‘This is Something that Traditional Economics Isn’t Prepared to Deal With’

25:18It's abstract. It's depersonal. It's not the way, I do not think this is the way Trump conceives of government. But he's got people around him. I actually find what just happened with the AI chips shocking. So background of this for people who have not been following it as much. We have had, since the Biden administration, pretty tough export controls on forms of chips that are very, very useful in creating frontier AI systems. And Trump just cut a deal on the urging of the CEO of NVIDIA to ship some of the more advanced NVIDIA chips to China. and it is just on some level to me impossible to, having covered a number of White Houses, you just normally have a bunch of advisors around being like, sir, that's not our policy.

26:12Like everything you have said, everything we are trying to do is trying to maintain dominance on this specific frontier, AI, against this specific competitor, China. So you can't give them the chips just because one of the CEOs who you've now taken a cut, you've had the country take a cut in this company wants to. them giving China the NVIDIA chips just struck me as like the final collapse of the China policy, at least at any level of intelligibility in the Trump White House. I just didn't have a way of reading it aside from that. If you're going to ask us to explain it, we're going to struggle.

26:49See, you know, the David Sacks argument is that the important thing is that NVIDIA, the American chip company, remains the dominant infrastructure for the development of AI. And I don't find that to be completely unreasonable. I don't find that to be a completely absurd argument. So there's the, on the one hand, dominance of AI, the question is like, who is at the edge of developing models, right? That's certainly one way of measuring who is at the frontier of AI. But I think it's totally, it does not strike me as per se crazy to redefine the question of the AI race as on whose chips and on whose software architecture will all AI models be built in the future.

27:33I don't have like a view on like which is right or wrong. I'm just saying it does not strike me as necessarily absurd, that view that it is a win if everyone is using the chips of an American design chip. On some level, I disagree with you, but I don't think it's absurd. What I would say about it, though, is I guess what you could say is the Trump administration spent a year evolving on the question of China. I would find it genuinely interesting if a member of the Trump national security team would come out and give a speech being like how we rethought everything on China. But nobody did that.

28:04I mean, we just went from one policy to the other without anybody really explaining how the theory of the policy changed. I mean, I think that's right. And I doubt anyone in the Trump administration was like, OK, we need to change our approach right now. we've had this big, you know, realization. What I would say, if you think about how China views the sort of technology competition with the U.S., the thing that comes up quite a lot domestically in China is, have you guys read The Three-Body Problem? Yeah. Or, okay. I never read it. Okay. I know I should. There's a pretty good Netflix. I've watched the Netflix show.

28:39Yeah, the Netflix series is good. Yeah, I should watch it, yeah. Very brief synopsis, but, you know, aliens are threatening Earth, and basically all of humanity comes together at some point and develops technology to get rid of the aliens. Good. In a domestic context. I would say that does some violence to the plot, is my take. It definitely does. But, you know, we don't have that much time. So I'm shortening. Yeah, they're long. But like in China, there's this idea that if the U.S. completely cuts off the country from global technology, then China is going to accelerate its own technological development and basically do everything that the rest of the world does, probably more cheaply and at better scale.

29:22And so that was a concern that we saw starting to bubble in the Biden administration when they toughened up the initial restrictions on chips. We saw China start to, you know, allegedly produce some pretty advanced things. So I think there is a concern there that if you press too hard, China is just going to double down on its own development.

30:11So I think we should move to talking about another major economics trade there, which we've begun to back into here, which is artificial intelligence and the huge AI build out. And I want to start here, Tracy, by showing this chart from JP Morgan. Walk me through what you're seeing here. Yeah. Okay. This is a U.S. real GDP growth contribution from tech CapEx. And as you might expect, technology-related, AI-related CapEx has become a much more important driver of GDP growth. I can't tell on this particular chart, but I heard 40 percent of U.S. growth in 2025 is estimated to be coming from AI, which is more than the growth we're getting from consumer spending, which is pretty phenomenal in the context of the U.S.

30:59economy. I would also just add, right before we came in here to record, I saw a number from Standard Chartered. They were saying two-thirds of U.S. growth this year is coming from AI. And, you know, You never want to be too dependent on one particular industry. You especially don't want to be too dependent on an as yet unproven technology in a highly cyclical industry for your growth. What is all this money buying? You all have had a bunch of episodes this year on the sort of AI build out. What is being built out? Yeah, gigantic computers, basically, you know, in huge complexes that are as large as Central Park somewhere in like near Abilene, Texas, or whatever, where it's these mammoth data centers that are these assets that are a combination of real estate.

31:52So they're a real estate play. They're high-tech plays because they're filled with those NVIDIA chips or other chips and so forth. They're huge energy consumers or increasingly energy producers in their own right. So whether, you know, because it takes a while to get anything access to the grid, they'll have a natural gas facility producing energy on the campus directly. And so it's this extraordinary build out all over the country of these data centers, which, of course, become very political and very important to the economic growth, etc. You know, the really important thing is since basically 2008, 2009, 2010, this handful of tech companies have been where a lot of the action is for growth, particularly for growth and income and making money in the U.S.

