America’s Economy Is Entering a New Era — ft. Noah Smith

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29:13we're back with prof g markets something we've been covering a lot related to this is just the public perception of ai as more the more dollars we plow into this technology the more we roll ahead it seems the more pushback we're starting to see uh in the general public and in And at the political level, we have obviously seen Kathy Hochul, the governor of New York, who has issued a pause on data center production. And it seems like that is growing as a form of AI regulation. It's like, just hit the pause button on data centers. But it also seems to be related to some of the wealth inequality issues that we keep on seeing are kind of getting worse every passing year in America.

30:05The top 1 % of Americans control roughly a third of all U.S. household wealth, which is an all-time high today. um to what extent do you think that these two issues are linked um and how much of a problem do you think wealth inequality really is in america what does it mean for the u.s economy when wealth inequality goes from you know when when the top one percent has like this many trillions of dollars versus that many trillions of dollars it's not a number humans understand you know regular people you know who are just trying to make their credit card payments don't understand that you know you need data by you know and then you have you can have like economists who gather data on this and then argue about how much is really happening because it's hard to measure this top wealth and then you have people arguing but i don't think the sheer number is like oh my god look at how much these people have i don't think that's the way that wealth inequality becomes a problem in normal people's minds.

31:07I think instead people think about inequality of power and people think about the companies that these people control and are these companies being run in our best interest. Everyone knows these people are getting rich. Small changes in exactly how much they're getting rich or even large changes in how much they're getting rich don't affect the basic idea that, you know, people are being squeezed at their jobs and they're being squeezed on their finances and they're being squeezed in their consumption and they don't necessarily see like, and then they hear, oh, all these stories about how fabulously rich the people who own these companies are getting.

31:41That's the way in which I believe wealth inequality comes home to real people. That's what we need to address. The idea of can the rich guys continue to do things that make them get richer while other people struggle. And I think we need to attack that from two sides. Number one, we need to make sure that normal people don't struggle. Okay. If people can make their, like, if people have less credit card debt and if people have, you know, more wealth in their houses and, you know, which is where normal people have their wealth, by the way, normal people have their wealth in the real estate market, not in stocks, but if people, you know, but also we can give people like, you know, um, uh, wealth in terms of like a sovereign wealth fund, what Alaska does with the permanent fund.

32:25But, but the other thing we need to do is to make sure people know that these rich guys are ultimately under the control of the people through the government. That the government, although the government doesn't necessarily tell you what to do with all your businesses, central planning, at some sense, these big corporations are serving the interests of the nation. And I think that during World War II and the early Cold War, people had a very strong sense that big companies like Ford, U.S. Steel, Alcoa, GM, Boeing, and all these companies were serving America. These were American companies working for America and working for the people of America through the nation state.

33:02We need to reestablish that. So Sam Altman floated the idea of a government stake in open AI. He's right. And that's how this has to happen. And so Sovereign Wealth Fund is really the best policy we can do to do all of this. So Sovereign Wealth Fund says, so Alaska has the Alaska Permanent Fund. You know what that is, right? The oil, right? So it takes Alaska oil revenues and natural resource revenues and redistributes the money to the people of Alaska. We need to do that with tech and AI and these strategically important industries where we don't have the government micromanaged and central plan and control business decisions, but we redistribute some of the capital income.

33:44And if necessary, we could. If our companies were going rogue and doing stuff that was against the interests of the nation, we could have the government as a shareholder consensus in one of the shareholders meetings instead of just regulation and law. In addition to that, in addition, we can have someone go to the shareholders meeting and say, hey guys, you need to act in the interest of America and the people of America. And that's what we need. We need people being reassured that they have some sort of stake in this, not just financially, but also in terms of power. I think that solves the problem.

34:16I would push back on that, no. I think sovereign wealth funds are used when a nation that's blessed with an inordinate amount of natural resources has excess capital beyond their spending commitments. A sovereign wealth fund in the U.S. would be nothing more than issuing debt that Ed's going to have to pay back to fund the sovereign wealth fund such that a current administration could pick winners and losers, which governments usually aren't very good at. I understand the need to invest structurally in certain industries that have defense implications. But generally speaking, when the administration decides we should buy 5 % of open AI with debt-fueled capital that will create regulatory capture and disparage or diminish the other competitors, I just can't find evidence of where that makes any sense.

