Welcome to our seventh episode of Curiosity podcast, where we go deep on a wide variety of technical topics with the smartest leaders in the world. This is hosted by Immad Akhund, cofounder and CEO of Mercury and Raj Suri, cofounder of Presto and Lyft.
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Transcription of our conversation with Noah Smith
00:00:00:02 - 00:00:18:23
Noah Smith
The idea that, you know, the idea that we're going to have this runaway inflation is gone. The Fed is squashed. That. Everyone knows that that that's not going to happen now. Unless some other weird bad thing happens, like Trump gets elected and goes crazy. I don't know. That's always possible. But but not with the current policy regime that we have.
00:00:19:01 - 00:00:33:16
Noah Smith
Um, and I think that the level of inflation no longer scares me.
00:00:33:18 - 00:00:45:07
Immad Akhund
Welcome to the Curiosity podcast, where we go deep on a wide variety of technical topics with the smartest leaders in the world. I'm a mother and the co-founder and CEO of Mercury, also an investor in 300 plus companies.
00:00:45:09 - 00:01:12:08
Raj Suri
And I'm Raj Suri. I'm the co-founder of Lift and Pressed Automation. And today we're talking to Noah Smith, who is a prolific writer on a wide variety of topics. He's an economist. He talks about China, He talks about interest rates. He talks about housing, basically every topic under the sun. Really interesting guy who used to work at Bloomberg and and just has the team to know a lot about a lot.
00:01:12:10 - 00:01:15:07
Raj Suri
Nima, what are you interested in talking to know about today?
00:01:15:09 - 00:01:34:23
Immad Akhund
The thing I love about Noah is, you know, I studied economics. I think you did as well back at school. And Noah just makes it come to life like he really applies it to the real world, to current events, and also really makes it easy to understand and relatable rather than this kind of abstract academic subject.
00:01:35:01 - 00:01:55:12
Raj Suri
So welcome, Noah, to the Curiosity podcast. We're really excited to have you here. And as we get started here, I think one question that Matt and I both have just about you, it's like, how are you so prolific? You know, you produce a huge amount of really detailed research and and you kind of make it really accessible for for everyone.
00:01:55:14 - 00:02:01:10
Raj Suri
How do you produce so much? Are you like actually like Noah's or like what?
00:02:01:12 - 00:02:19:12
Noah Smith
Well, I don't have kids. You know that that helps. And I don't really have a real job. So it's not like I'm, you know, doing this in my off hours anymore. And but to be honest, the real secret is just to know a lot of stuff and be able to apply that stuff to things you see in the news.
00:02:19:14 - 00:02:41:13
Noah Smith
You know, also, I mean, writing fast is is a thing. Some people write fast, some people don't. I don't edit or revise at all. I just type it and hit send. Like, that's you know, that cuts off so much from the process. I think a lot of writers are perfectionists who go over and, you know, go over their pieces with a fine tooth comb and make sure that it's, you know, exactly how they want it.
00:02:41:13 - 00:03:01:02
Noah Smith
And but I think this doesn't actually work because I think that, like, you know, when you're taking a standardized test and you go back and check your answers, you're more likely to introduce errors than to catch errors. You catch a few errors and you introduce a lot of errors. And so I think that writing is similar. You once you go back and edit, you're out of the frame of mind that you were in when you first wrote something.
00:03:01:04 - 00:03:14:20
Noah Smith
And so when you go back and edit it, you're sort of mixing multiple frames of mind. I guess for a book you have to do that. But for blog post, you don't. And I think that that's, you know, being able to just sit there and bang out a blog post is the advantage of blogging.
00:03:15:01 - 00:03:16:12
Immad Akhund
How do you decide what to write about?
00:03:16:14 - 00:03:44:01
Noah Smith
Now, that is a difficult question. I have a list of topics to write about that are longer than I can possibly write about. So to some degree, it's it's whatever I see in the news, but it's not because I want to, you know, like get more subscribers by hopping on trending topics. It's because inevitably I see people saying things I disagree with and need to disagree with them in real time.
00:03:44:03 - 00:03:55:23
Noah Smith
You know, like, so it's you know, that that old cartoon about someone has said something wrong in the Internet. Yeah. That's a very powerful motivator for for you know, punditry.
00:03:56:01 - 00:04:01:20
Immad Akhund
Do you worry about being wrong yourself or like, you know, just like stream of conscious and you don't mind too much?
00:04:01:22 - 00:04:32:08
Noah Smith
No, no. I really worry about being wrong. Like and I'm wrong sometimes. And, you know, I don't like that I want to be right, you know? Um, but then, you know, if you if you select topics, you, you know, like the topics that I'm more sure where I'm that I'm right about or topics that I've, you know, covered a lot before and I've read a lot of the relevant research and blah blah, blah, and there's not going to be huge amounts of new information to update my priors on, you know, and there'll be a bit of new information.
00:04:32:08 - 00:04:51:12
Noah Smith
And then and then I write about it. You know, I change my mind about stuff, obviously. But but then, you know, when I when I sort of already know a lot about some topic and I see some some people saying something that I kind of know is wrong, you know, I'll jump on that pretty quick because the people generally haven't said anything new.
00:04:51:15 - 00:05:13:15
Noah Smith
Make me change my mind. Occasionally they'll pull out some new piece of information or data or whatever they will. But then, um, in other words, the topics I select or topics that I happen to know fairly well already, or at least if not even if I don't know fairly well, at least understand some sort of aspect there that I think is being missed in the discussion.
00:05:13:17 - 00:05:29:07
Raj Suri
It seems to me like I mean, you mentioned like one of the keys to being prolific is that, you know, a lot and it seems to me like you do know a lot about a lot of different topics and you kind of delve pretty deep and you seem to know not just like, you know, the high level like fundamentals, but also the research in different areas.
00:05:29:09 - 00:05:36:19
Raj Suri
Like, do you actively read like research in a different areas? Like what do you read to keep yourself as knowledgeable as you are?
00:05:36:22 - 00:05:53:00
Noah Smith
What I actively read in terms of researchers, economics, you know, I'll just read economic papers all the time, or at least, you know, I've not looked at them in detail. These at least, you know, skim a lot more papers than I even read in detail. But I do read a number in detail. And so I know that pretty well.
00:05:53:00 - 00:06:18:11
Noah Smith
But then when it comes to research on, you know, some some like climate or some field where I'm not an expert, then what you have to do is you have to get experts that you trust to point you in the direction of good things. Basically, you're piggybacking on their effort and your your you know, piggybacking on their expertise to select good research, to know that they they're essentially doing a literature review for you.
00:06:18:12 - 00:06:38:18
Noah Smith
So, for example, in climate modeling, a person I would turn to would be Jesse Jenkins. This is a bit like journalism in that Jesse Jenkins is sort of a source, but Jesse Jenkins will say, here's a paper that does a bunch of modeling and shows the, you know, how much the Inflation Reduction Act will reduce carbon emissions in the United States over the next 20 years or something.
00:06:38:20 - 00:06:55:11
Noah Smith
That was a paper I blogged about the other day. So you know, I haven't read a million papers in that literature, but, you know, I think I was correct. I've been correct in selecting Jesse Jenkins to be a curator of that sort of info sphere for me. So I can just go to that paper that he points me to, which happened to be his own paper.
00:06:55:11 - 00:07:15:01
Noah Smith
But I can go to that paper and you know, it was a literature review too. So it, it, it covered a lot of other papers, but I can be fairly confident that he's got it right. Now, that doesn't always work, right? Once in a while you pick someone who has some ax to grind on, some on some part of a specific issue or has some idiosyncratic wrong beliefs.
00:07:15:01 - 00:07:36:23
Noah Smith
So you can't be completely and diversified here. You've got to have several experts and then you have to notice when they disagree. So, um, how to get a bit of expertise in a field that you don't have long, you know, academic sort of background in is it is a difficult thing and I should probably write like a how to guide for how to do it.