32:38economy. These companies used to just spend on labor. Their main cost was their software engineers, etc. And everything else was like pretty cheap because cloud compute was pretty cheap, etc. But they're famously like asset light, as they say. So the other big story of this chart, setting aside this sort of U.S. GDP component, is the degree to which these very important companies for the U.S. economy have suddenly become like big spenders on stuff in a way that they never had any history before. And so you see these companies, they're taking out more debt or they're coming up with these special financing vehicles where there's sort of this, you know, it's off book, these off balance sheet arrangements to finance these things.

33:19So there is this fundamental restructuring, I would say, of like the P &L and the balance sheet of these big companies that is novel in their corporate history. And that's really a story the last two or three years. I was watching this interview with Sam Altman. So I think the single biggest question I've heard all week and hanging over the market is, you know, how can a company with$13 billion in revenues make$1.4 trillion of spend commitments? You know, and you've heard the criticism, Sam. We're doing well more revenue than that. Second of all, Brad, if you want to sell your shares, I'll find you a buyer.

33:56Just enough. The argument he's making there is there are so many investors of every different level piling into this, piling into if you could buy, I mean, OpenAI remains a private company, but if you could buy OpenAI stock, people very much would. But these are, as Joe was just saying, banks and private equity players, and there are all kinds of highly sophisticated financial players and companies coming in behind these investments to make them. That means there are all these board meetings and shareholder meetings where an argument is being made about how these huge build-outs of these giant computers will lead to profits that justify the build-outs.

34:38When Meta and Microsoft are making these arguments to their shareholders, to the other investors they might want to work with, what is the argument? What does this look like if it pays off economically? You know, there's a lot about the AI boom, the AI race that, you know, probably intuitively sort of reminds me in many dimensions of the sort of race to build a nuclear bomb. Okay, so first of all, I heard— I wasn't sure where that was going, but I didn't quite see that. So, you know, someone once described to me, OpenAI, as being like the Manhattan Project, except the goal is not to build the bomb.

35:13Because, you know, the big fear is that AI, as many people in the space fear, is like you're going to have this like runaway AI that kills us all. Right. So it's like, how do we like build something that doesn't kill everyone? It's very existential for those companies. Yeah, it's very existential. Right. That's exactly it. So there's that. There's this fear of like who is going to get there first. There's the U.S. versus China, et cetera. I think there is something similar going on with the way companies feel about buying into AI as products, et cetera. that this technology is going to be so powerful, it's going to be so important, that even if you can't articulate why you need to be adopting it for your company, you better have an AI project.

35:53You better have an AI experiment going on because the stakes are so high for whoever figures it out, a way to plug AI into their business, reduce labor costs, get more productivity, and so forth, that the gains are going to be so great that you literally just can't afford to not be investing in it from a consumer experience. You know, you like listen to someone like Mark Zuckerberg. He clearly thinks that. I think you look at every other company, it is this fear. And I do think it's worth pointing. There are examples, you know, clearly engineers use AI coding all the time. Other companies are figuring out a way.

36:28We did an episode with the CEO of a firm and he was talking about how AI allows them to see like companies that are misstating what they do in their terms of service. So it is true that already companies are figuring out way to deploy these tools. But I really do think there's a tremendous amount of fear driving this at both the hyperscaler level and the customer level that someone else is going to figure something out. Let me zoom in on that because, I mean, I've covered these AI companies for a long time. I covered the Anthropoc guys when they still worked at OpenAI. And that is how they all used to talk about it, that it is a race to build the superintelligence, the one AI that will rule them all.

37:08To build God. Yeah, to build the machine God. But I think if you believe that version of it, that there is a race, there's like a piece of tape at the end of the race, and one of the companies is going to pass first, and then, you know, second place is the first loser. That actually implies something very dangerous about this buildout, which is that it only matters for one of them. Right. And the assets are going to be not useless, but not that useful for the others. And I believe they believe it. I certainly believed it. It has been strange watching these people turn into like SaaS businesses.

37:45I know, I know. You know, it seems to me more like what you see is Anthropoc is trying to own coding. Meta, you know, is going to try to own social relationships and AI and, you know, use it to kind of manipulate you into buying things. OpenAI is going to be a layer in enterprise software like Microsoft. You know, then Google has everything in Google. I mean, what you're getting at is actually my fear about it, that there are two stories that they're sort of acting as if it's a race to the finish line. And so all that matters is being in front. But if that's not true, then actually there's like way over investment.

38:20And then there's this phenomenon where it's like, while we're on the race to create super intelligence, we're going to create these sort of, you know, slop apps that everyone has heard. Like, so Meta has the Meta AI, which is sort of like Instagram, except it's all AI-generated garbage, and ChatGPT is Sora, which is a little bit better, I think. But, you know, whatever. It does not feel like a way station on the path to superintelligence when you see them rolling out these things. And as you mentioned, starting to look more and more like traditional software businesses that just sort of like plug into various layers.