35:03And ultimately, it doesn't just end up with a warehouse full of unsold DeLoreans or Air France. A sovereign wealth fund, I just think, is indefensible at this point in picking winners and losers by an administration, many of whom have no experience in business or their experience in business as bankruptcies and failed subcontractors. So, again, sovereign wealth fund, I think it's a terrible idea. Where am I wrong? if you don't want a sovereign wealth fund to pick winners and losers, you can just have it by index funds. I invest in stocks, but other than, you know, I invest in friends, startups, but I don't, I don't really sit there thinking, I think Ford's going to do well this week.

35:39You know, I don't, I don't do that. I don't pick, I don't pick winners and losers. I buy the index, you know, and then I buy the, you know, Vanguard, Vanguard index fund. And you can have the government do that too. The only winner you're picking then is America itself. You're making a bet on America. you're betting on American stocks over foreign stocks. That's fine. But then you're not picking winners in terms of industries or companies or things like that. So if you don't want your sovereign wealth fund to do that, then you don't have to have it do that. It's really easy to not have it do that.

36:11In fact, the sovereign wealth fund proposals that I've heard involve explicitly buying the index. So I think that ad hoc stakes in companies like OpenAI are dangerous for this reason. But then you can easily solve that just by buying the index. So if you look at the labor share of income, it's going down. It's going down by any reasonable measure. And so if you buy a very broad index of stocks, all you're doing is buying some of the capital share of income and then redistributing it. So you're doing that. So that fear, I think, of picking winners and losers. I also think that picking winners actually has a much better track record than people think.

37:00I think that the idea that this always, picking winners always fails, it doesn't. It has some pretty predictable failure modes that we see a lot, sure. But it's not like the simple easy nostrum of, oh, picking winners always fails, guys. If I can label something picking winners, then it's something we shouldn't do. That's been proven wrong again and again. But that said, we don't have to pick winners with a sovereign wealth fund. We can just buy the index. So that's not a worry I think you should worry about, or it should be a reason to encourage a broad sovereign wealth fund that buys index funds rather than the kind of policy Donald Trump is doing with ad hoc stakes individual companies, which I do have very strong misgivings about.

37:50I think that makes sense. You're saying, as opposed to picking winners and losers, support the U.S. economy and also give consumers or American citizens similar to that. I think it's the super return fund or whatever it is in Australia, a chance to participate in what has been largely compounding. I guess the issue is or the caution I would throw out there, I don't want to get your response, is that we don't have surplus. So any investment, any incremental investment in an index fund or a company is going to come from debt, which will ultimately be taxes on either current or future generations.

38:33Why not just try and maintain lower deficits and let individuals decide what companies – in other words, ultimately that's saying that the government is a better stock picker. And indexes have effectively become stock picking. When you buy the S &P index, you're buying 40 % of it's going to seven or 10 companies. Isn't this me saying, infantilizing the public, saying, I'm going to run up your kid's credit card and then I'm going to pick, I'm going to invest in index funds rather than just getting government out of the way and letting you buy your own index funds? The main difference there being that most people don't have the money to buy index funds and they don't have the liquidity to borrow money to buy index funds.

39:17And so if the government does it, how does the person who doesn't have money? It's a redistribution. Okay, so it's a redistribution because then you would have some sort of mechanism for returning the gains to citizens. Yes, that's the point. Redistribute capital income to regular people. So you got some person who works at a gas station, that person could theoretically, you know, like scrimp and save and buy a tiny bit of index fund, but the transaction costs are high. The information costs are high. They don't understand how to do it. And practically they can't borrow. Like what does the government borrow at?

39:52A couple percent? Like even in now that interest rates have risen a ton, what's, what's the, what's the 20 year treasury rate? I don't even know. It's like a, it's like a few percent. Do you think the gas station worker can borrow at a few percent to buy an index fund? You're crazy. That's absolutely not. There's two pieces here. Number one is it's redistributionary. Because if you have the government buy services, you know, like pay for old people's health care or something, or maybe build highways or whatever, or provide for the national defense, if you have the government do those things that benefit the gas station worker just as much as they benefit a rich guy, okay, that's redistributionary.

