June 12, 2025 • 44 mins
The focus of Trump's trade policies is clearly China. There are tariffs on everyone, of course, but it's the growing Chinese manufacturing might, and the various perceived risks associated with that, which have catalyzed this impulse to rethink how America trades with the rest of the world. But can the US actually move the manufacturing center of gravity? On this episode we welcome back Harvard Professor Ricardo Hausmann. We've had him on before to talk about the importance of economic complexity -- the capacity to build complex things -- in measuring the wealth of nations. On this episode we use that lens to discuss tariffs and the trade war, and the risks that the new administration's policies will play in reducing our capacity to build the most advanced things.
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of The Odd Laws podcast.
I'm Joe Wisenthal.
Speaker 3 (00:22):
And I'm Tracy Alloway.
Speaker 2 (00:24):
In this ongoing trade war, I don't know. I guess
it's a trade war, all the trade headlines. I have
to say. One of the things I always think about
is and I write about it, and we reference it.
The two of us reference it all the time. The
complexity and the importance of sort of building complex things
as a marker of a sort of country's capacity for wealth,
and the sort of complex international trade webs that undergird
(00:48):
the production of complex things.
Speaker 3 (00:50):
Joe, I know what you think about. It's monkeys and do.
Speaker 2 (00:53):
You think about that?
Speaker 4 (00:56):
Yeah?
Speaker 3 (00:56):
I do think about that.
Speaker 1 (00:57):
Okay.
Speaker 3 (00:57):
The reason I think about monkeys and trees is because
couple of years ago we had Ricardo Houseman on the
podcast and he used this metaphor to describe why some
countries are richer, more economically developed than others. And the
metaphor was that certain products or industries are like trees
in a forest, and the firms are like monkeys, and
(01:20):
so businesses kind of jump from tree to tree, and
so what you find is if a country gets good
at one particular product, then the business the monkey will
jump to the next tree, the next adjacent product, and
use that experience to build out their offerings. And so
you tend to see, you know, the more complex economies,
(01:42):
the bigger forests, the more monkeys swinging from trees are
indicative of greater advancement and more wealth.
Speaker 2 (01:49):
Right, And this is how you can have a you know,
a country that at one point specialized in rubber becoming
a major player in cell phones, or a economy that
one point made t shirts, which requires some level of
coordination of supply chains from the thread and the electricity
to power the looms suddenly become much more advanced any
(02:10):
number of things. Anyway, I think there's a very powerful idea.
But when I think about, you know, the idea that Okay,
now there's this trade barrier between the US and Canada,
for example, and we have these complex webs of supply
chains in which goods cross the border multiple times. Do
we constrain our capacity to do complex things?
Speaker 3 (02:28):
Are the monkeys going to slam headfirst into a trade wad?
Speaker 2 (02:32):
Yeah, it's literally right, Like they're swinging around and they're
making these webs and densifying and then suddenly they slam
into a wall in a very real way. What does
it mean for American wealth if America is sort of
like constrained.
Speaker 3 (02:47):
Yeah, this ecology of trade, I think it's a very
valid question.
Speaker 2 (02:51):
Well, I'm very excited back on the podcast that we're
going to be speaking with Ricardo Housman, professor at the
Harvard Kennedy School and the founding director of the Harvard
Growth Lab. So, Professor Housman, thank you so much for
coming back on Outlaws.
Speaker 4 (03:06):
Thank you for having me. I'm really happy to be back.
Speaker 2 (03:10):
It does not seem like if we're thinking from the
complexity framework, right, if we're gonna start like putting up nets,
maybe it's nets, we're gonna start putting up nets in
the forest between the trees from place it does seem
harder for the monkeys to swing.
Speaker 4 (03:25):
Well, the way I think about the problem is that
the complexity that you were talking about in the introduction
is really the amount of knowledge that you have to
put together in order to be able to do things.
And the question is a little bit you know, how
mobile is that knowledge, how easy it is for you
(03:46):
to get to that knowledge? And that knowledge takes if
you want three forms, it takes the form of embodied
knowledge and tools and materials. So when you buy a cookbook,
it says if you want to make an omelet, it says,
you know, take eggs, take milk, take this, take that.
It doesn't tell you how to make eggs. It doesn't
tell you how to make milk. You just you just
(04:08):
buy the eggs, and you don't you disregard all the
technologies that go into making chickens and to making eggs,
and to feeding the chickens, and you disregard all of that.
You just buy the eggs, right, and all the knowledge
that was embedded in it, it's just in the egg.
So embodied knowledge is one form of knowledge, and trade
(04:30):
is one way to get it right. Codified knowledge is
the knowledge that exists in recipes, formulas, algorithms, do files.
You know, you just need to have the code and
follow the instructions if you are and then the third
form of knowledge is nohow in brains. And the problem
(04:52):
with knowledge is that there's very little knowledge that fits
in a brain. So if you want to run a company,
you need a lot of knowledge. You need knowledge about accounting,
about finance, about human resource management, about procurement, about production,
about branding, about marketing, you know about taxes, about contracts.
So you need a lot of knowledge. And to bring
(05:15):
that knowledge together, you need a team of people that
you need to put together. And complexity comes from, you know,
the breadth of the team that you have to put together. Now,
the more you can kind of modify stuff, then you
don't need to put the brains together because it's all
in the code. That's one of the things that we
may talk about artificial intelligence. It makes things in some
(05:37):
sense simpler because the knowledge is in the machine. It's
no longer you no longer need a brain to do it. Now,
what these trade barriers are doing is that they are
preventing you from, say, buying the eggs right so that
now you need to know how to do the eggs yourself.
So in some sense it's making things harder to do.
(06:00):
As Larry Summers has pointed out, there are about sixty
times more jobs using steel than job making steel. So
you know, you protect steel, you're making it easier for
all those guys that were going to make omelets by
making now the eggs harder to get. And that's going
to come at a detriment. You're going to get maybe
(06:22):
more jobs and steel making in the US, and you're
going to make all the people who use steel have
more trouble competing in the domestic market with their products
and more trouble selling their products abroad because now they're
buying more expensive eggs, more expensive steel. In this metaphor,
so in some sense, yes, what you're saying is that
(06:45):
bread barriers are going to make the ability to put
things together harder in the US. It's going to incentivize
some of the things that are being protected, but it's
going to create difficulties for everybody who you uses those
things to make other things.
Speaker 3 (07:03):
Is there a way to design tariffs or other protectionist
trade measures in such a way that you would preserve
knowledge and I guess preserve access to some of the
components you need to build out more complex industries.
Speaker 4 (07:18):
I mean, an interesting question is what is the case
for intervening in the market. Why would you need a policy?
And then the second question is would trade would tariffs
be your instrument? Okay, so I would say that economic
theory gives you at least three good reasons to intervene
in the market. That might justify something you might want
(07:40):
to call industrial policy. And then the question is is
tariff's the right industrial policy because now they're putting tariffs
on steel and aluminum. They want more still and aluminum
being made in the US. If you wanted more still
and aluminum made in the US, what instruments could you
have used? And its tariffs the right way? Okay, So
(08:01):
first there is the argument that in order to make something,
you have to know how to make it. You know,
it's hard to make things you don't know how to
make it, and typically when you start something you don't
you're not particularly good at it, but maybe over time
you become better at it. There are some learning curves,
and you want to get into those learning curves. And
(08:23):
that's a compelling reason maybe to intervene in a relatively
new industry where you know you haven't yet to figure
things out, saying maybe like solar panels or batteries, or
you know something that's relatively new that you still have
yet to figure out. You wouldn't do it for a
mature industry like say like electric gas turbines, because you
(08:46):
know they've optimized that to death and you know there's
there's no significant breakthroughs for decades now, so still would
not be the obvious thing that would come to mind. Right,
it's a nineteenth century chnology, it's an industry that has
that's quite mature, etc. But you might have a national
(09:07):
security reasons to protect it or something, but definitely not
learning curves. By the way, those learning curves, if they
are like inside the company, if it's something that the
company is learning and the company owns, markets have been
super happy to fund that. I mean, markets have funded
Amazon for decades while the company was losing money because
(09:30):
they're saying no, no, the company is figuring out how
to sell stuff on the internet. Eventually, when they do
figure it out, they will have access to a humongous
market and that's going to be super valuable. So markets
supported negative cash flows in Amazon for a very long time.