38:53So I agree. I think it's like very muddled, and I don't think we know yet whether these... I'm sure there's a mix within the companies, right? I'm sure there are people that's like, no, we are here to build superintelligence, And there are probably others who are like, we're here to build enterprise software and build a subscription. Well, what you're watching happen inside the company, since I feel more confident talking about, is the very normal thing that happens in politics and in companies, which is that you talk yourself into the story that your bottom line needs you to believe. Yeah, yeah, yeah.

39:21And so the way to build super intelligence is through building SaaS software. Yeah. Because that's going to get you the scaling. It's going to get you the investment. I think the most striking thing to me in covering this for years now, like the things I have heard from people building AI are just wild. And they were really wild in 2022 and in 2021. Like truly like the wildest things I've ever heard in my reporting in terms of like what people believe to be true in like 10 years. I'm not even sure they're wrong about what will eventually be true. But then watching them end up running these totally normal looking businesses, except for the scale of the investment, you know, how much of your slack should be written by AI kind of thing.

40:02It is amazing. I mean, I guess it's true for religion too, right? You're trying to tap into transcendence, but also you need to fund the real estate investments for the church. But there is this incredible mixture of the sci-fi and the mundane. And watching the companies have to bring those two things into alignment has been, to me, sociologically, Very interesting. And a reminder of the incredible power of capitalism to persuade people of things. I was just about to say, first of all, if you couch everything in existential terms, then, you know, the limit on your capital expenditure is basically infinity.

40:42So that's part of what's happening here. There are two approaches to building out AI at the moment, and I call this the coffee pod theory of AI. America is building really expensive cappuccino machines that it thinks are going to produce the most amazing cup of coffee that the world has ever known. And because of that, everyone in the world is going to want to buy one of these cappuccino machines. That is not the only way to approach AI development or the AI business model. China has taken a very different approach. Again, China is doing the Nespresso coffee pod version of AI technology. They're producing something that's relatively cheap, something that's pretty standardized, and something, again, that it sees the entire world being a market for.

41:31I don't think we yet know the answer which particular business model is going to win out. But then you mentioned capitalism. On the customer side, we're also seeing this narrative dynamic where, you know, late stage capitalism, it's kind of hard to boost returns forever. And so now this new lever has appeared. It's called AI and all you have to do is pull it or at least put out a press release saying that you're pulling the AI lever and, you know, cutting workers and saving a bunch of money and you'll see your share price go up. And I think that's pretty important. Like investors are still responding very well to any utterance of AI in a business press release.

42:15There may come a moment where people are actually like, wait a second, we want to see the cost savings, but it's not happening yet. I'm just going to take a point of host personal privilege and we're going to wander down an alley for one minute and I'm going to not keep us there. But in terms of questions I would like to ask the Adlots hosts. What is late stage capitalism? And do you believe in it as a conceptual? Tracy said it, so I'm going to make her know. As a useful conceptual tool. I'm going to put, it's all on Tracy. It's not the Adlots hosts. It's high on my list. Tracy's the one who mentioned it.

42:44I mean, okay, it's a little bit of an intellectual crutch. I will give you that because we're always living in late stage capitalism, right? Late stage capitalism is now. But I think if you look at our existing situation, it's a relentless search for growth. And a relentless search for growth is also something that is in many ways very unique to America. Other countries, I hate to keep talking about China, but other countries take a different approach, right? So in China, we've seen China take the lead in a number of strategic industries, which, you know, counts as growth. But that growth hasn't translated into huge returns for investors.

43:24So if you look at a line of the Shanghai composite, it's been going sideways for many, many years. China is willing to make that trade off. You know, we're going to develop important industries and give people jobs and maybe, you know, shareholders just aren't going to make that much money off of it. But in the U.S., it's pretty much all about shareholder return and getting that line going up forever. And our political economy is basically built on that entire system of if you put your money in the S &P 500, you'll probably have a decent retirement. And so everyone will be fine. So it's not so much that the way you understand it is not so much that there's something specifically late about this stage of capitalism, so much as this is, you know, financialized growth capitalism.

44:09Yes. And also, late-stage capitalism implies that there's an end at some point, and I'm not sure there is. Well, that actually is a better segue to this next chart I was going to show you than I thought it would be, which is there's some suspicions going around that this whole thing has become a kind of circular money machine that the hunt for growth, the hunt for justifying share prices and investment and valuations is leading to just money constantly passing hands to create the almost appearance of activity. So, Joe, I'm going to show you this chart, which is a Bloomberg chart. I recognize it from a distance.

44:44I know this chart from a distance. And it is extremely hard to parse, including for me. But why don't you... You just don't need to parse. Like, the point is almost not to parse it. The point is to just... This chart is a vibe as much as it's... It's a vibe. It's a visual more than a chart, too. It's just to gaze upon this, like, incredible level of interlinkages. This, to me, is the most almost interesting chart to look at in AI. So why don't you, like, look at it aloud for me and tell me what you see in it. So, I mean, for those just listening, you know, here we have... It's a chart with NVIDIA at the center.

