← Interesting Times with Ross Douthat
Interesting Times with Ross Douthat
We Can Survive an A.I. Bust
00:53:24
Is the artificial intelligence revolution keeping the entire economy afloat? This week on “Interesting Times,” Ross talks with Jason Furman, an economist from the Harvard Kennedy School and a contributing writer for Times Opinion, about how investors, policymakers and consumers should think about the boom — and potential bust — of the fastest growing segment of the American economy and look to past bubbles for answers.
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- [00:00]
Feeding America/Ad Council Announcer
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- [00:30]
Ross Douthat
From New York Times Opinion I'm Ross Douthit and this is Interesting Times. Is the AI economy a bubble? Are we just in the early moments of a technological revolution or are we overextended and headed for a crash? And if we are watching a bubble inflate right now, what should the government, or for that matter the individual investor do about it? My guest today has a lot of bubble experience. He was an economic advisor in the Clinton White House when the dot com boom imploded. And then he worked for President Obama in the aftermath of the housing bubble and the crash of 2008. Today he's a Harvard economist and a contributing writer for New York Times Opinion. Jason Furman, welcome to Interesting Times.
- [01:37]
Jason Furman
Great to be with you.
- [01:41]
Ross Douthat
So Jason, we're going to talk about the economy as a whole and even the long term future of American growth. But I want to start in the place where a lot of Americans thoughts about the economy start, which is with my own stock market portfolio. I had this moment a few months ago when OpenAI rolled out its latest version of ChatGPT and there was sort of a general disappointed reaction. And you had people who had been AI skeptics finally claiming vindication, saying, look, the AI revolution is not delivering as fast as was hoped. And in that moment I went in and looked at my very boring mix of mutual funds and index funds, looked at just how fast it had risen in the era of the AI boom, and thought to myself, man, it seems like I'm invested in what might be a bubble. And a lot of Americans have had this thought, I think in the months and weeks since then, you've had a lot of talk about how large AI and AI related companies loom in the stock market. And I want to start there. Just how big a part of growth right now is artificial intelligence and everything associated with it.
- [02:54]
Jason Furman
AI is an enormous part of our macro economy right now. There's two ways to think about the economy. One is demand. That's the amount of stuff you're buying. The other is supply, how much you're producing. Right now, AI is really showing up on the demand side. It's building those data centers, buying those microchips and by my estimate, in the first two quarters of this year, 92% of the increase in demand in the US economy was due to just two categories in GDP, one called information processing systems and the other called software. Ultimately, though, what we're really hoping for is that AI shows up on the supply side of the economy, actually helping us do more with less. And certainly some of that is happening, but there hasn't been anything particularly special about productivity growth to date.
- [03:55]
Ross Douthat
So just to stay on that, the point you just made about how much of growth and expansion is driven by AI. Now, that doesn't mean, right. That absent AI, data center investment and everything else, economic growth would be zero, right?
- [04:11]
Jason Furman
Yeah, that's right. I don't think we'd have as much growth absent AI, but we'd have a different type of growth. So a bunch of that AI demand is coming in the form of imports because those chips are being produced abroad, which don't add to gdp. Absent the AI boom, I would expect that we would have lower interest rates right now because so much capital is being siphoned up by the enormous demands in this sector. If that weren't happening, there'd be a little bit less pressure on the economy. The Fed would be cutting rates faster. And what does that mean? We'd have more activity in other sectors, more like home building and manufacturing. So the AI boom is partly adding to the economy and partly crowding out other activities. And just as a really sort of wild, rough guess, that might be 5050. So half of growth due to the AI boom, and then the other part of the AI boom is crowding out what would have been other sources of growth that we could have had if we didn't have this.
- [05:14]
Ross Douthat
And then something similar is happening in the stock market. Right. Can you, can you tell listeners what are the Magnificent Seven?
- [05:23]
Jason Furman
The Magnificent Seven are seven enormous tech companies, companies like Amazon and Microsoft, that represent a very large fraction at this point of the S&P 500 and a very large fraction of, of the increase in the S&P 500. So if one is wondering why the stock market has risen, you're largely talking about why are the mag7 worth so much more today than they were a year and a half ago?
- [05:54]
Ross Douthat
And why are they worth so much more today than they were a year and a half ago?
- [05:58]
Jason Furman
It's because of all this expectation of what their profits will be in the future. Now, there's some differences between the different companies. A company like Apple is a little bit closer to buying a utility where every year they're going to come out with a new phone every year, they're going to sell a bunch of those phones and you buy it and you're just sort of guaranteeing that cash. So there's a little bit less expectation of growth there. But for a company like Meta, a lot of their value is based on the expectation that they're going to figure out something about AI and that they will also figure out how to make a profit out of that, something from AI to justify these valuations. You need really both of those. Both the breakthroughs will happen, but also that the breakthroughs will generate a profit.
