The Index Fund Problemtunity

0:10Hello!

0:10Mary Childs: Did I do good? You did good! Mary Childs, who are we, what is the name of the show that we are welcoming people to? Mary in America. No, it's Slate Money! What if I did a hostile takeover? I am Felix Salmon of Bloomberg. I don't know how much longer I'm going to be hosting this show because Mary Childs is doing hostile takeovers. think. Elizabeth Spires is here as well. Mary Charles, of course, lovely friend of the show, stepping in for Emily Peck this week, who is doing an Axios retreat in Washington. I am a knockoff Emily Peck today. And we are going to have some awesome discussions, very up Mary's alley about stock and bond and that kind of stuff.

0:49Mary Childs: We're going to talk about the equity issuance that Alphabet just did. We're going to talk about employment and what happens to it when you increase immigration. We are going to have a Slate Plus segment on fuck you money and whether it exists. Mary in America is performing a hostile takeover of Slate Money. So subscribe to that and stay tuned because lots of fun stuff is coming up on Slate Money.

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3:48Mary Childs: so in an inversion of the usual slate money-ness i am going to start with the number which is 250 billion dollars which is more or less the amount of money that is going to be raised in fresh equity market issuance from ai type people this year and that is an enormous amount of money and it is coming basically from four companies. There are three companies that are going public, SpaceX, OpenAI, and Anthropoc. And then there is the fourth, which might well turn out to be the biggest equity raise of all, which is a company named Alphabet. Now, I'm just going to come out and say that some of Slate Money's listeners don't even know what Alphabet is.

4:35Mary Childs: So, Elizabeth, who or what isn't Alphabet?

4:38Elizabeth Spiers: Alphabet is the company that most of you know as Google. It's the larger kind of holding company.

4:44Mary Childs: It is a massive, incredibly profitable company. And the way that the equity markets work is that you go public when you're small and you need some capital and you raise money from investors. And then for the rest of your existence as a public company, more or less, unless you're doing a major acquisition or something like that, you just share your profits with your investors and your investors can sell their stock back to other people and they can trade the stock on the stock market and that kind of stuff. Investors don't need to stay the same. But the equity is permanent capital and you try not to dilute it.

5:23So it is actually quite uncommon for public companies to do big equity raises.

5:28Mary Childs: Not unheard of, but it's often a sign of weakness. And yet here we are. Google is raising$80 billion, which is more than the$75 billion that SpaceX is raising. And Mary, why? Like they, historically, they've been doing stock buybacks. In 2022 and 23 and 24, they were buying back like$60 billion of stock a year. They were like, this is how we're returning money to shareholders. And now they've done a complete 180 on that. Yeah, they said that, you know, they already have$100 billion in debt. And I think they were like, why don't we stop tapping that? We don't want to overdo it in one area. And, you know, our stock price is pretty high.

6:14Mary Childs: But they have like$4 trillion in equity. I feel like$100 billion in debt is not so much. It's not that bad. They have pretty low yields. Yeah.

6:23Elizabeth Spiers: I think it's more about preserving balance sheet flexibility, though. That sounded good, Elizabeth. That was really good.

6:29Mary Childs: That a bit like preserving optionality, which is the way Wall Street is referred to doing absolutely nothing. It's in the universe. If you keep coming back to the debt markets, though, they're going to eventually be like, hey, we just saw you. Like, it's like art market provenance. It's actually kind of delicate. I don't know. I feel like the debt markets actually really like regular issuers. They like regular issuers, but they don't. I mean, I think there is a little bit of skepticism, a growing amount of skepticism about the hyperscaling. Sure. I just want to make it clear here that there is no concern about Alphabet's credit quality.

7:04Mary Childs: They have, I mean, they might have$100 billion of debt, but they have like$120 billion of cash. They have more cash than they have debt. There is no world in which they are going to default on this debt, even if they borrowed an extra$80 billion. I have my hand raised. Can you call on me, please? Mary, Mary Childs, what do you have to say? Okay, what if they thought it was a great idea? Because one of the people who want to buy the equity is literally Berkshire Hathaway. And they're like, that's cool. What if it's like that? Okay, so tell me. All right, next question. This is the new pop quiz.

7:35Mary Childs: This one, since Elizabeth got the last question right, Mary, let's see if you can get this one right. No. Who is the chap in charge of Berkshire Hathaway? Greg Abel. He's certainly Abel. Ding, ding, ding. It is not Warren Buffett anymore. No, Warren is, bless his heart. He has retired finally at the age of 207. Good for him. Shouldn't we all? And Warren Buffett famously made one of the world's biggest ever stock bets. I think arguably the biggest ever stock bet that any investor has ever made on any company when he bought a metric fuck ton of Apple shares. And that bet did incredibly well for him.

8:11Mary Childs: And a lot of the time people started talking about Berkshire Hathaway as basically just being Apple plus a bunch of other stuff. It's not quite that anymore. But while he was very good at being early and right on Apple, he never quite got comfortable with Google. And yet now, finally now, Greg Abel has taken over and he's like, well, Warren never managed to pull the trigger on Google, but I am going to pull the trigger on Google.