45:13And basically everyone is invested in everyone else. So NVIDIA invests in OpenAI, then has an investment in CoreWeave, which is one of these NeoCloud data center companies. And CoreWeave buys chips from NVIDIA, so the revenue gets recycled. So it's basically everyone is linked to everyone else. And again, like - And bi-directionally, right? And bi-directionally, yes. It's not like you pay someone and they pay someone else. It's like you pay them and they pay you. Yes, exactly right. You invest in them and they invest in you. I'm going to invest in you. And then not only are you going to buy chips from me, you're going to make an equity investment.

45:45So obviously, there's the web of complexity, which I think we associate with 2007, 2008, which is just like the sheer volume of the web of relationships and so forth and how hard that is to decipher. But then there's the other element that go back to like the dot-com bubble. And if you looked at a lot of the companies that were riding high on the dot-com bubble, they had real revenue. The poster child for this was Yahoo.com or Cisco. So you have these companies that say, okay, maybe they're like a little rich on the stock market. But look, we know they're real businesses. The issue is that underneath these real businesses, there was a lot of financialization going on.

46:22By that, I mean specifically, there was a host of startups and they were raising money in IPOs. And then that IPO money that they raised would immediately be put into either ads on Yahoo or purchases of Cisco equipment. And when the IPO market closed down, when there was a little bit of risk off appetite in the stock market, suddenly then the revenue collapsed at those giants. And so, yes, what looked like sustainable, healthy businesses were actually really being funded by financial markets. And I think that the concern when you look at the AI boom is you have all these companies doing very well.

46:57Inveida is absolutely a real business. It absolutely has real revenue. It absolutely has real profits. No one is denying it. is there some richness in the valuation? Sure, maybe, I don't know, but very plausibly. They're real businesses. So I think that like when we talk about a bubble in the AI, sure, there may be rich valuations, but the fear would be that these are not sustainable revenues and therefore not sustainable profits. So let's talk about the question of a bubble, Tracy. You all have done a bunch of episodes talking to different people about this. Make for me the best case you can both against the idea of a bubble and then for it.

47:32Oh, man. Okay. So against the idea of the bubble is very simple. It's this idea that we were talking about earlier, which is this is basically a winner-takes-all strategy. And if everyone develops the products that they say they're going to develop, if they develop AI models or systems that magically solve every business or person's problems in the entire world, then perhaps you can justify some of those valuations. It's not a bubble if magic occurs. That's right. That's right. And that's what a lot of these companies are promising. They're promising magic, right? That's the way they talk about it.

48:11So I think there's a concern as AI becomes an even more dominant force in the U.S. economy, if the bubble bursts or even if, you know, the promised revenue and savings doesn't materialize to the scale that people think it's going to, then you're going to have an economic impact that potentially feeds on itself, which would be similar to what we saw, again, not to be too pessimistic, but similar to what we saw back in the run-up to the great financial crisis, housing became an incredibly important driver of U.S. economic growth. Everyone was buying houses, houses were being built. We saw the share of housing construction in the U.S.

48:51economy go up, And eventually it got so big that housing became the source of wider problems in the U.S. economy. That wasn't always the case. It used to be that there were problems in the U.S. economy and housing would get hit. What happened was housing got so big that housing became the proximate source of problems in the wider U.S. economy. And the concern now is that we might be on the same path with AI. So, you know, you showed the chart of the circularity of a lot of these businesses. I always think about that It's Sunny in Philadelphia meme of the guy standing in front of, you know, the board with all the red strings connecting everyone.

49:29It feels very much like that once you start to untangle these relationships. But the other concern is just the opacity of how AI is actually getting financed right now. There's a lot of stuff going on in the private credit market. The private credit market is where businesses get loans from, you know, sometimes banks, but mostly other types of investors. And these loans and bonds are not publicly issued, not publicly traded. So normally, if, you know, IBM or Microsoft or whoever issues a bond, it would come with a big prospectus. objectives. There'd be a lot of information available about it online.

50:08You could see the terms. Anyone can buy it and people would trade it after. Private credit is something much more bespoke. It's sort of a customized loan between a business and an investor. It's very hard to get much insight on that particular market for obvious reasons, right? The clue is in the name. It's all private. And so I think when it comes to financing, it's pretty difficult to get a sense of the scale of what's happening right now, but also to get a sense of who is actually financing what. We hear stories, you know, you hear big private credit investors like an Apollo who will say something like, oh, you know, we're really into data centers at the moment.

50:47But it's hard to get a sense of how much. So I want to look at this, not then from the market's perspective or the financier's perspective, but from the worker's perspective. You were talking about how they're promising magic. And that's one way to put it. The other way you might put it is a promising replacement. That the thing that would make these companies extraordinarily valuable is if, in fact, you are suddenly, you being other companies, able to replace human labor like accountants and paralegals and HR workers with tireless chatbots who never want to join a union. And one thing I have wondered about a lot is not in the case where they invent superintelligence, which has its own set of possibilities and problems, but in the place where the more direct economic bet pays off.

51:44the bet I hear CEOs talking about and investing in. Is that good for workers? Is it like, if we are not in a bubble, does it mean we are in a labor substitution world, which in some ways is going to be much tougher on normal people, Joe, than a bubble? Yeah, the way I like to think about it is either the AI, if the AI bet fails, then we're going to have a recession, a bunch of people are going to lose their jobs. And if the AI bet succeeds, then a bunch of people are going to lose their jobs because AI will be able to replace labor. So either way, bet or succeed, it feels like it ends in a bunch of people losing their jobs.

