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Hello and welcome to another episode of the Audlots Podcast. I'm Tracy Alloway.
And I'm Joe. Why isn't Joe?
This is very special. This is actually this must be our fastest turnaround time on an episode ever.
Well, it is election day.
Yes, I think we had technically a faster turnaround day on the day of the Baltimore Bridge collapse.
Okay, fine, fine, but this was like four hours of content that we are squeezing into a very timely episode. So what you are about to hear is a live recording of the Audlots Podcast, multiple panels, multiple conversations, that took place on November fourth, at a recording in front of a live audio in New York.
That's right.
So today is an election day. Last night was election Eve. We figured a bunch of people, if they have preferences in this election, we're probably anxious looking for something to do other than just sort of refresh the Internet and refresh Twitter all night. So I figure, why not get some of our favorite guests over the years from the podcast and get our fans who we always love seeing our listeners and hang out and talk politics and policy
for a little while. And I didn't drink, actually, but some people drank.
I stress drink.
I did it.
Yeah I didn't.
But what better way to spend election day than listening to some live recordings of the au Thoughts podcast. So what you are about to hear is a selection of the conversations. We had some amazing guests. So we started with Zoe lu She is of course a senior fellow for China Studies at the Council on Foreign Relations, and we had her with Jordan Schneider of the China Talk podcast.
We've spoken to both of them before, but we had a great conversation about what's going on in China right now and what could possibly happen with US China trade.
Right and then where this particular episode will pick up. Then we had a conversation with Neil Dutta of Renaissance Macro Research, Sconda Amernath, executive director at Employee America. And we had a special guest that we kind of have to explain here for a second, because otherwise some of the conversation might not make any sense. We had zvie Maashwitz, and he is a prediction market's better.
He's a writer.
He's a legendary designer of Magic the Gathering Decks. He's an advisor to Polymarket. He used to be a Jane Street trader. We're gonna have to have him on some time. Tracy just yeah, it's totally separated.
He was great.
I just want to talk to him about deck construction, deck.
Construction in Jane Street. Let's do like that episode.
Okay, But Zphie, in addition to all those things, set up a betting pool on Manifold for which podcast he would actually appear on in twenty twenty four, and one of those options was blocks, right.
He set it up at the beginning of the year, and so there's all these different possibilities which podcast will appear on. And just again to sort of set the stage, we never announced the t V is going to be part of this. He is our mystery guest. But we flashed the market onto the screen behind us while we were at caveat the place where we recorded the episode, and then during the conversation we watched as the market slowly repriced.
It's very priced up and down.
It was very strange.
My belief in efficient markets has been completely debunked.
No, you know what, it was this is actually really interesting. There was someone in the audience who was using free manifold tokens to bring the probability down even as V was actually on stage. So a live experiment in how prediction markets work.
How they actually work right. Well, Actually, one of the things you'll hear is V talks a lot about one of the constraints and prediction markets being a capital constraints among traders. Yeah, so here's a guy who currently had no capital construction because he had free tooken, and you see how much that destroys that. So we started off that conversation to about all things markets, finance, what to watch it polling, what to watch for in tonight's selection yep.
And then our headliner of the evening was Brad Setzer. He is, of course a senior fellow at the Council on Foreign Relations, one of our favorite guests. We've had him on I can't even remember how many times.
Nine times now probably Yeah.
He was also a trade advisor to USTR's Catherine Tie under the Biden administration, So someone who definitely knows what's up when it comes to, I guess, the sausage making of trade policy. So a fantastic group, a great evening. Big thanks to everyone who came, and if you weren't able to make it in person, we hope you enjoy this version.
Right so start off check out our first our conversation with Skanda, Neil and Zvie. We have some great guests coming up and.
Bowser chance to money.
Now's your chance you could play.
We have a one of the people I'm not gonna say who it is, but one of the people that we will be having on the show is an avid prediction markets trader expert in this area, and I'm not gonna.
Say who it is, but it's a mystery mystery guest.
So let's bring to the stage, in no particular order, we have a Neil Dutta of Renaissance Macro Research, frequent odd Lots guests, and we have Skanda Amernath of Employee America, another frequent odd Lots guest. And we have Zvimashewitz. He's a writer, trader into prediction markets and stuff and currently
on Manifold Markets. There's a twenty percent chance that he appears on odd Lots in the year twenty twenty four, so we're doing a little test of prediction markets or sorry, efficient markets right here live on stage, so.
Thank you so much. He's ready to insider trade.
He hasn't insider traded on his own market yet, but it's just sitting there.
We'll see, we'll see if the odds move. We'll see.
If the odds move, they should be at one hundred percent.
So yeah, I guess prediction markets are debunked if they don't immediately move to one hundred percent.
Actually, V, let's start with you.
When you look at any prediction markets and you're also advisor to polymarket.
Yes, I'm advised it's your trader prediction market guy.
Oh there it is. It moved up to forty four percent, still works, It's still.
Not high enough, Like it's still I'm not sure.
It's literally on stage, is literally on stage right now?
Like how do you note that? Yes, but you don't think you should take it farther?
Yeah, it's something for okay whatever, maybe if someone, oh there it is, someone tweet this out. There's still fourteen percent gains to be made. The IRR of fourteen percent in like thirty seconds of increduble anyway, when we see these odds, not for this market, apparently, but when we see these poly market and kelshy odds, et cetera. They say, whatever, how seriously should we take them?
I take them at least as seriously as any other data point or source of information that we have available. They are the best thing we have.
It's up to there's still a chance that you're not appearing on this stage right now.
Yeah, wait, why do you they're the best thing we have? Like, please explain in the context of this still being stuck at ninety four percent.
Well, if you're on the internet, what other source do you have other than the actual broadcast? Like obviously, if you're looking at the poll not just the polls, but like the actual ballots and you're like, oh, I guess we know who won, then that's better than a prediction market. But anything short of that that we have is going to be incorporated into the prediction market, right, So, like the polls, the aggrogations, the projections, all of that gets
worked into how we trade the prediction markets. So for the prediction markets to be wrong, there has to be is thematic mistake. And those mistakes do happen, and you can in fact profit from them, but it cannot to be very large.
Neil, what about real markets, and you know, you're always watching what's happened what I said, real markets, the ticker DJT, what's happening in rates, maybe regional banks. What are you like seeing over the last few days or what are you going to be sort of watching in terms of the real markets and how they trade.
Well, I I mean, my work suggests that the sort of Trump trade, particularly with respective fixed income markets, wasn't so much Trump, I mean, as it was just stronger economic news. I mean, you have to remember that the increasing probability at least up until recently, that you know, Trump would you know, sweep into the White House. That was coinciding at a time of you know, meaningful data surprises to the upside, we had a strong job's number of
strong retail sales. Jobless claims have been low. So I think it's less about politics and a lot more just about the data as it's been coming out. I mean, in terms of what I'm going to be watching in particular, my sense is that people will just replay the twenty sixteen playbook if if that's what happens, and if you get the alternative, in which case I think it's likely that you know a Vice President Harris Wins. You probably
get a Republican center. You probably see, you know, a rally and fixed income.