So you have to argue that these learning curves somehow
(09:52):
spill over into the value chain, spill over into more
complicated things to coordinate, and that's why you need some
kind of action. Sometimes the reason why industries get into
trouble is that you have chicken and egg problems that
you know the supplier is not there because you are
not there and you're not there because the supplier is
(10:12):
not there. So there's a good equilibrium in which both
you and your suppliers are there, and there's a bad
equilibrium in which neither of you is there. So how
do you go from the val equilibrium where none is
there to the good equilibrium where both are there. And
that's a problem that we know how to solve. In
each one of these cases, caras may not be the
(10:33):
right instrument. So for example, you know, if you wanted
the supplier and you to be there, well, maybe the
garment comes and says, you know, I'm going to give
a supplier the guarantee that you're going to buy from them,
and I'm going to give you a guarantee that the
supplier is going to be there to sell you. So
you install your plant, he installs this plant, and the
(10:53):
guarantee expires worthless. So the government can coordinate on the
good equilibrium. Essentially no money and taxing nobody. A set
of guarantees would do the trick. If you want the
firm to learn, I mean, one thing is to have
these temporary what they call infant protection and the term
(11:14):
in the literature is infant industry protection. So you take
an industry at its infancy, and you give it some
protection until it finds its way, and then you open
up an alternative to that is you subsidize their capital investment,
or you guarantee their demand maybe government procurement or something else,
(11:38):
or you give it a special tax treatment, so you
have other ways to intervene. The moment you intervene with tariffs,
you're essentially dumping the cost on the consumers of that industry,
and the consumers of that industry are going to become
less competitive, and their size will shrink, and they may
(12:01):
become vulnerable to other attacks. So it's not the ideal instrument.
There's an additional reason why it may not be the
right thing to do. The US is and politically, part
of all these policy is based on the fact that
the Midwest did very poorly. The russ Belt did very poorly.
They lost a lot of manufacturing jobs, and you would
(12:22):
like jobs to go back to the Midwest. Pittsburgh loss
it's steal industry. Garandianna lots it's steal industry. Youngstown, Ohio, Cleveland, Detroit,
et cetera. These cities lost jobs in some industries. Now
you put the barriers you put tariffs at the national level.
(12:44):
It doesn't mean that the industries are going to go
to the Midwest. They may go to write to work
states in the South. They may go to the Southwest.
So it's not not your solution to the places at
your t I have to help those might be better
dealt with using place based instruments.
Speaker 2 (13:19):
You know, I really like this idea of physical products
as embedded knowledge, so that if I'm making some recipe
that calls for eggs, that the eggs that I buy
are the end result of all the knowledge of the farmers.
I don't have to have that knowledge myself. It makes
it simpler process. I was reading a speech recently Ellen Young.
This speech was given I think in nineteen twenty eight.
(13:41):
Here's the former president of the London School of Economics,
and he said, it is generally agreed that Adam Smith,
when you suggested the division of labor leads to inventions
because workmen engaged in specialized routine operations come to see
better ways of accomplishing the same results miss the main point.
The important thing, of course, is that with the division
of labor, a group of complex processes is transformed into
a succession of simpler process. So therefore making something with
(14:04):
eggs is simpler because someone else doing the simple job
of making of growing eggs, I'm making the simple job
of maybe making an omelet or something. Something becomes a
succession of simpler jobs. But the question I have is,
does that mean that sort of like sheer market size
as measured by even by things like population, et cetera,
become important in these questions because if we're going to
(14:27):
make complex things, doesn't that on some level require either
through our population or our friends population, a decent number
of people who can then do all of these individually
simple tasks.
Speaker 4 (14:40):
Well, I mean, if that's the reason why value chains
have become longer, where you just slice it into more modules,
and then you bring those modules together, and then some OEM,
some original equipment manufacturer that is putting fifty thousand pieces together,
and then each one of the fifty thousand pieces, it
becomes a more manageable task. But some industries require a
(15:05):
lot of a lot of talent that has to come together.
And for example, when you go to the do you
see a film? In the movies, sometimes they put at
the end of a movie it says the end, but
it's a misnomer because after they put the end, they
start showing you the credits, and the credits go on
(15:25):
for minutes and minutes. You know, there's there's the casting,
there's the sound effects, there's the visual effects, there's editing,
director of photography. So you need a whole massive team
of people that are involved in that in that movie
making industry. Well, an industry that requires this deep pool
(15:46):
of differentiated talent tends to locate only in very large cities,
say like Los Angeles or New York. That's the only
place where you would you could put together all that
necessary talent that is required. So industries that require a
more diverse pool of talent tend to locate themselves in
(16:08):
bigger cities, and the ones that are kind of simpler,
lower complexity, they can afford to locate in a smaller
city because in that smaller city they could probably find
the more limited diversity of skills that they need. Now,
one of the things that is a feature of the
(16:28):
American economy over the last twenty years is that the
industries that tend to locate in large cities have done
dramatically better than the industries that tend to locate in
smaller cities. The industries that tend to locate in smaller cities,
they tend to demand more land and not that diverse
(16:49):
labor force. So they're not willing to pay the high
prices of land of big cities so they can buy
more land and they don't rely so much on this
diverse labor force. But the industries that require a deep,
diverse pool of talent, they are willing to pay the
higher price of land in larger cities because they don't
(17:11):
use that much land. So what I would put it
to you is that part of the drama of the
US is the fact that there's been this shift in
demand in favor of the things that happened to be
done in bigger cities. And by the way, let me
make a very important point. We just saw the elections
in Poland, and the elections in Poland meant that, you know,
(17:35):
the president that won that election is a more called it,
a more trump like figure, and in fact, his party
pis he got elected more or less ten years or
eleven years before Trump, so there was already kind of
like a Trumpian motivation behind the election of that party.
(17:56):
They were upset about Trey and globalization, and Europe and
so on. Now, the interesting thing about Poland is that
Poland is at the exact opposite experience of the US.
In terms of trade. Poland has seen rising market share
(18:18):
across the board in all industries, in agriculture and manufacturing,
in cars, in machinery, in textiles, they have made out
like Bandits. Trade has exploded positively in Poland. But the
thing that has exploded in Poland has benefited these larger
(18:39):
urban areas and has has heard the smaller, less metropolitan
parts of the country, and that has generated a political backlafe.
Speaker 3 (19:06):
So even even if the gains have been absolute for
Poland overall, I guess the relative differences within the country
are are have become a grievance.
Speaker 4 (19:17):
Yes, let me say one point that we often they
do not emphasize. No, we often think of countries as
small open economies. They are small in the sense that
what they do is not going to change the global economy.
The US is relatively bigger, but many countries think a
smaller open economy. When you think of a city, a
(19:37):
city tends to be an even smaller and even more
open economy. It's smaller, right, much smaller than the country
it's in right, and it's more open because it trades
with not only the rest of the world, but the
rest of the country, and the labor force can either
come from the rest of the country or leave to
the rest of the country. Right, So what tends to
(20:02):
characterize a city. And you know, for a country, its
export base is super important. For a city, its export
base is even more important because a city is less
self sufficient than a country. A city needs to consume
a lot of things that it doesn't make. Most cities
(20:24):
don't make cars, don't make antibiotics, most cities don't make
X ray machines, they don't make, you know, eggs. So
all of these things have to be brought in and
to pay for these things that they want to consume
in the city, they need to earn money from outside
the city. They need to export in order to be
able to import. So the set of export activities in
(20:46):
a city determines very much the life of the city.
If those export activities in the city get into trouble,
then it's not just that those jobs in those exports,
in thus trees getting, you know, are lost, but those
workers used to you know, go to the barber, go
(21:07):
to a grocer go to the dentist. So all those
jobs in all of these local services also get lost,
and you get this multiplier local effect and people start
leaving the city. The moment people start leaving the city,
their housing prices go down. There's less money to pay
for education, so the quality of education, the theories, and
(21:28):
you get all of these negative local effects in the city. Okay,
that's associated with the export industry of your city getting
into trouble. So what I'm saying is that the shift
in demand has it hurt cities. The kinds of industries
that tend to locate in smaller cities, the kind of
(21:51):
industries that need less of a deep pool of talent
and more land. And the current industry is a good example.
The whole still you skill is a dirty, complicated, large thing.
So it may hire a lot of workers, but it
doesn't want to have too many people around them. They
need a lot of land, so they're not going to
go to Los Angeles. They're going to go to a
(22:13):
place where they can acquire a lot of land to
put their big plant. And it's the fact that the
export sector of cities in the Midwest, say, got into trouble.