52:19I mean, I have very mixed feelings about this question, though. I mean, economists are very sort of strict on this idea that, like, there's always demand for labor. That, yes, of course, sectorally, you're going to have the—historically, you're going to have an invention that from time to time puts an entire class of workers out of business. Or that there is no longer need for this because we've developed a technology. But then that means savings from someone else, and then they spend it somewhere else, and that creates new labor demand. Furthermore, they would say that's literally what economic progress is, is that, you know, we're not toiling in the fields the same way because we've gotten so much more productivity.

52:56They would say this is by definition what progress is. What feels different about AI, obviously, is just the sheer range that's all happening at once and the sheer range of potential vocations that AI could disrupt, whether we're talking about lawyers, whether we're talking about accountants, whether we're talking about coders, etc. So again, progress is labor-saving technology. The ability to get more with fewer man-hours is what economic growth is at its core. But it is weird to talk about a technology, I just think. I just think what makes AI different or why it raises anxiety in the way that other labor-saving technologies might is just the sheer range of professions.

53:35Let me combine your two scenarios there into the one that I actually worry about the most on the labor market side, which is you could have this thing where the AI bubble pops at some level. Yeah. This creates some kind of recession, which leads to firms wiring themselves for AI in a way they haven't before and bringing in the technology in a way that's actually much worse for labor. And then you have a scenario where there's been an acceleration of labor substitution. And yes, in the long run, according to The Economist, the labor markets will adapt. Although, again, AI is a bit of an unusual technology because it's meant to mimic us.

54:15But markets adapt over time. People don't like that. We haven't really had so much time here. Our productive years are very limited. And we know that to be fired during a recession scars workers for life. Yeah. So I'll just say two quick things. One is an interesting twist in the story of the last several years is that in 2021 through maybe 2023, for like the first time in decades, firms realized or learned that they couldn't just put a help on inside in the window when there would be a line of labor. And so I think actually we've already seen the beginnings of this setting aside AI where there's been this catalyst for labor-saving technology that started even before Chad GPT.

55:00Because for the first time, I think it was sort of taken for granted that there would not be an endless supply of labor. And I think there are further developments since then that have driven this besides AI. So obviously there's the change in flows of immigration is one. And then you have demographics. So we know that an aging population is going to put an incredible amount of strain on the productive population because we have to care for the elderly and so forth. So already there are these catalysts for firms to feel like we have to get more productivity out of our existing labor force, even before we get to the AI question, even before we get to the recession question.

55:33But to the point, it's like, yes, recessions are catastrophic. They're really bad. I think economists and policymakers are too comfortable with the inevitability of recessions. That is like, no, recessions are natural. Recessions are healthy. This is like what clears out the brush. They ruin lives. They impair earnings forever. They're terrible for workers. I would just add that also what's different about AI this time is, you know, we're not talking about industrial automation. We're talking about automation that's really centered in the knowledge economy. So things like writing, filling out forms, podcasting.

56:10I would describe it as a lot of the fun stuff like writing music and doing art and things like that. And that's really where AI is dominating. Meanwhile, we're still waiting for the robots who can, you know, fold our laundry or, I don't know, serve us a burger or something like that. Watch our children during the day. Yeah, something like that. So it's kind of, you know, I think that's also why there's a lot of nervousness around this. So there's been a lot of talk about, first, whether or not we are seeing any evidence in the labor market data that AI is doing anything. But then also there's been more and more evidence that there's something strange in the hiring and firing side of the economy where things seem more frozen than normal.

56:52Could you sort of walk through both of those questions? Do you think that there's an AI effect on the labor market? And then what is the frozen labor market that people are talking about? Yeah, okay. So first of all, whether AI is having an impact on the labor market, I mean, it's hard to tell, right? You know, people, you know, if people or businesses are cutting or adding workers broadly, you don't necessarily always know the reasons. I will say that I remember very clearly a moment, I think it was last year, when the Challenger jobs report came out and there was a little anecdote. The Challenger jobs report?

57:27Yeah. So there's a company called Challenger that produces their own layoff tally. Right. So they're counting up the number of layoffs in the U.S. And there was a tiny little bit of text at the bottom of this report that said a bunch of companies said they were laying off workers because of AI. That was the first time I ever really saw job losses being attributed to this new technology. But going back to our earlier point about the narrative, it's hard to tell whether businesses are actually doing this because they're replacing workers with AI or whether they've just figured out that if I say I'm cutting people because of AI, investors like that and my boss really likes it.

58:06So that's what I'm going to say. And then in terms of the broader employment environment. Which is, by the way, culturally a little bit grim. Yeah, but it's real, yeah. Incentives matter, right? Like a lot of the world works because people are doing what their boss wants them to do. Beyond that, though, broader employment, the way everyone's been characterizing it is that low hiring, low firing environment. So we're really seeing companies basically stick with the workforce that they have. Two things to say on that. I think it gets back to Joe's point about the scarring from the pandemic. Everyone found themselves caught short of labor supply in 2020.