Scanda. What are you watching? Because with poles, so obviously there's a lot of you know, people have strong opinions about the usefulness of poles. I kind of think, like who is answering the phone anymore? If someone an unidentified number is calling them, it feels like there's a bias to towards a certain demographic that's actually picking up the phone.
But what are you watching?
Yeah, I mean I think there's a clear limit on what poles are going to be able to tell you be on a certain point. I think that itself just kind of tells you it's close.
It's probably fifty to fifty.
Your ability to discern whether it's fifty fifty or sixty forty is pretty limited, even like you could make a case for sixty forty for either side. But beyond this, like, we don't have a lot of information that polls tell us poles are scammier.
Now what do you mean by that?
There are some establishments that seem a little less scrupulous that do a good job of gaming the rating systems. So I guess like to give the finance analogy, so passive versus active, like the idea of just like, okay, just trust the aggregation more so than in visual polls. But now we have like a weird set of partisan or quasi partisan polsters that come in less transparent methodologies and the attempts to make process to better understand who's better who's worse.
That's not great.
So we actually have like aggregators that I don't pay as much attention to relative to. Just like, Okay, if there's a good poll from a whether it's a republican establishment or democratic establishment, there are some good ones on either side, I think that's got more information in it. But even then it's like very limited, there's a ceiling. I mean, I'd be more curious to see about the geographic distribution. So obviously the Sphing states come out seven
pm onwards. We get some early states I report early but are read. Just seeing the geographic distribution is gonna be kind of interesting because that's actually the polarizing thing I see, which is urban like urban versus more democratic trending suburban versus rural, And it's like ultimately about the
margins and how those shift relatives of twenty twenty. That's like, still not really clear about how many new Trump voters can come out of the would work there were a lot in twenty twenty and how much will a lot of those suburbs swing further to the left. Yeah, these are all kind of open questions, and I don't think we have great ways of betchmarking probability be on a certain point.
Zv Anskanda, maybe can you explain the hurting controversy. I've been seeing a lot of tweets like upholsters are hurting and what's that? And then I don't know, how do you heard exactly? Like what is that all about?
Like doing?
So? The idea is, if you have a poll and you come up with the same results as every other pollster, and so everyone is saying Harris plus one or Trump plus one, you come out with Harris plus one or Trump plus one or zero, then no matter what happens in the election, this is not your fault, right, you
didn't screw up. But if you were to say Harris plus four and then Trump wins that state, then suddenly everyone looks at you and goes, you're terrible, your career is over, You're an idiot, and to lesser extent if it's Trump plus four. So what a lot of these pollsters are very cretively doing batistical analysis for the polls is they are cooking their books, putting their fingers on the scale to make sure that their number comes back
very close to what everyone else is saying. And there are only a few, like New York Times Morning consults that are clearly not doing that. And often they'll also do this thing where they'll take a poll and they'll see the result is like way off, and then maybe they just won't release it, or they'll find a way
to adjust it or whatever they have to do. And Nate Silver recently posted recently on Twitter the chance of all these polls coming in this close even if the race was actually tied on the order of one in nine trillions. So it's clearly just not a coincidence.
So what actually happens on prediction markets on election night? I imagine like things are going to be moving quite a bit. But also when does the actual payout occur for Trump versus Harris?
So the payout depends on the exact terms of the contract. So four years ago, we had a lot of very interesting discussions going on behind the scenes, and a lot of very public yelling as different sites proposed to pay out based on the fact that Biden had actually won the election, and other people very much disputing that Biden hadn't won the election, and in fact buying Trump long after Biden had won the election. Yeah, I made some
money on that. That was kind of awesome. And so I mean, like the bets before election day, they did Okay, I won them, but I should have held my money. The bets afterwards so much better. But the way it works is there's a technical rule for when the bet pays out, and this convey based on where you bet. So what are the ways to do it? Did you say, Okay, if the networks call the election, then that counts because they're being very conservative these days. And then we pay
out immediately no matter what happens. And that way you don't have to hold it for weeks and weeks, including if there's another dispute, which you know, we all hope there isn't, but you never know that.
The way happened, it occurred to me, so you're now at ninety six percent chance of appearing on odd lats. It occurred to me there may be some ambiguity of the rules because this this audio could I don't want to jinx it, but maybe it never comes to see the light of day. And so maybe just the same way people are wondering the technical rules of your contract here and whether interviewing you on the stage is the same as appearing on the podcast. Let's get to a
little macro neil monetary policy. Have you been contacted about being either the next fed share or being on the FOMC in the event of.
A Trump victory.
What are you trying to say?
I am not saying anything.
I'm simply asking whether the transition team has reached out not a role.
I've not been contacted, and I wouldn't expect you, though I know people that are that traffic in those circles.
Okay, do you what do you like when you think about the medium term trajectory of monetary policy under a theoretical Trump administration or a Harris administration. Does tomorrow night sort of change your outlook on that type of policy?
Not really? I mean I think in terms of what I typically do, as you know, I don't let political outcomes really affect my kind of near term decision making in terms of what my monetary policy call is going to be. I think the next few rate cuts are really just baked, I mean, regardless of who wins. And that's because I think the underlying dynamics in the economy are still kind of pointing to slower growth, benign inflation,
and probably ongoing monetary policy recalibration. So I don't think that's going to change, you know, before the first quarter of next year. So I think they'll they'll keep cutting. It's really just about how much they will gone to.
I'd be curious to get your take on this as well, like what kind of economy or how would you characterize the economy that either Harris or Trump will inherit.
So, I mean, all things considered, like employment's still very high, inflation is generally falling. I mean, each month is their bumps. That's not a bad hand to be given. Productivity growth looks like it's picking up a gear at least for the time being. All these things are pretty good at the same time. To Neil's point, there are gonna be some foreseeing signs that growth will be slower in Q four and probably Q one, and for that reason, like we're kind of see some some bumps in the road.
I don't think that policy is going to be changing on a dime, even if like Trump goes for really aggressive tariffs. These are not things that will be done overnight. And so that's like the kind of friction in the system. Everyone likes to talk about politics and how it's relevant to markets, and there will be some election reaction, but it's like as twenty sixteen kind of told you, right, whatever correlation structure was their pre election, doesn't it to
be their pro selection. And I do think that's like something is to be mindful of. As far as like policy will take more time to change, I think it's pretty clear that if it's a Harris administration, it's probably with the Republican Senate, there's like some compromise on tax policy.
You're not going to get big things done.
But I don't think there's even like a huge appetite within the Democratic Party to do big things. That's a little different in terms of like like they've already passed all legislation, right, but in terms of Republicans they actually have a.
Good shot at trifect though.
Right if that happens, then the box opens up. They might cut corporate taxes more, but there's also more discretion on like trade and immigration that Trump could wield.
Well, I was just gonna say, I mean, if you go back to twenty seventeen, remember that discussion around monetary offset. We were all talking about monetary offset because the idea was, well, you know, Trump is going to be this sort of inflationary demon, and you know the Fed has to do all this sort of rate hikes to offset. And in hindsight, there wasn't really a monetary offset. They ended up doing
more or less what they were planning to do. So, you know, I just think it's it's important to kind of try to separate these things out and just sort of take the world as it comes to you. I think that's as opposed to trying to forecast in front run sort of potential fiscal outcomes.
