WEBVTT - Ricardo Hausmann on What it Takes to Win a Trade War 0:00:02.480 --> 0:00:13.880 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:18.079 --> 0:00:21.440 Hello and welcome to another episode of The Odd Laws podcast. 0:00:21.520 --> 0:00:23.239 I'm Joe Wisenthal. 0:00:22.880 --> 0:00:24.000 And I'm Tracy Alloway. 0:00:24.880 --> 0:00:27.840 In this ongoing trade war, I don't know. I guess 0:00:27.840 --> 0:00:30.440 it's a trade war, all the trade headlines. I have 0:00:30.520 --> 0:00:32.720 to say. One of the things I always think about 0:00:33.040 --> 0:00:34.919 is and I write about it, and we reference it. 0:00:34.960 --> 0:00:36.600 The two of us reference it all the time. The 0:00:36.640 --> 0:00:40.640 complexity and the importance of sort of building complex things 0:00:40.680 --> 0:00:43.800 as a marker of a sort of country's capacity for wealth, 0:00:44.159 --> 0:00:48.360 and the sort of complex international trade webs that undergird 0:00:48.760 --> 0:00:50.240 the production of complex things. 0:00:50.360 --> 0:00:53.600 Joe, I know what you think about. It's monkeys and do. 0:00:53.720 --> 0:00:54.400 You think about that? 0:00:56.080 --> 0:00:56.400 Yeah? 0:00:56.440 --> 0:00:57.200 I do think about that. 0:00:57.280 --> 0:00:57.560 Okay. 0:00:57.600 --> 0:00:59.920 The reason I think about monkeys and trees is because 0:01:00.080 --> 0:01:02.720 couple of years ago we had Ricardo Houseman on the 0:01:02.760 --> 0:01:07.560 podcast and he used this metaphor to describe why some 0:01:07.880 --> 0:01:12.520 countries are richer, more economically developed than others. And the 0:01:12.560 --> 0:01:17.440 metaphor was that certain products or industries are like trees 0:01:17.520 --> 0:01:20.920 in a forest, and the firms are like monkeys, and 0:01:20.959 --> 0:01:24.280 so businesses kind of jump from tree to tree, and 0:01:24.360 --> 0:01:27.080 so what you find is if a country gets good 0:01:27.160 --> 0:01:30.679 at one particular product, then the business the monkey will 0:01:30.720 --> 0:01:33.920 jump to the next tree, the next adjacent product, and 0:01:34.080 --> 0:01:37.760 use that experience to build out their offerings. And so 0:01:37.920 --> 0:01:42.280 you tend to see, you know, the more complex economies, 0:01:42.520 --> 0:01:45.880 the bigger forests, the more monkeys swinging from trees are 0:01:45.920 --> 0:01:48.760 indicative of greater advancement and more wealth. 0:01:49.040 --> 0:01:51.920 Right, And this is how you can have a you know, 0:01:51.960 --> 0:01:55.720 a country that at one point specialized in rubber becoming 0:01:55.720 --> 0:01:59.280 a major player in cell phones, or a economy that 0:01:59.480 --> 0:02:02.800 one point made t shirts, which requires some level of 0:02:02.840 --> 0:02:06.240 coordination of supply chains from the thread and the electricity 0:02:06.240 --> 0:02:10.680 to power the looms suddenly become much more advanced any 0:02:10.800 --> 0:02:13.440 number of things. Anyway, I think there's a very powerful idea. 0:02:13.440 --> 0:02:15.640 But when I think about, you know, the idea that Okay, 0:02:15.639 --> 0:02:18.280 now there's this trade barrier between the US and Canada, 0:02:18.320 --> 0:02:22.880 for example, and we have these complex webs of supply 0:02:22.960 --> 0:02:25.840 chains in which goods cross the border multiple times. Do 0:02:25.880 --> 0:02:28.440 we constrain our capacity to do complex things? 0:02:28.520 --> 0:02:32.359 Are the monkeys going to slam headfirst into a trade wad? 0:02:32.919 --> 0:02:35.720 Yeah, it's literally right, Like they're swinging around and they're 0:02:35.760 --> 0:02:39.480 making these webs and densifying and then suddenly they slam 0:02:39.520 --> 0:02:41.800 into a wall in a very real way. What does 0:02:41.840 --> 0:02:46.160 it mean for American wealth if America is sort of 0:02:46.200 --> 0:02:47.160 like constrained. 