58:44No one wants to repeat that process. So they're actually holding on to people. And then secondly, it goes back to this uncertainty as well. No one really has a good handle on how the economy is going to unfold. And so if you're sort of unclear on what's going to happen, then you're basically frozen in terms of your investment choices. So people are just choosing or having to stay where they are. You know, there's a third option. We did an episode with our friend Connor Sen, who writes for Bloomberg, where he said, you know, look, you could say going into 2026 that every company has to make decisions about allocations.

59:19And if the view is we are definitely going to spend more money on AI technology, then we're going to just shift some of our spending plans for the year from hiring to capital investment. And so maybe there is like a direct link, not so much that the models themselves are good substitutes yet for an employee. But just from a sort of capital planning standpoint, 2026 is the year we spend more on AI. Therefore, we don't post as many job openings this year.

1:00:13so for a couple of years now economics types have debated this idea of the vibe session which is a term from kyla scanlon and in one of her recent newsletters she had this chart that of every graph i've shown you guys this is one i've been thinking about the most i'm gonna give it to you tracy to just this is her chart of the vibe session and how you know it's real okay walk me through what you see here. Okay, so there's two lines on the chart. One is real disposable personal income per capita, so how much people can spend individually. Accounting for inflation. Accounting for inflation. That spiked in the years after the pandemic, and then it started to dip, and now it's sort of flatlining.

1:00:55Meanwhile, we have the University of Michigan consumer sentiment, which is very volatile, but in general had been going up in the years from, let's say, 2010 to 2020. And since 2020 has been on a broadly downward plunging path with occasionally tiny, tiny bits of recovery, but not really. I mean, what I see on the chart is those two things used to kind of track each other a bit. Yeah. Right? They orbit around each other. And basically since the pandemic... Yeah. Yeah. a chasmic difference has opened up. This is the late stage capitalism thing, right? We found it. It's in the show, yeah. That's right.

1:01:36Eventually, you know, if you want more and more growth, then it takes more and more to keep people satisfied. And I think one of the things that's happening now is, you know, it used to be that money was, in some senses, shameful. You know, being too rich was a bad thing. And if you were a billionaire, you were expected to give some of your money to charity or, I don't know, contribute to the world in some other way. Now, we're seeing this sort of grifting culture take over the world, right? Money is the point. Even on the religious side of things, we have prosperity gospel now, which basically says, if you're rich, it's because God loves you, and so it's good to be rich.

1:02:19There's no limit on how rich people want to get anymore. And I think that's part of the reason that we're seeing a broad dissatisfaction, let's put it that way. But then, you know, realistically, I think a lot of people also are just desperate about their future. They see house prices, they see insurance costs, they see, you know, retirement programs diminishing. And they think like, well, the only way for me to get out of this hole that's been dug for me is to do something like gamble or bet on a meme stock or something like that. So I think, you know, money itself is becoming more and more an important part of not just the way our economy functions and the businesses that get built, but also on our culture.

1:03:08What is your explanation of the Vibe Session? I mean, clearly, like, COVID kind of broke a lot of society. But I don't know. I'm like sort of, I mean, it's the phones guy. Now, granted, the problem with my theory with that chart specifically is obviously the smartphone has existed for long before COVID. But I still think that, like, there is to some extent—because the important thing—the other important thing of that chart is, like, that there has not been some major change in affordability. There's not been some major change in the cost of living. Yes, there was an inflation spike. Yes, the cost of living has gone up.

1:03:42But in such a dramatic way that could massively explain why people are so pessimistic, I don't think you'd like see it on the chart. Real wage growth has generally been positive and it's been trending up lately. And it looks more or less along that same trajectory that was pre-COVID. So I do think like something is going on that I would say economists themselves are not equipped to answer. I think we're in a point in the world in which economists only have some of the answers. But I think there are things going on in the way people perceive the economy that I would say logically precede economics.

1:04:17And they have more to do with cultural status. So they have politics or just the amount of times that people are spent like, you know, scrolling their phones and alternating between doom scrolling rage bait or doom scrolling slop. I think these are real things. And so I sort of put myself in, I definitely put myself in the it's the phones camp. I think economists have also historically underestimated the importance of relative relationships and relative gains. So, you know, most economists would look at that chart and focus on personal income and say, well, everyone's been getting better off on an absolute basis.

1:04:51Everyone is, you know, doing slightly better than before. Or realists would probably not look at that chart, but they'd look at the actual tails of the chart. So, like, how much has personal income been going up for the wealthiest segment of society versus the poorest society? And would say, well, what actually matters here is the relative gains. Even if you are slightly better off yourself, if you see someone who's doing much, much, much better than you, you're going to be annoyed and depressed, which is what that consumer sentiment line says. Connect those two theories, right? Yeah. Which is to say, you could say, what you're talking about is to some degree, we might be having very unequal wage gains.