- [06:51]
Ross Douthat
But all of these companies generally are themselves profitable. Right. The companies that look more like classic startups. Right. Are the companies that are just doing AI research and development. Right. And most of those are not publicly traded. So you're not looking at like ridiculously high stock market valuations for these companies, but they do have extremely high valuations in some, in some sense. Can you talk a little bit about those companies?
- [07:19]
Jason Furman
Yeah. Open AI, for example, is worth hundreds of billions of dollars, but it's pretty hard to buy a share in it. It's not publicly traded. That just the valuation you get when, you know, they get new investors from venture and elsewhere. One sense that's enormous. I mean, Goldman Sachs has been built up over a century and OpenAI, which was built up over the last decade, is more valuable than Goldman Sachs. You know, on the other hand, 10% of the world is using OpenAI is using ChatGPT. And that's just amazing. Five years ago, basically 0% of the world was using it, and now 10% of the world is using it. Now a much smaller percentage of the world is actually paying for ChatGPT. And that's the big question, is one, is six, seven and eight going to be continued? Things like iPhones have become where there's small design changes and the camera gets better one or are they going to be profound changes in the way that three and four were? We don't know the answer to that. And then second, this gets back to the issue I was talking about before. It's not just that you need the innovation, it's that you also need to be able to profit from the innovation. And if, you know, large language models become like a commodity where there's three of them that are absolutely amazing, but they're basically all the same. It's very hard to price a commodity at something higher than the marginal cost of delivering that service. And so they won't make a profit, they won't justify Their valuations. If they can't figure out how to build what's often called a moat, a way of delivering something unique, sticky people, once they're in the Apple ecosystem, they tend to stay in the Apple ecosystem. Is it going to be the case that if you're in the ChatGPT ecosystem, you can stay there?
- [09:20]
Ross Douthat
How much of this. I know this is a, the impossible question, right, for the Economist, but how much of this is just vibes?
- [09:30]
Jason Furman
Psychology definitely is a big driver in markets. There's something enormous going on here. This is not Pets.com? pets.com was part of the dot com bubble. It had barely any revenue, barely any business plan, and yet had, you know, a pretty high valuation. These are companies that already have quite high revenue, enormous numbers of customers, enormous upside. And then how do you quantify all of this? Well, you add the genuinely large thing with some vibes, and maybe that's where we, we are today.
- [10:09]
Ross Douthat
And in terms of historical comparisons, is there any model from American history or modern history of a single form of technological investment playing this kind of role in the economy or in an economic expansion?
- [10:24]
Jason Furman
So on the demand side, railroads were probably larger at various points in time in the 19th century, where just enormous amounts of the economy was being devoted to laying track as well as building railroads. We're at roughly a similar scale of where we were in the late 1990s and early 2000s with the fiber build out broadband. That was an actual real economy, demand side activity. And there's probably some other things in between that have been at similar scale. So we've often had, you know, whether it's the automobile or electricity or airplanes or the personal computer, one thing that was playing a disproportionate role. In many of those cases, that one thing did turn out to be a bubble. But not in every one of those cases.
- [11:18]
Ross Douthat
Well, in the pattern. So with railroads, and I guess you could say the same thing with the Internet. Right. The pattern seemed to be there was a bubble in the sense that people got overextended building out infrastructure before it had a path to profitability. But in the end they were right to build the infrastructure. Right?
- [11:41]
Jason Furman
Yeah. So by the way, on railroad, you actually want to say railroad bubbles because it burst over and over again in the United States, in the UK and continental Europe, and my guess is in lots of other countries around the world. So they just kept making the same mistake of, you know, overbuilding track, maybe building duplicative track. But yeah, when it all settled out, the railroad was enormously transformative The Internet was enormously transformative. Radio is another thing, which was a bubble that was enormously transformative. And I don't have an exact tally, but I think there probably have been more bubbles of things that were actually real, actually big, than these just totally fantastical, unproductive ones.
- [12:27]
Ross Douthat
Okay, so play, play bubbles advocate for me right now. If you wanted to make the case that this is what we're looking at right now, that AI is a railroad style productive bubble where the tech is real, but we're just overinvested and overbuilt. What would that argument look like?
- [12:48]
Jason Furman
Well, first I'd look at the market as a whole. And Robert Shiller, who won a Nobel Prize for his work on ways in which markets could turn irrational, developed a concept called the cyclically adjusted price earnings ratio, or CAPE. The Shiller CAPE right now stands at about 40, which says the price of a stock is 40 times the inflation adjusted average earnings over the last decade. That 40 is the second highest that this Shiller measure has ever gotten, and it goes back about 150 years. The first highest was where it got in early 2000, right before the tech bubble burst. So the basic standard, first thing that financial market people, economists look at to assess the value of the stock market right now is screaming that it is sky high in a way that has never lasted before. So that would be number one. Number two would then be to dig into certain companies and go through, you know, just what would have to happen to justify their valuations. And if it's a really small startup to say their revenue is going to double every year for the next decade, fine. That definitely happens sometimes. But when you already are a big established company and you're being priced a little bit more like a startup, you know, what's the plausibility of that? When it requires both the technology to work and you to need to figure out how to profit from that technology.