0:02:47.240 --> 0:02:50.280 Yeah, this ecology of trade, I think it's a very 0:02:50.360 --> 0:02:51.000 valid question. 0:02:51.440 --> 0:02:55.119 Well, I'm very excited back on the podcast that we're 0:02:55.160 --> 0:02:58.000 going to be speaking with Ricardo Housman, professor at the 0:02:58.000 --> 0:03:01.720 Harvard Kennedy School and the founding director of the Harvard 0:03:01.760 --> 0:03:04.240 Growth Lab. So, Professor Housman, thank you so much for 0:03:04.320 --> 0:03:05.480 coming back on Outlaws. 0:03:06.120 --> 0:03:09.440 Thank you for having me. I'm really happy to be back. 0:03:10.120 --> 0:03:12.360 It does not seem like if we're thinking from the 0:03:12.400 --> 0:03:17.160 complexity framework, right, if we're gonna start like putting up nets, 0:03:17.280 --> 0:03:19.560 maybe it's nets, we're gonna start putting up nets in 0:03:19.639 --> 0:03:23.560 the forest between the trees from place it does seem 0:03:23.600 --> 0:03:24.920 harder for the monkeys to swing. 0:03:25.919 --> 0:03:29.399 Well, the way I think about the problem is that 0:03:30.000 --> 0:03:32.960 the complexity that you were talking about in the introduction 0:03:33.720 --> 0:03:36.720 is really the amount of knowledge that you have to 0:03:37.040 --> 0:03:40.640 put together in order to be able to do things. 0:03:40.800 --> 0:03:43.080 And the question is a little bit you know, how 0:03:43.240 --> 0:03:46.720 mobile is that knowledge, how easy it is for you 0:03:46.800 --> 0:03:50.000 to get to that knowledge? And that knowledge takes if 0:03:50.040 --> 0:03:53.440 you want three forms, it takes the form of embodied 0:03:53.480 --> 0:03:57.840 knowledge and tools and materials. So when you buy a cookbook, 0:03:57.880 --> 0:04:00.360 it says if you want to make an omelet, it says, 0:04:00.400 --> 0:04:02.920 you know, take eggs, take milk, take this, take that. 0:04:03.200 --> 0:04:05.280 It doesn't tell you how to make eggs. It doesn't 0:04:05.280 --> 0:04:08.120 tell you how to make milk. You just you just 0:04:08.200 --> 0:04:11.600 buy the eggs, and you don't you disregard all the 0:04:12.000 --> 0:04:16.880 technologies that go into making chickens and to making eggs, 0:04:16.960 --> 0:04:20.240 and to feeding the chickens, and you disregard all of that. 0:04:20.320 --> 0:04:23.799 You just buy the eggs, right, and all the knowledge 0:04:23.800 --> 0:04:26.279 that was embedded in it, it's just in the egg. 0:04:26.320 --> 0:04:30.159 So embodied knowledge is one form of knowledge, and trade 0:04:30.360 --> 0:04:33.920 is one way to get it right. Codified knowledge is 0:04:34.520 --> 0:04:41.120 the knowledge that exists in recipes, formulas, algorithms, do files. 0:04:41.160 --> 0:04:44.440 You know, you just need to have the code and 0:04:44.560 --> 0:04:48.279 follow the instructions if you are and then the third 0:04:48.320 --> 0:04:52.520 form of knowledge is nohow in brains. And the problem 0:04:52.560 --> 0:04:56.080 with knowledge is that there's very little knowledge that fits 0:04:56.080 --> 0:04:59.280 in a brain. So if you want to run a company, 0:04:59.320 --> 0:05:03.160 you need a lot of knowledge. You need knowledge about accounting, 0:05:03.160 --> 0:05:07.680 about finance, about human resource management, about procurement, about production, 0:05:07.839 --> 0:05:12.280 about branding, about marketing, you know about taxes, about contracts. 