I mean, if you're the.
FITZV, do you see anyone, Well, you're back down to fifty percent.
How did that happen?
We've fallen.
Someone hit the cell and apparently the order book must not be They're like, all right, I'm going to take my profits at ninety six percent. And I guess the order book was pretty thin because whoever just sold you like, really got a bad price on that, So you shouldn't have sold whoever that was.
Oh okay, there you go. Yeah, it gotta get we gotta get some liquidity.
Here is anyone doing, like, do you see people in your world trading cross between the prediction markets and the real the real markets, I don't know what to call them, oh market, you know. Do you see much of that where it is like, you know, this should this level of confidence in Trump is not consistent with this thing we're seeing in I don't know, bitcoin or something like that.
Are you seeing much of that?
So you earlier asked what happens on election night, and what happens on election night is that the odds will move dramatically and they will respond very quickly to every piece of news. And there's both the reaction that happens when the news is available to those who are paying attention.
So like if the counties file their numbers online, there's some people who are downloading the information from the counties and they have their spreadsheets ready and they're analyzing all the details and they're trying to stay ahead of the game. And then there are the people who are watching the news and they're like, oh, they've network called Wisconsin and then they suddenly you know, the money comes in.
But of course it's kind of embarrassing, isn't it, Like I remember that last time, Like the people always following on Twitter clearly new stuff before the official calls, and yet the market seem to react to the calls in many cases.
That's right, So if if you know what the calls are going to be, you can clearly make some money by doing something before the market moves. But this is often true of that there's there's one set of people who have one set of information and those lot of people who have a different set of information, which is
coming to them slower. Right, they're more square action, they're more less sophisticated, and they still help make the market more accurate in general, but they're often predictable somewhat in advance.
But they're all transaction cost about Neil, I know, people only have so much capital, Like all the major players on election night are going to be somewhat capital constrained in the prediction markets because they're often going to see there's some sort of systematic miss pricing, there's some sort of opportunity and they're going to have to watch their
bankrolls and make sure they don't spend too much. Right, So in a situation where everyone's looking for these big miss pricings, but then like you have these different waves and then one of the things that you notice is the early movement on the prediction markets is often actually ahead of the financial market movements and things like currency things that are open and you can in fact make money for real if you are watching about this, because
the beta thing is real. Right, so like you go touch not you say, okay, what is going to be the trump you know beta for everything in the world, right, every currency exchange, every index that's still trading, whatever you can get and if it was going on during market hours, it would be so much more fun.
Wait, who's actually trading on the prediction markets? Like walk us through the typical person who's doing this and whether or not that introduces some bias into the probabilities because I imagine, you know, for something like poly market, you have to have a VPN, you have to be somewhat crypto literate. L Yeah, so like does that influence some of the numbers that we're seeing.
So you could be a French multi millionaire. You could be a Scottish teen is the other traditional joke. But the answer is, you know, all types of people around the world are getting into it, but yes, because it's
poly market. You see a difference between poly market and say, you know Calshi or you know these other sources predict it that are allowing Americans in and that aren't crypto, because there's absolutely a bias in who has easier access to polymarket, who wants to get involved in poly market, who's eager to do that, and that bias is favoring Trump this year, Trump is much more for a crypto.
You see these associations in various different ways. So polymarket has been several points stronger for Trump than other similar prediction markets. And you could also of course argue that like, no, it's polymarket, that's fine, and then everyone else is biased and like you know, who is really to say?
You're up to ninety eight point six.
Now, Scanna, tell us more about what specifically you're going to be watching. You mentioned the rural urban splits that even in the red areas we may get signal from some of these things. Are there bell weather counties that are useful to watch Wakeosha County, Wisconsin is like a crucial Waukeasha County. Now you're done to fifty percent? Uh? Is there anything like that? Like what a what are talk more about? How you're going to be consuming the information to man?
Yeah?
Bell Weather counties are basically fake, right, So like what matters? Like you can have We've had a twenty twenty twenty sixteen where the p packing, isn't it.
Because you can always find some county that always vote for the winner but doesn't necessarily manage.
I mean we have every county is moving somewhere at the margin, right, and every marginal vote counts. So if like let's say Harris is really well at just trimming Trump's margins and rural counties, that's like a big deal. In the same way that Trump's ability to amplify them in twenty twenty was very underrated by the polls, by general expectations among forecasters that he was able to scale rural turnout even the percent margins, which people obsess about.
Percentage margins in a lot of deep red counties did narrow in twenty twenty, but just because turnout was ramped up even further, Trump got more margin and so a lot of states were a lot closer than what the polls predicted. You find your ways to cluster the counties, whether it's an urban, suburban, ext urban, rural, whatever way you want to swing it, that cluster every single one matters, right,
every part of it. Like there's going to be some movement among the urban counties those that among that are trending blue, and every vote counts on either on all of them. So it doesn't really make a lot of sense to like obsess about a particular county where if it slips from red to blue, that can happen at the exact same time a bunch of red counties that are deep red become even redder.
And that's like what happened in Florida for example.
Right, So we had a like Pinelli's County was highlighted as that chooses the winner. It wasn't in twenty sixteen. It was Hillsborough County and that wasn't right. So these these flip blue and it didn't really matter. And it's just that's a good warning for a lot of this election I coverage.
Neil.
I know one of your favorite things to do is to tear apart the ism Manufacturing survey. What happened to the vibes like the soft data post the election, and how should we measure it? I guess not the ism clearly.
Well, I mean you mean when right.
Now, no, after the election, next week?
I mean I think you would. I would expect to see a pretty meaningful increase in consumer confidence and small business sentiment, primarily because you know, small business sentiment. I mean that survey really skews you know, I mean, think about who's putting it out. It's the NFIB. What do they do. They're a lobbying an organization on behalf of
you know, sort of right wing causes. So my sense is that the small business sentiment number would go up a lot, consumer confidence would probably go up a lot too. Whether that actually translates into real consumer spending, I have my doubts, but that's kind of what you saw after the twenty sixteen period, right And similarly, you saw a big decline in sentiment after you know, after the twenty twenty election, but again that didn't really translate into what
people were actually doing. So, you know, I think twenty sixteen was an interesting case because things like the ism which you mentioned, I mean Trump was coming into office at that time at the front edge of sort of a global manufacturing recovery. So this is, you know, the so called sort of Trump boom. I mean that was it was an Abe boom, and it was a you're you know, you saw that in a Macron boom. I mean it was everyone was kind of feeling it at at the time, so it wasn't just us specific.
This time around.
I mean, manufacturing frankly looks a little sluggish. I mean there there hasn't really been much. There's been a lot of construction of manufacturing facilities, and I know Scan's Scanda has been pointing that out quite a bit, but but if you look at actual manufacturing production, you know, it hasn't really been great shakes.
Is election uncertainty and you see this like in the anecdotal comments on some of these surveys, whether it's the is M or the Dallas FED, which always has very colorful anecdotal aspects. Is election uncertainty real or is that just a code word for people who preferred Trump hoping that that's the outcome and then that maybe changing their outcome out their outlook.