40:34And so that's the first benefit. The second benefit is insurance. So debt is unconditional. It's like you pay the same interest rate back whether or not AI takes over our economy. But if you buy the AI company, part of the AI company, and then you're able to redistribute that income in the future, it functions as insurance. Because in the state of the world, it's a state contingent asset. Because in the state of the world where AI takes over the whole economy, normal people get a piece of that. But the amount of debt that taxpayers have to pay back doesn't change. It's state uncontingent. It doesn't change based on whether or not AI takes over the economy.

41:09Sounds like you'd be a fan of Trump bonds or baby bonds. Yeah, baby bonds. I mean, that's been done in other countries and it's been successful. Yeah, absolutely. 100%. And that's exactly what you do. That's a thing you can do. So you can choose to pay down America's debt if you think inflation is a problem and you need to, you know, pay down some of the debt to reduce inflation. You can use it. You can do baby bonds. If you think it's better to just give people cash to, you know, UBI fund, UBI, you can also just do public goods. You can use this for research and development spending, you know, to improve productivity in a Paul Romer sense.

41:43You can use this to do national defense. If we need to build up for big war, you can use this for building highways. If we need better infrastructure, you can use this to build trains. You can use this to build, you know, critical infrastructure. And you can use this for in-kind redistribution, like buying old people healthcare, which is, you know, not as broad-based as baby bonds, but it's pretty broad-based because everyone gets old and everyone gets sick. And so, you know, you can do a lot of these redistributionary things. So there's the insurance benefit, there's the redistribution benefit, and then there's the fact that the government's borrowing costs.

42:16You're talking about running up these kids' credit card, but you're not talking about their credit card because a credit card interest rate credit card interest rates are through the roof where the government interest rates are a few percent even after we raised interest rates to fight inflation the government is the cheapest borrower right and unless you unless you believe that uh there's a good chance that the government is going to get below treasury returns on its stocks over the maturity of government debt that it takes out to buy these things which is a possibility. I mean, that's, uh, we haven't seen negative returns or we haven't seen below treasury returns, I think on, on 20 year, uh, you know, S and P whatever ever before, but we could see it for the first time.

42:57It's not out of the realm of possibility. We could take a bath. We could actually lose this, right? If you use state uncontingent debt to buy state contingent assets, there are states of the world in which you take a bath. You, you, you lose money. Okay. The government can lose money. And this is the argument that people used, uh, to, to stop Bush from, from investing social security funds in the stock market back in the day. But had he done that, we would have either less federal debt or much larger social security benefits, a much more robust social security trust fund today than we do. It was actually the right idea.

43:29And people use, you know, sort of the specter of risk to dunk on it, to stop it back in 2005. And yes, there is risk, but it's aggregate risk. Because if corporate America is doing so bad that the stock market does really bad over a 20-year period or whatever, even a 10-year period, but especially a 20-year period, then America as a whole has done badly. It's hard to see a case in which the stock market does crap, underperforms treasuries for 20 years in which the regular Americans are thriving. That's a weird state of the world. It's a state of the world I'm willing to bet a lot against. It seems like you and I, I mean, you would agree that the Trump accounts have been a good idea.

44:19I personally, I've talked about this on our show. It's one of the only policies that I've seen out of this administration that I really support and that I think is moving in the right direction for a lot of the reasons that you're describing. um one i just want to confirm that you think that trump accounts are kind of the right idea i wish we could just change the name because i don't see why we need to politicize this thing but the idea of gifting a child at birth an investment account automatically buys them into into the s &p into the aggregate capital markets of america that to me seems like a very good thing and a step in the right direction so one i'd like to just get a reaction to that.

44:58And then two, we're tackling like the biggest, most difficult, most unanswered question in economics, which is like, at what point is U.S. debt unsustainable? How bad is it really? I'll pose that question to you. I know it's kind of unanswerable, but I'd like to get your take. U.S. debt is on a very bad trajectory right now. That said, if you take out debt to buy U.S. stocks, and to have the government buy U.S. stocks, and you have the option to use the proceeds from the stocks to repay the debt, if you structure the sovereign wealth fund that way, then it would be more sustainable than it is.