The fact that the export activities in some parts of
Poland got into trouble, that they got into this negative
spiral as people you know, left because they have better opportunities,
(22:35):
and maybe other parts of the country, in larger cities,
they leave behind a deteriorating economic and social situation.
Speaker 3 (22:44):
I promise not to get to hung up on metaphors
and monkeys, but I just want to go back to
the egg analogy for one second. So I understand. You know,
division of labor expertise can lead to efficiency and app
gains economically for everyone. However, you know, I'm thinking back
(23:05):
to when egg prices were very high in the US
earlier this year, and I joked on this podcast that
I was going to get my own chickens so that
I could declare egg independence, egg autarchy and have my
own supply. Are there not arguments, you know for certain
things that you would want to have the capacity to
(23:26):
build those components at home in order to enable you
to build more complex items.
Speaker 4 (23:33):
Well, no, you would want to make sure that you
have a diversified source of supply, so that there's a
problem in Brazil, you can buy from somewhere else. Right,
So this whole thing about food security that some countries say,
you know, we need to have food security, so we
need to produce food in our country at three times
(23:54):
the international price. Well, I mean that's not food security.
That's exacerbated risk because you know your country can be
hit by a drought, by a storm, by et cetera.
Many things that could destroy your food production. So you're
going to face much less risk if you have a
diversified source of materials. And that's one reason why you
(24:16):
would want to have a good trading relationships with many
countries because that way, you know, if you get in trouble,
you can buy from somewhere else. So no, I in general,
this idea that the price of wheat worldwide goes up,
that's the reason for you to have your own wheat production.
That doesn't follow at all. Your wheat production might be
(24:40):
it might subject you to even more risks than a
diversified source of wheat from across the world. It's a
different thing if you're talking militarily, right.
Speaker 3 (24:50):
Yeah, I was going to say, what about something like
I want to build semiconductors domestically because I think they're
a very important part of our defense strategy.
Speaker 4 (25:00):
Well, I can perfectly understand that you have an incredible
concentration of semiconductors in Taiwan, and it's very easy to
imagine a situation where you no longer have access to
those semiconductors. So in that case, I can I can
(25:20):
see the case that would justify things like the Chips Act,
not necessararily things like tariffs on chips, but because tariffs
and chips would make all industries that use chips less competitive,
et cetera. But you know, in creating an encouragement for
and by the way, convincing TSMC or the Taiwan Semiconductor
(25:43):
Manufacturing Company, which is the best a foundry in the world,
to come and see if they can figure out how
to make it in Arizona. And by the way, it's
very interesting and it shows you the importance of knowledge
and know how that sometimes it's very very difficult for
the same firm that supposedly the firm knows how to
(26:05):
do something, say Boying knows how to make airplanes in Seattle. Well,
guess what, making airplanes in South Carolina. Making Boying airplanes
in South Carolina proved to be much harder than making
airplanes in Seattle, and transporting the knowledge was a big headache,
and right now TSMC is facing serious challenges and transporting
(26:27):
the knowledge to Arizona. So if you put the accent
on moving the knowledge, things look a little bit different
than just a discussion about tariffs.
Speaker 2 (26:38):
Yeah, supposedly the yields on the Arizona fabs are quite impressive,
and they're starting together momentum. Of course, your point is taken,
but actually this does raise some questions. I mean, you've
talked about, okay, the importance of diversity of your supply chain.
To my mind, actually when I hear that, I think, okay,
there's something legitimate about like anxiety about China specifically, because
(27:02):
what's happening in manufactured goods is that it's not a
globally diverse supply chain. It's becoming in many areas a
China only supply chain. That China's lead in this, that
its network effects, that it's internal whatever is becoming so
concentrated in one country for such a big range of
goods that at least from a non China perspective, it
(27:25):
feels like from a risk management standpoint, et cetera, that
there probably is a very good imperative to put forth
effort towards not necessarily having an American production capacity, but
a non China production capacity.
Speaker 4 (27:40):
Well, we went through a Japan scare in the nineteen eighties, right,
And what ended up happening in Japan is that Japan
kept on progressing and becoming good at everything to a
point that wages in Japan went top a lot, and
Japan started to move their industries outside, the phenomenon that
was called the flying Geese, right, and so Toyota started
(28:04):
to make cars in Thailand and put things in Korea
and so on and so forth, and then they went
into poor states like Vietnam or Indonesia. So what you
have is that the more advanced manufacturing or the more
advanced parts of the value chain like R and D design,
(28:24):
et cetera, are retained in headquarters, and you move the
more labor intensive, the less skill intensive, the less complex parts,
the more standardized parts. You moved to a locations that
pay lower wages, and everybody is better off because for
those locations, it's a step up for you. It's a
(28:44):
way to save on labor costs that you cannot afford
in your country because you want to pay your workers
very very well, and you can afford to do that
because you have plenty of jobs for them, and the
more complex part of the value chain you don't need
to hire them, and the less complex part part of
the beligian So there is a world in which this
is a process. China is getting richer. A lot of
(29:06):
the things that are being done in China, by the way,
initially they were done in the coast, and so now
the coast has become too expensive, they're moving to elsewhere
in the country and to elsewhere in the region. And
you know, now there's more production in Vietnam, there's more
production even in Cambodia. There's more production in poor other
countries simply because the Chinese worker is now too expensive.
(29:29):
So there's a world in which this is just part
of just a repetition of what happened in Japan. But
let me make an important point. When a production is
happening elsewhere, it might be happening in a country. A
good question is where does the knowledge that they're using
come from? Because what is happening in the world today
(29:53):
is that the rich countries are becoming more and more
concentrated in producing knowledge. In order to monetize that knowledge,
they need to put brick and mortar things that they
prefer to put them in other parts of the world.
So Japan, for example, has come up with a lot
of innovations and a lot of R and D and
a lot of patents. But the way they monetize their
(30:16):
patents is not by hiring Japanese workers. That you know,
Japanese labor forces is declining and so on, and they
are at full employment. Anyway, they monetize their knowledge by
deploying that knowledge elsewhere with foreign direct investments and so on.
And that means that a lot of the of accounting
(30:38):
of how this process happens is not well captured by
our standard accounting techniques. For example, if Japan does R
and D and that improves the productivity of their foreign investment,
it doesn't show up as higher Japanese productivity. It is
increasing productivity, but not just not in Japan, in the
(30:59):
place is where Japan has its plans, and the same
is happening in the US. If you think of the
Magnificent Seven, the magnificence and for example Google, when Google
sort of like this places all the small newspapers of
the world because all advertising revenue is moving to it's
(31:19):
moving online, and Google is capturing a good chunk of
that that doesn't count as a US export because it's
some subsidiary that Google put in I don't know, in
South Africa or wherever that is collecting that revenue, and
that revenue you could count it as a US export,
(31:40):
but it's not being counted as a US export.
Speaker 2 (31:43):
It turns into the US marketcap exactly.
Speaker 4 (31:45):
It turns into the US into US marketcap. But US
marketcap is very poorly captured by balance of payment statistics. So,
for example, if you started the year two thousand, From
two thousand to the present, according to official statistics, the
(32:05):
US borrowed sixteen trillion dollars from the rest of the world.
It ran a cumulative current account deficit of sixteen trillion dollars.
You'd say, gee, you borrow sixteen trillion dollars. Well, how
much are you paying for those sixteen trillion dollars. Let's
say four percent? No, so four percent would be six
(32:27):
hundred and forty billion dollars in interest payments right on
the deck you borrowed. Now, if you look at the
US balance of payments primary income, essentially, the US doesn't
look like a country that has an external debt. They
are essentially paying zero. They borrowed sixteen trillion dollars, which
is say, sixty percent of GDP, and they're essentially not
(32:51):
paying anything for it. So you would say, well, if
I can borrow sixty percent of GDP for free, I
would do that. Well, in some sense, that's what do
you has done. The way I would like to describe
it is that US didn't just borrow sixteen trillion dollars.