- [14:25]
Ross Douthat
And you mentioned earlier that you don't think we're seeing in productivity data and other statistics evidence that AI uptake, the use of AI in, you know, programming or whatever else is having a fundamentally transformative effect. Yet.
- [14:43]
Jason Furman
Yet. And the yet is a really important part. If you're a business and you go out and hire 20 people to figure out how to integrate AI into your, you know, small business or medium sized business or large business, you know, whatever it is, and they're all out there trying to figure out how, you know, the chain of stores that you run or the chain of restaurants or something can use AI. The people you hire. If they don't figure it out right away, they actually show up in the data as lower productivity because you basically have more people working in that business and it's not producing a higher output. Now, that doesn't mean it's a mistake to hire those people. They may well figure it out. And five years from now, you can replace all sorts of people or get all sorts of higher profits or whatever it is, and the productivity will show up. This is called a J curve, where sometimes you go down before you go up. And I think that's happening in some companies right now, that, in a sense, AI is actually reducing their productivity because they're busy figuring out how to use it, but they haven't yet figured out how to use it. So in some sense, it's not that surprising to me that we're not seeing the productivity growth from AI yet. I do expect that we'll see some, but it is an open question as to how much we'll see. Right.
- [16:04]
Ross Douthat
And that would be again, in the argument that for a bubble, right, you would say that if you have sort of overextension, extraordinary overextension of investment, and you're in the downward part of the J curve, that makes a bubble scenario more likely.
- [16:24]
Jason Furman
Yeah, I think that would be in the case for a bubble. And productivity isn't the only thing that matters. We actually had more productivity growth from 2000 to 2005 than we did from 1995 to 2000. So even after the bubble burst, even after this investment was collapsing, productivity growth was actually very, very strong. It just wasn't nearly strong enough to justify, you know, the way in which those companies were valued in the year 2000. I should also say, as an economist, productivity growth actually is almost everything I care about. It tells you what the size of your economy is. It tells you sort of, on average, what wages will be, our possibility for the future. So to me, that's what I'm most focused about and care the most about. But definitely for the stock market, it's just one input.
- [17:17]
Ross Douthat
Right. And what about, just to be more anecdotal, there's been a fair amount of coverage in the last few weeks of these deals where effectively, the AI companies are paying each other and increasing each other's valuations through these. Through sort of deals with one another where one company agrees to buy another company's chips, and in return it gets, you know, I guess, shares in that company. I may be misrepresenting this slightly, but gets shares in that company and then its decision to purchase Chips from that company drives that company's share price higher. So the money that it uses to buy the chips, it's effectively getting from the increase in the share price of the company it's investing in. Right. Like, does that, to you, seem like the kind of thing that happens in bubble environments where it's sort of companies, you know, sort of hyping each other up, or is that more sort of what you would see normally in an environment where a bunch of companies are working together closely and are growing quickly?
- [18:19]
Jason Furman
So, like everything here, unfortunately, there's two sides to this, and I wish I could come down for you firmly. No. No, you don't.
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Ross Douthat
I'm going to ask you for the case against a bubble in a moment.
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Jason Furman
So, on this being a bubble, it's the opacity of these arrangements that would make one the most nervous, and also, I guess, the circularity of them. You know, there was an old phrase that in a gold rush, the way you could guarantee a profit is being the person that sold the picks and shovels to the miners. And the idea was the person went off to find gold. Maybe they found it and got rich. Maybe they found nothing and ended up poor. But you were guaranteed money if you sold them the picks and shovels. Well, right now, instead of selling them the picks and shovels, you're in some sense lending them the picks and shovels and telling them that you'll be repaid if they actually strike gold. So Nvidia would be the one with the picks and shovels, and OpenAI would be the one going off looking for gold in this.
- [19:20]
Ross Douthat
Nvidia is making. Is making the chips?
- [19:22]
Jason Furman
Yeah, Nvidia is making the chips. That's like a real actual thing. It's like a pick and a shovel, but a little bit more sophisticated and complicated to make. And if they were selling them all for basically cash, you'd say they're pocketing that money, but in some sense, they're now not just selling them for cash. It's essentially almost as if they're lending them to OpenAI and they'll get paid back, and they'll get paid back with multiples if OpenAI succeeds. But if it doesn't, then, you know, they won't get any money or won't get as much money as they would have gotten for selling those picks and shovels. So it's. It's.