45:44And in fact, this is what Japan has done. So Japan on paper has a higher debt to GDP ratio than we do. And, um, but they've taken, you know, they've had the government invest like a hedge fund and made very good returns. And, um, because of that, their debt is less of a burden than ours is now, even though it's, it's higher as a, uh, you know, headline share of GDP. Um, we would be the same. We'd be betting on us. I mean, Japan often invests in foreign assets, uh, but sometimes in the Japanese market too. So the, you know, the BOJ buys stocks and Japanese companies and things like that. And the, the, you know, the topics have done well.

46:23So even if we took out more debt than we have in order to buy shares in corporate America, that would, in every state of the world, except the long decline stagnation of America state in every state of the world, except that it would make our debt burden less of a problem, right? Just like if you have a bunch of debt, okay, and then you take out some more debt to buy stocks and you're able to hold that for 20 years, right? Then your personal financial position actually just improved. You can't do this because of liquidity constraints. The government doesn't have those liquidity constraints. Curious to get your take on the controversy around data centers?

47:10Some of the local harms of data centers that people tout are real. For example, if you're very close to it, it's noisy. It does drop power from the grid and that can compete for power with local communities. Some of the things people worry about are not real, like water. Water usage, that's not a real thing. Data centers have some a reservoir of water that they run to cool stuff and they lose extremely little water and they don't pollute any water. So the water thing is made up. The other, the other harms that people tend to emphasize a little bit less are actually real. Um, if you don't want data center near your, your house, that's, that's your right.

47:49You can, you know, I don't, uh, because I think data centers can go elsewhere. Like, you know, if, if New York won't build the data centers, Texas will, Alabama will places will, um, they bring benefits to the local economy that can then be seen in tax revenue, local tax revenue, you can tax them. So I'm not so worried about local, about this data center nimbyism. First of all, that's my first take. My second take is that I believe without solid evidence. So, you know, I don't have solid evidence for this one, but I believe that the, that the local nimbyism over data centers is to some degree, to some substantial degree, not all, but to some substantial degree, an expression of broader fears over AI itself.

48:36That people don't like the idea that AI will take their jobs, you know, basically take their jobs. I don't think most people think that AI will kill them yet. I think people are mostly scared of jobs. And that fear manifests as an instinctive opposition to AI that filters through to opposition to local data centers. I think it's ineffectual opposition because banning local data centers in New York or whatever community won't actually reduce the amount of compute available to the AI industry. But I think that that's what's motivating it to some degree. We'll be right back. And for even more markets content, sign up for our newsletter at profgmarkets.com.

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50:37In the end, it all comes down to the dreaded E-word, electability. But in Michigan, one candidate is trying to turn the electability concept on its head. If we think that voters walk around asking, where do I sit on some theoretical left-right spectrum? Then in theory, the bulk of the voters are somewhere in the middle. The problem, though, is that that model hasn't really accurately predicted our politics for a very long time. If Michiganders wanted moderate, why would they have elected Donald Trump twice? Dr. Abdul El-Sayed is making the progressive case for America first, and he's trying to settle the Democrats' ideological battle in the process.

51:15This is about the many versus the money. I'm Estet Herndon, and this is America Actually. Catch us every Saturday on YouTube or wherever you get your podcasts.

51:29We're back with Prof G Markets. A trend that we have been watching and kind of following your coverage of is the fertility crisis in America, the fact that the U.S. fertility rate fell to another record low in 2025. How big of a problem do you see this, this fertility crisis? And what kind of impacts do you think this will have on the U.S. economy, perhaps some impacts that maybe people aren't seeing or recognizing right now? It's going to be bad, but the bad is going to be is going to slowly trickle into our economy in ways that it's hard to notice. It's not like there's some cliff we fall off and like, ah, you know, fertility is low.

52:10It's, you know, old people will clog the top ranks of companies and will be more less nimble, less able to invest in the future. you know um less um our companies will get just less creative and dynamic um slowly you know the debt burdens and tax burdens will go up and social security benefits will be cut and you know there'll be the slow trickle of making it harder for uh you know just naturally harder for people to live because you have fewer workers supporting a greater number of retirees people have to do more uncompensated elder care people will have to pay more taxes to support elder care um Um, you'll see immigration become actually more contentious because on one side, you'll see people say we need to bring in more immigrants for labor shortages.