I'm sure it's probably both. I think there's like something.
I really deals not happening. He's like, I don't, we don't know.
I think, like, I'm serious, but we'll think about all the enacted legislation. Right, So, if you say there's like, if let's say Ira, maybe parts of chips that have come up under scrutiny or parts of the infrastructure wal if these are all things that are cast as these were all left wing items that Biden passed, and if it's like depends on whether Trump's going to be an office or not. If you perceive it as like, well it's a fifty fifty proposition. If Harris is in place,
then it's goin to stick. If Trump's in.
Place, it may or may not stick.
Then I can actually see like a case for like, if you have any business attached to a government contract or a government subsidy that might actually be genuine.
I think that I think there's also some partisanship.
I think generally speaking in my career, I mean, you talk about these sort of formal measures of policy uncertainty, like the one from Nicholas Bloom that's widely cited. My experience is that when that index is high, it's usually a time to go long equities right when so, so when policy uncertainty is high, it's usually a time to dip your toe into the market. It's a buying opportunity for stock historic.
Can we go out in the line and talk about like what everyone's day is actually going to look like tomorrow? Like how are you spending the election? Let's start with Neil.
So, like I said, I mean, the election is actually a very small part of what I try to do on a day to day basis. I'll probably i mean just a front run aer. I'll probably be spending some of my spare hours working on this piece that I was talking to you about.
You we have a new daily odd Latch newsletter, and Neil has promised to be one of the contributors, and so we have a piece coming from him.
So it just sort of gives me an opportunity to kind of take a step back because I have no edge. I don't try to pretend to have an edge on political stuff. And you know, one of the things I've been thinking about is just the sort of you know, this neutral interest rate. I mean, you know, FET's talking about it all the time and just exploring the ideas. They're like a dual neutral rate. I mean, for example, the neutral rate for housing, I mean whatever it is
that it's not working. I mean, housing is not working with mortgage rates here, So the neutral rate for housing is clearly a lot lower than maybe it is for say the housing I mean the labor market.
I don't know.
I mean so did and so if if if you sort of buy into that, I mean, it would imply that the FED needs to do a bit more to get you know, certain areas of the economy going. And if the Fed's lost the ability to stimulate housing, you know, I think that that's a that's a potential problem. So I'll probably be focusing more of my time on that as opposed to checking out the returns in I don't know what is it, Cuyahoga County or something.
I too am working on a piece for thover that that that that sir forthcoming as well on productivity. But I look, elections are people like numbers changing and like following them, which is probably most of you, I'm gonna guess on some level. If you're interested in finance and markets, Yeah, it's just a fun exercise of like seeing.
How margins shift.
I have some spreadsheets prepared for myself just to kind of track things if the New York Times needle isn't up and running, and yeah, I'll probably take it easy in the day, but I'll maybe I'll catch a nap and then.
I will probably be up till at least three am.
So as a writer, I want people to read what I'm writing, and I want them to think about it and pay attention to it and learn from it, and I want to influence them. So this past week has been a case of if I write about something, no one's going to pay much attention to it because they're going to be focused on the election. And so I kind of take this time off because I'm not going to try and put anything up except for my weekly
update until after the election is settled. So instead I've had a chance to like program some tools that are going to help me write over the long term. I might go see a movie, have a nice long lunch, you know, relax, and then of course in the evening I'm going to absolutely be following. I'll have the prediction markets up in various windows and various devices.
How many screens do you have?
I have three thirty inch screens, so I have I have one horizontal and two vertical on the two sides. Yeah, the trader you have six. But now that I'm trying to stay away from that, like I think that three is about right. And so you know, about one of them will probably be various prediction markets, especially Polymarket, and various different markets within them, So you need a lot
of space. And then you know, you're watching the television like everybody else, and you're watching Twitter, and you know you're just trying to get through it and process it because you know that, like even if you don't really want to pay quose attention, Like, what else are you going to do tonight?
Sorry? What else is anyone going to be doing?
Wait?
Real quickly, why is there not Why has the spread on some of these markets between the say Kelsey and Polymarket not been harbed away.
What is the constraint to free money?
The constraints is liquidity and access to the market, and the capital costs of committing the capitol to multiple places moving the money in and out. You know, everyone's kind of a little bit terrified every time they initiate any crypto transaction that somehow they don't and it's going to finish or something wrong is going to happen. I mean, it's it's very very unlikely in any given transaction it's going to happen. But you know, I definitely have an opinion.
By the way, I want to be clear, like when I say, like who knows which one is wrong? I very strongly believe that the poly market line is the one that is biased in the situation due to the access issues, Whereas I think that the line at the other markets is much more effective of what the line kind of showed in some air quotes.
Sense be actually real quickly, Skanda, Since you mentioned productivity and I know you have some thoughts on productivities via In fact, you just mentioned coding up some tools to make your life as a writing easier, I think you both have some different You think we're going to have like fifty percent GDP growth in the coming year on year because of AI or something like that.
No, not fifty percent this year.
No, but no, like you give us the give us the short the short synopsis of what you think is coming for productivity growth.
I think that the the skeptical line on productivity growth is we're talking about you know, percents per year every year on the course of ten to twenty years. And I think that's sort of the the ultimate barecase for AI. It doesn't do what we want it or expect it or hope it would do. And the bual case singularity super intelligence, we're all completely transformed.
Great, Uh, it's Kanda, what's your what's the gist of the productivity? And then also Neil, but what's the gist of your productivity piece that you have coming for the odd lasted daily newsletter.
Yes, so just speaking in terms of the realized data, and I try to start from how the data measured, what what are we actually capturing which may not be indicative of sort of conceptually what we assay say the productive productivity, but proctivity growth is actually outperformed post pandemic in a pretty meaningful sense relative to what we were seeing pre pandemics or pre pandemic was roughly one zero
point four percent. If it takes sort of longer look backs and we've been done put post pandemic period something like two percent. Maybe it's one point nine, maybe it's two. But that's like on an anualize basis, that's pretty meaningful deviation. And there are like a lot of reasons why but I think that it all kind of has to come back to, like the measured set of transactions inflation adjusted divided by total hours worked. That is basically our most
measurable version of productivity. It comes with lots of flaws. For example, Google maps that everyone uses on a day to day basis, right, it's ads supported, Right, it's not supported by a final expenditure. It should filter in somehow into our productivity statistics, but we don't have a great way of saying now and estimating.
That's actually really hard.
So for example, there's a lot of things that AI can make our lives very efficient and the same way the Internet's made our lives very efficient, but it didn't necessarily lead to a lot of transactions.
And that's kind of the open question.
That's like, for a lot of AI breakthroughs, how that leads to it may improve a lot of welfare, But the actual nuts and bolts of how it leads to more people spending in ways that are reflecting real things and not price increases, that is like actually a big part of the ballgame.
Neil An, your thoughts of productivity.
I mean, I agree with Scanda. The measure data is what the measured data is or the data are I mean's over it's you know, two percent, that's very strong.