0:05:12.440 --> 0:05:15.440 So you need a lot of knowledge. And to bring 0:05:15.520 --> 0:05:18.760 that knowledge together, you need a team of people that 0:05:18.800 --> 0:05:22.160 you need to put together. And complexity comes from, you know, 0:05:22.560 --> 0:05:26.000 the breadth of the team that you have to put together. Now, 0:05:26.120 --> 0:05:28.640 the more you can kind of modify stuff, then you 0:05:28.680 --> 0:05:31.240 don't need to put the brains together because it's all 0:05:31.279 --> 0:05:33.440 in the code. That's one of the things that we 0:05:33.480 --> 0:05:37.080 may talk about artificial intelligence. It makes things in some 0:05:37.120 --> 0:05:40.320 sense simpler because the knowledge is in the machine. It's 0:05:40.320 --> 0:05:43.799 no longer you no longer need a brain to do it. Now, 0:05:44.080 --> 0:05:47.839 what these trade barriers are doing is that they are 0:05:47.880 --> 0:05:52.080 preventing you from, say, buying the eggs right so that 0:05:52.240 --> 0:05:54.960 now you need to know how to do the eggs yourself. 0:05:55.680 --> 0:05:59.080 So in some sense it's making things harder to do. 0:06:00.080 --> 0:06:02.919 As Larry Summers has pointed out, there are about sixty 0:06:03.000 --> 0:06:07.920 times more jobs using steel than job making steel. So 0:06:08.600 --> 0:06:12.760 you know, you protect steel, you're making it easier for 0:06:12.880 --> 0:06:16.000 all those guys that were going to make omelets by 0:06:16.040 --> 0:06:19.680 making now the eggs harder to get. And that's going 0:06:19.720 --> 0:06:22.080 to come at a detriment. You're going to get maybe 0:06:22.200 --> 0:06:25.080 more jobs and steel making in the US, and you're 0:06:25.080 --> 0:06:28.720 going to make all the people who use steel have 0:06:29.080 --> 0:06:33.040 more trouble competing in the domestic market with their products 0:06:33.080 --> 0:06:36.480 and more trouble selling their products abroad because now they're 0:06:36.480 --> 0:06:41.200 buying more expensive eggs, more expensive steel. In this metaphor, 0:06:41.279 --> 0:06:44.600 so in some sense, yes, what you're saying is that 0:06:45.200 --> 0:06:48.760 bread barriers are going to make the ability to put 0:06:48.760 --> 0:06:52.880 things together harder in the US. It's going to incentivize 0:06:53.279 --> 0:06:56.200 some of the things that are being protected, but it's 0:06:56.240 --> 0:07:00.599 going to create difficulties for everybody who you uses those 0:07:00.640 --> 0:07:02.400 things to make other things. 0:07:03.240 --> 0:07:07.520 Is there a way to design tariffs or other protectionist 0:07:07.560 --> 0:07:10.680 trade measures in such a way that you would preserve 0:07:11.200 --> 0:07:14.360 knowledge and I guess preserve access to some of the 0:07:14.400 --> 0:07:17.400 components you need to build out more complex industries. 0:07:18.400 --> 0:07:21.840 I mean, an interesting question is what is the case 0:07:22.080 --> 0:07:25.880 for intervening in the market. Why would you need a policy? 0:07:26.120 --> 0:07:30.400 And then the second question is would trade would tariffs 0:07:30.480 --> 0:07:34.400 be your instrument? Okay, so I would say that economic 0:07:34.440 --> 0:07:37.600 theory gives you at least three good reasons to intervene 0:07:37.640 --> 0:07:40.800 in the market. That might justify something you might want 0:07:40.840 --> 0:07:44.920 to call industrial policy. And then the question is is 0:07:45.040 --> 0:07:48.480 tariff's the right industrial policy because now they're putting tariffs 0:07:48.520 --> 0:07:51.320 on steel and aluminum. They want more still and aluminum 0:07:51.320 --> 0:07:54.160 being made in the US. If you wanted more still 0:07:54.240 --> 0:07:57.880 and aluminum made in the US, what instruments