52:54On the other side, you're going to see like immigrants will go up faster as a percent of population because we're not reproducing local people as fast. And so that's going to freak people out more. So you're going to see immigration become more contentious, even than it already is. So that's going to be difficult. There's just all these, these problems you get from a low, a low TFR that trickle in slowly and subtly. and you don't see them like, oh my God, disaster. It's corrosive. Do you think that this is the kind of thing that will force us to sort of rewrite how we think about social security, how we think about taxation?

53:31Like, is this one of those era-defining events that may change the way we organize our entire economy? Yes, but I think it's less of an event than a trend. It's going to happen slowly. We already should have realized there's something very wrong with the pay-as-you-go method of social security. Because as, you know, Paul Samuelson famously proved in his paper about dynamic inefficiency back in, I think, the 50s or early 60s, social security, a pay-as-you-go system like social security is efficient, you know, if and when you have a growing population. When you have a slow, very slowly growing population or shrinking population, in the long term, social security is dynamically inefficient.

54:12You just, it has big economic problems. And so that's hitting already. That's hitting already. And so we needed to shift to a fully funded system. We can't now because expensive one-time shift. And instead, we're going to have to have constant bruising political battles over benefit cuts and retirement age raises and lifting the cap on taxes and making the system more redistributionary and all these things. We're going to have all these fights over. There's no way to avoid these fights. And it's baked into our system. And so, yes, it's happening, but it won't be a thunderbolt that happens all at once.

54:47Is the best solution, in your view, some form of redistribution? Is that what we need to all get on the same side on when you describe these kind of political debates that are inevitable? Is that the main thing? It's absolutely part of what we need, because when you have benefit cuts, that hurts. You know, I mean, if you're rich and you get your Social Security benefits cut, do you care? No. But if you're poor and you get your Social Security benefits cut, you starve. That's all you have. And so obviously, the more we cut benefits, which we'll need to do to maintain the solvency of the system, the more redistribution we'll need to do to prevent human suffering.

55:26So the insolvency of Social Security creates a greater need for redistribution across income gaps. And so I think that's absolutely one thing we need to do. we obviously need to be looking for ways to boost the fertility rate and to continue bringing immigrants without you know freaking out freaking people out um we need to do both those things especially high-skilled immigrants you know add lots and lots and lots to our revenue to our coffers they're a huge fiscal plus so we need to look at how to do more of that which we're really not doing right now it's the opposite of what we're doing right now um and we need so we're going to need more redistribution we're going to need to to tighten our belts and do more redistribution at the same time in order to keep the system solvent and keep it supporting old people and have old people not be synonymous with poor people as they used to be.

56:15And at the same time, we need to be looking to address the root causes of the problem here for the long term. What would you say to someone who believes that redistribution is veering on socialism? People who say, I mean, obviously, we've seen the wealth tax proposals, we've seen the billionaire tax proposals, which are kind of way over here on the extreme end of things. And a lot of people say that's not the right direction. And I think those arguments might have some merit. But there are also arguments that, you know, increasing taxes, redistributing in and of itself is not the right path. It's not the right solution.

56:54We're kind of waiting on government, waiting on some centralized system to solve all of our problems. To the people who take that view, what is your response to them? My response is, what's your alternative? What's your better idea? They have nothing. Nobody who just like, well, that would be socialism has any alternative other than just like, you know, more money for my bank account. I think we're using the words incorrectly, though. Socialism is supposed to, it used to mean, at least, government controls the means of production, which just doesn't have a good track record. But, and then they, when you ask, where does it work?

57:32They'll point to Northern Europe. I would argue Northern Europe in many instances is more capitalist than we are. I think what most socialists today really mean is a capitalist economy that has a stronger social safety net, more progressive taxation, and more investment in social services. It feels as if a lot of this argument is an inefficient argument around semantics, that those of us who think of socialism as East versus West Germany, North Korea versus South Korea, Soviet Union versus, you know, or USSR. I mean, the 50s and 60s here had much higher tax rates, much more public infrastructure investment, great society.