8:39Elizabeth Spiers: But Greg is able to do it. Exactly. Now that Mary made a pun, I had to. If you're looking at the buffet of options, all right, finally we found a way to use it. It was warranted. All right.

8:51Mary Childs: Guys, like, no, stop it. Only Emily Peck can do terrible dad puns. Oh, my God. Am I doing such a good job at being Emily right now? You are. You're doing such a good job at being Emily. So this is one of those things that we will remember, those of us with long memories from the financial crisis, where, like, if a bank wanted a big vote of confidence, the first thing they would do is go to Berkshire Hathaway. And if Berkshire Hathaway said, sure, we'll buy$10 billion of whatever security you're offering, then everyone else would be like, if Warren's good with it, we're good with it, and they would pile in.

9:24It was better than the government.

9:25Mary Childs: And certainly Abel is able to get a reasonably good deal. He's negotiated whatever he's negotiated for this$10 billion of stock he's buying. But Alphabet does not need Berkshire Hathaway's vote of confidence. Everyone is perfectly fine with Alphabet. Its stock is doing incredibly well. And so like, I can see why Greg Abel, if he's a good old-fashioned value investor and he looks at Google's profit margins and moats and all the rest of it would be like, I want to be an investor in Alphabet. I'm still struggling a little bit. So Mary, if you could expand a little bit on your answer here, what is it that Google gets from Berkshire in particular?

10:05Well, I think one of the things that it gets is maybe Google doesn't need the vote of confidence, but hyperscaling might. It does make one feel a bit better about the prospects of actual profitability from AI products if Berkshire is willing to co-sign it.

10:23Mary Childs: Right. So the idea is that everyone kind of understands Google as a media property. And now Google is quite explicitly sort of pivoting to hyperscaling and AI and search is sort of being, if not deprecated, then changed out of all recognition. And so they're like, this is a whole brave new world that we're entering here. and weirdly this is like an IPO for new Google and Berkshire Hathaway is buying in with a$10 billion allocation. And it's so tiny when you think about it. That's adorable. Yeah, I know.

10:57Elizabeth Spiers: It does make it though one of their five biggest public companies that they own. The other four are Coca-Cola and there are three others.

11:05Mary Childs: American Express, Apple, and Wells Fargo, I think. I can't remember. I love that Coke is one of them because Warren supported them single-handedly with his consumption. That's sweet. That's great. That's buy what you know. The other thing is that Berkshire has a$350 billion cash pile or thereabouts. And there are really very few things you can do with$350 billion. There aren't that many companies you can buy with$350 billion. And God knows they've been wanting, they've been out there elephant hunting, as Warren liked to say, and they have failed to find any elephants. The last elephant they bought was Burlington Northern Santa Fe Railroad Road.

11:41Mary Childs: and that was, what, 10 years ago, something like that? Wow. And so now it turns out that if you need to put$350 billion to use in the equity markets, it's actually really easy to do that by buying Alphabet stock. You can just pour it into a data center and they will evaporate it like water. It is. No, but, you know, there is, as I say, there's a$4 trillion free float of Alphabet. So, like, if you're making this bet, the idea is that if it works out well and the company keeps on doing what it says it's going to do, you could increase that holding over time. And it could become a really, well, as Elizabeth says, it's already a pretty core position, but it could become an even more core position.

12:19Mary Childs: So I can see this from Berkshire's perspective. I just want to sort of go back to the equity versus debt idea, though, and say, like, there used to be a lot of bellyaching. Go back a couple months of people saying, oh, my God, all of this investment in data centers and AI, where's all the money going to come from? The debt markets can't support it all. You know, it's all going to end in tears. And now, like, hey, we have$250 billion of new stock issuance. And it turns out that if the debt markets can't support it, then the equity markets can. And that's OK.

12:54Elizabeth Spiers: Well, I think there's still some concern about the debt. And I know that you like to tell me that that's pointless because the hyperscalers are funding most of the stuff out of cash flow. And that's true. But, you know, there was an earnings call for NVIDIA a little bit back, and they said that 50 % of the forward demand for GPUs is coming from the hyperscalers. But that means that 50 % is really coming from these neocloud companies. And I think that's where the debt problem might come into it. It's not really a concern for the hyperscalers, though. Okay, fine.

13:23Mary Childs: Like, some of the debt goes bad. I'm still not worried if that happens. Mary. Sorry, I raised my hand again. Felix, I feel like you've been hunting for an answer. And I wonder if you knew the emotional answer that I have in my heart. And that's what you're looking for. May I submit that for consideration? Yes. Is that what's happening here? Yes. Tell me what is in your heart. Yes. Okay. As a person who spent her career in debt markets and who loves debt markets and who is sourced in debt markets and not in equity markets. And that's on purpose because when I reported on equity markets for like three months, I was like, oh my God, I hate this.