- [20:00]
Ross Douthat
So in the gold rush economy, even if there's less gold at Suter's Mill or where, you know, or in the Klondike or wherever Else than people thought. At least if you're an investor, the pick and shovel money is going to prop you up. Whereas here, if there isn't, if there isn't enough gold out there, your investment in the pick and shovel company is also in deep trouble.
- [20:23]
Jason Furman
Yeah, and this is something that's changed. You know, six months ago I'd say Nvidia was the pick and shuffle company that was guaranteed to lock something in. And now, now that's changed and they're not getting all the money up front for selling those picks and shovels to people. And then the second part of this is just the opacity of it. We have in our economy different ways for a company to get money. One is you sell to sell a bond and bondholders buy it. That's a way of lending you money. A second is you go to a bank and the bank is super careful about, you know, who they'll lend money to because they're incredibly highly regulated. And the third is you go to what are sometimes called shadow banks. These are companies like Apollo and they lend you money, often with fewer questions asked. They themselves face less regulation. And a lot of the lending that's happening in this sector is happening with companies like Apollo that are shadow banks, that are less regulated. Now, to date, these are enormously profitable, enormously successful companies. They're incredibly sophisticated. I would for the most part bet on them knowing what they're doing. But one has to be just a little bit more nervous about them.
- [21:47]
Ross Douthat
Okay, now argue the other side. Tell me why this is not at all like the railroad bubbles or the dot com boom. Why should we not be alarmed about the Shiller index being almost as high as it's ever been?
- [22:05]
Jason Furman
The biggest reason why I have, frankly, full disclosure, kept all of my money in broadly diversified index funds and haven't reduced my exposure.
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Ross Douthat
So in some sense we were going to come around to the personal investment question. So that's good to know.
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Jason Furman
We can come around to that. So in some sense that's how I've answered this question for myself is I think a lot about a speech that Alan greenspan made in December 1996 where he said there was irrational exuberance in the market. There was a lot of reason to think that the market was pretty frothy and pretty bubbly. And what happened after he gave that speech? The stock market ended up doubling over the next three plus years and then the bubble burst. But if you had bought stocks when Alan Greenspan made that remark, and then you live through the bursting of the bubble and sold at the very bottom of the broad market, you still would have made money. And that type of pattern has repeated it over and over again throughout history that people thought something was a bubble went up a whole lot before going down. And it turns out if you call a bubble but you're early, that's not very impressive. That actually means that you are wrong. That's very different from almost anything else. Anything else, you predict it and you're the first one to predict it. You should get lots of credit. If you're the first one to predict a bubble, you probably were wrong because it went up a whole lot before it went down. And so getting the timing of these is just much, much harder than knowing that eventually there probably will be one.
- [24:11]
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- [24:39]
Ross Douthat
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- [25:00]
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- [25:02]
Ross Douthat
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- [25:12]
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- [25:53]
Ross Douthat
You've mentioned already pets.com which stands as sort of the paradigmatic example of the overvalued Internet company. Though honestly, the one I remember most from my college days is cosmo.com, which I think promised.
- [26:07]
Jason Furman
That's the delivery one, right?
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Ross Douthat
It was a delivery one, right?
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Jason Furman
That one was awesome while it lasted. They were just giving you almost free stuff, right?
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Ross Douthat
Well, I mean, what's striking about those companies is that, of course, you know, we now have very profitable delivery companies and we now have very profitable, you know, pet supply companies online. Right. So, you know, in, in the long arc of history, there were good ideas there. But yeah, cosmo.com it was like, well, we're going to deliver pizza. Oh, you don't want pizza? Well, we'll deliver ice cream. You know, we'll deliver like I remember.
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Jason Furman
Getting one of the Harry Potter books from them at midnight the day it was released.
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Ross Douthat
Oh, well, so there you go. Right. So you, you were the, you were the beneficiary of that kind of overexcitement. Right. But to me, I feel like we don't yet have the pets.com and the cosmo.com of this moment. Again, if I'm trying to talk myself into the idea that it's too early to call a bubble. You have these big, well established, extremely profitable companies that are investing heavily in this, but which are not dependent right now on AI for all their profits. Right. And then you have a set of companies that are not yet profitable, maybe never will be profitable, but their revenue is going up. Right. The, the AI companies are on a positive trajectory overall, would you say?
- [27:27]
Jason Furman
Oh yeah, they're on a positive trajectory and they're real companies with real business models. Now there are hundreds of others, many of them have not gone public yet. So called unicorns that are worth over a billion dollars, that don't necessarily have business models that people are in the venture industry are still throwing money at them. And I'm sure, you know, dozens of those, if not hundreds of them, will, you know, end up imploding. But you can have lots and lots of failures along the way and it not be a bubble. For it to be a bubble, you need the successes to make up for the failures. And it wasn't just that pets.com failed, it was that the successes, at least in the short run, did not make up for the failures in 2000.
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Ross Douthat
So you were, you were in the Clinton White House then, right?
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Jason Furman
Yeah, I was.