could you 0:07:57.960 --> 0:08:00.880 have used? And its tariffs the right way? Okay, So 0:08:01.640 --> 0:08:07.240 first there is the argument that in order to make something, 0:08:07.320 --> 0:08:09.240 you have to know how to make it. You know, 0:08:09.400 --> 0:08:10.920 it's hard to make things you don't know how to 0:08:10.960 --> 0:08:14.320 make it, and typically when you start something you don't 0:08:14.400 --> 0:08:17.160 you're not particularly good at it, but maybe over time 0:08:17.200 --> 0:08:19.800 you become better at it. There are some learning curves, 0:08:20.120 --> 0:08:23.200 and you want to get into those learning curves. And 0:08:23.320 --> 0:08:28.160 that's a compelling reason maybe to intervene in a relatively 0:08:28.200 --> 0:08:31.920 new industry where you know you haven't yet to figure 0:08:31.960 --> 0:08:36.240 things out, saying maybe like solar panels or batteries, or 0:08:36.320 --> 0:08:38.680 you know something that's relatively new that you still have 0:08:38.760 --> 0:08:40.440 yet to figure out. You wouldn't do it for a 0:08:40.480 --> 0:08:46.120 mature industry like say like electric gas turbines, because you 0:08:46.160 --> 0:08:49.360 know they've optimized that to death and you know there's 0:08:49.480 --> 0:08:54.480 there's no significant breakthroughs for decades now, so still would 0:08:54.480 --> 0:08:57.400 not be the obvious thing that would come to mind. Right, 0:08:57.480 --> 0:09:02.560 it's a nineteenth century chnology, it's an industry that has 0:09:02.720 --> 0:09:07.040 that's quite mature, etc. But you might have a national 0:09:07.080 --> 0:09:11.080 security reasons to protect it or something, but definitely not 0:09:11.280 --> 0:09:14.520 learning curves. By the way, those learning curves, if they 0:09:14.520 --> 0:09:17.760 are like inside the company, if it's something that the 0:09:17.800 --> 0:09:21.480 company is learning and the company owns, markets have been 0:09:21.559 --> 0:09:25.040 super happy to fund that. I mean, markets have funded 0:09:25.520 --> 0:09:30.920 Amazon for decades while the company was losing money because 0:09:30.920 --> 0:09:33.280 they're saying no, no, the company is figuring out how 0:09:33.320 --> 0:09:36.520 to sell stuff on the internet. Eventually, when they do 0:09:36.679 --> 0:09:39.800 figure it out, they will have access to a humongous 0:09:39.840 --> 0:09:42.880 market and that's going to be super valuable. So markets 0:09:42.920 --> 0:09:48.000 supported negative cash flows in Amazon for a very long time. 0:09:48.520 --> 0:09:51.600 So you have to argue that these learning curves somehow 0:09:52.040 --> 0:09:55.400 spill over into the value chain, spill over into more 0:09:55.880 --> 0:09:59.040 complicated things to coordinate, and that's why you need some 0:09:59.320 --> 0:10:04.080 kind of action. Sometimes the reason why industries get into 0:10:04.080 --> 0:10:06.680 trouble is that you have chicken and egg problems that 0:10:07.520 --> 0:10:10.080 you know the supplier is not there because you are 0:10:10.120 --> 0:10:12.320 not there and you're not there because the supplier is 0:10:12.320 --> 0:10:15.600 not there. So there's a good equilibrium in which both 0:10:15.640 --> 0:10:18.560 you and your suppliers are there, and there's a bad 0:10:18.600 --> 0:10:21.079 equilibrium in which neither of you is there. So how 0:10:21.080 --> 0:10:23.079 do you go from the val equilibrium where none is 0:10:23.120 --> 0:10:26.160 there to the good equilibrium where both are there. And 0:10:26.200 --> 0:10:30.480 that's a problem that we know how to solve. In 0:10:30.520 --> 0:10:33.719 each one of these cases, caras may not be the 