00:07:37:01 - 00:08:01:23
Noah Smith
But you know, having having been in academia gives you the ability to detect bullshit pretty well. And I think that I'm like extremely good at detecting bullshit. And so therefore I'm, um, I'm fairly good at, you know, detecting when I, when I've found some sources that are just wrong about a lot of stuff. Who's someone who's fundamental framework for analyzing things is just kind of broken.
00:08:02:00 - 00:08:07:00
Noah Smith
I could name names, but then, you know, Oh, no, I got me on this podcast.
00:08:07:02 - 00:08:21:21
Immad Akhund
Well, that might make good content when you quit Bloomberg in 2021, that was obviously like a big decision. We'll give you confidence in doing that. Was it like about the money or was it purely about the freedom to write about what you wanted to write about?
00:08:22:01 - 00:08:43:13
Noah Smith
It was neither. Actually, it was health. Um, in 2021 I started getting chronic vestibular migraines, which make me really dizzy, and it's gotten less, much less bad now. But for a while I had to limit the amount of time that I looked at glowing screens, and that meant that I couldn't really I did not really have the physical ability to do two jobs at once.
00:08:43:13 - 00:09:03:01
Noah Smith
So I had to choose between Bloomberg and my blog, and I knew I didn't want to give up my blog because it's just sort of central to like what I like to do in life. And by then, you know, I had started it as the side project just to make a bit of cash on the side and it was doing that I think at the time I quit Bloomberg, they made about the same amount of money.
00:09:03:03 - 00:09:25:13
Noah Smith
And so I thought, okay, these two things make the same amount of money. Um, obviously Bloomberg has more, I don't know, job security in a way, but the blog has more upside. But I wasn't really thinking about the finance of it. I was just thinking, I can't stop blogging, I want to blog. And as long as I can sort of apparently, at least in the short term, support myself doing that, I'll I'll keep doing that instead of Bloomberg.
00:09:25:15 - 00:09:49:17
Noah Smith
Um, also, you know, there were a few reasons why Bloomberg management had changed. Um, David Shipley left and uh, you know, it had implemented more bureaucratic procedures that made it much harder to get stuff published in real time. So saying, okay, so this is not as great a place to publish stuff because it takes way too long and with blogging it's just I can publish immediately.
00:09:49:17 - 00:10:07:15
Noah Smith
I just hit the send button, I can write about whatever I want, I can pull graphs wherever I want, I can write invoice if I want. I don't I can write whatever length I want. It's just a much, much, much better format. Um, the only thing is that I don't get someone to edit me, but that heavily depends on the quality of the editor.
00:10:07:17 - 00:10:10:22
Noah Smith
So you know, it's definitely worth the tradeoff.
00:10:11:00 - 00:10:17:02
Raj Suri
So now, just like most of your income comes from the blog, like do monetize on Substack, has it grown since you've quit?
00:10:17:04 - 00:10:23:16
Noah Smith
It has, yeah. Yeah, yeah. It um, I recently passed, uh, 10,000 subscribers a couple of months ago.
00:10:23:16 - 00:10:24:12
Raj Suri
Congrats.
00:10:24:14 - 00:10:42:12
Noah Smith
Thank you. So that's paid subscribers. The unpaid is 140 something thousand, I think. You know, I can make as much as a mid-level manager at Google. Uh, you know, so it's not the not, not the worst outcome, you know, for blogging in my pajamas or and it's still increasing, you know, it's still it's still going up. That's not the lid, though.
00:10:42:12 - 00:10:45:04
Immad Akhund
More the benefit and it compounds to some.
00:10:45:06 - 00:10:48:02
Noah Smith
I think I can get to 20,000.
00:10:48:04 - 00:11:12:00
Immad Akhund
Oh yeah easily maybe let's to flip topics to the favorite economics topic of everyone nowadays, which is inflation and interest rates. Yeah. What was your thinking after the most recent, uh, kind of CPI print and how would you, how do you see things going going in the next few months?
00:11:12:02 - 00:11:35:23
Noah Smith
Basically all my concerns about inflation are gone. I am no longer concerned about inflation as a thing. I think that we have entered a new economic regime where inflation may be more volatile. In the past you saw basically in the 2020 tens, inflation wasn't just, um, it wasn't just low, but it was low and steady. And so you didn't see it bouncing around much month to month or quarter to quarter or even year to year.
00:11:36:01 - 00:12:05:01
Noah Smith
Instead, you saw it, um, basically persisting it just about 2% and we sort of assumed that was the law of the universe. Everything was well anchored, blah blah, blah, blah blah. Um, that might be over, so we might see bounces. Uh, but I think that the idea that, you know, the idea that we're going to have this runaway inflation is gone, the Fed is squashed, that everyone knows that, that that's not going to happen now unless some other weird bad thing happens, like Trump gets elected and goes crazy.
00:12:05:01 - 00:12:24:00
Noah Smith
I don't know. That's always possible, but but not with the current policy regime that we have. Um, and I think that the level of inflation no longer scares me. So, you know, inflation is has come down to like three point something percent that that's not that problematic. You know, we talk about oh, but it has to be 2%.
00:12:24:00 - 00:12:48:05
Noah Smith
But it's a rare historical case when you get exactly 2%, usually it bounces around a bit and having it be like three and a half percent, that's not going to wreck your nation. The only reason you'd be scared of inflation that's that high is if it lasted for at that level for years and years and just thus destroyed Fed credibility, which could then allow inflation to accelerate and go to 40,000%, you know, something like that.
00:12:48:05 - 00:13:06:15
Noah Smith
But 3.5% is not going to that can really hurt a country much. Um, in fact it also, um, it has some side benefits too. You know, we erode debt. Everyone talks about the big mountains of debt we've built up, blah, blah, blah. Well, inflation is how we got rid of that in the past, and it's already helping to get rid of that now.
00:13:06:15 - 00:13:16:08
Noah Smith
So, So I'm no longer concerned about inflation. I think we've effectively got it beat. That doesn't mean I think we need to slash interest rates right now. I never think about I'm no longer worried.
00:13:16:10 - 00:13:22:16
Immad Akhund
If interest rates are higher than inflation, how are we eroding debt onto on the interest rate payments going up?
00:13:22:18 - 00:13:41:05
Noah Smith
Oh, because the answer is because debt isn't immediately rolled over. Most of your stock of debt is in long term fixed nominal interest rate debt. So you take out a, you know, a 30 year mortgage or something. You have a fixed fixed interest rate on a 30 year mortgage. That interest rate doesn't change when interest rates go up.
00:13:41:07 - 00:14:03:17
Noah Smith
Right. If you got like a 3% mortgage like five years ago and you're still paying that 3% mortgage, you know, you're still paying 3%, doesn't matter what the Fed does. Yeah. I mean, you're not going to refi for 7%, are you? Because that would be dumb. So you won't do it. So instead you just get relief because your nominal income will go up.
00:14:03:19 - 00:14:08:01
Noah Smith
But then the the fixed nominal interest rate that you're paying on your debt will not go up.
00:14:08:03 - 00:14:18:18
Immad Akhund
Yeah, but at some point it flips, right? Like if interest rates stay at 5% for a few years and then inflation falls, then like the rollover is in the wrong direction.
00:14:18:23 - 00:14:24:19
Noah Smith
That's right. That's exactly right. So then when inflation falls, then you cut interest rates so the rollover doesn't hit you like that? Yeah.
00:14:24:21 - 00:14:31:01
Raj Suri
In fact, the U.S. has a disincentive to issue new debt at these interest rates. Right? Yeah. So that's also helps.