13:55everyone's just like kind of dumb and yelling at you all the time and trying to sell you a story and it's like not that smart it's not that interesting i mean hard cosine here right okay felix is the thesis that you wanted for me that google's going to the equity markets because they're dumber and they'll buy an optimistic story whereas dead investors are gonna get like bro i'm over it no i don't want your ipo i really little baby i really really like this i really

14:19Mary Childs: like this because to use nick dunbar's formulation equity investors are the men who like to win and bond investors are the men who hate to lose the bond investors all they care about is the downside because there is no upside the best case scenario is the base case scenario and the you can get capital appreciation okay bond traders are another thing but bond investors Any bond, like long-term bond investors, they're like, I am buying this bond because I want to get the coupons and then get the principal back at the end. And go home and not have to worry in between. And yeah, if you are telling a story, bond investors don't care.

14:59Mary Childs: So long as they get their money back. And in the case of Google, they're going to get their money back. They don't care. Equity investors love a story. Equity investors are like, I know that this is risky, but my job is to take risk. I want an upside. And so, yeah. I want to go to the moon. I want to go to the moon. So it's easier to sell equity if you're selling a story than it is to sell debt, 100%. But then the other part of this, I think, and this is just also dumb and obvious, but it's worth saying, is that the stock market is high. And especially, like, Google stock is trading at very high levels.

15:34Mary Childs: And all tech stocks. You'd be a little dumb not to take some of that. If Google was buying stock in 2022, like buying$60 billion of stock back in 2022, and now it's selling$80 billion in 2026, that is effectively buy low, sell high, right? This is just like a good stock trade for Google. A good hedge fund. This is like, I know that in terms of returning money to shareholders, this is not exactly how companies think. But by the same token, when your stock price is high, what that means is that equity is cheap. and the cost of equity is low. And so if you're issuing$80 billion of stock at a$4 trillion valuation, that is a tiny little sliver of your company that you're giving away.

16:19Mary Childs: And you can afford to give a tiny little sliver of your company away to get$80 billion fucking dollars. And that's a good deal for you. And it is cheaper right now for Google to issue equity than it is for Google to issue debt. And even though its cost of debt is very low, its cost of the equity is even lower. So it just makes financial sense to do it.

16:39Elizabeth Spiers: Well, I also wonder about something Mary said earlier, that maybe they're doing it because they want to build up confidence in the hyperscalers as a sector, given the skepticism that people are expressing now.

16:51Mary Childs: And so, well, like I've seen a bunch of commentary and I don't really buy it, that they're sort of queering the pitch for SpaceX. Like once people spend$80 billion dollars on a bunch of Google stock, they're not going to have quite as much appetite for SpaceX stock, let alone the anthropic and open AI stock. I wish people were that petty. Like, can you be that petty legally? I feel like you have some duties that prevent, but go for it. But yeah, I mean, there doesn't seem to be any doubt that there is 250-ish billion dollars of dry powder just sitting there on the sidelines, happily waiting to get invested in AI companies.

17:34Mary Childs: And that's kind of impressive, given how much money has already been invested in these companies. It's almost like we dreamed up AI just to have something to invest in. We're like, oh, thank God, this is cash intensive. Everything was getting too cheap. We really needed it.

17:50Elizabeth Spiers: It is crazy, though, that 61 % of all VC money last year went to AI. That is bonkers. It is bonkers. And it is just like, you know, you see the memes and the like really good TikToks of people being like, we just think about AI. Can we have some money? And the VCs in the audience are like, here's my money. Like, that's true. It does feel a little bit like dot com 1.0, where if you just tacked on dot com to whatever your business was, you were suddenly treated like a tech company. You can almost do that with AI. I feel like there are a lot of smaller companies have definitely gotten away with that.

18:25And it's not clear. Like, I feel like there's, you need to have some sort of justification ostensibly. You need to be like, oh, like there's a reason why we're AI. Here's how it's like part of our business. But AI works so poorly so far that no one, there's very little ability to differentiate between like a company delivering a quality AI product and a company delivering a truly garbage AI product. I feel like those are kind of in a tighter range than I as an investor might want.

18:48Mary Childs: Exactly. Like it's really hard to know, or, you know, whether, say, Palantir's AI is actually amazing or actually crap. You're looking at it from the outside. Everything is covered in, like, veils of top secrecy, and no one has a fucking clue. Right. And they're like, actually, it's alive. Sorry. In a way, that's also why these big LLM companies, OpenAI and Anthropic, and to a certain extent, Gronk. I can't believe I'm placing it in with those other two. Yesterday, I heard someone pronounce it Gronk. I just am excited about that. But I think this is why they are able to attract such enormous amounts of money in the IPO market.

19:29Mary Childs: It's precisely that people are like, well, I don't really have the ability to trust random company that says it has a good AI, anything, because lunch could get eaten by Claude tomorrow the minute that Claude starts being able to do it. But Claude itself is investable. Right. And if history is any guide, they'll just buy the better ones and wrap them into the anthropics and Googles of the world anyway. If there's a better one that literally does something that Claude can't do natively, they will buy it. Mark Zuckerberg will send an explicit email to kill the competition. I mean, SpaceX is already...