It borrowed more like thirty two trillion dollars. It used
sixteen trillion dollars to cover that official deficit and use
(33:14):
the other sixteen trillion dollars to mix it with your
knowledge and invest abroad. And that investment abroad, say Google
in South Africa, mixed with US knowledge as this huge
rate of return. So when you borrow thirty two trillion dollars,
sixteen trillion dollars you borrowed at four percent, but the
(33:34):
other sixteen trillion dollars you invested at a much higher
rate of return because it was mobilizing your knowledge. And
so thirty two trillion, say, you pay four percent over
thirty two trillion dollars you borrowed, but you make eight
percent on the sixteen trillion dollars you invest abroad. Well,
it just turns out that eight percent over sixteen trillion
(33:56):
dollars is the same as four percent over thirty two
trillion dollars. You're not really running a deficit. You are
monetizing your knowledge, but current accounting standards don't capture that.
Speaker 3 (34:09):
Well, this is very This reminds me of the Matrix
and that scene where they say there is no spoon.
What if there is no US external deficit? But okay,
one thing I'm struggling to understand. So you know, you're
arguing that the US actually has a significant amount of
knowledge and know how that is mixed up with its
(34:31):
foreign direct investment, and that doesn't show up in the
official trade statistics. And I guess one thing I'm kind
of curious about is and you're arguing that the statistics
undervalue foreign direct investment. But I would have thought that,
like foreign direct investment, valuations inherently reflect market expectations. And
(34:55):
to Joe's point, I'm channeling Joe's love of the efficient
market's HYPOTHESI here, but they should be captured in market
cap and things like that. Why do we assume that
the statistical agencies, the accounting systems systematically mispriced these assets.
Are they not included anywhere.
Speaker 4 (35:15):
They use book value. When you see the investment abroad,
they count how many dollars you sent abroad, and then
they count how much money did you make abroad. And
when you look at it, the rate of return on
FBI is double the rate of return on debt in
the accounts, So they're not counting the firm direct investment
(35:38):
at the market value. By the way, it's very hard
to calculate that market value because these are subsidiaries of
companies that listed the S and P five hundred and say,
if the price earningserration in the US is twenty six
or something like that last time I checked, it means
that they are thinking that all that's money that the
Magnificent seven are making a broad they multiply by twenty
(36:02):
six or an even higher number. Right, But that was
not the accounting was made at book value. So in
most of these companies there's a huge difference between book
value and market value.
Speaker 3 (36:15):
Yeah, I was about to say, this is the argument.
I think We've even done an episode on this about
stock market valuations and how companies with a large amount
of intangibles. It's not reflected in book value.
Speaker 4 (36:27):
Right, and that, in my mind is the market's valuation
of your knowledge exactly. So in a world where knowledge
is intensive, then book value becomes less of a guide
on what's actually happening. In a lot of international trade
statistics is book value because that's what they have to
make the statistics.
Speaker 2 (36:46):
I think there's a really interesting question. I have one
last question, and I wasn't expecting to go here, but
I thought that was so interesting what you were saying
about Poland and some of the politics not necessarily being
about the country's overall trading position visa the rest of
the world, but the internal dynamics of what is happening
in these countries, where the booms are happening in cities,
(37:07):
and how that is a function to some extent of experts.
But I'm curious. One of the things that people bemoan
about the current environment in the United States and probably
elsewhere is that cities are no longer a good place
for upward mobility. That you can't be poor or middle
class that move to a city and find a job
and move up the career ladder in the same way
(37:27):
you could when cities were more centers of hard industrial activity.
And I'm curious when you talk about the types of
companies that locate in big cities versus the type of
companies that locate in smaller cities, et cetera. Are the
type of companies that locate in big cities not as
conducive inherently towards upward mobility because there's just so much
(37:52):
talent required just to get in the door anywhere at
these firms.
Speaker 4 (37:57):
No, I think that the problem of big cities in
the US is the fact that they have regulated urban
space in such a way that housing supply is very inelastic,
so as people try to move to a city, housing
prices go up until it's unaffordable to move into a city.
That if cities had a more elastic supply of housing,
(38:18):
a more elastic supply of urban space, this dynamic would
help generate more opportunities in those cities and would help
maybe raise the price of labor in the cities where
people are leaving, because now they've become scarcer and people
would be willing to pay more for them. So that's
why you're seeing so much growth in cities like Boiseaira
(38:41):
or or Salt Lake City, or cities in Texas, Visa
these cities in California and having incredibly inelastic supply of housing.
So I would put there that, you know, on a
more inclusive policy involves urban development that allows for that
inclusion to happen.
Speaker 2 (39:00):
Ricardo Houseman, So great chatting with you. Always extremely thought provocative,
always takes us down avenues that I don't expect. Really
appreciate you coming back on outlause.
Speaker 3 (39:09):
Yeah, that was great.
Speaker 4 (39:10):
Thank you, Ricardo, Thank you for having me.
Speaker 2 (39:26):
Really like every time, like I mean every time. We've
always spoken to Ricardo twice, but I feel like every
time I talk to him, there's like a bunch of
ideas that are going to stick in my head for
a long time I'll be chewing on. In this one,
it's this idea that like official trade statistics don't capture
the fact that market value of this trade and which
(39:48):
you could see in the stock market trading in the
United States is much higher than what just sort of
like what is captured in the activity. I'm really intrigued
by this idea.
Speaker 3 (39:58):
On board with that idea, but I kind of wonder
how far you can stretch it, and like can you
stretch it all the way to actually, the US doesn't
have an external deficit, or could you stretch it all
the way to the idea that like, okay, well China
needs to like worry about accruing liabilities from importing US expertise, Like.
Speaker 2 (40:20):
Yeah, I don't know what we need. Is a debate
between Ricardo and Brad. Sets are ups because one of
the dimensions. Look, one of the counter arguments to some
of this stuff would be that there are actual flows,
because the entity that might be set up in South
Africa by a US multinational might pay licensing fees back
(40:41):
so the home country for the right to use the
Google name and so forth. Obviously, Brad talks a lot
about this in the context I mean, he talks a
lot about this actually in the context of software. But
there is some you know. The fact is is that
like Microsoft is gigantic and so even, and there's you know,
these companies that are trillions in trillions of dollars and
have huge footholds all around the world, and whether they're
(41:04):
accruing value to America in a way that doesn't show
up strictly in trade statistics strikes me as an important
load to continue to mind.
Speaker 3 (41:13):
Well, that's the other thing I was going to say,
which is, you see this debate in markets quite a lot,
and the difficulty in analyzing intangibles is it's hard, right,
Like how do you put a price on things like
brand value or soft power and stuff like that, And
so you get these arguments over. Okay, well, book value
(41:34):
doesn't include intangibles, but you know, maybe it should. But
if it should, then how do you avoid the problem
of over inflating because you think that this brand value
is really good and it's difficult to actually measure.
Speaker 2 (41:46):
Also, it doesn't matter what our trade statistics say if
we can't make things critical for national security, Like to
your point, whatever you say, oh, we don't really run
any sort of trade issues, except if you don't actually
have the physical capacity to make important things that are
necessary for having a sovereign nation, then it kind of
doesn't matter, doesn't You could run surplus and it wouldn't matter.
Speaker 3 (42:08):
I reject the idea that I need to have a
diversified supply chain of eggs. I'm going full on egg autarchy.
Speaker 2 (42:15):
But here's the thing, Tracy, Like, you could do egg autarchy,
but God forbid, Like some wolves get in there like
you do still have the option of going to the
grocery store, right, So like, even if you know it's like.
Speaker 3 (42:28):
See, then I just need a diversified supply of new chickens.
Speaker 2 (42:31):
It's like that pulp song about the Greek girl at
the thirst for knowledge. It's like you'll never know what
it's like because you always have the option to go
to the grocery stores.
Speaker 4 (42:40):
You know.
Speaker 2 (42:40):
It's like you can't actually replicate true autarchy knowing in
your head that you have that backup.
Speaker 4 (42:45):
Yeah, that's true.
Speaker 3 (42:46):
That's a good point.
Speaker 2 (42:48):
Yeah, that was a good one, wasn't it.
Speaker 3 (42:49):
That was very good. Okay, I think all right, shall
we leave it there? Yeah, this has been another episode
of the Authoughts podcast. I'm Tracy Alloway. You can follow
me at Tracy Alloway and I'm Jill Wise.
Speaker 2 (43:00):
Oh, you can follow me at the Stalwart. Follow our
producers Kerman Rodriguez at Kerman armand dash Ol Bennett at
Dashbot and Kelbrooks at Kelbrooks from our Odd Lots content.
Go to bloomberg dot com slash od Lots with a
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chat about all of these topics. Twenty four to seven
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Speaker 3 (43:18):
Lots and if you enjoy odd Lots, if you like
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(43:40):
Thanks for listening. Eight
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of The Odd Laws podcast.