00:14:31:03 - 00:14:58:10
Noah Smith
Absolutely. It it really does, which is why I think the mood has shifted very quickly to kind of pro austerity. I think, you know, even the Biden administration and has many, many sort of lefty macro people advising it and those people are very, you know, sort of pro debt like pretty much always. Um, and but I think that the Biden administration is listening to a little bit less because it knows that, you know, interest rates are high right now.
00:14:58:12 - 00:15:02:07
Noah Smith
They'll come down in a bit. This is not the time to be borrowing a ton of money.
00:15:02:09 - 00:15:06:10
Immad Akhund
Yeah. When do you see the rates going down? You said not immediately.
00:15:06:13 - 00:15:16:12
Noah Smith
No, I don't know. I mean, I think if inflation returns to near Target and stays there for half a year or something, then you'll see it start to go down. That's just a rough guess though. I don't really know.
00:15:16:14 - 00:15:39:22
Immad Akhund
You made a really interesting point in a blog post I read recently where you said that Larry Summers got it wrong because he was kind of a proponent of causing unemployment, not just him. Like there was this general feeling that the only way to get inflation under control is by causing a recession and unemployment. But somehow it got under control without that.
00:15:40:01 - 00:15:46:18
Immad Akhund
Right. Do you think that's like a new thing or has that always been the case that you can control inflation just by like setting expectations?
00:15:46:20 - 00:16:03:18
Noah Smith
So I think that that, you know, Larry Summers just assumed that the things we would have to do to control inflation would naturally cause unemployment. I don't think he ever wanted to target unemployment like you never want to say, let's raise the unemployment rate to this amount. You know, I think that that's not an accurate characterization of what he was saying.
00:16:03:20 - 00:16:31:18
Noah Smith
I think instead he simply said, be prepared for this cost. And so but I think that he was wrong about that because he really underrated the role of a forward looking expectations. Also, you know, he he I think he underrated the impact of of oil price declines. I think that positive supply shocks rode to our rescue a little bit you know and gave us a boost made it easier to control inflation without raising unemployment.
00:16:31:19 - 00:16:53:09
Noah Smith
I don't think that was the whole story. I think expectations were there as well. You could see expectations go down in real time. I mean, you can look at the five year breakeven and see that market expectations inflation went down in late 2022 and at both in both the short term and the long term. And so, you know that like the the macro data is really hard to parse.
00:16:53:10 - 00:17:08:23
Noah Smith
You know, it's really hard to get causality. But when you when you look at it, when you look at just a bunch of studies that try to get at this in different ways, they generally say that after around six months from when you begin tightening, you should get you should start to get some some important effects on inflation.
00:17:09:01 - 00:17:22:06
Noah Smith
I think that's exactly what we got. You know, it was late 2022. The Fed started tightening in early 2022. I think that the people who say that you have to wait two years to see any impact from rate hikes or whatever, that's not supported by the data.
00:17:22:08 - 00:17:37:22
Immad Akhund
Was there something about this cycle where expectations worked so well, like in terms of how quickly they that people reacted to expectations or like this is just like the world we live in and like expectations setting is enough to control inflation?
00:17:38:00 - 00:17:56:09
Noah Smith
Well, a couple of things. Number one, there has been some research that indicates that expectations are more important in recent years than they've been in the past. And, you know, we've got the Internet now. We've got a lot of massive more real time data on the economy that everyone pays attention to than we had in the 1970s. Right.
00:17:56:11 - 00:18:15:12
Noah Smith
The 1970s. You you saw inflation only through a very sort of slow and diffuse filter. You saw, you know, you could read in The Wall Street Journal about Fed moves, but it would, you know, like it would take a long time for it to percolate. Now you're being bombarded with inflation conversations 24 seven and statements from the Fed are flying fast and furious.
00:18:15:14 - 00:18:36:12
Noah Smith
And everybody's talking about it all the time. And you see all the real time data dashboards and blah, blah, blah, blah, blah. And so there that's a good reason to think that expectations may be more powerful now, just because people are everyone's paying attention and they're able to get much more information much faster than before. And so there there's at least one paper from the Fed recently that suggests that expectations are more important.
00:18:36:18 - 00:18:57:11
Noah Smith
But I also think that a fundamental reason is that, um, in the current inflation, I think that the Fed had not been tested for a long time. Mm hmm. Right. So, so I think that uncertainty about what the Fed was going to do, how it was going to react to actual inflation was high because inflation hadn't been high since the eighties, right.
00:18:57:11 - 00:19:19:09
Noah Smith
Early eighties and inflation hadn't been high in 40 years. And people, you know, that's that's beyond like almost everyone who was working then is now retired or dead. You know, like there's almost zero people who even can remember that. And so I think that for all of people's lives, we had this low inflation and then suddenly high inflation happens for the first time in people's remembered experience.
00:19:19:11 - 00:19:40:01
Noah Smith
And they don't really know what the Fed is going to do about that. They don't know if the Fed is going to crack down or if the Fed is just going to sort of allow this. And there was this period of uncertainty. And I think in 2021, I think and the fact that the Fed waited a little while to get started with this, you know, probably waited six months too long to get started raising rates, um, uh, I think helped.
00:19:40:03 - 00:19:59:07
Noah Smith
Uh, you could really see this if you follow the five year break evens and the five year, five year, uh, forwards, um, the inflation expectations measures, if you follow these things, you saw that, that the at first inflation expectations didn't rise and then when the Fed, you know, waited and waited and waited to start hiking, you saw inflation expectations start to rise.
00:19:59:13 - 00:20:15:07
Noah Smith
And this did freak out the Fed because they understand the idea of an expectation spiral. And you know, where everyone thinks that the Fed's not going to do anything. So everyone else is going to raise prices. So they raise prices preemptively and create a self-fulfilling prophecy. That's how it's supposed to work. Um, and I think that the Fed got very scared of this and started tightening.
00:20:15:09 - 00:20:32:00
Noah Smith
And I think that you can if you just look the expectations, you can see this. And I've been to Fed meetings where they constantly talk about the role of expectations. They talk about watching the exact same measures that I just described. And in addition, they also watch internal internal survey measures of expectations that they themselves collect, that we are not privy to.
00:20:32:02 - 00:20:45:03
Noah Smith
So I think that they got scared of expectations. I think uncertainty was real. And when they started raising rates, I think after a few months people realized, okay, the Fed is serious.
00:20:45:05 - 00:20:45:19
Raj Suri
Yeah.
00:20:45:21 - 00:20:47:14
Noah Smith
They're not going to let this go out of control.
00:20:47:16 - 00:20:58:07
Raj Suri
So, yeah, I know. Earlier you mentioned that you're not worried about inflation. I we get that. So what are you worried about when it comes to, you know, the economy? Well, U.S. and global.
00:20:58:09 - 00:21:31:22
Noah Smith
World War Three, that is my chief fear right now is World War three. I was I was taken aback by Putin's decision to invade Ukraine. That's not going to turn into World War three, primarily because Putin, Russia sucked and Putin lost. But I am worried about China. I'm worried because the United States has repeatedly, explicitly said that we will jump in to defend Taiwan, and that means that China would have a very difficult time invading Taiwan without launching preemptive strikes on American bases to make sure that that does not happen.
00:21:32:00 - 00:22:00:23
Noah Smith
And if China decides to pull a Pearl Harbor on Okinawa and Guam and our bases in the Philippines, that's World War three. And that means that a number of things happen. Besides just the risk of nuclear war. What happens is that our investments in China go poof. You know, all the all the the money that people have invest in China, all the factories they've built in office branches, research centers or whatnot, just won't be able to be accessed in the event of that conflict.
00:22:01:01 - 00:22:20:08
Noah Smith
And globalization will receive a massive, immediate shock. China is still the workshop of the world and responsible for a very large percent of manufacturer and in a very large number of goods. And, you know, a lot of that will be cut off. And we saw this happen in World War One, Germany and Britain, where each other's top trading partners on the eve of World War One.