20:00Mary Childs: Just kidding, Mark. No, but SpaceX has already done this, right? They have this agreement to buy Cursor for$60 billion. And they're like, Cursor does something we can't do. So yeah, I'll throw$60 billion at you.

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22:19Mary Childs: Today's episode of Slate Money is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value in fixed income is not easy. Bond markets are massive, murky, and let's be real, lots of funds throw a couple flashy funds your way and call it a day, but not Vanguard. Vanguard bonds are institutional quality. It's a commitment to your clients. It's top-grade products across the board. There's more than 80 bond funds. They're actively managed by a 200-person global squad of sector specialists, analysts, and traders, of course. This isn't about star portfolio managers.

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23:49Here we go.

23:49Mary Childs: Here we go. Mary, explain what the problem or the opportunity is. The problem-tunity. The problem-tunity. Thank you, Felix. I'm excited to present on behalf of my dear friend and colleague, Bess Levin, an article that she wrote. I'm basically channeling Bess. Bess just wrote something from New York Mag the other day called Good Luck Trying to Opt Out of the AI Stock Market Bonanza. And I loved it because it read my mind because it was exactly what I and I think a lot of people have been thinking about, which is these monster IPOs are coming down the pike. All of the, all asterisks, Felix, I hear you.

24:21All of the index fund providers where you and I put our retirement funds, you know, they build the indexes and then everybody goes and buys them. And so my BlackRock fund and your TIAA fund and whatever all buy these products. And those products have rules that prevent unprofitable companies, that prevent too new of companies, that prevent like little guys from getting in that are maybe not the best companies, getting into those indexes, which then you and I invest in our retirement accounts and or in our discretion. I don't know what you do. So all of those companies had been bending their rules to allow these monster IPO companies to the anthropic open AI and SpaceX's into the indices.

25:04And I'm an index fund investor, but I don't want that. I don't want that. I don't know about you. I feel like you don't want that. Most people hate AI.

25:14Mary Childs: So, okay. So this is exactly, this is exactly, there are two incredibly different views of this. And I think I placed myself on the exact opposite side of that spectrum on, on what you might call the bogle head. You're bullish. You're a buyer of AI here. So we talked about this many years ago on Slate Money when Tesla was not in the S &P 500. For years and years and years, Tesla was this massive growing company that was becoming one of the biggest stocks in the stock market. And S &P DJI, the company that builds the S &P 500 index, consistently refused quarter after quarter to allow Tesla into the index on the grounds that it was losing money.

25:59Mary Childs: And they were like, in order to get inculcated into this grand group of 500 stocks, you need to be profitable. And so every S &P 500 investor lost out on all of those Tesla gains because Tesla was never part of the index. And then when Tesla finally made enough money, like more than zero, to become part of the index, it was already valued so highly that there weren't so many future gains. Or so people thought. In the end, it wound up going up even more. But the story was the whole point of index investing is you don't second guess the wisdom of crowds and the wisdom of the stock market. The stock market understands that a company that is losing money today might be making money tomorrow.

26:43Mary Childs: And so it's worth ever larger amounts of money. And you want to invest in the stock market and you want to make that money. And therefore, it is a bit weird and wrong for the index providers to be like, yeah, no, you can't make profits on Tesla because it's not a profitable company. Who are they to stop us from doing that? And so long as you are investing in a company that is supposed to be a cap-weighted collection of all of the stocks in the market, which is basically what an index fund is, you should include all of the stocks in the market, even the ones you don't like.

27:16Elizabeth Spiers: Well, isn't the point of these restrictions to really kind of reduce the risk profile of the index? No, that's not. So the profile of a company like SpaceX or Anthropic or OpenAI is going to be different than, I mean, even Tesla. Maybe it's not risk so much as like prestige almost. This is a gatekeeping function.

27:35Mary Childs: I would push back strongly on the idea that it's a risk thing. It is not. If all of the stocks in the S &P 500 start levering up and becoming ever riskier because they're all borrowing lots of money, then fine. That's up to them. It's not S &P's job to say, oh, no, now you're too risky. We're going to kick you out. That's the debt market that does that. Yeah, there aren't like bits of the S &P 500 where they're like, we are not going to allow the tech sector to be more than 25 % of the index, because then that would be too much concentration or anything like that. If you want... There is a worry about that.

28:06Mary Childs: There are lots of worries about the stock market, right? And the whole point of index funds is that if you want to put together your own personal portfolio of things that you consider to be low risk, or you don't want too much concentration or whatever the hell, you can do that. If all you want to do is buy a cap-weighted bucket of every single stock in the world, then that's what a broad index fund is designed to provide. What I love about this is it reminds me so much of that Adriana Robertson paper from a couple years ago, Passive in Name Only. She's a law professor at Chicago who's obsessed with index funds, and she's extremely funny and smart.

28:42And the paper basically says that like you think you're investing in a passive thing, every index is active because the selection at the outset and also on an ongoing basis makes them all different. There are more, As you know, I know you know that there are more products, more index products than like exchange rate than there are stocks to put in those. So I just think that, you know, it's a slippery slope.