I'm Joe Wisenthal.
Speaker 3 (00:22):
And I'm Tracy Alloway.
Speaker 2 (00:24):
In this ongoing trade war, I don't know. I guess
it's a trade war, all the trade headlines. I have
to say. One of the things I always think about
is and I write about it, and we reference it.
The two of us reference it all the time. The
complexity and the importance of sort of building complex things
as a marker of a sort of country's capacity for wealth,
and the sort of complex international trade webs that undergird
(00:48):
the production of complex things.
Speaker 3 (00:50):
Joe, I know what you think about. It's monkeys and do.
Speaker 2 (00:53):
You think about that?
Speaker 4 (00:56):
Yeah?
Speaker 3 (00:56):
I do think about that.
Speaker 1 (00:57):
Okay.
Speaker 3 (00:57):
The reason I think about monkeys and trees is because
couple of years ago we had Ricardo Houseman on the
podcast and he used this metaphor to describe why some
countries are richer, more economically developed than others. And the
metaphor was that certain products or industries are like trees
in a forest, and the firms are like monkeys, and
(01:20):
so businesses kind of jump from tree to tree, and
so what you find is if a country gets good
at one particular product, then the business the monkey will
jump to the next tree, the next adjacent product, and
use that experience to build out their offerings. And so
you tend to see, you know, the more complex economies,
(01:42):
the bigger forests, the more monkeys swinging from trees are
indicative of greater advancement and more wealth.
Speaker 2 (01:49):
Right, And this is how you can have a you know,
a country that at one point specialized in rubber becoming
a major player in cell phones, or a economy that
one point made t shirts, which requires some level of
coordination of supply chains from the thread and the electricity
to power the looms suddenly become much more advanced any
(02:10):
number of things. Anyway, I think there's a very powerful idea.
But when I think about, you know, the idea that Okay,
now there's this trade barrier between the US and Canada,
for example, and we have these complex webs of supply
chains in which goods cross the border multiple times. Do
we constrain our capacity to do complex things?
Speaker 3 (02:28):
Are the monkeys going to slam headfirst into a trade wad?
Speaker 2 (02:32):
Yeah, it's literally right, Like they're swinging around and they're
making these webs and densifying and then suddenly they slam
into a wall in a very real way. What does
it mean for American wealth if America is sort of
like constrained.
Speaker 3 (02:47):
Yeah, this ecology of trade, I think it's a very
valid question.
Speaker 2 (02:51):
Well, I'm very excited back on the podcast that we're
going to be speaking with Ricardo Housman, professor at the
Harvard Kennedy School and the founding director of the Harvard
Growth Lab. So, Professor Housman, thank you so much for
coming back on Outlaws.
Speaker 4 (03:06):
Thank you for having me. I'm really happy to be back.
Speaker 2 (03:10):
It does not seem like if we're thinking from the
complexity framework, right, if we're gonna start like putting up nets,
maybe it's nets, we're gonna start putting up nets in
the forest between the trees from place it does seem
harder for the monkeys to swing.
Speaker 4 (03:25):
Well, the way I think about the problem is that
the complexity that you were talking about in the introduction
is really the amount of knowledge that you have to
put together in order to be able to do things.
And the question is a little bit you know, how
mobile is that knowledge, how easy it is for you
(03:46):
to get to that knowledge? And that knowledge takes if
you want three forms, it takes the form of embodied
knowledge and tools and materials. So when you buy a cookbook,
it says if you want to make an omelet, it says,
you know, take eggs, take milk, take this, take that.
It doesn't tell you how to make eggs. It doesn't
tell you how to make milk. You just you just
(04:08):
buy the eggs, and you don't you disregard all the
technologies that go into making chickens and to making eggs,
and to feeding the chickens, and you disregard all of that.
You just buy the eggs, right, and all the knowledge
that was embedded in it, it's just in the egg.
So embodied knowledge is one form of knowledge, and trade
(04:30):
is one way to get it right. Codified knowledge is
the knowledge that exists in recipes, formulas, algorithms, do files.
You know, you just need to have the code and
follow the instructions if you are and then the third
form of knowledge is nohow in brains. And the problem
(04:52):
with knowledge is that there's very little knowledge that fits
in a brain. So if you want to run a company,
you need a lot of knowledge. You need knowledge about accounting,
about finance, about human resource management, about procurement, about production,
about branding, about marketing, you know about taxes, about contracts.
So you need a lot of knowledge. And to bring
(05:15):
that knowledge together, you need a team of people that
you need to put together. And complexity comes from, you know,
the breadth of the team that you have to put together. Now,
the more you can kind of modify stuff, then you
don't need to put the brains together because it's all
in the code. That's one of the things that we
may talk about artificial intelligence. It makes things in some
(05:37):
sense simpler because the knowledge is in the machine. It's
no longer you no longer need a brain to do it. Now,
what these trade barriers are doing is that they are
preventing you from, say, buying the eggs right so that
now you need to know how to do the eggs yourself.
So in some sense it's making things harder to do.
(06:00):
As Larry Summers has pointed out, there are about sixty
times more jobs using steel than job making steel. So
you know, you protect steel, you're making it easier for
all those guys that were going to make omelets by
making now the eggs harder to get. And that's going
to come at a detriment. You're going to get maybe
(06:22):
more jobs and steel making in the US, and you're
going to make all the people who use steel have
more trouble competing in the domestic market with their products
and more trouble selling their products abroad because now they're
buying more expensive eggs, more expensive steel. In this metaphor,
so in some sense, yes, what you're saying is that
(06:45):
bread barriers are going to make the ability to put
things together harder in the US. It's going to incentivize
some of the things that are being protected, but it's
going to create difficulties for everybody who you uses those
things to make other things.
Speaker 3 (07:03):
Is there a way to design tariffs or other protectionist
trade measures in such a way that you would preserve
knowledge and I guess preserve access to some of the
components you need to build out more complex industries.
Speaker 4 (07:18):
I mean, an interesting question is what is the case
for intervening in the market. Why would you need a policy?
And then the second question is would trade would tariffs
be your instrument? Okay, so I would say that economic
theory gives you at least three good reasons to intervene
in the market. That might justify something you might want
(07:40):
to call industrial policy. And then the question is is
tariff's the right industrial policy because now they're putting tariffs
on steel and aluminum. They want more still and aluminum
being made in the US. If you wanted more still
and aluminum made in the US, what instruments could you
have used? And its tariffs the right way? Okay, So
(08:01):
first there is the argument that in order to make something,
you have to know how to make it. You know,
it's hard to make things you don't know how to
make it, and typically when you start something you don't
you're not particularly good at it, but maybe over time
you become better at it. There are some learning curves,
and you want to get into those learning curves. And
(08:23):
that's a compelling reason maybe to intervene in a relatively
new industry where you know you haven't yet to figure
things out, saying maybe like solar panels or batteries, or
you know something that's relatively new that you still have
yet to figure out. You wouldn't do it for a
mature industry like say like electric gas turbines, because you
(08:46):
know they've optimized that to death and you know there's
there's no significant breakthroughs for decades now, so still would
not be the obvious thing that would come to mind. Right,
it's a nineteenth century chnology, it's an industry that has
that's quite mature, etc. But you might have a national
(09:07):
security reasons to protect it or something, but definitely not
learning curves. By the way, those learning curves, if they
are like inside the company, if it's something that the
company is learning and the company owns, markets have been
super happy to fund that. I mean, markets have funded
Amazon for decades while the company was losing money because
(09:30):
they're saying no, no, the company is figuring out how
to sell stuff on the internet. Eventually, when they do
figure it out, they will have access to a humongous
market and that's going to be super valuable. So markets
supported negative cash flows in Amazon for a very long time.