I think for what that means for me is that basically, this is one reason why we should not worry about inflation, okay, and and that and that should give the FED, you know, plenty of cover, right being, And this is something we talked about earlier in the year, right is that it's one thing to just see the inflation data it's going up without having like a rational framework for why it's going to keep doing that. And you know, the fact that productivity has been fairly robust over the last year,
I think it means a couple things. Number One, we should sort of resist the temptation to kind of buy into the stagflation store. You can't really have stagflation of productivity is doing what it's doing. But it also makes the likelihood of like some inflation reacceleration highly unlikely as well,
like where is it coming from? Unit labor cost growth over the last year is basically zero, So, you know, for a FED that has a very labor market centric view of how the inflationary process works, the robust growth and productivity that we've seen, I think is an important kind of you know story in terms of mitigating inflation risk.
If you had to choose, what would you say is the biggest constraint for Trump and Harris both?
Like?
Is it political? You know, maybe like Harris gets in and doesn't have a trifecta like maybe the Republicans would have. Is it something like the deficit? Choose one for each.
Well, I mean, personally, I think that it's going to be. I mean, the markets have been sort of like, oh, the unified GOP. But I mean even if Trump, even if it was to be a unified GOP government, the margins in the House would still be very very thin. It's not like they can just steamroll whatever the hell he wants, you know, next year. But I would I
would probably say the bond markets the constrain. I mean, you have to be worried about how what's the appetite going to be in the fixed income market to fund a huge sort of deficit, you know, spending plan.
Skanda.
I go back to the politics.
I think like American government makes it very hard to pass things in general, and the wisdom of that where everyone wants a debate. It's just even under a unified government. To Neil's point, like Lisa Murkowski still has a lot of leverage, Susan Collins has a lot of leverage.
They probably will pass some things.
It's easier to pass things under unified government than under divide government. But that's probably still binding constraint. It was the constraint on Biden in one twenty twenty two. I mean, even though interest rates are going up, the real question was was Joe Manchin willing to say yes to? And so even if like we can debate how much, what's the nature of public finance constraints? Oftentimes they are re used ultimately to like the hardball legislative politics.
I've alluded to this before, and I don't want to like let it shade my view, but I would like mortgage rates to come down in the next two years. Do we need to get do we need to like do we need a spending crackdown? Do we need to go into austerity mode to get mortgage rates back to roughly somewhere on the ballpark of the twenty tens.
I mean, I would say, to the extent you can free of real resources, right, yeah, I mean to the extent that you're actually reducing inflation or getting the FED to be more confident about the willingness to lower interest rates.
That would probably be the main methods.
I won't let my mortgage affect how I assess the economy.
But I'm just saying, yeah, but I think that's like a tricky thing. You can do a lot of deficit reduction that doesn't necessarily move the needle on inflation or the fence reaction function. But like health care costs for example, right, health care costs in general need.
To be constrained. They do have a pretty direct role in inflation outcomes.
And because of those two things, that's a pretty strong nexus for if we could reduce health care inflation by half a percentage point each year, that would be a very big deal for what the FED will We'll probably get to the last mile of whatever the Fed's trying to achieve. V.
Can you say a little bit more like about the spreadsheets set up that and you scotn do you mentioned your spreadsheets too? As that data is coming in tomorrow, I mean, this is what we really care about, right, Like the numbers start to come in, they get posted on what secondary of state websites, et cetera. Like how are the traders ingesting that in that process to be ahead of like when the network's the cold Wisconsin.
So it's gonna vary a lot from trader to trader, from house to house, and you know, a remarkably large
number of people just don't do this. And that's clear by because you look at the financial markets over time, like I haven't followed the most recent was like twenty twenty two that carefully in terms of the reactions, but you definitely see these delays, and like if there was a lot of participants in the market who were keeping close eyes and incorporating that money that information instantly, that
wouldn't happen. So the right ways to do it involve things like setting up automatic interfaces with these websites to just pull things into your spreadsheets. Right, so you have your Excel spreadsheets that contain all of the county by county data from all of the returns, and then ideally you want to figure out what that implies about the results, and the technically correct way to do that is a
basy in calculation. It takes a new account all the information because you don't know which piece of information you're going to get, so you need to know how to feed them into your calculation, and then that should then output a range of distributions with various probabilities of various different outcomes, and you price that into your beta on various things based on those elements, and you figure out what the prices are supposed to be, and then you make the good trades.
See weren't you at Jane Street before? What was an election night? Like there?
Well, I mean all hands on deck, right, so everyone's there. It's a working night, and you use what tools you have, and you you know, use what instruments are available for you to trade because it's the middle of the night. So like you know, obviously if the US dock market was opened, everything would be dramatically different. But you are somewhat limited, right, I.
Have one last question as an AI productivity optimist, Like I don't know anything about how to code a system that will ingest all the data and set up a basian model in your vision of what AI could do. Can I in a couple of years, could I go to Chad GBT and say, like, write the code that will pull this in and then build some kind of model.
You can do that now?
All right?
All right?
Vs?
Skanda and Neil. Thank you so much. I feel prepared. V is it ninety one percent? So there's still some ambiguity about whether he was on stage.
Or We're still.
All right?
The final stretch here with Brad Setzer, Senior fellow at the Council for Foreign Relations. Who better to tie up all the disparate things we've been talking about in the previous two sessions, then, Brad, we always enjoy speaking with you because we can basically throw anything at these Yeah, I'm pretty sure you might be close to the top for number of odd loots appearances. But why don't we start with something really specific? Because you published a paper
recently all about globalization. The title is the Surprising Resilience of Globalization, an examination of claims of Economic fragmentation, and your conclusion was basically that we are still globalizing, and to some extent since twenty sixteen, we've globalized even more. Walk us through how you come to that.
Well, First, thanks for inviting me, and thanks for asking me about my recent paper. You are the first person who actually seems to have read the whole title.
I promise I did actually read it. I read it earlier today, but I'm.