29:06Mary Childs: My view on this is that there is a very legitimate worry and there is an illegitimate worry. The illegitimate worry is these stocks are too risky. These stocks aren't profitable enough. these stocks are just not gold-plated enough to belong in a broad index fund. These stocks didn't go to Harvard. Exactly. That one I'm like, eh, fuck off. The legitimate worry is the one about the free float, which is that if you list your company at a$2 trillion valuation, but you only issue$50 billion of stock, and suddenly every index fund in the world has to buy your company according to a$2 trillion weighting, then you're going to have more people trying to buy your stock than there is stock available to buy.

29:58Mary Childs: And you're going to get this artificial squeeze in the value of your stock. This is a problem that has already been solved. All of these indexes are what they call float-weighted. So when, if S &P 500, it turns out that they're not going to, but if S &P allowed SpaceX into the index on day one, as a lot of people expected them to do, but in the end, they didn't, then on day one, it would only be about 0.1 % of the index because the float is so small. Eventually, when in six months or a year, when all of the stock is freed up and everyone is free to sell their stock and all the rest of it, then it would expand to being like a full weight.

30:43Mary Childs: But in the initial months, which when people are worried about, that wouldn't be a problem.

30:48Elizabeth Spiers: I love that. Bess is correct, though, in this analysis. Bess is always correct.

30:52Mary Childs: So Bess is basically saying that Anthropic and OpenAI and SpaceX should not be in the index. Is that what she's saying?

31:02Elizabeth Spiers: I think she's saying that you can't avoid your money being in any of these companies if you are investing in indexes. Exactly. There's no way to work around it.

31:10Mary Childs: But that's true of every large company on the stock market, right? When they become a large company on the stock market, they're just going to be a large company on the stock market. So if you're buying an index fund, ipso facto, you're buying them. Why is that bad? I think that in AI, you know, you've seen all these polls come out and Bess cites them. that the favorability basically of AI has plummeted in the last year or so. And I think people are seeing the effects in their lives of like layoffs coming and we expect maybe more layoffs than have come. There's the water use, there's AOC holding up a bottle of like dirty water from near a data center.

31:49I think the deleterious effects or like second order effects of these technologies are pissing people off. And so more than when you're like, oh, I'm getting like a car company in my index fund. Like it's whatever, but you're getting a batch here. You're getting a batch of companies that are enormous and that everybody on Wall Street seems so excited about, you know, with some exceptions, but like generally excited about. And so you know that you're going to be like at some point in your life, like so crazy overweight these companies because of their gargantuan size and like dominance and forward profit projections.

32:18Elizabeth Spiers: Also because narrative is so important in stock market for the reasons that we all discussed. Somebody on Blue Sky yesterday had a tweet or whatever we call them on Blue Sky. that said something like, you know, it's amazing how badly the tech industry has told the story of AI, because now people associate it primarily with job loss and the deleterious effects of data centers. It would be like if you were putting out a new car, and then you decided that you were going to market it by running over the family dog to demonstrate its efficacy. That's basically what the AI companies have done. Like, I don't think that they're...

32:51Mary Childs: Well, I mean, I can see that in the court of a certain type of public opinion. I certainly can't see that in the stock market valuations. As we were saying earlier, the equity markets are all about storytelling. And as far as the AI story is concerned, they're doing a fantastic job. I think that's right because you do see corporations like all over the place adopting AI, whether or not it serves them necessarily. And there's an enormous lump as they work through how to make it work for them. And like their productivity kind of drops off until they get it right. But I think normal people who have been taking the good advice of just buy an index, don't try to day trade, don't try to time the market, just buy your index fund and go do your other job.

33:32People took that advice and now they're like, great, this thing that I'm investing in by accident, this thing that I'm going to have to invest in without my consent, basically with my implicit like preordained consent, now is going to take my own job. Like, I don't like that.

33:45Mary Childs: But it's good. It's a natural hedge. It's like, at least you're invested in the company that is taking your job. I don't think it works that way.

33:53Elizabeth Spiers: That is definitely not something people think about when they think about their own job loss. I talked to this guy once who was really mad at private equity. And I was like, oh, yeah, like, of course, yada, yada. We're all mad at private equity, whatever. And he was like, no, my mom, you know, had a city pension. And she put money into that pension, which then put money into the private equity companies, which then bought her my dad's job or something and like destroyed that. You know what I mean? Like he drew the circle really tight of causality of like she was funding the very thing that ended up fucking us over.

34:21Mary Childs: Okay, but let's be clear about this. In the stock market, if you buy a stock, you are not funding the company. If you buy a stock, you are just buying a stock from someone else. You're buying it from some other one who's selling it. You're funding the, yes, you're not directly participating in the IPO. But I think that there's, those things are so closely related. I don't know how much I care about that difference.

34:41Elizabeth Spiers: If all of you have to put money into the equity of an AI company, you're not funding them directly, but you are potentially causing the value of the company to appreciate. Yeah, but that's good because you're making money. And I think the resentment is just like, we don't want to help these people.