So you have to argue that these learning curves somehow
(09:52):
spill over into the value chain, spill over into more
complicated things to coordinate, and that's why you need some
kind of action. Sometimes the reason why industries get into
trouble is that you have chicken and egg problems that
you know the supplier is not there because you are
not there and you're not there because the supplier is
(10:12):
not there. So there's a good equilibrium in which both
you and your suppliers are there, and there's a bad
equilibrium in which neither of you is there. So how
do you go from the val equilibrium where none is
there to the good equilibrium where both are there. And
that's a problem that we know how to solve. In
each one of these cases, caras may not be the
(10:33):
right instrument. So for example, you know, if you wanted
the supplier and you to be there, well, maybe the
garment comes and says, you know, I'm going to give
a supplier the guarantee that you're going to buy from them,
and I'm going to give you a guarantee that the
supplier is going to be there to sell you. So
you install your plant, he installs this plant, and the
(10:53):
guarantee expires worthless. So the government can coordinate on the
good equilibrium. Essentially no money and taxing nobody. A set
of guarantees would do the trick. If you want the
firm to learn, I mean, one thing is to have
these temporary what they call infant protection and the term
(11:14):
in the literature is infant industry protection. So you take
an industry at its infancy, and you give it some
protection until it finds its way, and then you open
up an alternative to that is you subsidize their capital investment,
or you guarantee their demand maybe government procurement or something else,
(11:38):
or you give it a special tax treatment, so you
have other ways to intervene. The moment you intervene with tariffs,
you're essentially dumping the cost on the consumers of that industry,
and the consumers of that industry are going to become
less competitive, and their size will shrink, and they may
(12:01):
become vulnerable to other attacks. So it's not the ideal instrument.
There's an additional reason why it may not be the
right thing to do. The US is and politically, part
of all these policy is based on the fact that
the Midwest did very poorly. The russ Belt did very poorly.
They lost a lot of manufacturing jobs, and you would
(12:22):
like jobs to go back to the Midwest. Pittsburgh loss
it's steal industry. Garandianna lots it's steal industry. Youngstown, Ohio, Cleveland, Detroit,
et cetera. These cities lost jobs in some industries. Now
you put the barriers you put tariffs at the national level.
(12:44):
It doesn't mean that the industries are going to go
to the Midwest. They may go to write to work
states in the South. They may go to the Southwest.
So it's not not your solution to the places at
your t I have to help those might be better
dealt with using place based instruments.
Speaker 2 (13:19):
You know, I really like this idea of physical products
as embedded knowledge, so that if I'm making some recipe
that calls for eggs, that the eggs that I buy
are the end result of all the knowledge of the farmers.
I don't have to have that knowledge myself. It makes
it simpler process. I was reading a speech recently Ellen Young.
This speech was given I think in nineteen twenty eight.
(13:41):
Here's the former president of the London School of Economics,
and he said, it is generally agreed that Adam Smith,
when you suggested the division of labor leads to inventions
because workmen engaged in specialized routine operations come to see
better ways of accomplishing the same results miss the main point.
The important thing, of course, is that with the division
of labor, a group of complex processes is transformed into
a succession of simpler process. So therefore making something with
(14:04):
eggs is simpler because someone else doing the simple job
of making of growing eggs, I'm making the simple job
of maybe making an omelet or something. Something becomes a
succession of simpler jobs. But the question I have is,
does that mean that sort of like sheer market size
as measured by even by things like population, et cetera,
become important in these questions because if we're going to
(14:27):
make complex things, doesn't that on some level require either
through our population or our friends population, a decent number
of people who can then do all of these individually
simple tasks.
Speaker 4 (14:40):
Well, I mean, if that's the reason why value chains
have become longer, where you just slice it into more modules,
and then you bring those modules together, and then some OEM,
some original equipment manufacturer that is putting fifty thousand pieces together,
and then each one of the fifty thousand pieces, it
becomes a more manageable task. But some industries require a
(15:05):
lot of a lot of talent that has to come together.
And for example, when you go to the do you
see a film? In the movies, sometimes they put at
the end of a movie it says the end, but
it's a misnomer because after they put the end, they
start showing you the credits, and the credits go on
(15:25):
for minutes and minutes. You know, there's there's the casting,
there's the sound effects, there's the visual effects, there's editing,
director of photography. So you need a whole massive team
of people that are involved in that in that movie
making industry. Well, an industry that requires this deep pool
(15:46):
of differentiated talent tends to locate only in very large cities,
say like Los Angeles or New York. That's the only
place where you would you could put together all that
necessary talent that is required. So industries that require a
more diverse pool of talent tend to locate themselves in
(16:08):
bigger cities, and the ones that are kind of simpler,
lower complexity, they can afford to locate in a smaller
city because in that smaller city they could probably find
the more limited diversity of skills that they need. Now,
one of the things that is a feature of the
(16:28):
American economy over the last twenty years is that the
industries that tend to locate in large cities have done
dramatically better than the industries that tend to locate in
smaller cities. The industries that tend to locate in smaller cities,
they tend to demand more land and not that diverse
(16:49):
labor force. So they're not willing to pay the high
prices of land of big cities so they can buy
more land and they don't rely so much on this
diverse labor force. But the industries that require a deep,
diverse pool of talent, they are willing to pay the
higher price of land in larger cities because they don't
(17:11):
use that much land. So what I would put it
to you is that part of the drama of the
US is the fact that there's been this shift in
demand in favor of the things that happened to be
done in bigger cities. And by the way, let me
make a very important point. We just saw the elections
in Poland, and the elections in Poland meant that, you know,
(17:35):
the president that won that election is a more called it,
a more trump like figure, and in fact, his party
pis he got elected more or less ten years or
eleven years before Trump, so there was already kind of
like a Trumpian motivation behind the election of that party.
(17:56):
They were upset about Trey and globalization, and Europe and
so on. Now, the interesting thing about Poland is that
Poland is at the exact opposite experience of the US.
In terms of trade. Poland has seen rising market share
(18:18):
across the board in all industries, in agriculture and manufacturing,
in cars, in machinery, in textiles, they have made out
like Bandits. Trade has exploded positively in Poland. But the
thing that has exploded in Poland has benefited these larger
(18:39):
urban areas and has has heard the smaller, less metropolitan
parts of the country, and that has generated a political backlafe.
Speaker 3 (19:06):
So even even if the gains have been absolute for
Poland overall, I guess the relative differences within the country
are are have become a grievance.
Speaker 4 (19:17):
Yes, let me say one point that we often they
do not emphasize. No, we often think of countries as
small open economies. They are small in the sense that
what they do is not going to change the global economy.
The US is relatively bigger, but many countries think a
smaller open economy. When you think of a city, a
(19:37):
city tends to be an even smaller and even more
open economy. It's smaller, right, much smaller than the country
it's in right, and it's more open because it trades
with not only the rest of the world, but the
rest of the country, and the labor force can either
come from the rest of the country or leave to
the rest of the country. Right, So what tends to
(20:02):
characterize a city. And you know, for a country, its
export base is super important. For a city, its export
base is even more important because a city is less
self sufficient than a country. A city needs to consume
a lot of things that it doesn't make. Most cities
(20:24):
don't make cars, don't make antibiotics, most cities don't make
X ray machines, they don't make, you know, eggs. So
all of these things have to be brought in and
to pay for these things that they want to consume
in the city, they need to earn money from outside
the city. They need to export in order to be
able to import. So the set of export activities in
(20:46):
a city determines very much the life of the city.
If those export activities in the city get into trouble,
then it's not just that those jobs in those exports,
in thus trees getting, you know, are lost, but those
workers used to you know, go to the barber, go
(21:07):
to a grocer go to the dentist. So all those
jobs in all of these local services also get lost,
and you get this multiplier local effect and people start
leaving the city. The moment people start leaving the city,
their housing prices go down. There's less money to pay
for education, so the quality of education, the theories, and
(21:28):
you get all of these negative local effects in the city. Okay,
that's associated with the export industry of your city getting
into trouble. So what I'm saying is that the shift
in demand has it hurt cities. The kinds of industries
that tend to locate in smaller cities, the kind of
(21:51):
industries that need less of a deep pool of talent
and more land. And the current industry is a good example.
The whole still you skill is a dirty, complicated, large thing.
So it may hire a lot of workers, but it
doesn't want to have too many people around them. They
need a lot of land, so they're not going to
go to Los Angeles. They're going to go to a
(22:13):
place where they can acquire a lot of land to
put their big plant. And it's the fact that the
export sector of cities in the Midwest, say, got into trouble.
The fact that the export activities in some parts of
Poland got into trouble, that they got into this negative
spiral as people you know, left because they have better opportunities,
(22:35):
and maybe other parts of the country, in larger cities,
they leave behind a deteriorating economic and social situation.