00:22:20:10 - 00:22:44:05
Noah Smith
So that sort of debunks the notion that trade prevents war. But there was this huge shock, you know, Britain still the British Empire, and they had to turn to the British Empire to replace, you know, some of their trade with Germany. And then they had to ramp up domestic manufacturing a lot. And it was extremely disruptive for their economy and, you know, extremely disruptive for Germany as well.
00:22:44:07 - 00:23:06:14
Noah Smith
And so to see this repeated on a global scale after, you know, much deeper supply chain integration than we ever had before, World War One would put that shock to shame. And so we're looking at sort of a bigger, badder World War one here in terms of what that would do. And I'm you know, Xi Jinping has proven himself to be quite sort of an unwise leader in many cases.
00:23:06:14 - 00:23:26:22
Noah Smith
You know, his zero-covid policy is bad. He has not handled the real estate bust well. He cracked down on tech companies for two years, is not clear why he did that. Um, and then, you know, he's just made a lot of blunders. You know, Belt and Road has really gone belly up under him. And the, you know, he sent out these wolf warrior diplomats to kind of bellow in the international scene like we would.
00:23:26:22 - 00:23:42:12
Noah Smith
Barry, you like Kaiser Wilhelm or something? Like, what are you doing? And so he's just made mistake after mistake. And I think a lot of Chinese people have lost confidence in him. But because of their system, there's no way to get him out of there until he dies, which, you know, he's going to be in there for ten more years at least.
00:23:42:12 - 00:24:04:22
Noah Smith
And so it's easily possible that he will launch World War three because he's stupid. And, you know, even if the rest of the people in China sort of know better and they'll kind of go along with it, because once the machine of aggressive expansionist nationalism gets rolling, you can't be the one who seem to be against that. That's a way to end up in a cell for the rest of your life or dead.
00:24:05:00 - 00:24:24:23
Noah Smith
And so I really worry about that because, you know, the entire like fate of global manufacturing supply chains and economic integration lies in the hands of this one sort of dorky bad leader, uh, who can't be dislodged. And that should scare you. It scares me.
00:24:25:01 - 00:24:35:12
Immad Akhund
If this was to happen, that would be the first war between two nuclear powers. Is there a reason it would not go nuclear? Like is? Do you think they could avoid that?
00:24:35:14 - 00:24:41:16
Noah Smith
I don't know. I have no idea. I'm not sure anyone really knows.
00:24:41:18 - 00:24:56:12
Raj Suri
The recent events give you hope. Like, you know, the fact that like China is trying to engage more, they're starting to reverse a lot of the bad policies that they put in place. They're trying to win. They're trying to stimulate the economy again. Those events give you some hope.
00:24:56:14 - 00:25:16:19
Noah Smith
A little bit. But, um, I think what worries me is that China's economy is now slowing and it doesn't it looks to be entering a protracted slowdown that because of the real estate bust. The real estate, you know, we think of China's economy in terms of export oriented manufacturing, but that was that was true before the Great Recession.
00:25:16:19 - 00:25:33:03
Noah Smith
But since the Great Recession, it's been increasingly about real estate and to some degree infrastructure, but really just property. And and now that's that's sort of gone. The you know, I won't call it a Ponzi scheme or a pyramid or the other hyperbolic expressions that people use because it was a bit different than that. There were some elements of that.
00:25:33:03 - 00:25:58:11
Noah Smith
But then I think more it's just that the build out of real estate has has run its course and that building more is just building stuff that no one's going to buy and that now that people realize that it's set in the expectations for price appreciation or a long term flat or even possibly negative trend, which means that real estate is the driver, The economy has done for now and or basically to the degree it was, it will never come back.
00:25:58:13 - 00:26:21:11
Noah Smith
And how China shifts in that model, it's doing the extend and pretend thing very well. Prices haven't really come down because no one's selling. Um, and at the same time we're starting to see things, you know, activity. The real economy is really suffered. Youth unemployment, which is a little over over measured in China. They, they, they count a few too many people as unemployed.
00:26:21:14 - 00:26:42:00
Noah Smith
Officially, youth unemployment is gone from like 8% to over 20%. And that's using the same measure that they consistently do. That's that's an internal or internal measure. And so that's bad. And I worry that people might think that a shift to massive war production of the kind we did during World War Two would be the way to get out of that.
00:26:42:00 - 00:26:57:11
Noah Smith
The real way to get out of that is just to make a health care system, right? You just say we're going to make a world class health care system and put everyone to work there. That's sort of what America did to solve our employment problems. You know, we just put everyone to work in health care and China could do that, too, and they should do that.
00:26:57:12 - 00:27:14:08
Noah Smith
That is the smart thing to do here. It's I'm afraid they'll do the stupid thing, which is to think, okay, the United States got out of the Great Depression by going to World War Two and having everyone working in munitions factories or in the army itself. Let's do the same thing. But now the production advantage is on our side.
00:27:14:10 - 00:27:39:15
Noah Smith
So China is in the position that America was in, in World War two, where it can just out produce everybody else. And so we'll win. And we just have to put everyone to work on the war effort. And so I'm worried about that. I'm also worried that in the 2020 tens, China avoided making aggressive moves because its economic growth was so fast that it didn't want to jeopardize that.
00:27:39:17 - 00:27:55:06
Noah Smith
Mm hmm. It's sort of like the old economics problem of when to cut a forest, right? When your growth rate slows, then you cut the forest down. Um, and so I'm worried that China's growth rate has slowed so much that now they think, well, okay, we always sort of wanted to go to war, at least some of us did.
00:27:55:06 - 00:28:25:16
Noah Smith
The people now in power always wanted to go to war, and so now we'll do it because we don't have any more growth to look forward to. So I'm worried about that. And the third thing I'm worried about is the danger zone hypothesis by Hal Brands and and some other people, um, which is basically that if China thinks that aging is going to make it decline in terms of relative power and relative strength, um, you know, relative to its rivals, uh, you know, especially India in the future, then it wants to do as much as it can before that decline happens.
00:28:25:16 - 00:28:49:11
Noah Smith
And so it could be scared into moving now. And if you see Germany in world or one part of their reason for going to war was that they were afraid of Russian industrialization. They were afraid that was going to overtake them, reduce their power. And so they had to beat France and knock out France. That was their idea before Russia gets totally, you know, like in gear with industrialization or otherwise, they'd have no chance of resisting the Franco Russian alliance.
00:28:49:12 - 00:29:07:16
Noah Smith
And that was a big part of their calculation. I think that they're you know, I don't think aging is going to like bring down the Chinese economy. I think that the impact of that is overstated. But I think that they don't know that and they could be scared that it will. Everyone talks about it all the time. And it's it is it is a pretty stark aging challenge to facing.
00:29:07:18 - 00:29:21:18
Noah Smith
And so I think that you know, how brands and some other people have suggested they could get scared of that and then launch a war because they think they only have a shrinking window of time. So those those are the fears I have. I'm encouraged by the fact that China has been a bit more willing to talk recently.
00:29:21:18 - 00:29:41:10
Noah Smith
And I think watching Putin sort of fail in Ukraine has has had a salutary effect. There. And that was one of the most important reasons to support Ukraine, is that it warns China off from trying something similar. But I don't think they've been warned off completely. And I think they still have this idea that it's go time, You know, the winds are blowing from the east or whatever.
00:29:41:10 - 00:29:54:02
Noah Smith
Xi Jinping said in that speech back in 2020, I think, and, you know, whatever boomer metaphor that he uses to understand the world and the winds are blowing from the east, shut up anyway.
00:29:54:05 - 00:29:56:21
Raj Suri
And I guess you're not traveling to China any time soon.
00:29:56:23 - 00:29:59:12
Noah Smith
No, not until he's out.