34:56Mary Childs: Okay, I am old enough to remember when the largest company in America by market capitalization was ExxonMobil, right? And ExxonMobil was like a bad company that people hated. And everyone in an index fund had a large chunk of ExxonMobil. This is an old story. I think this is a different kind of hatred. Felix, you're forgetting the China shock. We've learned some lessons about distribution. Rich people have index funds. Poor people don't. The gains, the profits from this will not be distributed to the poor people whose jobs are getting AI'd. We all see it coming and we know that the overall societal outcomes from that kind of economic bomb going off are incredibly painful and that's not exciting.

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37:41Mary Childs: won one did I win Mary you always win you win every single segment by default no I don't want default I want to actually win so no you you win every single segment just because you're smarter than the rest of us. No, that's not it either. And also funnier. And also better looking. No, stop it. You're making it work. All right, segment three, let's do it. Segment three. No, no, but this is, okay, explain the segue from what you're just saying to segment three. Well, I was just saying that the gains are not distributed evenly. And no, I don't, can you do it? I didn't have enough coffee. I'm sorry, Felix, I take it back.

38:13Mary Childs: So the question is, in this world of labor and capital diverging more than they have in a very long time. Really good. Good segue. When you have capital going up and to the right and labor sort of going down and to the right, how do you fix the labor problem? And Mary has her hand up. Can I just make a quick aesthetic objection? It's always going to go to the right. It's driving me crazy. Everybody's always saying it makes it go up and to the right. The right is time. It's just the x-axis is time. If it's not going to the right, you have much larger problems. Thank you. No, no. If you can make time go backwards, then you can go back and buy Apple stock.

38:47Mary Childs: Anyway. Much larger problem-tunities.

38:49Elizabeth Spiers: If you're on the other side of the chart, it's going up. I loved Tenet. I did. But I'm just saying that that saying pisses me off. Please go on, Felix.

38:58Mary Childs: I will just blithely continue here and say, let's concentrate on the labor side of things rather than the capital side of things. And one of the most interesting questions in labor economics is, what happens to wages? What happens to employment when you get a positive labor shock of like more people entering the labor force, specifically from immigration. The Trumpist answer is unambiguous. They're saying like immigrants take our jobs. If we kick the immigrants out, then those jobs will have to be taken by Americans. There will be less competition for those jobs. So the price of that job, which means the wages will rise and unemployment will go down among Americans and wages will go up.

39:44Mary Childs: And so immigration is bad for the existing labor force. If you look at Finland, this is arguably true. Finland has received a large number of immigrants from Ukraine. Those immigrants are finding it hard to get jobs and unemployment has risen as a result. So the labor force is looking worse and unemployment is over 10 percent, I think, for the first time in recent Finnish history. On the other hand, if you look at Spain, this is categorically false. Spain imported 3 million immigrants from Latin America in recent years, which is just an astonishingly enormous amount of immigration. Way more immigration than appeared in the U.S.

40:30Mary Childs: on a sort of per capita basis. And the result of all of this immigration from Latin America is that unemployment in Spain has gone down quite spectacularly. and is now lower than unemployment in Finland. It is still high on an absolute level, but it is lower than it has been in years. And Spain's economy is like the number one economy in the world, per The Economist. And it is booming and unemployment is falling. And all of this immigration seems to be really good, not only for the immigrants who are getting jobs, but also for native Spaniards who are also seeing better work opportunities as a result.

41:07Mary Childs: One of the mechanisms that causes this anecdotally is that some of the lower skilled immigration is going into elder care and child care, which is freeing up Spanish women to take jobs in like the white collar workforce. But Mary, you're going to broaden this out, I know, because you're Mary. Oh, no, I'm just glad you made that point, because there are these jobs that are so crucial to the economy and that are not AI-able, interestingly, that enable more work, that grow the pie. And like you're saying, like these care based jobs enable the family member who has been doing it for free to kind of outsource.

41:43And that's just a lot more GDP. OK, so Chloe East at the University of Colorado Boulder and her co-author Elizabeth Cox just came out with a new working paper called Labor Market Impacts of Ice Activity in Trump 2.0. And this basically look at what happens when Trump targets an area, the Trump administration targets an area for ice deportations. And you can kind of compare that to an area that hasn't been targeted because it has been so uneven across the country. Right. And what they found is these mass deportations are actually shrinking the overall pie. It's not only obviously bad for the people being deported, but then that's bad for the companies that they were working for because those companies are like, oh, shit, where did my people go that were working for me building these houses and like digging these foundations?

42:26And so then they're like, well, I can't deliver this house on time and they can't find the labor to replace them. So the overall industry is shrinking in these areas that were like higher percentage of labor of people who have been impacted by these deportations. And so that's just overall net fewer jobs.