Speaker 3 (22:44):
I promise not to get to hung up on metaphors
and monkeys, but I just want to go back to
the egg analogy for one second. So I understand. You know,
division of labor expertise can lead to efficiency and app
gains economically for everyone. However, you know, I'm thinking back
(23:05):
to when egg prices were very high in the US
earlier this year, and I joked on this podcast that
I was going to get my own chickens so that
I could declare egg independence, egg autarchy and have my
own supply. Are there not arguments, you know for certain
things that you would want to have the capacity to
(23:26):
build those components at home in order to enable you
to build more complex items.
Speaker 4 (23:33):
Well, no, you would want to make sure that you
have a diversified source of supply, so that there's a
problem in Brazil, you can buy from somewhere else. Right,
So this whole thing about food security that some countries say,
you know, we need to have food security, so we
need to produce food in our country at three times
(23:54):
the international price. Well, I mean that's not food security.
That's exacerbated risk because you know your country can be
hit by a drought, by a storm, by et cetera.
Many things that could destroy your food production. So you're
going to face much less risk if you have a
diversified source of materials. And that's one reason why you
(24:16):
would want to have a good trading relationships with many
countries because that way, you know, if you get in trouble,
you can buy from somewhere else. So no, I in general,
this idea that the price of wheat worldwide goes up,
that's the reason for you to have your own wheat production.
That doesn't follow at all. Your wheat production might be
(24:40):
it might subject you to even more risks than a
diversified source of wheat from across the world. It's a
different thing if you're talking militarily, right.
Speaker 3 (24:50):
Yeah, I was going to say, what about something like
I want to build semiconductors domestically because I think they're
a very important part of our defense strategy.
Speaker 4 (25:00):
Well, I can perfectly understand that you have an incredible
concentration of semiconductors in Taiwan, and it's very easy to
imagine a situation where you no longer have access to
those semiconductors. So in that case, I can I can
(25:20):
see the case that would justify things like the Chips Act,
not necessararily things like tariffs on chips, but because tariffs
and chips would make all industries that use chips less competitive,
et cetera. But you know, in creating an encouragement for
and by the way, convincing TSMC or the Taiwan Semiconductor
(25:43):
Manufacturing Company, which is the best a foundry in the world,
to come and see if they can figure out how
to make it in Arizona. And by the way, it's
very interesting and it shows you the importance of knowledge
and know how that sometimes it's very very difficult for
the same firm that supposedly the firm knows how to
(26:05):
do something, say Boying knows how to make airplanes in Seattle. Well,
guess what, making airplanes in South Carolina. Making Boying airplanes
in South Carolina proved to be much harder than making
airplanes in Seattle, and transporting the knowledge was a big headache,
and right now TSMC is facing serious challenges and transporting
(26:27):
the knowledge to Arizona. So if you put the accent
on moving the knowledge, things look a little bit different
than just a discussion about tariffs.
Speaker 2 (26:38):
Yeah, supposedly the yields on the Arizona fabs are quite impressive,
and they're starting together momentum. Of course, your point is taken,
but actually this does raise some questions. I mean, you've
talked about, okay, the importance of diversity of your supply chain.
To my mind, actually when I hear that, I think, okay,
there's something legitimate about like anxiety about China specifically, because
(27:02):
what's happening in manufactured goods is that it's not a
globally diverse supply chain. It's becoming in many areas a
China only supply chain. That China's lead in this, that
its network effects, that it's internal whatever is becoming so
concentrated in one country for such a big range of
goods that at least from a non China perspective, it
(27:25):
feels like from a risk management standpoint, et cetera, that
there probably is a very good imperative to put forth
effort towards not necessarily having an American production capacity, but
a non China production capacity.
Speaker 4 (27:40):
Well, we went through a Japan scare in the nineteen eighties, right,
And what ended up happening in Japan is that Japan
kept on progressing and becoming good at everything to a
point that wages in Japan went top a lot, and
Japan started to move their industries outside, the phenomenon that
was called the flying Geese, right, and so Toyota started
(28:04):
to make cars in Thailand and put things in Korea
and so on and so forth, and then they went
into poor states like Vietnam or Indonesia. So what you
have is that the more advanced manufacturing or the more
advanced parts of the value chain like R and D design,
(28:24):
et cetera, are retained in headquarters, and you move the
more labor intensive, the less skill intensive, the less complex parts,
the more standardized parts. You moved to a locations that
pay lower wages, and everybody is better off because for
those locations, it's a step up for you. It's a
(28:44):
way to save on labor costs that you cannot afford
in your country because you want to pay your workers
very very well, and you can afford to do that
because you have plenty of jobs for them, and the
more complex part of the value chain you don't need
to hire them, and the less complex part part of
the beligian So there is a world in which this
is a process. China is getting richer. A lot of
(29:06):
the things that are being done in China, by the way,
initially they were done in the coast, and so now
the coast has become too expensive, they're moving to elsewhere
in the country and to elsewhere in the region. And
you know, now there's more production in Vietnam, there's more
production even in Cambodia. There's more production in poor other
countries simply because the Chinese worker is now too expensive.
(29:29):
So there's a world in which this is just part
of just a repetition of what happened in Japan. But
let me make an important point. When a production is
happening elsewhere, it might be happening in a country. A
good question is where does the knowledge that they're using
come from? Because what is happening in the world today
(29:53):
is that the rich countries are becoming more and more
concentrated in producing knowledge. In order to monetize that knowledge,
they need to put brick and mortar things that they
prefer to put them in other parts of the world.
So Japan, for example, has come up with a lot
of innovations and a lot of R and D and
a lot of patents. But the way they monetize their
(30:16):
patents is not by hiring Japanese workers. That you know,
Japanese labor forces is declining and so on, and they
are at full employment. Anyway, they monetize their knowledge by
deploying that knowledge elsewhere with foreign direct investments and so on.
And that means that a lot of the of accounting
(30:38):
of how this process happens is not well captured by
our standard accounting techniques. For example, if Japan does R
and D and that improves the productivity of their foreign investment,
it doesn't show up as higher Japanese productivity. It is
increasing productivity, but not just not in Japan, in the
(30:59):
place is where Japan has its plans, and the same
is happening in the US. If you think of the
Magnificent Seven, the magnificence and for example Google, when Google
sort of like this places all the small newspapers of
the world because all advertising revenue is moving to it's
(31:19):
moving online, and Google is capturing a good chunk of
that that doesn't count as a US export because it's
some subsidiary that Google put in I don't know, in
South Africa or wherever that is collecting that revenue, and
that revenue you could count it as a US export,
(31:40):
but it's not being counted as a US export.
Speaker 2 (31:43):
It turns into the US marketcap exactly.
Speaker 4 (31:45):
It turns into the US into US marketcap. But US
marketcap is very poorly captured by balance of payment statistics. So,
for example, if you started the year two thousand, From
two thousand to the present, according to official statistics, the
(32:05):
US borrowed sixteen trillion dollars from the rest of the world.
It ran a cumulative current account deficit of sixteen trillion dollars.
You'd say, gee, you borrow sixteen trillion dollars. Well, how
much are you paying for those sixteen trillion dollars. Let's
say four percent? No, so four percent would be six
(32:27):
hundred and forty billion dollars in interest payments right on
the deck you borrowed. Now, if you look at the
US balance of payments primary income, essentially, the US doesn't
look like a country that has an external debt. They
are essentially paying zero. They borrowed sixteen trillion dollars, which
is say, sixty percent of GDP, and they're essentially not
(32:51):
paying anything for it. So you would say, well, if
I can borrow sixty percent of GDP for free, I
would do that. Well, in some sense, that's what do
you has done. The way I would like to describe
it is that US didn't just borrow sixteen trillion dollars.
It borrowed more like thirty two trillion dollars. It used
sixteen trillion dollars to cover that official deficit and use
(33:14):
the other sixteen trillion dollars to mix it with your
knowledge and invest abroad. And that investment abroad, say Google
in South Africa, mixed with US knowledge as this huge
rate of return. So when you borrow thirty two trillion dollars,
sixteen trillion dollars you borrowed at four percent, but the
(33:34):
other sixteen trillion dollars you invested at a much higher
rate of return because it was mobilizing your knowledge. And
so thirty two trillion, say, you pay four percent over
thirty two trillion dollars you borrowed, but you make eight
percent on the sixteen trillion dollars you invest abroad. Well,
it just turns out that eight percent over sixteen trillion
(33:56):
dollars is the same as four percent over thirty two
trillion dollars. You're not really running a deficit. You are
monetizing your knowledge, but current accounting standards don't capture that.