58:13But we didn't call it socialism back then. We just called it healthy capitalism. Isn't a lot of this words? It's all words. Yeah, you're exactly right. Like the word socialism isn't magic fairy dust that you can sprinkle on something to like make it go away. Like that, that, that might've worked for like a few years in the 1980s, but, but that dog will not hunt now. And so you're right. It is, it is totally semantic. And that's, isn't that just socialism is, uh, you know, like there's a shrinking and rapidly aging cohort of people for whom that sort of argument carries any weight at all. Yeah, you're talking to one of them.

58:49But I'm glad that you and I are on the exact same page about, you know, the idea that ownership and control the means of production and is a very different thing from, you know, redistribution, like social democracy, kind of the stuff like Sweden does. If you look at the Scandinavian countries, those countries are less regulated than we are. That's exactly right. They're more capitalistic than we are on the production side. And then on the redistribution side, they do a lot more. And so is that more or less socialist than us? Like, it is a totally semantic argument. And I wish people would just stop like saying, well, isn't that socialism?

59:25And they soon will because that, you know, like that's going away. We need to come up with a new term. I thought what George Bush did was pretty, or W, compassionate conservatism. Isn't there, is there room for compassionate capitalism? Woke. You're talking about sloganeering and I'm not necessarily a good sloganeer. I want a bumper sticker, Noah. I'm not good at bumper stickers, except for maybe silly ones. But I think that I would just use the word redistribution to use a word to mean what it means. Instead of tying it to a whole package of ideologies and stuff by calling it socialism, just call it redistribution, which is what it is.

1:00:03Call things what they are. Use terminology to mean specific useful things. My final question, if you know it, is there any economic trend that you're seeing today that makes you optimistic about America, that makes you bullish on America or the world or humanity at large? what are i mean like obviously ai you know is the big reason for optimism you know productivity growth we're already starting to see some productivity growth that's probably from ai we're not sure uh without apparent job loss you know like all these people thought ai was a job destroyer and a human remover and so far it's turning out not to be that like you know there's a few occupations that are under stress and under pressure from from ai but that's true of any technology.

1:00:52That was true of machine tools. That was true of anything that improved our prosperity in the past that now we're not worried about. It's true of databases and computers. It was true of the internet. It's true of everything. And AI so far, like our job markets, you know, there's less hiring and less firing. How corporations hire and fire people is going to change. I think we'll go more toward a Japanese system where we have like salarymen doing generalist jobs for companies and like, you know, instead of highly specialized things and a whole lot more independent entrepreneurs. We're seeing a lot more independent people start small businesses.

1:01:22There's a positive trend. We're just seeing a massive surge in dynamism, a surge in business formation. Individuals can start businesses more easily than ever before. My substack is a tiny business. It is an S corporation. And so we're seeing a ton of that and we're seeing no big negative effects so far of AI on aggregate employment outcomes. And yet we're seeing apparent productivity acceleration. And that is great. That's a much better outcome than we could have, than people would have hoped for even two years ago, even one year ago. Even now, it's better than what people think is happening.

1:01:59You know, people think AI is out there destroying jobs, and so far it's not. And so that's something we need to be more vocally acknowledging of. We need to say like, look, guys, AI is not destroying jobs, and yet productivity is accelerated. And all these people, there's all this dynamism, all these people are starting these small businesses. That's a big reason for optimism. We will need to have plenty more conversations in the future, but for now, I will have to wrap us up. Noah Smith writes the No Opinion blog covering economics, technology, geopolitics, and culture. Previously, Noah was an economics PhD student at the University of Michigan, an assistant finance professor at Stony Brook University, and an economics columnist for Bloomberg Opinion.

1:02:37He left Bloomberg in late 2021 to blog full-time. For more of his work, head to Noah Pinion, that's Noah, his name, pinion.blog to subscribe to his newsletter. Noah, thank you so much for joining us today. And thank you to our live audience for tuning in. We will see you all next time. Yeah, it was great to come on and please have me back anytime. Congratulations on your success, Noah. This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Jorge Carty. Our research team is Dan Shallan, Kristen O'Donoghue, and Mia Silverio. Jake McPherson is our social producer.

1:03:15Drew Burrows is our technical director. And Catherine Dillon is our executive producer. Thank you for listening to Prof G Markets from Prof G Media. If you liked what you heard, give us a follow and join us for a fresh take on markets on Monday.

1:03:41In kind reunion As the world turns And the dark flies In love alone

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