Impressed, and then thanks to everyone for sticking around. Appreciate it. So most papers, or many of my papers, originate out of a sense that a narrative has taken hold, and that narrative is sort of perpetuated itself, even when that narrative isn't fully backed by all of the detailed data. And there have been two narratives that have been you know, they're closely related, narratives that have been very prevalent and prevalent at the IMF, prevalent at Davos, prevalent in the
financial media, prevalence on Bloomberg. One is that the world is deglobalizing, and the other, which is related but not quite the same, as the world is fragmenting, different political blocks are interacting less economically. That thesis seemed at odds with a couple of things. One I spend a lot of time. Don't ask why trade in pharmaceuticals. No, It's just it's an interesting subsector of the global economy. It's a hobby. Yeah, I mean, I'm certainly not paid from
my odd take on the pharmaceutical industry. And the pharmaceutical industry has continued to globalize. US imports of pharmaceuticals have doubled since twenty sixteen. The US imports from low tax jurisdictions, which is a big part of pharmaceutical trade. It's not with low cost jurisdictions, it's low tax duristictions. About half of our imports are from five tax hubs. They've doubled. One quarter of those imports come from the great Country
of Ireland. So that's not a story of deglobalization. That is a story of continuity. It's a story of globalization continuing because there's a tax advantage filter globalization. But then the other component of the argument is the one that sort of irritates people. I looked at the data. Everybody
tries to look at the data. And you know, if you look at the data for China, biggest economy and the biggest potential source of fragmentation, I mean, you can fragment with Russia, which has happened, but fragmenting with China would be big. And I didn't really see the evidence. So China's exports to the world are up by about of manufacturers or up by about a trillion dollars since twenty nineteen, so since the peak of the trade war,
since the pandemic. China's imports are up, manufactures up two hundred billion, China's surplus of manufacturer goods is up eight hundred billion. And I'm pretty confident because I have some sense of magnitudes. Is that's not all trade with Russia. There's a little bit which is trade with Russia, but it is mostly because trade deficits amongst democracies have risen. So the classic offsets to China's surplus or are the deficits in the UK, the US, and India not geopolitically
aligned with China, but the global counterpart. So my overarching thesis is the world has continued to globalize, but in unhealthy ways. Unhealthy because there's still a lot of tax driven globalization, and unhealthy because this increase in China's exports is a reflection of deep weaknesses which have already been discussed in China's domestic economy, which make China incapable of growing at the pace at once without relying more, not less, on exports.
So that's the theme, a lot to chew on, and that's what we're gonna do. But the trade war that started in twenty eighteen, does it show up with the data in any meaningful sense, like when you look at the data now versus some counterfactual where tariffs had put in place, do you see fingerprints of it?
Yes. The most obvious is that you know the US is the one country that currently doesn't import any cars from China. Since the trade war, China has become the world's biggest auto exporter, and the US market is effectively for now walled off. If you look at the bilateral trade data between the US and China, the first thing to notice is they no longer agree. In the bilateral data.
From the US side, we think our trade with China's gone down, and significantly if you look at that same data from the Chinese side, China thinks it's exports to the US are broadly unchanged. Now you can still say there's an impact because China's exports to Europe, the obvious counterfactional, have gone up. So there's some evidence of a bilateral decoupling.
There is a lot of evidence of tariff avoidance. And then at a global level, there's no real evidence of a serious decoupling or fragmentation, because a serious fragmentation, in my view at least, is one where China runs a smaller surplus with democracies where China trades balances amongst the axis of autocracies, that clearly hasn't happened.
You mentioned earlier tax incentives to globalization, and I'm trying to think how to frame this question, but like, why are we so obsessed with tariffs if you know, the ultimate cost of a product is not the only thing driving decisions about where it's made and where it's going.
I mean, in all honesty, I think it's because Donald Trump won the twenty sixteen election, and Donald Trump believes tariff's matter. Donald Trump is, He's a tariff man, he really is. The other one is, Look, there is absolutely no lobby, powerful lobby that is pushing back against importing
more pharmaceuticals from Ireland. And there's a very powerful lobby that wants this current pattern to remain by producing outside the United States and moving intellectual property outside the United States. The American pharmaceutical industry has reduced its effective tax rate to ten roughly ten percent. Why wouldn't you want to maintain that The opposite side, the loser side, is mostly the taxpayer. There's not a lot of jobs at stake, although there's some so a couple of shocking to me
little nuggets. The US pharmaceutical industry top six companies roughly made sixty to seventy billion dollars in twenty twenty three top six companies. Those top six companies paid collectively some a little bit of offsets zero in tax to the US federal government. They reported losing money on their US operations, even though the US has well known much higher pharmaceutical prices than the rest of the world, And they report making all of their profit and paying all of their
tax in other jurisdictions. So everyone except seems to win.
What was the effect, if any so one of the things, regardless of who wins tomorrow's vote, At some point there's going to be a The Tax Cut and Jobs Act is going to come up, though I think the corporate side is permanent that that part is going to be less controversial or not going to be a thing. But what was the effect of the Tax Cut and Jobs Act?
Because there was some impulse at least claimed that, oh, this will encourage companies to recognize their revenues in the United States and crack down on that to some extent, at least in the realm of pharmaceuticals as you've described, that hasn't happened. What was the intent and what was the effect.
Of that bill? Look, first of all, you broke my heart by saying there's nothing that's going to happen on the corporate tax code next year?
Is there?
Like it is obviously going to be part of a negotiation.
Okay, Yeah, that's right.
It is the great chance that we have to correct some of the flaws. In my view, the tax.
Cuts the corporate side doesn't expire automatically the way some of the personal does.
So you know how much detail do you want to go into. The twenty one percent does not expire, the ten and a half percent low guilty rate, which is for your global intangibles income, which is.
Really anything about this stuff.
Clearly it goes up to thirteen point one twenty five, which of course some people care about. And the Foreign derived Intangible's Income tax or FITTY goes up to the god awful higher rate of sixteen percent. So there are some ratchet ups. So what happened with the Tax Cuts and Jobs Act? First of all, the corporate side was
a total revolution. Before the Tax Cuts and Jobs Act, the US had a system called deferment, a deferral where profits earned abroad in theory were taxed at the US headline tax rate of thirty five, but only if the profit was returned to the United States. Profits were never returned to the US companies borrowed against their offshore profits.
And that was essentially a system that sort of worked, but it meant that US companies had on the US side of their balance sheet a lot of debt and on the foreur in side of their balance sheet a lot of assets. It wasn't great. So the main thing that tax cuts and JOBZAC did was it got rid of deferral. You pay tax as you go. Once you pay your US tax, you're free to move your money wherever you want. That was supposed to bring a lot of money back. Obviously lowered the headline tax rate from
thirty five to twenty one. It created this new global minimum on intangibles, which is sort of a strange concept but essentially intellectual property that everyone pays on their global income. So in theory it's sound territorial, but it's not entirely. And then it created a separate low tax rate, the foreign derived intangible's income tax rate for companies that move their intellectual property back to the US and used it to export. Pharmaceutical companies make most of their profit, although
they don't say it on their US sales. They preferred to keep their intellectual property and production abroad and remain in the ten and a half percent guilty bucket. So no change there. Apple, same thing, Microsoft broadly the same thing, but some companies did adjust. Facebook and Google return their intellectual property to the US you see this very clearly in their corporate returns, and now sell their intellectual property to their Irish subsidiary where they book most of their
ad revenue globally. Qualcom has also adjusted its global taxbusher. So it's not a story of no change, but it
is a story of mixed change. And it is a story where, at least in my view, the six biggest pharmaceutical companies clearly pay less to the US government after the Tax Cuts and Jobs Act than they did before because they actually had to bring some money back from their offshore tax subsidiaries at they're thirty five percent to cover their ongoing cost and Apple now mostly for even more complex reasons, but Apple books more of its profit in Ireland than in the United State States and Apple
is now paying roughly as much in tax to Ireland as is it pay into the United States. That's why Ireland has a sovereign Wealth Fund. So there are still changes that could be put in place that broadly speaking, wouldn't significantly increase the corporate tax burden, but would increase the amount that the biggest and most successful US companies paying the US. So hence you broke my heart. You said there's nothing to be done.
It was just ignorant, It was it was just ignorant.