00:29:59:13 - 00:30:14:10
Immad Akhund
If they couldn't conduct, like an easy passage through the sea lanes, wouldn't there be an issue that the export economy would come to a halt? Their ability to import fuel would come to a halt. How would they be able to maintain a wall for very long?
00:30:14:16 - 00:30:42:16
Noah Smith
It's that's a great question. So one of the things that America could do in World War Two is that we had all the natural resources we needed to produce everything at home for the war effort. China does not they don't have oil, which is one reason they're switching to electric cars so quickly. Um, there's a number of critical minerals that they don't produce domestically, even though they do the processing of those minerals domestically, they're still buying them from South Africa and Latin America and Australia, um, forever.
00:30:42:18 - 00:31:01:16
Noah Smith
And so, you know, and those flow through the Strait of Malacca and around the little tiny little straits of Indonesia and all that stuff, and the United States might be able to blockade them, um, and India might be able to blockade them, although who knows if they would want to in a Taiwan conflict. Um, and so, and Japan might be able to help as well to some degree.
00:31:01:18 - 00:31:23:16
Noah Smith
And so that is a worry that I'm sure keeps Chinese planners up at night. Um, you know, we might be able to just starve them of the resources they need for their massive production machine because they don't have the resources at home and those resources they do at home, they're actually depleting as fast as possible. So China, you know, is digging up and burning every single bit of coal it can possibly consume.
00:31:23:16 - 00:31:50:21
Noah Smith
Well, guess what that means? That means that if they go to war, they won't be able to do what Germany did in World War Two, which is to use, um, coal gasification to replace lost oil supply. So the first year top for us can turn coal into something that works like petroleum. And, um, you know, it's, it's not quite as good, a little more expensive, but you can do it and China had the world's probably the biggest world's reserves of coal outside of the United States or maybe even more.
00:31:50:23 - 00:32:10:22
Noah Smith
And so they had that. But the problem is, if you look at the charts on how much coal China's been burning, it's just it's Titanic. And so they burned all their easily available coal already. They burned all their anthracite. They burned much of their, like, you know, easily accessible surface coal. And so now it's going to just get more and more expensive to produce that coal lower and lower quality, blah, blah, blah.
00:32:10:22 - 00:32:13:18
Noah Smith
So that might make it harder for them to sustain a long war effort.
00:32:13:19 - 00:32:25:02
Raj Suri
Now, what do you think is the right US strategy when it comes to China at this point? You know, we've tried the engagement thing for 40 plus years. I think that is over. But what is the new strategy going to be and what do you think it should be?
00:32:25:04 - 00:32:46:03
Noah Smith
Well, it's obviously going to be containment. I mean, you can really do three things. You can engage, you can contain, you can fight. That's it. I mean, I guess you can also ignore, but we're not going to do that. But so I think it's of those I don't think we're going to launch attacks and I don't think we're going to ignore them and I don't think we're going to continue our policy of just mindless, like China good sort of engagement that we had up through Obama.
00:32:46:05 - 00:33:01:02
Noah Smith
Um, I think instead what we'll do is some sort of containment. Now that's not going to necessarily look exactly like it did with the Soviet Union because China is a very different country and it's a very different world. So just, you know, directly saying, well, we're not going to contain them the way we did the Soviet Union. WILL Yeah, that's right.
00:33:01:04 - 00:33:25:07
Noah Smith
We're not. But containment doesn't look the same from cold War to Cold War. Instead, export controls are part of it. And other things like spheres where we, you know, try to block them stealing our technology, building a bunch of alliances in Asia is obviously going to be a really important, um, building defensive capability on the islands. And those in Asia will prevent China from making offensive military moves.
00:33:25:09 - 00:33:52:08
Noah Smith
Um, and then, you know, using industrial policy to encourage things like friend shoring right where we move stuff like Apple's moving production from like China to India and we're moving some semiconductor product production to Japan in addition to, of course, reshoring, where everyone wants to say, oh, we're look, we're building all these factories in America, Well, great. But also we're going to ensure stuff so that we get it out of China so that we're not at risk in that way.
00:33:52:08 - 00:34:07:19
Noah Smith
And I think that's an important part of containment as well, because it means China can't kind of weaponize that interdependence as much and say, well, hey, if you guys oppose our takeover of Taiwan, where are you going to get all your stuff? You can't fight your factory well, so we make them a bit less of our factory. So I think that that's what it's going to look like.
00:34:07:19 - 00:34:27:17
Noah Smith
It's going to look like economic containment. And I think it's going to look like, you know, a military build up and build out of alliances. In fact, it's not just the United States either. You can already see the countries of Asia engaging in their own military alliances. So you see Vietnam rushing to make alliances with a bunch of countries in the region now or quasi alliances.
00:34:27:17 - 00:34:45:02
Noah Smith
Right. You see Vietnam hedging its bets, not just depending on the United States, although they're becoming more friendly with us. Do you see Indonesia doing the same and and even Malaysia to some degree, even though they've historically been pretty pro-China. So you see all these things happening. And I think that it adds up to containment.
00:34:45:04 - 00:34:54:03
Immad Akhund
Do you think India would be a reliable ally for the U.S.? They obviously weren't super reliable with the Russian sanctions.
00:34:54:05 - 00:35:15:22
Noah Smith
Well, sure. But that, you know, well, first of all, the reason they weren't reliable with Russian sanctions is because India was a long time ally of Russia. You know, India was very friendly with Russia during the Cold War, I'm sorry, with the Soviet Union, of which Ukraine was a part. We shouldn't forget that. But then Russia was was India's protector against both China and the United States, and a United States supported Pakistan.
00:35:15:22 - 00:35:36:16
Noah Smith
So against China in Pakistan, India's two main enemies in the region that it fought was with during the Cold War or Soviet Union was the big sort of protector that's gone. You know, like not only is Putin's Russia much, much, much, much weaker than the USSR was in a relative sense. But also, you know, India doesn't necessarily need that kind of protection.
00:35:36:18 - 00:35:53:17
Noah Smith
Like, you know, Putin's not going to protect India against China. That's just not going to happen. And so I think that the rationale for that alliances is fading. Also, you know, buying military equipment from Russia isn't going to work as well now. So I think that those reasons are fading in. I mean, India has always conducted a very independent foreign policy.
00:35:53:19 - 00:36:14:01
Noah Smith
They're like they're a bit like France in that way. You know, France is our ally. They're not always the most dependable ally. And they criticize us a lot and are always trying to do things that assert their independence because it's very important to sort of how they see themselves as a nation. And I see India being the same way, giant France in terms of diplomacy.
00:36:14:04 - 00:36:41:09
Noah Smith
Right. And I think whether or not it would partner with the United States in an actual conflict over China depends on what the conflict is about. If it's Taiwan, I say probably not. Um, but there is a possibility that China could simply attack India because, you know, China, India have come to blows in 2020. There was that there was that border incident and India was able to sort of prevail through intelligence sharing with the United States.
00:36:41:09 - 00:37:13:05
Noah Smith
You know, the United States said, oh, here's where the Chinese troops are. Do with that what you will. And it's like, okay, well, ambush them. And so they did. And and sort of won that engagement. You know, I shouldn't laugh because people died and it was bloody and bad. But then but that was that was what happened. And and so I think that it really depends on if China sort of tries to do what Japan did in the 1940s, which or thirties and forties which was to stage this general breakout where China just attacks everywhere at once and decides to become the suffering of of Asia.
00:37:13:06 - 00:37:29:03
Noah Smith
India is in that right. India will be in that because China is their main threat and they know that if the United States goes away from the region, then India will sort of be at China's mercy over a specific conflict over Taiwan. I think India probably will not get involved directly, although I could be wrong, but who knows?