42:44Mary Childs: And one of the things we should mention here in contradistinction to Spain, and I'm not saying that like caregiving is a low skill job. But I am saying that in the construction industry, jobs that we're talking about are genuinely skilled jobs, right? It's masons and carpenters and people who you need to be trained up and you need a certain amount of years of training in order to be able to do these jobs. And if you deport those people who are capable of doing the jobs, there is no one left who is capable of doing the jobs. Native-born Americans just for whatever reason don't tend to go into these trades in remotely enough numbers to be able to fill the demand.

43:24And they haven't had to because there was an enormous supply of people who wanted to do them and were doing them and had the skills and expertise.

43:31Elizabeth Spiers: And the Trump theory is that wages would go up and then Americans would want those jobs and that has not happened at all. But I do think the American situation is not dissimilar to Spain's in terms of how immigrants fit into the economy. Finland has problems because, first of all, this sort of match between skill set and jobs that are needed is misaligned. aligned, the biggest demand for jobs in Finland is for very high-skilled, white-collar jobs. And that's not true in Spain. I don't think that's really true here.

44:00Mary Childs: I am a little bit confused as to why there isn't a bunch of demand for this caregiving jobs in Finland. There are only like 10 people there. It's just like, they've got, they're good. They've got their cup of tea and their reindeer.

44:15Elizabeth Spiers: I think they've already got the care economy figured out. That's part of the appeal of Finland. They're healthier, they're happier. Also, Finnish is apparently a very difficult language to learn. And so that's another issue. Most of the immigrants are Ukrainian, apparently. And so learning the language and being able to fit into those high-skilled jobs is just much more difficult. Germany has the same issue.

44:33Mary Childs: Can I just mention, as an aside here, we are cribbing massively from this wonderful FT article that my wife actually requested that we talk about. But the author of the article, whose name I do not have in front of me, talked to the OECD analysts for Finland and Spain. And the OECD person covering Spain covers Spain and Chile, while the OECD person covering Finland covers Finland and New Zealand. No. What? By the way, it's Sarah O 'Connor, who is great. They just draw countries out of a hat. It's so wonderful. Finland and New Zealand, they're both... Are they shaped similarly, maybe? Longer than they are wide.

45:14I think we should also cite the Atlantic piece called The Spanish Exception, which I really loved. It's also about how Spain has become this economic success story, which is so fun if you have a long enough memory to have been there in 2011 when everyone was like, Portugal, Italy, Ireland, Greece, and Spain are so screwed and they're never going to get better and they're awful and they're the bane of our existence in Europe. What? They're all good now. That's amazing. They did it. That's so happy.

45:41Mary Childs: As someone who's been spending quite a lot of time in Ireland, Ireland is booming. Ireland is doing great. Yeah, thank you. There's one little wrinkle that I want to add to this, though, which is to go back, Mary, to something you said earlier, which is that these caregiving jobs can't be replaced by AI. I have this theory that the real labor force revolution when it comes to AI is actually going to be in blue collar work and not white collar work. Right now, everyone is worried about AI is decimating the ranks. I got bad news for you. I don't know which color is which color. I've never known.

46:17Mary Childs: Okay. So basically right now, everyone is worried that... Oh, you're saying it's a China shock for rich people. Recent graduates can't find jobs because AI can do those entry-level jobs better than the recent graduates can, that kind of stuff. So it's the rich and educated who are being disrupted by Claude. Get them. Sorry. Which might well be true. But if you just go forward some number of years, and I don't know how many years, it's probably more than two and it's probably less than 20. But you can see a world in the future, which is almost certainly going to arrive, when all of these humanoid robots that Tesla and everyone else is making are actually going to achieve their potential.

46:58Mary Childs: And they're going to be able to load the dishwasher and they're going to be able to fold the laundry. and all of the stuff that they can't do right now that they famously can't do right now that the famous test is will it be able to walk into a kitchen work out how to make a cup of coffee and make the cup of coffee just by looking around and seeing what kind of coffee making equipment there

47:18Elizabeth Spiers: is i mean i can't do that yeah i feel like the jetsons set us up for disappointment on this you know i had expected us to have flying cars by now poor allocation of capital and innovation We could have done it.

47:29Mary Childs: It's a really tough AI problem, but it's a tough AI problem that everyone expects will be solved at some point. Can you put a date on it, though? Yeah, I did. Somewhere between 2 and 20 years. No, no, no. Make it tighter so that we can actually come back and be like, Felix, TikTok, it's the time. So, no, I can't. And I'll buy you cashmere socks or whatever. Okay, well, yes. I mean, I like the idea of turning this into a bet.

47:52Elizabeth Spiers: I knew that would work. Well, Elon says that we don't need retirement funds anymore because AI will be doing all of our work.

47:59Mary Childs: So Elon is one of the, Tesla is one of the companies that is, I mean, Tesla has basically become a robot company rather than a car company at this point. If you look at the valuation of Tesla, the stock market in its infinite wisdom, you know, the wisdom of the crowds is saying that like they believe these humanoid robots are going to be here sooner than you, you know, pretty soon and making lots of money. The minute that happens, at that point, it is incredibly disruptive to the caregiving economy, to the housekeeping economy, to all of these jobs, the minute that happens, I would actually be very happy having a robot nurse pick me out of bed and put me into my wheelchair or whatever because they are less likely to drop me and steal from me.

