out U We need to do both those things, especially high skilled immigrs you know, add lots and lots and lots to our revenue to our coffers. They're a huge fiscal plus So we need to look at how to do more of that which we're really not doing right now, it's the opposite of what we're doing right now U and we need so we're going to need more redistribution. We're going to need to to tighten our belts and do more reistribution at the same time. U in order to keep the system solvent and keep it supporting old people and have old people not be synonymous with poor people as they used to be And so and at the same time, we need to be looking to address the root causes of the problem here for the long term. What would you say to someone who believes that redistdistribution is veering on socialism. People who say, I mean, obviously we've seen the wealth tax proposals, we've seen the billionaire tax proposals, which are kind of way over here on the extreme end of things and a lot of people say that's not the right direction. I think those arguments might have some merit Um There are also arguments that, you know increasing taxes, redistributing in and of itself is not the right path, It's not the right solution. We're kind of waiting on government, waiting on some centralized system to solve all of our problems. who take that view What is your response to them? My response is what's your alternative? What's your better idea They have nothing. Nobody who just like, well, that would be socialism has any says any alternative other than just like you know, more money for my bank account. I think we're using the words incorrectly though Socialism isos used to mean, at least goovernment controls the means of production, which just doesn't have a good track record But and then when you ask, where does it work, theyll point to Northern Europe, I would argue Northern Europe, in many instances is more capitalist than we are. I think most socialist today really mean is a capitalist economy that has a stronger social safety net, more progressive taxation and more investment in social services. It feels as if A lot of this argument is a inefficient argument around semantics that those of us who think of socialism as east versus West Germany, North Korea versus South Korea Soviet Union versus, you know, or USSR I mean, the fifties and sixties here had much higher tax rates much more public infrastructure investment, greatreat society. But we didn't call it socialism back then. We just called it healthy capitalism. Isn't a lot of this words? It's all words. Yeah. you're exactly right. Like the word socialism isn't magic fairy dust that you can sprinkle on something to like make it go away That might have worked for like a few years in the nineteen eighties, but That dog will not hunt now And so you're right. it is totally semantic. And that's isn't that just socialism is, you know, like there's a shrinking and a rapidly aging cohort of people for whom that sort of argument carries inang with. Yeah, you're talking to one of them But I'm glad that you you you and I are on the exact same page about You know, the idea that ownership and control of the means of production And um is a very different thing from, you know, redistribution like social democracy, kind of the stuff like Sweden does. If you look the Scandinavian countries, those countries are less regulated than we are. That's exactly right. They're more capitalistic than we are on the production side and then on the redistribution side, they do a lot more And so Is that more or less socialist than us? Like it is a totally semantic argument. and I wish people would just stop like saying, well, isn't that socialism? and they soon will because that you know, like That's going away We need to come up with a new term. I thought what George Bush did was or w Compassionate conservatism. Isn't there Is there room for compassionate capitalism? Woke You're talking about sloganeering and I'm not necessarily good sloganeer. I want a bumper sticker, Noah. I'm not good at bumper stickers, except for maybe silly ones. But then but I think that what I would just use the word redistribution usese a word to mean what it means. instead of tying it to a whole package of ideologies and stuff by calling it socialism, just call it redistribution, which is what it is. Call things what they are, use use You know terminology to mean specific useful things My final question, if you know it, Is there any economic trend that you're seeing today that makes you optimistic about America that makes you bullish on America or the world or humanity at large. What are I mean, like obviously AI, you know, is the big reason for optimism productivity growth we'reready starting to see some productivity growth that's probably from AI. We're not sure Uh without apparent job loss You know, like All these people thought AI was a job destroyer and a human remover And so far it's turning out not to be that you know, there's a few patients that are under stress and under pressure from AI, but that's true of any technology. That was true of machine tools, That was true of anything that improved our prosperity in the past that now we're not worried about. It was true of databases and computers. It was true of the interternet is true of everything. and A so far, like our job markets You know, there's less hiring and less firing what how corporations hire and fire people is going to change. I think we'll go more toward a Japanese system where we have like salary men doing generalist jobs for companies and like, know instead of highly specialized things and a whole lot more independent entrepreneurs. We're seeing a lot more independent people start small businesses. There's a positive trend. We're just seeing a massive surge in dynamism, a surge in business formation. indndividuals can start businesses more easily than ever before I have my My substack is is a tiny business, you know, is an S corporation. And so We're seeing a ton of that and we're seeing no big negative effect so far of AI on aggregate employment outcomes. and yet we're seeing apparent productivity acceleration. And that is great. That's a much better outcome than we could have than people would have hoped for even two years ago Even one year ago, even now, it's better than what people think is happening