00:37:29:03 - 00:37:48:01
Noah Smith
But I think it's unlikely they don't have the historic ties with Taiwan. It's not part of the strategic interests, their maritime trade. That area isn't so important to their maritime trade. And um, and they're not used to this sort of like this policy of joining international alliances to like oppose rising powers, which we call offshore balancing. India is really not used to that.
00:37:48:01 - 00:38:19:10
Noah Smith
So I think that they would necessarily join. That said, partnership with India makes sense for a lot of reasons that have nothing to do with a direct conflict over Taiwan, you know, the more manufacturing we we move to India, the more secure we are against Chinese economic policy and and the more power, the more power India has, the more it gets built up, you know, in the region, the less freedom of action China has to be able to just do what it wants wherever, because it'll know that getting embroiled in the Taiwan conflict will weaken it relative to India.
00:38:19:12 - 00:38:26:03
Noah Smith
And so these are all sort of important considerations when when when making those alliances. I think.
00:38:26:05 - 00:38:37:10
Raj Suri
So why why doesn't the US have a policy of trying to attract as many talented Chinese folks as we can, given that, you know, people are disillusioned with the government there?
00:38:37:12 - 00:39:05:20
Noah Smith
That's a really great question. There's essentially two reasons. Number one, everybody's worried about Spain. Number two, xenophobia. You know, America over the grand sweep of our history is a very pro-immigration country. And yet we've had eruptions of xenophobia multiple times. We had one in the 1950s, which probably would have resulted in made policy to cut off Irish immigration and the Civil War, not come along and done that anyway, and disrupted those those efforts.
00:39:05:22 - 00:39:26:08
Noah Smith
We had a giant eruption of xenophobia in the 19 tens and early twenties, which resulted in a restrictive immigration law that, you know, restricted immigration for 40 years. And we had a small one in the nineties which resulted in, you know, denial of of welfare services to a lot of people on visas and things like that in 1996.
00:39:26:08 - 00:39:53:14
Noah Smith
And so we have we've had these these spasms of, of anti-immigrant sentiment uh, that, that, you know, that happened. And I think Trump is obviously a big one. Right? And, you know, Trump just constantly hammered on this idea that immigration is invasion, the white population is being replaced. It's a plot to replace us. And or the more sanitized version of that is the Democrats are importing votes for themselves, you know, and which I'm sure the Democrats were pretty happy to do that anyway.
00:39:53:14 - 00:40:10:22
Noah Smith
Like they're not above a little vote importing. But that's that's that's always been true throughout our whole history. And so but so but I think that xenophobia really erupted and it was this that like the white population of America is being replaced that Tucker Carlson was pushing and, you know, sort of people on the on the far right were pushing.
00:40:11:00 - 00:40:34:00
Noah Smith
That scared a lot of people combined with scenes of chaos at the southern border, which concerns a whole lot of people, especially annoys Hispanic people living close to that border. So we saw a lot of those people shift for Trump in 2020. We're coming off that right. That will end. That will go away. We will reestablish confidence in America's mission to be the nation of immigrants in the city, on the Hill, and blah, blah, blah.
00:40:34:01 - 00:40:55:22
Noah Smith
It will not probably happen until the end of this decade. We will be dealing with the fallout from that xenophobic backlash at a very inopportune time. Um, that plus concerns over, you know, spying. Um, so much spying has been done and China, unlike Russia, is not very good at suborning our people. Occasionally it can suborn one of our people, but it's just much worse at it.
00:40:55:22 - 00:41:18:13
Noah Smith
So what you see is Chinese employees in U.S. companies taking stuff that's been the pattern. It's especially pattern. And startups, you say, oh, great, you know, Chinese engineer, they just take all your stuff and then, you know, a week later, a startlingly similar competitor startup appears in China with the exact same tech in this stuff your engineer just nabbed when they left.
00:41:18:15 - 00:41:36:06
Noah Smith
And so that kind of stuff is, you know, part of it. I think I worked in at Stony Brook Business School for a couple of years, and most of our students are Chinese. I love that. I thought that was great and every faculty meeting a ton of professors would bring this up as a big problem that we needed to fix.
00:41:36:07 - 00:41:56:17
Noah Smith
You see polls that show, you know, America extremely pro-immigration, but Then when you turn the question to like Chinese students at American universities, you see you saw majority support in like, I don't know, 2020 or something or 2019 for restricting Chinese students at U.S. universities. And even some you know, a bunch of Democrats are saying this is like, what?
00:41:56:19 - 00:42:01:07
Noah Smith
And so xenophobia isn't just on the right. The right's louder and meaner about it.
00:42:01:09 - 00:42:12:07
Immad Akhund
What is the countervailing forces that stop or slow down xenophobia? Like, how do we reverse that? You said it will reverse itself by the end of the decade. But what is the actual countering force?
00:42:12:09 - 00:42:34:04
Noah Smith
The counting force is national self-confidence. When America has a strong sense of who it is and a strong sense of its own destiny and that things are going okay, we allow immigration. And so you saw that in 1965, the sort of height of postwar liberalism, We we liberalized immigration and tossed out the racist immigration restrictions that we had built in 1924.
00:42:34:04 - 00:42:52:19
Noah Smith
That was the height of our confidence you saw in the nineties and early 2000s, the kind of incipient xenophobic backlash was crushed basically by a bunch of people, including Republicans, including George W Bush, saying, look, immigrants are great. I don't know. You're talking about shut up, America's great America, immigrants. Yeah, and that and people bought that. I bought that.
00:42:52:19 - 00:43:10:17
Noah Smith
Everyone bought that. Like, if you look at the poll, there is a surge of xenophobia in the early nineties that then really crashed in the late nineties and 2000s. We had this economic boom. Everyone thought there's room for everybody. We're building out the suburbs or building all these McMansions, you know, ethno burbs. Everybody come here and get your McMansion and stuff like that.
00:43:10:20 - 00:43:29:05
Noah Smith
So economic confidence and sort of national self-confidence was kind of a trough of political unrest. We had 911, but, you know, we it was a time where we didn't have a lot of unrest in American society compared to, you know, the 20 tens when we had a lot and or the 1920s, when we had a lot over the 1970s.
00:43:29:07 - 00:43:45:12
Noah Smith
So I think that that national self-confidence, it's a nebulous thing because it includes economic, social, cultural aspects, political, blah, blah, blah. But I think that's my general answer. We need to become confident in ourselves, the nation again. I think we will, but it's going to take a decade as well.
00:43:45:12 - 00:43:53:20
Immad Akhund
So economic forces that push towards that in terms of labor shortage like this need to have immigrants to to help with that.
00:43:53:22 - 00:44:17:04
Noah Smith
You know, in the long run, if we had if fertility continues to decrease and then we have we're counting severe labor shortages, especially skilled labor, 20 years from now, then, yes, we would see that. We saw this with Japan in Europe and we're about to see it with South Korea, Taiwan and even China, although they're too big to really do much.
00:44:17:08 - 00:44:26:11
Noah Smith
But no, I think that labor shortages haven't yet started to bite. And so that that's not going to be a big deal except in specific industries, semiconductors.
00:44:26:13 - 00:44:46:06
Raj Suri
Yeah, yeah. The various industries that yeah, I mean, tech tech start ups would probably disagree or like, you know, I worked in the wrestling industry, they would probably disagree, but yeah, we've seen a lot a lot of the labor shortage. Yeah, I had a question about fertility. You mentioned fertility was declining. What do you think can be done to reverse that?
00:44:46:11 - 00:44:53:18
Raj Suri
Is there have been any interesting or successful cases of fertility declines reversing?
00:44:53:20 - 00:45:22:15
Noah Smith
There have been a few, but only only to a modest degree. So the United States had sub replacement fertility in the seventies and then fertility went back above replacement in the nineties and 2000. Um, and then went back down again. Um, you've seen New Zealand do some reversal, you've seen France have a minor reversal, Sweden, you've seen a small reversal, you've seen Japan increase their fertility a little bit, a little bit, not like a big reversal.