I realized I should have said this in the intro. But in addition to writing and researching and tweeting about all these issues, you also have real life experience when it comes to trade policy. You were an advisor to a US trade representative, Catherine Tie, who has also been
on the show. Maybe you can't get into specifics here, but like give us a sense of what the most surprising thing was when you were actually in that advisor role when it comes to the construction the rail, I guess of making trade policy, I.
Guess one surprise, and it's just a cultural thing about usdr as I previously worked at the US Treasury, is that financial markets, which you know, are the obsession of this town. Presumably this crowd are weighted at about zero. In USCR internal decision making, people do not get a report on what happened in the market at the start of a significant meeting at USDR, whereas that would be kind of the norm at the US Treasury. So culturally
it's not driven by the market. Culturally, US trade policy is driven by lawyers, and lawyers care a lot about process. So I think what surprised me the most is the weight that is given to following the procedural niceties of the various different trade laws, which I think are actually quite relevant if Trump were to win, which I person we certainly do not hope is the case, but those procedural niceties become constraints on how quickly he can restart various trade wars.
You mentioned in the beginning that globalization continues despite all the memes and despite all of the narrative, but you described it as an unhealthy form of globalization. Was there a point where it was healthy in your view? And is there a turning point where the globalization process went from healthy to unhealthy?
So in general, I think globalization in the nineteen nineties had a different impact on the US economy than globalization after the nineteen nineties. If you look at at trade patterns in the nineteen nineties, and you know there's a significant interruption in the Asian financial crisis, and I think most people in Asia would say globalization went wrong in
the nineteen nineties. But during that period, broadly speaking, experts and in him were both expanding symmetrically, and you didn't have an expansion and explosion of the offshore balance sheets of big banks and their special investment vehicles like the obsession of Wall Street in the pre global financial crisis period. So to me, that was a healthier form of globalization. What went wrong, well, a technical thing checked the box made it really easy for US companies to shift intellectual
property offshore. That unleashed a wave of tax driven globalization that we have not yet, in my view, been able to rein in. It created incentives wherever broadening sectors of the US economy. So one of the things I point out in the Aspen Econometic Strategy paper is that semiconductor equipment manufacturing actually a pretty strategically important industry, has between two thousand and five and twenty twenty three twenty four, moved a lot of its manufacturing and all of its
profit to Southeast Asia. Why we thought that was in our strategic interest is beyond me. But it wasn't just a one off. It's been a continuous process. And then obviously China enters the WTO, the Chinese surplus explodes, and I think that generated a period of unhealthy globalization as well. And so that's why I'm a little worried right now that the increase in China's surplus judged on the global basis, not on the bilateral basis against the US, is on
a magnitude comparable as a share of world GDP. To that scene immediately after WTO.
Entry, there seems to be some consensus about diagnosing the problems in the Chinese economy, so not enough domestic assumption to high savings, et cetera. And yet it still seems relatively committed to the export driven model. Why is that?
The pithy answer would be that there can be no consensus in China that doesn't include President She. So actually, I don't think there is consensus because I think President She doesn't share this diagnosis. I think President She, generally speaking, views support for households as unproductive, and he views investment,
particularly investment in high tech sectors, as productive. The intellectual leap that giving checks to households, taking less from households lets household spend more, and therefore supports investments, not just consumption, but it supports investment throughout the economy is not one that president, she obviously shares. So, yeah, I don't think there is yet consensus.
One of the things that people love to talk about is just forever for as long as is the future of the dollar, and you know, just one of those things people just love to talk about it.
I've noticed.
Yeah, when you look at it, it.
Is not a topic that I prefer to talk about, but I will talk about it.
No, you have to talk about it.
He didn't talk about it, all right, Tracy, what she introduced, she said, we could ask Brad anything.
So this is on my mind.
When you look at unhealthy globalization, do you see any strains on the existing the dollar regime or any reasons to think that there is going to be a meaningful change in the trajectory of dollar usage, either within the trade for goods and services globally or the use of dollar.
In financial transactions.
Globally, not really. So there has been one obviously important and significant change, which is the sanctions on Russia. You know, Russia is one of the top ten global economies, produces a lot of oil in the world wants oil. We meaning in this case, the US, the EU, the sanctioning coalition the G ten countries have generally not actually sanctioned
dollar in europayment. But even though we have not sanctioned dollar in europayment, Russia obviously is very concerned that we could, particularly because we've frozen all the central Bank's assets, and that was a pretty big step. Russia, to be fair, was the country that did the most before twenty twenty twenty two the invasion to reduce dollar usage. Didn't get rid of it, but Russia had moved almost all its
reserves out of the dollar. It had certainly removed all of its reserves out of visible dollars, stuff that the US can see in this normal data reporting, and it had migrated to basically using the Euro for most of its oil and gas transactions. You could say that's just logical.
Russia traded mostly with Europe before the invasion, but it was using the euro to denominate trade with China, not the yuan, not the dollar, And I think the main lesson of the sanctions it has been that if you want to diversify out of the dollar and you want protection against sanctions, which is the one thing that you get with diversification out of the dollar, diversifying out of the Euro isn't diversifying far enough, so you essentially have
to diversify into using the yuan. Now, the yuan has a bunch of disadvantages. The wan is not accepted globally. If you're an African country and you get yuan for selling something to China, you can't use that yuan to buy stuff from your neighbor. It's not that kind of global currency yet. The dollar in euror and in general, holding financial assets in yuan means you've been holding a depreciating currency with lower yields than in the dollar. And then by the way China uses is geopolitical and g
you want. Mostly it's been over its trade leverage pretty aggressively, and you would have to assume if you have a lot of your financial assets in yuan, or your trade is denominated in yuan, that you are potentially subject to Chinese financial pressure. So you you get a little bit of defense against US and European sanctions, but at a pretty significant cost, and you just don't see it. So one one anecdote, you know, because you know, it goes
a little interesting. It was. It was sort of striking to me because I hadn't been to China for quite some time. I was a little nervous about it, to be honest, and heard a bank treasurer from a big Chinese bank talk about how they were thinking about the world. And you know what that Chinese bank was worried about. I was worried about the fact that Yuan lending rates were being forced down and that was squeezing Yuan net interest margins and fair things. That's what all banks tend
to worry about. Although it was king to me that this bank treasurer was more or less saying, you know, the official lending rate, which the Chinese had been deemphasizing, was actually really important. The other thing he was complaining about is, well, there's all these lending quotas. Like again, I was like, I thought you'd reformed your commercial banks. You weren't doing quotas. No, no, no quotas for manufacturing,
quotas for lending to innovation. The Treasurer obviously was sort of implying quotas that required us to lend to companies that were going to generate losses in the future. So what was the great hope. Well, they looked at the Japanese banking system and discovered that the Japanese banks do this great dollar business that generates half their interest income, and they looked at that with with envy. You could choose your own interest margin in dollars and you weren't
forced to lend to loss making companies in dollars. So, just as an anecdote, you see growth in the dollar business, offshore dollar business of Chinese state banks, which completely runs against the d dollarization narrative and is very much a function of China's own domestic weakness. So I think that to me that was telling.