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Ross Douthat
What were you doing?
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Jason Furman
I was doing two things simultaneously, one of which was private and I can be really proud of, one of which was public and is totally embarrassing. So why don't I talk about them in in reverse order? We were planning a New Economy conference, that's what it was called back then, to celebrate just how awesome and transformative everything was in this new economy. And we ended up in late February announcing that we were going to hold this conference in April. I just went back and reread the fact sheet for this announcement and I think I Probably wrote much of that fact sheet. And it was just going on about what a high fraction of economic growth was coming from this one sector. And isn't it amazing? Just look at the disproportionate investment growth, the disproportionate GDP growth, and it's all coming from the information technology sector. Isn't that super cool? So we announced the conference in late February. The bubble started to burst about two weeks after we announced it. And by the time we held it in April, I think the market was down something like NASDAQ, at least maybe 1/6 from its high. And, you know, in one respect, that was embarrassing in retrospect, that we were celebrating a new economy, even as on the financial side, it was imploding. In another sense, though, we were right in that productivity growth over the next five years was even higher than it was in the five years leading up to that. And so in some sense, it was a new economy, just not nearly as exciting as what financial markets thought. So that was the public thing. In private, the Clinton administration was running a project that. My memory is that it was called Project Nirvana. In an optimist, in an ironic type of way, to try to understand what would happen if all of this fell apart and if the stock market fell was one scenario, and investment collapse was another scenario, and to see what we needed to do to be prepared. My memory is that we didn't actually ever get to a real answer, but we largely reassured ourselves that even if the bubble burst, the macro consequences would not be very large. And so we didn't actually prepare anything, to my knowledge, other than just to reassure ourselves that even the downside was not so bad. And. And I think that was a good exercise that we went through and. And largely was vindicated by what ended up being a pretty shallow recession when the bubble burst.
- [30:55]
Ross Douthat
What do you think will happen if this is a bubble and it does burst or leak or diminish?
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Jason Furman
Yeah. So we've had two bubbles that burst in the last 25 years. One was the tech bubble, and the consequences were relatively mild. The housing bubble was massively devastating to the economy because it wasn't just that house prices went down, which mattered for families and consumers. It was also that all the mortgage debt had been thought to be completely 100% safe and was used as collateral in other lending throughout the financial system. And then all of a sudden you found out it wasn't completely safe. And a lot of other parts of the financial system experienced problems and runs. So which one is this one? Like most of me thinks it's more like the dot com, where if this bubble bursts, it's just the stock market goes down, people spend less, some businesses invest less, you have a recession, but it's not a particularly terrible one. The one piece of it that makes me nervous though is these companies like Apollo that we were talking about before. I'd like to say that if one of these big shadow banks failed, we would just let it fail in a way that, you know, we're willing to let most hedge funds fail, but maybe we can't. Maybe they're too systemic. Maybe they, you know, spread their effects throughout the economy. And if all of a sudden you were in a position where you were facing systemic risk because of a largely unregulated financial institution that was doing hundreds of billions of dollars of lending, if this ends up being a problem, that's where it is.
- [32:42]
Ross Douthat
But partially how we come out of it then depends on just the underlying health of the economy.
- [32:48]
Jason Furman
And.
- [32:51]
Ross Douthat
There'S a lot of different indicators in the air. Right. And I feel like people give you different assessments of the underlying state of the economy based on jobs numbers one day and consumer sentiment the next day and manufacturing sentiment the next day. And there's a lot of disagreement with indicators pointing in a lot of different directions. What's your assessment of the underlying economic situation?
- [33:16]
Jason Furman
Yeah, so there have been two broad disconnects in the economic data this year. One was for a while, the so called hard indicators where you looked at what a business actually did were much better than the soft indicators where you looked at consumer confidence or business uncertainty or, or what businesses said their plans were. That was true earlier this year, this disconnect between the hard data and the soft data. And so far it looks like the hard data was actually vindicated that all of the complaints about uncertainty, all of the lack of confidence was not something that seems to have translated into decisions that businesses and consumers made. It was more like mood music around politics. So it's like a pollster comes to you, what do you feel about the world? Oh, it's, you know, it's all going terrible, I hate it. But then you go to the store and spend just as much as what you were spending before. So I've devalued, frankly how much emphasis I place on the importance of uncertainty, which never was very central to the way I thought about economic policy. But is it maybe even a little bit less now the current confusion in the data? And I should say we haven't really gotten any government data since the beginning of October since because of the government shutdown. But the current confusion in the data is that the labor market is slowing quite rapidly, but GDP is growing quite quickly. And you see that in the unemployment rate, which keeps ticking up. You see that in the hiring rate, where businesses are hiring at a rate that you would normally associate with recessions. You see that in the number of jobs added per month, where we're averaging, you know, less than 50,000 jobs a month. And it used to be 200,000 jobs a month. So pretty big deterioration in the labor market. At the same time, the economy in the third quarter. The latest GDP tracking estimate is for growth above 3%. And consumer spending is growing. Businesses are continuing to invest. So everything that goes into GDP looks quite strong.