48:39They don't smile. They have such a garbage bedside manner no matter how you program them. Now, it's true that not all people have good bedside manners. So again, there's going to be a dispersion in talent and you have to be above average bedside warmness to really excel in these jobs. I think you're right. I think there's like a scale problem, too, where like there will still be those jobs. If you look at car manufacturing as instructive here, those jobs were all very manual, right? And I just am thinking, guys, on OddLabs the other day, I regrettably called them human hand jobs. I called them hand jobs.

49:12Mary Childs: You know, Rana Faruha did that on Slate Money once as well. Did she? Yeah. Oh, I feel better. So let's just call them that. She talked about the head jobs and the hand jobs. She's right. Okay. We're standing by it. if you look at like the factory floor for cars, it used to be all people. And now there are robots and there are people babysitting the robots. Are there fewer people? Yes. Do they make cars more good or faster? I do. Okay. Yes, there are definitely productivity gains and like cost gains, but probably from laying off those people, I don't know what proportion, but there are still, you know, you need a mechanic to come fix the robot.

49:43You need somebody to make sure the robot is doing whatever, you know, doesn't get like confused and go the wrong way. So there are still jobs. It's just fewer jobs and it's different skills and the skill transition sucks.

49:53Mary Childs: Right. But my point is just that the lower skilled jobs are the ones being the most disrupted in this scenario.

50:15Mary Childs: On which note, we should really move on to numbers round. Elizabeth, do you have a number?

50:20Elizabeth Spiers: I do. My number is 350. and that's dollars. And that's how much a t-shirt from the 99 NBA finals sold for on eBay, because now there are a lot of people who are super excited about the Knicks. And some of them, me included, are not longtime Knicks fans, but we want to get in on this, right? Fairweather fans. I love it. Admitting it. If you have a vintage Knicks shirt, then you can sort of cosplay as a longtime Knicks fan. I die. That's so good. So vintage merch is selling really well right now. Did you buy it? Are you the winning bidder? Did you buy it? That's awesome.

50:55Mary Childs: No, I did not buy it. Elizabeth, you could have expensed it. Yeah, if it's on the show, then that's a legitimate business expense, right? Go do it real quick, and then it counts. My number is 16. Good number. 16 is the number of American colleges where tuition next year is going to be more than$100 ,000 for you. Worth it. That's terrifying. And none of those kids are going to get a job. Like, what are we doing? And you know what? The one which I think is highest is one which I'm not sure I've heard of called Harvey Mudd. It's$104 ,512 if you want to go there for a hundred. Is Washington and Lee on that list?

51:36Just wondering, asking for an alumni.

51:38Mary Childs: Washington University in St. Louis is on the list. No, that's not me. Frequently confused. And NYU and USC and Vassar and Wesleyan and Duke and Claremont McKenna. But yeah, obviously not Harvard and Yale because they have lots of endowments they don't need to. That's nuts. Yeah. This one time I got into Vanderbilt and they offered me a scholarship, thank God, because it was really expensive, of$1 ,000. I mean, the one thing I would add here is that increasingly no one pays the rack rate. In order to pay that full$104 ,000 of tuition or whatever, you need to be obscenely rich. They will always throw some kind of incentive at you.

52:19Mary Childs: But on another level, yeah, they're a great kind of matter somehow. It normalizes things. Didn't we used to have a bunch of international students that were like the heirs to enormous fortune paying the full? Yeah, international students found it harder to get the discounts, for sure.

52:34Elizabeth Spiers: When I was at Duke, they weren't eligible for any kind of financial aid at all. So that was, and I think Duke was like 25 % international students and they were all playing directly.

52:45Mary Childs: But now, of course, all of those Chinese students have fucked off. So if you don't have to worry about can the international students afford the rack rate, because there aren't any international students anymore, then you just make it more attractive by saying, well, the rack rate is$105 ,000, but you only have to pay$85 ,000. So really, you're saving$20 ,000 a year. It's a sale. Let's go to college. Yeah. Anyway, Mary, what's your number? my number is 395 which is how many youtube subscribers my new channel has is that a high or low i know right it's confusing so i was until very recently a host of planet money where we had large numbers of downloads and subscribers and people that listened and and i left and i started something brand new but yeah it's the numbers are smaller but they're growing and it's really fun and we should add that we used to call this a podcast now we just call it a show.

53:40It's a talk show. You know what I mean? It's a video first interview chat podcast.

53:44Mary Childs: It's a video first interview chat podcast. But for those of you who are listening to this show on Apple Podcasts or Overcast or Spotify, you can also find it there. Yeah, you can get Mary in America wherever you find your podcasts. So it doesn't matter to me. Go out there and subscribe to Mary in America. Thank you. Thank you to Jessamyn Molly for producing and mostly thank you to Mary Childs for being amazing and brilliant and thank you for coming on. Thank you for having me. So fun as always. Yeah, we will be back next week with more Slate Money.

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