1:05:31Although I will say that if you look at median incomes are going up too. This is not just a factor of, you know, Bill Gates or Sam Altman is getting all the money and nobody else is. Like you look at down the income quintiles and it doesn't, we haven't seen gains since the pandemic. On the other hand, to the extent people are on their phones all day, looking at viral videos, looking at Instagram, the comparison dimension of just human life has really changed. Yeah. There's the famous phrase, comparison is the thief of joy, which is a phrase that people have known about forever. And now we have the ultimate comparison engine.

1:06:06And no one's happy anymore. Well, that phrase predicted it all right there. Well, there's also, isn't there a line that wealth is when you have more money than your brother-in-law? Yeah. Right? That's like the thing that truly matters. Well, so there's the other thing which that chart does not capture at all, which is the effect of wealth, because this is an income chart. And so what we know is that, like, it's been incredible times for people who already have assets. And if you're lucky to have, like, really special assets, if you had been, you know, someone in your family had gotten interested in crypto at some point in the mid-2010s, you didn't work harder probably than anyone else.

1:06:36But you're like, you happen to be standing on top of a gold mine, et cetera. And so there is this distribution of wealth in this country that not only is it unequal, it feels arbitrary in many respects. Why did that person get crazy rich such that their bloodline never has to work again? They're just standing in the right thing. It feels disconnected in many ways from the effort or time that someone put into labor income, you know? And also, this is something that traditional economics just isn't prepared to deal with, right? Traditional economics is all about those absolute gains, and we're talking about relative differences.

1:07:09And then, do you remember I wrote about this in the Odd Lots newsletter? Shout out for the Odd Lots newsletter. And someone actually wrote into me saying, well, if the poor owned more assets. If the poor own more assets, then they would be in a much better position. Sure. Yeah. You know, have you tried not being poor? Yeah. I guess one way of thinking about what's going on here is consumer sentiment is a tricky thing to measure. I mean, you can word the question in different ways, but I do think you're getting at somebody's story about the economy. And I think something happening in people's stories about the economy right now is so one, Trump came in and he disappointed even his own people.

1:07:49I mean, this tariff policy is terribly unpopular. Things are very chaotic. Trump himself is unpopular. It doesn't feel like there are people with their hands on the wheels of the economy who have a vision and a theory and competence and you trust them. So your story that you're living in a period when the line is going to go up is weakened. The AI story is threatening to people. And then you have the comparison stories and precarity and just like, I think things just feel like both not good in the moment, but there isn't a story that people believe, either because there is a leader or because there is a plan or because the thing that is, seems right around the corner seems good.

1:08:37There's very little sign of things getting better. I mean, yeah, layer into the fact that we've had a few massive crises in a short period of time. and we have the added, you know, the way the phones mess with their heads. And yeah, what is the thing that's supposed to make you happy? I don't know. And it's supposed to be AI. It's got it, right. And it's here to replace you. Yeah, right. That is right. And drive up your electricity cost. Yes, right. That's a really important part of it. People perceive that AI is a combination of it's going to make electricity more expensive and you're not going to have a job.

1:09:08It's not great. It's a tough sell. Let's put it that way. Do you think there's anything, as we turn the corner into 2026, Like, if this chart looked much better at the end of 2026, either because personal incomes went up or because just sentiment went up, why do you think it would be? I think it would probably be because asset prices keep going up and our, you know, broad consumer economy is more levered to asset prices than it ever has been, arguably. I also think that consumer sentiment doesn't matter that much for the overall economy, because frankly, even though consumer sentiment's been going down, people keep spending on stuff.

1:09:48Right. And that's been another surprising aspect of why we haven't seen a recession emerge from the vibe session. And I think part of the spending story, ironically, is that, again, people are kind of desperate. And so if you're not going to be able to afford a house, then why not, you know, just buy that extra lipstick or, I don't know, phone or whatever and make yourself happy in the short term. Another interesting thing about AI is that if you think about the technologies that emerged in the early 2010s or the late 2000s, like they had several years of, wow, this is really cool, the smartphone.

1:10:24Wow, this is amazing. What can it do? I love sharing pictures with my friends. I love being able to like talk to fellow reporters all day on Twitter, et cetera. So what it seemed like the trajectory with past technologies is that something new emerges. People are very excited about it for a while. It seems to make people happy. is sort of fun. And then only after years do we sort of look around and be like, oh, God, this is like creating all these like headaches in my life. AI is weird in that it's from day one. Like the three of us could sit here all day and just talk about why AI is going to be bad, right?

1:10:57We talk about electricity prices. We talk about how it's going to put us out of a job. We talk about how music is going to be garbage. Like we just come up with the list. It's almost a waste of time. Any person could come up with a million negative stories about AI, et cetera. So I guess my optimistic take, which is not grounded in something specific that I can point to, which is that if you assume that the first snapshot of any technology is wrong, that we're sort of like mistaking on, maybe then like something emerges with AI that's like, wow, our lives are like, I can point to things that are better in a way we can't articulate yet.

1:11:32Basically, that many different areas of our lives, we experience the equivalence of a Waymo, right? Because people get into a Waymo and like, oh my God, this is insane. This is genuinely incredible. And this car is like so smooth and it is so clean and it's so awesome. And that like the promise would be that there turns out that there are implicitly the seeds of many other Waymos. We just can't see them yet. But whether we're talking about medicine, whether we're talking about whatever, that there are other things like that, that AI will enable. We just don't quite know what they're going to be yet.