- [35:26]
Ross Douthat
So I want to talk about Trump administration policy and how it might affect those numbers. But just on that point, do you think immigration policy has any effect on any of these numbers? Certainly on employment numbers, I think you've had Trump administration officials saying, well, you know, you wouldn't expect rapid job growth in an environment where we're deporting people and lots of people are self deporting relative to the Biden era. What do you make of those kind of theories?
- [35:54]
Jason Furman
Yeah, immigration's having a large effect on the economy. Couple of years ago, we were getting a few million people into the country a year. Now we don't have a really good estimate of net immigration, but maybe it's zero, maybe it's 500,000. And that means you're going to have slower job growth, you're going to have slower economic growth, everything else being equal in some sense. I wish there were more people in favor of immigration restrictions. That just made the honest argument that, you know, our goal isn't to have the highest job growth, it isn't to have the highest economic growth. It's, you know, to work better for people here in the United States. And, you know, we're going to sacrifice on those other metrics in order to do that. Just to be clear, by the way, I'm not sure I even agree with that argument, but that is a, you know, internally coherent one.
- [36:44]
Ross Douthat
Yeah, I think you've heard that argument from some people in the Trump administration or people arguing for their policies. I think obviously that's an argument they're more likely to make in an environment where the job numbers are not great. If the job numbers were great, they were just, they would just take credit for it. What about tariffs? You wrote a essay for the Times for us about arguing basically that economists to some degree got the Trump Tariffs wrong. Not in the sense that they've proven that they were a stroke of genius, but in the sense that there was an expectation that they would be totally disastrous, and they haven't been. Where do you think that argument stands now?
- [37:26]
Jason Furman
It stands roughly where it stood when I wrote that essay in July. I have no doubt that tariffs have been a negative for GDP growth, a negative for employment growth, and positive for inflation. Positive for inflation also being a bad thing, something you'd rather not have. But all of those were, you know, maybe plausibly been on the order of something like half a point rather than something catastrophic. And just to gauge things, the economy normally grows at about 2% a year. And so if you do this, then it grows at 1.5% a year. Now, I think that's a pretty bad unforced error. Works out to be about $1,000 for every household, and that's not a cost that as a policymaker, I would want to impose on every household. But it's also not like the history books are going to remember the year growth was one and a half instead of two.
- [38:18]
Ross Douthat
What about the extent to which the Trump administration seems to have tried to basically exempt or. Or shield artificial intelligence from the impact of tariffs? Right. Like, because that, that seems to be part of the story here as well, that there is sort of this special zone for AI where the kind of protectionist agenda doesn't apply in the same way. Do you think that's part of the story?
- [38:47]
Jason Furman
Yeah, that's certainly part of the story, is, yeah, tariff rates are lower than they were originally announced in April, and they're much lower on things like microchips. There was going to be an expectation of, under a national security procedure called Section 232, that there would basically be across the board tariffs on microchips. They were expected to be at least 25%, and that hasn't happened. So they're betting on this sector. And it's interesting to me, if you look at the original defense of tariffs, a lot of it centered around restoring American manufacturing and American manufacturing jobs. It's completely failed, at least so far. And it's obviously still very early. Manufacturing jobs are down now. You're seeing a lot of defense of the tariff. Some of it is revenue raising, which part of me warms my heart when I hear Republicans getting excited about tax increases, but wasn't exactly where it started.
- [39:45]
Ross Douthat
Surcharges, we're called.
- [39:46]
Jason Furman
We're calling them surcharges. I apologize. And, and not. Look, just, just in the Clinton administration, We had a plan to raise tobacco taxes, and we also called that a tobacco surcharge or something like that surcharge. So I'm not going to get too moralistic about Orwellian language when it comes to the tax code. But the second argument that you're hearing is that the tariffs are leading to all this inbound investment into the United States. All these companies and countries are committing to invest more in the United States. It's still too early to figure out whether those promises are real or fake. But what's notable is if they come about, it might even mean that the trade deficit widens. So what started out as as a plan to lower American trade deficit and revive manufacturing is turning into a plan to increase investment into the United States, raising the trade deficit and by the way, taking the main manufactured thing and importing more of it, rather than building it here in the United States, that being microchips.
- [40:53]
Ross Douthat
So what will the Trump administration do in the event that the stock market starts going down?