Speaker 3 (34:09):
Well, this is very This reminds me of the Matrix
and that scene where they say there is no spoon.
What if there is no US external deficit? But okay,
one thing I'm struggling to understand. So you know, you're
arguing that the US actually has a significant amount of
knowledge and know how that is mixed up with its
(34:31):
foreign direct investment, and that doesn't show up in the
official trade statistics. And I guess one thing I'm kind
of curious about is and you're arguing that the statistics
undervalue foreign direct investment. But I would have thought that,
like foreign direct investment, valuations inherently reflect market expectations. And
(34:55):
to Joe's point, I'm channeling Joe's love of the efficient
market's HYPOTHESI here, but they should be captured in market
cap and things like that. Why do we assume that
the statistical agencies, the accounting systems systematically mispriced these assets.
Are they not included anywhere.
Speaker 4 (35:15):
They use book value. When you see the investment abroad,
they count how many dollars you sent abroad, and then
they count how much money did you make abroad. And
when you look at it, the rate of return on
FBI is double the rate of return on debt in
the accounts, So they're not counting the firm direct investment
(35:38):
at the market value. By the way, it's very hard
to calculate that market value because these are subsidiaries of
companies that listed the S and P five hundred and say,
if the price earningserration in the US is twenty six
or something like that last time I checked, it means
that they are thinking that all that's money that the
Magnificent seven are making a broad they multiply by twenty
(36:02):
six or an even higher number. Right, But that was
not the accounting was made at book value. So in
most of these companies there's a huge difference between book
value and market value.
Speaker 3 (36:15):
Yeah, I was about to say, this is the argument.
I think We've even done an episode on this about
stock market valuations and how companies with a large amount
of intangibles. It's not reflected in book value.
Speaker 4 (36:27):
Right, and that, in my mind is the market's valuation
of your knowledge exactly. So in a world where knowledge
is intensive, then book value becomes less of a guide
on what's actually happening. In a lot of international trade
statistics is book value because that's what they have to
make the statistics.
Speaker 2 (36:46):
I think there's a really interesting question. I have one
last question, and I wasn't expecting to go here, but
I thought that was so interesting what you were saying
about Poland and some of the politics not necessarily being
about the country's overall trading position visa the rest of
the world, but the internal dynamics of what is happening
in these countries, where the booms are happening in cities,
(37:07):
and how that is a function to some extent of experts.
But I'm curious. One of the things that people bemoan
about the current environment in the United States and probably
elsewhere is that cities are no longer a good place
for upward mobility. That you can't be poor or middle
class that move to a city and find a job
and move up the career ladder in the same way
(37:27):
you could when cities were more centers of hard industrial activity.
And I'm curious when you talk about the types of
companies that locate in big cities versus the type of
companies that locate in smaller cities, et cetera. Are the
type of companies that locate in big cities not as
conducive inherently towards upward mobility because there's just so much
(37:52):
talent required just to get in the door anywhere at
these firms.
Speaker 4 (37:57):
No, I think that the problem of big cities in
the US is the fact that they have regulated urban
space in such a way that housing supply is very inelastic,
so as people try to move to a city, housing
prices go up until it's unaffordable to move into a city.
That if cities had a more elastic supply of housing,
(38:18):
a more elastic supply of urban space, this dynamic would
help generate more opportunities in those cities and would help
maybe raise the price of labor in the cities where
people are leaving, because now they've become scarcer and people
would be willing to pay more for them. So that's
why you're seeing so much growth in cities like Boiseaira
(38:41):
or or Salt Lake City, or cities in Texas, Visa
these cities in California and having incredibly inelastic supply of housing.
So I would put there that, you know, on a
more inclusive policy involves urban development that allows for that
inclusion to happen.
Speaker 2 (39:00):
Ricardo Houseman, So great chatting with you. Always extremely thought provocative,
always takes us down avenues that I don't expect. Really
appreciate you coming back on outlause.
Speaker 3 (39:09):
Yeah, that was great.
Speaker 4 (39:10):
Thank you, Ricardo, Thank you for having me.
Speaker 2 (39:26):
Really like every time, like I mean every time. We've
always spoken to Ricardo twice, but I feel like every
time I talk to him, there's like a bunch of
ideas that are going to stick in my head for
a long time I'll be chewing on. In this one,
it's this idea that like official trade statistics don't capture
the fact that market value of this trade and which
(39:48):
you could see in the stock market trading in the
United States is much higher than what just sort of
like what is captured in the activity. I'm really intrigued
by this idea.
Speaker 3 (39:58):
On board with that idea, but I kind of wonder
how far you can stretch it, and like can you
stretch it all the way to actually, the US doesn't
have an external deficit, or could you stretch it all
the way to the idea that like, okay, well China
needs to like worry about accruing liabilities from importing US expertise, Like.
Speaker 2 (40:20):
Yeah, I don't know what we need. Is a debate
between Ricardo and Brad. Sets are ups because one of
the dimensions. Look, one of the counter arguments to some
of this stuff would be that there are actual flows,
because the entity that might be set up in South
Africa by a US multinational might pay licensing fees back
(40:41):
so the home country for the right to use the
Google name and so forth. Obviously, Brad talks a lot
about this in the context I mean, he talks a
lot about this actually in the context of software. But
there is some you know. The fact is is that
like Microsoft is gigantic and so even, and there's you know,
these companies that are trillions in trillions of dollars and
have huge footholds all around the world, and whether they're
(41:04):
accruing value to America in a way that doesn't show
up strictly in trade statistics strikes me as an important
load to continue to mind.
Speaker 3 (41:13):
Well, that's the other thing I was going to say,
which is, you see this debate in markets quite a lot,
and the difficulty in analyzing intangibles is it's hard, right,
Like how do you put a price on things like
brand value or soft power and stuff like that, And
so you get these arguments over. Okay, well, book value
(41:34):
doesn't include intangibles, but you know, maybe it should. But
if it should, then how do you avoid the problem
of over inflating because you think that this brand value
is really good and it's difficult to actually measure.
Speaker 2 (41:46):
Also, it doesn't matter what our trade statistics say if
we can't make things critical for national security, Like to
your point, whatever you say, oh, we don't really run
any sort of trade issues, except if you don't actually
have the physical capacity to make important things that are
necessary for having a sovereign nation, then it kind of
doesn't matter, doesn't You could run surplus and it wouldn't matter.
Speaker 3 (42:08):
I reject the idea that I need to have a
diversified supply chain of eggs. I'm going full on egg autarchy.
Speaker 2 (42:15):
But here's the thing, Tracy, Like, you could do egg autarchy,
but God forbid, Like some wolves get in there like
you do still have the option of going to the
grocery store, right, So like, even if you know it's like.
Speaker 3 (42:28):
See, then I just need a diversified supply of new chickens.
Speaker 2 (42:31):
It's like that pulp song about the Greek girl at
the thirst for knowledge. It's like you'll never know what
it's like because you always have the option to go
to the grocery stores.
Speaker 4 (42:40):
You know.
Speaker 2 (42:40):
It's like you can't actually replicate true autarchy knowing in
your head that you have that backup.
Speaker 4 (42:45):
Yeah, that's true.
Speaker 3 (42:46):
That's a good point.
Speaker 2 (42:48):
Yeah, that was a good one, wasn't it.
Speaker 3 (42:49):
That was very good. Okay, I think all right, shall
we leave it there? Yeah, this has been another episode
of the Authoughts podcast. I'm Tracy Alloway. You can follow
me at Tracy Alloway and I'm Jill Wise.
Speaker 2 (43:00):
Oh, you can follow me at the Stalwart. Follow our
producers Kerman Rodriguez at Kerman armand dash Ol Bennett at
Dashbot and Kelbrooks at Kelbrooks from our Odd Lots content.
Go to bloomberg dot com slash od Lots with a
daily newsletter and all of our episodes, and you can
chat about all of these topics. Twenty four to seven
in our discord Discord dot gg slash out.
Speaker 3 (43:18):
Lots and if you enjoy odd Lots, if you like
it when we talk about monkeys swinging from trees or
egg autarchy, then please leave us a positive review on
your favorite podcast platform. And remember, if you are a
Bloomberg subscriber, you can listen to all of our episodes
absolutely ad free. All you need to do is find
the Bloomberg channel on Apple Podcasts and follow the instructions there.
(43:40):
Thanks for listening. Eight
Hosts And Creators
Joe Weisenthal
Tracy Alloway
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