1:12:02But if you could just roll out Waymo's everywhere tomorrow, which you can't. But if you could, that would actually put a huge number of people out of work. It's very hard to navigate that trade-off, right? If I were to answer my own question about why might you see a different feeling than in the end of 2026, it would be if something has shifted in people's sense of the politics, right? There's a lot of uncertainty and people want somebody to have a plan. And right now, it's like you look around the world, it's like China seems to have a plan. And people didn't trust that Biden had a plan, you know, and he certainly was not able to articulate that even if his economic policy was quite like coherent in what it was attempting to do and trump is all over the place and so i do think there's something about times of uncertainty people want clear leadership and they just don't have it and haven't had it for some time we need a jed bartlett you know that's the nobel prize winning economist someone who like i think sort of is like what people feel is like statesmanship right that there's like somehow emerge and it It seems very hard to imagine given the environment, but that somehow you could have like someone who like has some pretense of statesmanship, purpose, unification, coherence.

1:13:06I think that's sort of like if that somehow emerged in this environment, it's very hard to see. That might change the way people view the trajectory of the country. I think it's a good place to end. Always a final question. What are three books you recommend to the audience? Tracy, why don't we begin with you? Okay. Well, this is very pertinent to our conversation, but Dan Wong's new book, Breakneck, is excellent for comparing the political economy of the U.S. and China and a lot of the things we just discussed, this idea of like, why is China able to do some of this faster and seemingly better than the U.S.?

1:13:40That one's great. Best fiction I read this year, new fiction, is Northwoods, which is the sort of surreal story about an old house in New England. And Joe knows that I won't shut up about my house in Connecticut. It's really good, though. And then historical fiction. This one is actually for Joe. I just started reading it, actually. Marriage at Sea, which is a true story of a couple in the 1970s that gets shipwrecked by a... Something whaling related. A whale. Oh, that's great. And survive at sea. It's really good. I really had a hard time thinking about which direction I was going to go because I read Moby Dick this year and it changed my life.

1:14:20And I've read a bunch of sort of whaling related books. How did it change your life? Oh, God. I mean, all I do is think about whales. All he does is talk about Moby Dick. All I talk about is Moby Dick now. And every single— This is true. This is true. And every single story in the economy or whatever, I was like, okay, that's the Captain Ahab. So, like, everything I just frame into Moby Dick. But I'm going a different direction than the whales. It's a strong Moby Dick recommendation there, though. Yeah, it's implicit. Just read Moby Dick, people, if you haven't. But so we talked about, you know, I mean, it's the phones guy.

1:14:50I truly think that the new media environment is fundamentally restructuring and altering society. So there's a fairly recent book. Andre Muir is the sort of independent journalist and writer like based in Toronto who like self-publishes his own books, which is usually a huge red flag, but they're phenomenal. So people should check out his book, The Digital Reversal, which is about the way digital media like sort of like flips a lot of things on its head, but also this idea of like, it seems to be happening at a faster and faster pace, the sort of pace of crises. That's great. And then there's two books written several decades ago that I recommend to almost everyone, Walter Ong's Orelity and Literacy, which I've been talking about a lot, which is basically the way like our communication environment is such that we're like an oral society increasingly, not just by the fact that we literally talk more as in a on a podcast, but everything is back and forth in this.

1:15:43And therefore, you don't have this sort of logical contemplation of the person sitting alone in a room actually reading text and judging text on its own merits. He anticipated a lot of changes with social media and the phones decades ago. And I think it's a lot better than reading a lot of contemporary stuff because it doesn't try to shoehorn contemporary events into a theory. It's very predictive. And then another book that I recommend on the same level, it just celebrated its 40th anniversary. So another one that's sort of pre this moment, which is Josh Meyerowitz's No Sense of Place, which anticipates the way electronic media would like dissolve the walls between, you know, this is where you work and this is where you live.

1:16:24or this is a type of conversation that's appropriate for one environment, but not appropriate for here. This sort of obliteration of norms from one place to another, I think, has a lot of explanatory power. So, yeah, No Sense of Place by Josh Meyerowitz is my last one. Joe Weisenthal, Tracy Alloway, thank you very much. Thanks for having us. Thanks for having us. That was a blast.

1:16:53This episode of The Azar Clown Show is produced by Roland Hu. Fact-checking by Annika Robbins with Kate Sinclair. Our senior audio engineer is Jeff Geld. Our executive producer is Claire Gordon. The show's production team also includes Annie Galvin, Marie Cassione, Marina King, Jack McCordick Kristen Lynn Emma Kelbeck Michelle Harris and Jan Koble Original music by Marian Lozano Dan Powell and Pat McCusker Audience strategy by Christina Samalewski and Shannon Busta The director of New York Times Opinion Audio is Annie Rose-Strosser Special thanks to Kimberly Klausing Natasha Surin and Kyla Scallon

1:17:40Thank you.