- [41:01]
Jason Furman
Well, the first thing that will happen is everything that they criticized previous administrations for doing, both Fed and Treasuries, you'll see them doing them because in a crisis, you do all sorts of things that you'd rather not do in terms of buying assets or lending to certain parts of the economy and that sort of thing, just to keep stuff afloat. And so I doubt some of the purity that you've heard, for example, from Secretary Scott Besant, who's talked about and criticized the big expansion of the Fed's role in the past. Well, a lot of that expansion happened in crises. And I expect that he would be a pragmatist, not an ideologue in a crisis. And I'm sure Donald Trump would be. In fact, we've seen him be a pragmatist, not an ideologue, in dealing with the financial aspects of COVID in 2020. Second, though, I worry about the government is directly inserting itself into the sector in advance. They're buying equity stakes in these companies or getting things that are almost like the equivalent of an equity stake, where they get a fraction of all of Nvidia's export revenue. And that in some sense says to me they are more willing to do things for individual companies than you've seen in the past. Now, Bush and Obama basically bailed out the auto industry. The theory at the time was in the middle of a severe economic crisis. What was basically a liquidity crisis that was temporary, could turn into a solvency crisis and then spread throughout the economy and be very Costly. I think, ex post, they were largely justified in bailing that industry out. And much of the money that went into it, but not all of it was repaid here. You know, in 2000, we didn't do that. Global Crossing went bankrupt. No one in the government tried to do anything about the firm. Global Crossing, which is a firm building a lot of the fiber optic cable and switching networks and stuff like that. My guess is that that 2000 approach would be the right one here. I could see this administration wanting to be much more interventionist, especially for its favorite companies, and getting involved with them directly in a way that sort of gets in the way of what capitalism and bubbles bursting are supposed to accomplish.
- [43:18]
Ross Douthat
Well, so, yeah, and this is. This is a theory that I've been kicking around for a little while that's based in part on what you described, the Trump administration's eagerness to be in partnerships and take ownership stakes and so on. But it's also based on, you know, the extent to which the vision of the AI future is deeply entangled with issues of national security. You know, when. When you do exercises and thought experiments about accelerated AI timelines, including people we've had on the show, they tend to very quickly turn into arguments about the new Cold War with China. And I feel like when you put those pieces together, plus the fact that the Trump administration has made such a bet on AI, all of that makes me feel like, from the point of view of the administration, maybe these companies are already too big to fail.
- [44:11]
Jason Furman
So, absolutely. I think you do need to inject national security into this conversation in a way that you didn't really need to in the bursting of the 2000, you know, or bubble or the. Or the housing bubble. And there are things that are economically costly that you want to do for national security reasons. In fact, just in normal times, for example, I would subsidize chip companies to make more advanced microchips in the United States. Not because I think it's a great source of jobs in the United States, not because I think we're good at making the microchips, just because it terrifies me that almost all of our advanced microchips come today from Taiwan. So there's all sorts of costs, economic costs, you want to pay for national security. I'd also say one more thing here, which is you want to be very targeted. So intel got a subsidy under the CHiPs program from the Biden administration, and that law was passed with a decent number of Republican votes as well, to build microchips in the United States to me that made sense for national security, but was a cost economically. This administration has taken an equity stake in intel, and the problem is intel does lots and lots of things and an equity stake isn't very well targeted to that one activity that they're not doing enough of right now, which is building microchips in the United States. So it's not just that we want intel, it's we want intel doing certain things, and we should be willing to pay transparently for those certain things. And we have less of that well thought out targeting now than we had before. And by the way, it was very far from perfect before.
- [46:10]
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Jason Furman
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Ross Douthat
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Ross Douthat
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Jason Furman
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Ross Douthat
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- [47:21]
Jason Furman
The People.
- [47:29]
Ross Douthat
All right, let's do a couple of big picture questions before I let you go. It seems to me that when I look at the future trajectory of growth in the United States or Europe or the entire developed world, there's a lot of underlying reasons to be pretty pessimistic, right? That you have these societies that are aging, that have low, sometimes extremely low birth rates, that are running permanently large deficits, and in that environment, sometimes it seems like we're betting so heavily on AI because there isn't any other bet to make and the alternative is just sort of depressing, right? If this technology doesn't achieve the kind of takeoff that people imagine, then you're Just headed for a kind of global experience like Japan from the 1990s on of sort of stagnation and old age. Are you optimistic about the long term future of the American economy otherwise?
- [48:31]
Jason Furman
I'm reasonably optimistic. I mean, in some sense, you know, we're.
- [48:37]
Ross Douthat
Why are you optimistic?