You had a great line in the paper, just going back to the like lending quota point, but you said free markets appear to favor a country that hasn't freed its own market. Ie, China has probably benefited the most from the trade liberalization of the nineteen nineties and early two thousands. Why is that?
Well, again, Tracy, thanks for really closely reading my paper.
I try.
I actually thought that was a good line. Ummm, you're the first person who's noticed it. Um I'd throw in, like, hopefully, like some witty quips and a forty page paper just to test to see if anyone actually reads U tast you did. Look, I am not the first to make this observation. I think it's an observation that has influenced politics and policy in the United States and in Europe. China does not have a full market economy. The government
runs the banking system. The banking system still dominates the distribution of credit within the Chinese economy. It favors some sectors over others. The Chinese state, in its many layers at the central government level but also at the provincial level,
provides a lot of equity investment for Chinese companies. And so you can argue that China doesn't just have one industrial policy, kind of has twenty because all the different provinces have their own industrial policy trying to build up provincial champions that become national champions, and in the process they get cheap capital, very cheap capital. There isn't a mean the private equity industry in China exists, but it's not demanding you lever up to get a fifteen percent
internal rate of return. It exists to provide a bit of a veneer of private capital for strategy investments and strategic sectors. There's a lot of patient capital that has gone in to sectors that are quite capital intensive and that are willing to accept high risk and low rates of return in part because it is state capital. And as a result, in those sectors where this internal competitive
hothouse generates globally competitive products, production migrates to China. So that is the trend that was famously exhibited in the solar industry. Joe loves excavators. It's a slightly different story, but you know, twenty years ago China was importing a lot of excavators actually from the United States. Then Caterpillar sets up shop in China. Then a bunch of Chinese companies with state capital backing them, they're not all state owned,
get into the excavator business. Then Chinese demand for excavator goes ballistic. With the property market, the property market tanks and guess who's exporting excavators to the world. I know so, and obviously everyone's petrified that this is the same pattern will replicate itself in electric cars and potentially legacy semiconductors and potentially cutting edge chips. But that's a little there's a little tech war going on to something.
If Trump wins tomorrow, Look, it seems very plausible that we could get some sort of radically different approach to everything, certainly on the trade front. So let's just sort of accept that that, you know, again, per the models and the aggregators of fifty percent chance, if Harris wins, as you see it, what are the priorities when looking at
unhealthy globalization? Not like necessarily what she's thinking, but from your perspective, what are the priorities towards addressing this unhealthy version of globalization that you describe.
Looks start well, I would start to some degree with some of the points that Secretary Yellen and Layale Brain would have made about China's own unbalanced economy. And fundamentally, the US has, in my view, and interest in a more balanced Chinese economy, and we have an interest in convincing our allies and partners who also join us and putting pressure to get a more balanced Chinese economy. That's
a long, hard slog. It depends a bit on choices China makes so one interesting example least I find it interesting. You know, Trump talks a lot about replacing the income tax with tariffs. That's been one of his ideas. It is unclear if he's actually gonna do it, but it's an idea. China currently collects more revenue from tariffs than
from its personal income tax. It already has achieved this, partially because it still has somewhat significant tariffs, and partially because it only collects one percent of GDP and personal income tax, which is a very low number. We collect eight, so that to me is necessary. It's a part of the broader policy package that generates more balanced Chinese economy. But it is not something that the US Congress can change.
So the other component for addressing unhealthy globalization is something that the US Congress can change, which is the US tax law. So my immediate priority, if I were given advice to, hopefully President Harris, would be Look, there's a budget negotiation Washington, DC will be consumed with the expiration of the tax cuts. Twenty twenty five is a fiscal year.
It is a year which is set up in DC to debate the structure of taxation, and Republicans, and this is conventional wisdom, have an incentive to come to the table because if nothing happens, we have a cliff and all of Trump's personal income tax cuts expire, Republicans don't go to Washington to raise people's tax so they have
an incentive to bargain. And my hope would be as part of that bargain, some of the remaining incentives in the corporate tax code that have clearly encouraged or not discourage the migration of intellectual property and production outside the United States get addressed. That'd be where I'd start. I also think one of the tensions, you know, one of the tensions in trades Trump's trade policy was that bilateral tariffs are way less effective than he thinks. You can
get around them really easily. You put you know, ninety five percent Chinese content, a few screws in Southeast Asia, you go to a zero tariff. Right, It's trivial to get around with a little bit of work. So bilateral
tariffs don't really work, but Trump loves them. One of the tensions in Biden administration views on trade, again widely accepted, is that the Biden administration talked a big game about friendshoring working with allies, and then you know, thanks to Joe Manchin, your friend, very important US Senator, Thanks to Joe Mansion, we have an inflation reduction Act, and thanks to Joe Manchin, that inflation Reduction Act didn't treat our
friends very nicely. So I think there's a lot to do to kind of harmonize our industrial policies with our allies, and they have to make some changes too. I think the Europeans are ridiculously obsessed with following a super strict interpretation of what the WTO allows, which means that they won't do buy Europe on their EV subsidies inside Europe, even though China clearly did buy China on its EV subsidies inside China, they just didn't write it into the law.
They just never qualified a foreign made car, actually initially never qualified a battery made in China by a foreign company. That only happened after the Chinese companies which now dominate global Batteri's got a good foothold. China has been super restrictive, and I think Europe should be symmetric. Do a kind of buy Europe deal and My idea is that like, hey, we have buy us Europe, we will You know, this
is what I learned at USCR. You can deem European or allied goods to be American for purposes of qualifying for US subsidies. And we would offer to do that if Europe would deem American goods to be European for qualifying for European subsidies. So we kind of each create an open market towards each other while being pretty restrictive towards China. So those are I think, to me, the cutting edge of policy in the Harris administration.
Would you be open to a potential position in a Harris administration?
I had a suspicion, you might ask, I have never turned down an opportunity to serve my country.
So that was our live recording of the podcast at Caveat in New York. I can't believe after all that that it's actually election day.
Now, Wait, did we find out last night who's going to win?
I forget did anyone?
I think that's the one question we forgot to ask. We should have put.
Everyone on the spot. Yeah maybe not okay, but we hope if you came to the show that you enjoyed it. We are hoping to do more of these events in the future, so if you liked it, please let us know. And in the meantime, a big thank you to everyone who worked to make this possible, notably Carmen Rodriguez, our producer, and Kate Seaberry at the Bloomberg Events team, as well as the entire crew at Caveat.
Thank you so much, and again, we'll do it again in four years, but all the things in the meantime, shall we leave it there?
Let's leave it there.
This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
I'm Jill Wassenthal. You can follow me at the Stalwart. Follow all of the guests that we had last night. Follow Zoe Lu She's at Zongwin. Zoe Lou followed Jordan Schneider He's at Jordan sch NYC. Follow Zvimashwitz He's at the v Follow Neil Detta at renmac Llc. Follow Scanda Emerneth at Irving Swisher, and follow Brad Setzer at Brad Underscore Setzer. Follow our producers Kerman Rodriguez at Kerman Erman dash Ol Bennett at dashbot and Klee Brooks at Kale Brooks.
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