00:45:22:17 - 00:45:39:18
Noah Smith
So the short answer is no, we don't know how to solve this problem. And if we do, I'll call you and then the world will change. You won't need me to call you. You'll see. But then, uh. But the long answer is that we know a few things that work a little bit, and we can do more of those things.
00:45:39:18 - 00:45:56:13
Noah Smith
But then we don't have a general comprehensive solution to this. And now fertility rates are plummeting in Africa, which was sort of the last holdout of high fertility in the world, which means that by the end of the century, the world is going to start running out of young people as a whole, not just in particular regions.
00:45:56:15 - 00:46:14:03
Raj Suri
That'll be a big change for sure. Another question, I mean, I know you're very interested in like housing, right, in general, and you've been looking at you know, you talked about urban design and you've talked about like the importance of density. Do you think like the high price of housing may also be related to fertility rates and birth rates?
00:46:14:05 - 00:46:22:01
Raj Suri
Not many people associate kids with buying a house, so buying a house is expensive immediately having kids. Do you think there's a relationship there?
00:46:22:03 - 00:46:41:15
Noah Smith
There is a relationship. We can see it in the data. It doesn't seem that strong of a relationship. Um, but there is it is there it is a thing. Right now, the places we're seeing with above replacement fertility is the triangle of North Carolina, South Carolina and Tennessee. I don't know that they necessarily have cheaper housing than Texas or build more than Texas.
00:46:41:15 - 00:47:04:22
Noah Smith
And yet Texas has declining fertility as well, or Texas has, you know, suburb placement. And so in Texas has a ton of like, you know, immigrants from Mexico who traditionally had higher fertility rates. But oh, so, by the way, what people do know is the big story of of plummeting fertility since 2010 in America or since really since 22,008 is Hispanics.
00:47:05:02 - 00:47:27:02
Noah Smith
It is Hispanic fertility that has fallen off a cliff in America, whereas white and black fertility have declined only like a little bit. Those were already below replacement. Um, and Asian fertility is fairly well too. A white, black and Asian fertility are all like, you know, 1.7, 1.6 ish. And then Hispanic fertility just went from like basically three to something like one.
00:47:27:02 - 00:47:36:14
Noah Smith
You know, it's almost pretty much converged with with white and black fertility and and that was that was our ace in the hole, you know, that was our secret sauce. And I've lost that.
00:47:36:15 - 00:47:39:08
Immad Akhund
So is there known reason why that happened?
00:47:39:12 - 00:47:59:12
Noah Smith
Education. Absolutely. Massa massive increase in high school and college completion rates among Hispanic people in America. Over those years, we attempted to get all the Hispanic educated. We did, in fact, Hispanic college enrollment rates, which counts community college. But as all sort of college enrollment rates went above non-Hispanic white rates. So that's it. Yeah.
00:47:59:14 - 00:48:11:18
Raj Suri
So so the more educated people, obviously choose to have less see that in countries around the world is education or also like wealth. I mean, because they're more educated, they also make more money and they choose to put off having kids.
00:48:11:23 - 00:48:30:11
Noah Smith
Absolutely. And also, you know, there's there's changing gender values, too, in there. I don't want to admit that. Right. Um, and we've seen that. We've also seen this in Mexico, you know, and think that Mexican values, to some degree are transmitted to to, you know, Mexican immigrants who come to America, you know, come with with low fertility already.
00:48:30:11 - 00:48:45:16
Noah Smith
They don't have to, like, assimilate before they have low fertility. Now, you know, they just come with low fertility to start with because Mexican fertility dropped. And that had a lot to do with Mexico getting more rich and also more gender equal. So there's a lot of things going on.
00:48:45:18 - 00:49:10:14
Immad Akhund
This is a throwback to like 30 minutes ago. But you said unemployment in China, youth unemployment had gone up from 8% to 20%. That kind of surprises me because, like, if you have this kind of demographic problem and there's less young people, I would have thought there'd be more jobs for a smaller set of people. So, yeah, how are the demographics hurting them if the unemployment rates are going up?
00:49:10:16 - 00:49:30:23
Noah Smith
The impact of demographics on unemployment is subtle. So if you took an entire country and just doubled it, you know, just doubled that country, would you expect, you know, none of the new people to have a job? Would you expect wages to crash if you just doubled it? Well, no, you wouldn't, because, you know, more population doesn't just increase labor supply.
00:49:30:23 - 00:49:59:11
Noah Smith
It also increases labor demand. Labor demand comes from the demand for goods and services. Demand for goods and services comes from consumption. Consumption comes from people who spend their labor income. Right. And now that's that's it doesn't just work exactly like that because there's a bunch of age factors. There's like a life cycle peak where in some ages people spend more in some ages they borrow more and some ages they consume more, etc. But to a first approximation, increasing your population shouldn't really affect labor supply without also affecting labor demand.
00:49:59:11 - 00:50:19:17
Noah Smith
And this is true of immigration as well. You know, we just naturally think of immigrants coming in and competing down wages. At the same time, immigrants are spending their money on stuff for everything from doctors to the like school for their kids to new houses. And that creates labor demand for locals, right, for for native born people. And so there's labor supply shock and labor demand shock at the same time.
00:50:19:17 - 00:50:45:02
Noah Smith
And you get immigration and, you know, more babies kind of produces very similar effects in this way. Immigrants are just, you know, babies from elsewhere. And so, so like, so so the effects are similar in China. I would say youth unemployment is a is not really a a structural problem so much as a cyclical problem. That's economics jargon.
00:50:45:07 - 00:51:08:10
Noah Smith
What that means is it's the real estate bust. Real estate was 29% of China's entire economy, and it just fell right off a cliff. Like demographics are drop in the bucket compared to that, right. Like, hmm, you know, if China was really trying to ramp up education. So I think a lot of like educated young people are holding out for you know, they don't want to go like put together shoes in a factory.
00:51:08:12 - 00:51:29:09
Noah Smith
Right. They wanted jobs, you know, at least pushing paper at a desk job, maybe doing something more exciting with more upside than that. These people had great expectations and hopes and they're not necessarily going to just take the same kind of job long suffering parents did in a factory. And yet now that demand is decreasing because of the real estate bust, demand is decreasing in educated people, industries as well.
00:51:29:11 - 00:51:51:04
Noah Smith
Or, you know, like maybe there's a company that does property insurance for the new, you know, property developers and whatever, right now that that needs some insurance assessors and maybe you got a degree doing accounting. Now what you're out of a job. So like there is just tons and tons of of the Chinese economy that we don't see by analyzing it constantly through this lens of export manufacturing.
00:51:51:06 - 00:51:53:01
Noah Smith
But that is very important for employment.
00:51:53:03 - 00:52:08:21
Raj Suri
Yeah, Yeah. Let me add just a little bit of context on that. My wife is Chinese. I a lot about China and importance of real estate there because it's like it's actually like a cultural value to own real estate in China. It's a big thing. Destroy wealth and real estate is like almost like a little, little bit like a birthright.
00:52:08:21 - 00:52:19:15
Raj Suri
Everyone's going to grow up once the media buy a house, but it is a cultural value. Everyone expects to have real estate, which is why the boom happened in the first place. And everyone's very proud of the real estate that they are.
00:52:19:20 - 00:52:45:22
Noah Smith
Yeah, So, you know, there's historical reasons for this, which I'm sure you could go into, and we could go into that. But but essentially what you had is this thing where you would have a couple and they're together. They had four parents and grandparents and all those people savings would be put into a single apartment for that couple, one apartment you'd get all the life savings.