- [48:38]
Jason Furman
We have had over the last 50 years nearly 2% annual productivity growth. So every year you basically figured out how to do 2% more with a given amount of labor than you did a year before. Now, that's not as high as what we had in the 1950s and 1960s when we were coming off all the World War II innovations. But that's pretty cool and impressive that no matter how advanced stuff gets, that we keep figuring out how to squeeze out more. The AI might be add on top of that, might not even add on top of that. It might be how we keep getting to 2% each year, but that accumulates up and makes a difference over time. Second, though, is my optimism at the US Economy does rise and fall a lot with what we do on immigration. Immigration matters both for your labor force and how many people you have to work, which is an increasingly a challenge for the United States were it not for immigration. And not every country can overcome unfavorable demographics, but we really can with this. And then immigration also matters for that, you know, 2% number that productivity growth, because a lot of that innovation, a lot of the companies we're talking about are, you know, founded by, staffed by, run by first or second generation immigrants. So that to me, a lot of our future does rise and fall with immigration. But I grant you, I would love to see the world have more of a growing population than it has now. And I'd feel better about the next 200 years if I knew either that population was growing or that the robots could do everything else and we could just sit around and chat with each other on podcasts.
- [50:23]
Ross Douthat
On podcasts.
- [50:24]
Jason Furman
Yeah.
- [50:25]
Ross Douthat
Well, let's. So let's talk about that as the last question, that kind of scenario. This has been a conversation about what normal economic models and normal historical economic experiences can tell us about the short term likelihood that we're in a bubble, what policymakers can do, and so on. But one of the bizarre things about AI is just this sort of fundamental unknowability in the tech right now. That just doesn't seem to me to have been the case with like the transcontinental railroad or even with the Internet. Right. Derek Thompson, who is a fellow podcaster and a writer on all these subjects. Right. He was going through these arguments the other day, and he said, you know, he's talking about pets.com, right? And he says, did you know that pets.com delivers food, drinks and toys? That was a real line from an actual pets.com ad. So it wasn't just Cosmo. Pets was delivering it too. But he says, you know, what they didn't say was, did you know that pets.com will solve Alzheimer's, invent nuclear fusion, and loosen the icy grip of inevitable cellular death? And it's very easy for me to get guests on this podcast who will make predictions like that about AI, along with the prediction that, you know, might well kill us all. As an economist looking at this landscape, do you just have to sort of set all that to one side and just sort of narrowly focus on the numbers in front of you and say we have to assume this is a normal technology until it starts to act like one that isn't? How, how do you put that into models of our situation?
- [52:12]
Jason Furman
Well, I'll tell you how I handle it in a class that I co teach with David labson. It's called EC10. It's the principles of Economics class. And last year, in our last class, we taught the students exactly the answer to this question. And we gave them exactly the right answer to this question, which is to say I told them the future would look like the past and we could extrapolate. David Labson told them it would be totally different from the past and one of us would was correct. Do you want to know which one was correct?
- [52:47]
Ross Douthat
I. I mean, yes, I suppose I do.
- [52:51]
Jason Furman
My argument is, you know, we've had some big transitions. For example, you know, in the 19th century, when almost everyone was working on. When the majority of people were working on farms. Be impossible to imagine what life would be like in a world where only a few people were able to grow enough food for everyone. And largely the reason the unemployment rate has stayed the same is several things. We create new types of jobs we couldn't have imagined. We have more demand for old types of jobs. A lot more people eat out at restaurants now than did 100 years ago because we're richer. You know, radiologists, AI is helping them now, but there's more radiologists than there were ever before. It's not turning into a radiologist because you need to talk to the patient, coordinate with the other doctor, figure out what model to use. And that finally, and this is the scary part of it, new technologies can change relative wages. So if it partly substitutes for what people do, often they keep their jobs by their relative wages falling. And that's part of what we've seen, the increase in inequality over the last many decades. So all of those forces have kept it so that at any point in time, about 96% of the people who want to work can work. And that's been true most every year for a very long time now, you know, except in a recession or something dysfunctional, largely. If you've seen something for 100 years, my first bet would be to assume it happens for the next hundred. I know a set of stories under which the future will be different from the past. A lot of them in the labor market go under the story of horses, where every argument I just said applied 100 years ago, but yet now, you know, 300 horses would have as much horsepower as your car. But I don't think even for free you would take 300 horses over a car in some sense.
- [54:40]
Ross Douthat
Children. I have some children who would make that deal, but I would advise them against it.
- [54:44]
Jason Furman
So that's the other side of the story is sometimes things are discontinuous, but there are so many powerful economic forces that have worked for a long time that I'm going to still emphasize them in my teaching, even if my co teacher is more visionary and feels otherwise.
- [55:02]
Ross Douthat
Well, on that note, I think you have to go teach that class. So Jason Furman, thank you for joining me.
- [55:08]
Jason Furman
Thanks for having me.
- [55:37]
Ross Douthat
Interesting Times is produced by Sophia Alvarez Boyd, Andrea Batanzos, Raina Raskin and Victoria Chamberlain. It's edited by Jordana Hochul. Our fact check team is Kate Sinclair, Mary Marge Locker and Michelle Harris. Original music by Isaac Jones, Sonia Herrero, Aman Sahota and Pat McCusker. Mixing by Sophia Landman. Audience strategy by Shannon Basta and Christina Samulewski. And our director of Opinion Audio is Annie Rose Strasser.
- [56:36]
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