00:52:45:22 - 00:53:12:00
Noah Smith
I mean, of course, the old people didn't have that much life savings since they were in the Cultural Revolution or whatever. But then whatever they had, plus the parent's savings from like the Jiang Zemin, Hu Jintao era plus the couple's savings would all be put into one single apartment. And then on top of that, you had this big run up in mortgage debt in the late 20 tens and so every single source of demand you could have for new apartments was put into new apartments.
00:53:12:02 - 00:53:34:15
Noah Smith
Where is the demand going to come from to provide the price appreciation for those apartments that everyone was expecting? It does not exist. The central government is not going to borrow 200% of GDP and use that to continually buy houses to push the prices of those houses up. You know, the expected price appreciation can't happen. People have already overbid these things.
00:53:34:15 - 00:53:52:18
Noah Smith
And so even if they don't sell, they know that it's not going to go up anymore. Barring the government borrowing 200% of GDP and using it to buy houses, you know, second thought, I don't put it past the Chinese government to try some sort of scheme like this because they are that powerful and that nuts. But I don't think they will.
00:53:52:18 - 00:54:14:09
Noah Smith
I hope they don't. But what that means is that the idea that your house, that an apartment is your nest egg is out the window now, because for your nest egg, you need, at the very least, capital preservation, preferably capital appreciation. This is where China is more vulnerable than Japan, because in Japan, land could appreciate, but structures always depreciated.
00:54:14:09 - 00:54:32:13
Noah Smith
No one wanted to live in an old structure and every 30 years they'd invent new earthquake safety technology and just scrap and build everything in the whole country. And so in Japan you had real estate in the bubble back in the eighties being used as collateral for businesses, which was a big problem. But what you didn't have was the entire country using it as their savings vehicle.
00:54:32:18 - 00:54:53:13
Noah Smith
For Japanese people, the big savings vehicle is and always has been bonds. China does not have that. China does not have a bond market strongly connected to, you know, corporations and and the government, blah, blah. China needs a bond market or a stock I mean, stock market. But stock market's always smaller than bond market, right? Like we talk about, China doesn't have a functioning stock market.
00:54:53:13 - 00:55:10:04
Noah Smith
That's why everyone saves in real estate. Well, okay, but look at the size of real estate markets in the United States. Compared to stock markets. It's bigger than the real place that people save. Is when they don't use real estate is bonds. And that's and that's where Japanese people save all their money bonds and China in the bond market.
00:55:10:06 - 00:55:30:01
Noah Smith
But that requires cutting regular people in on a lot more of the proceeds of the enterprises than they're prepared to do, You know, being more egalitarian and less sort of like corrupt. And you then they're willing to do yet. And so but I think eventually this is what they're gonna have to do if they want to restore the ability for middle class people to save money.
00:55:30:01 - 00:55:33:21
Noah Smith
And if they don't restore it, well, people are going to get mad.
00:55:33:23 - 00:55:44:14
Raj Suri
Yeah, absolutely not. What really? Well, but I have a final question before we go. My question is actually out of left field, but I was wondering if I should get rabbits for kids. You seem to be a rabbit expert.
00:55:44:16 - 00:55:45:20
Noah Smith
How old are your kids?
00:55:45:22 - 00:55:47:13
Raj Suri
Two and four.
00:55:47:15 - 00:56:10:23
Noah Smith
No, no, don't. Don't get a rabbit for a kid younger than four. But for a kid for young kids. By the way, the rabbit that you want to get is a giant rabbit. Uh, a continental giant or a Flemish giant. Um, the continental Giant is the largest and cuddly est of all of them. And these rabbits are the size of dogs, and they have a very calm temperament and personality.
00:56:11:01 - 00:56:16:06
Noah Smith
It's it's essentially a family dog. You can walk it with a leash like a dog. And in fact, they make friends with thought.
00:56:16:06 - 00:56:17:05
Immad Akhund
Wow.
00:56:17:07 - 00:56:18:15
Noah Smith
And so.
00:56:18:17 - 00:56:19:10
Raj Suri
You have to gentle.
00:56:19:10 - 00:56:39:03
Noah Smith
Giant rabbit. No, no, I don't see the downside of these is that like a big dog, they have shortened life spans. So Continental giant rabbit has a life expectancy of seven or eight years. Um, more really More like seven years, honestly, because they were bred to be so large, like Great Danes or Saint Bernards. Um, a normal rabbit has a lifespan of 10 to 12 years.
00:56:39:05 - 00:56:51:01
Noah Smith
But then. But a giant will have a shorter lifespan. So that's the downside. If you don't mind that, then, you know, go get a giant rabbit and your kids will have fun hugging it and playing with it.
00:56:51:03 - 00:56:51:13
Raj Suri
Thank you.
00:56:51:16 - 00:57:16:17
Immad Akhund
All right. My question is not as playful as Roger's. One concern that people have for the U.S. economy is commercial real estate, especially all the lending around it and whether, you know, a lot of high vacancies and high interest rates kind of making it untenable, do you think that is an issue and do you think it would cause a U.S. recession if it came to fruition?
00:57:16:19 - 00:57:40:20
Noah Smith
Yeah, Yes. And probably I don't know how bad it is, but I'm going to be looking into that soon. I think that that's obviously going to be the weakest sector of the American economy. And of course, real estate. Real estate traditionally is the driver of of booms and busts. That's not always true, but it wasn't true in the years after the Great Recession because the real estate market had gotten so out of whack that a lot of things were adjusting.
00:57:40:22 - 00:57:59:17
Noah Smith
But traditionally, you know, they say housing is the business cycle now. It's usually residential real estate. Commercial real estate caused a bust in Japan. And so we could have our first commercial real estate caused bust ever now. But, yes, it's a it's definitely a thing to think about.
00:57:59:19 - 00:58:07:05
Immad Akhund
And if it did happen, what would happen? Like interest rates would go down again. Like what would be the kind of set of things you would expect to happen?
00:58:07:06 - 00:58:13:15
Noah Smith
Interest rates will go down, growth will slow, unemployment will rise. And yeah, whoever's in power will lose an election.
00:58:13:17 - 00:58:22:10
Immad Akhund
I say, Well, I guess we're looking forward to the whole article on this. The you right so we could see floor right up.
00:58:22:12 - 00:58:43:01
Noah Smith
I have to look into, you know, how commercial real estate is doing like I don't know, off the top of my head what's you know, what the numbers are like really. This is a question of numbers. How much commercial real estate might default, like how big defaults are we looking at here? And fortunately, the the aftermath of the Great Recession and the housing based financial crisis meant that a lot.
00:58:43:01 - 00:59:02:17
Noah Smith
You know, there were a lot of new regulations and just a lot of general fear that made banks not really leverage themselves as highly on real estate assets, which is why you've seen so many of the big bank losses in the current interest rate environment come not from real estate but from bonds. You know, bond prices just going down like that's why Silicon Valley Bank collapsed.
00:59:02:18 - 00:59:23:07
Noah Smith
And and so you've seen the biggest stresses on the system come from bonds, not from real estate, because we got a lot more cautious about real estate after 2008, as we should have. And so that may be our saving grace in terms of the commercial real estate thing is that these loans probably weren't packaged and sold off as like increasingly Byzantine mountains of CDOs or whatnot, like housing was before the 2008 crisis.
00:59:23:09 - 00:59:31:20
Noah Smith
You know, we're in a more robust position relative to real estate related debt in general could cause a recession. Yes. Is it going to be like 2008? I would say no.
00:59:31:22 - 00:59:41:01
Immad Akhund
It's not. Yeah, make sense. This is a super interesting chart. I feel like we could keep talking for another hour, so I really appreciate you taking this time.
00:59:41:03 - 00:59:43:22
Noah Smith
We'll have me back on any time we can do another.
00:59:44:00 - 00:59:45:12
Raj Suri
Thanks. Now is an amazing.
Inflation, China, immigration and rabbits with Macroeconomist Noah Smith