0:10:33.800 --> 0:10:36.840 right instrument. So for example, you know, if you wanted 0:10:37.080 --> 0:10:40.240 the supplier and you to be there, well, maybe the 0:10:40.240 --> 0:10:42.240 garment comes and says, you know, I'm going to give 0:10:42.240 --> 0:10:45.320 a supplier the guarantee that you're going to buy from them, 0:10:45.920 --> 0:10:48.280 and I'm going to give you a guarantee that the 0:10:48.320 --> 0:10:51.280 supplier is going to be there to sell you. So 0:10:51.360 --> 0:10:53.920 you install your plant, he installs this plant, and the 0:10:53.960 --> 0:10:58.200 guarantee expires worthless. So the government can coordinate on the 0:10:58.200 --> 0:11:02.560 good equilibrium. Essentially no money and taxing nobody. A set 0:11:02.559 --> 0:11:05.559 of guarantees would do the trick. If you want the 0:11:05.760 --> 0:11:09.040 firm to learn, I mean, one thing is to have 0:11:09.120 --> 0:11:13.960 these temporary what they call infant protection and the term 0:11:14.559 --> 0:11:19.559 in the literature is infant industry protection. So you take 0:11:19.600 --> 0:11:23.080 an industry at its infancy, and you give it some 0:11:23.160 --> 0:11:26.959 protection until it finds its way, and then you open 0:11:27.040 --> 0:11:31.920 up an alternative to that is you subsidize their capital investment, 0:11:32.080 --> 0:11:37.480 or you guarantee their demand maybe government procurement or something else, 0:11:38.320 --> 0:11:41.800 or you give it a special tax treatment, so you 0:11:41.880 --> 0:11:46.599 have other ways to intervene. The moment you intervene with tariffs, 0:11:47.200 --> 0:11:51.360 you're essentially dumping the cost on the consumers of that industry, 0:11:52.040 --> 0:11:54.600 and the consumers of that industry are going to become 0:11:55.360 --> 0:12:01.120 less competitive, and their size will shrink, and they may 0:12:01.120 --> 0:12:05.400 become vulnerable to other attacks. So it's not the ideal instrument. 0:12:05.679 --> 0:12:08.520 There's an additional reason why it may not be the 0:12:08.640 --> 0:12:13.200 right thing to do. The US is and politically, part 0:12:13.240 --> 0:12:15.600 of all these policy is based on the fact that 0:12:15.640 --> 0:12:19.800 the Midwest did very poorly. The russ Belt did very poorly. 0:12:20.320 --> 0:12:22.800 They lost a lot of manufacturing jobs, and you would 0:12:22.880 --> 0:12:27.120 like jobs to go back to the Midwest. Pittsburgh loss 0:12:27.120 --> 0:12:33.559 it's steal industry. Garandianna lots it's steal industry. Youngstown, Ohio, Cleveland, Detroit, 0:12:33.640 --> 0:12:38.959 et cetera. These cities lost jobs in some industries. Now 0:12:39.040 --> 0:12:43.160 you put the barriers you put tariffs at the national level. 0:12:44.720 --> 0:12:48.280 It doesn't mean that the industries are going to go 0:12:48.920 --> 0:12:53.320 to the Midwest. They may go to write to work 0:12:53.360 --> 0:12:56.560 states in the South. They may go to the Southwest. 0:12:57.160 --> 0:12:59.600 So it's not not your solution to the places at 0:12:59.640 --> 0:13:02.439 your t I have to help those might be better 0:13:02.880 --> 0:13:15.880 dealt with using place based instruments. 0:13:19.040 --> 0:13:22.040 You know, I really like this idea of physical products 0:13:22.080 --> 0:13:25.559 as embedded knowledge, so that if I'm making some recipe 0:13:25.559 --> 0:13:29.280 that calls for eggs, that the eggs that I buy 0:13:29.440 --> 0:13:32.080 are the end result of all the knowledge of the farmers. 0:13:32.120 --> 0:13:34.600 I don't have to have that knowledge myself. It makes 0:13:34.640 --> 0:13:37.920 it simpler process. I was reading a speech recently Ellen Young. 0:13:38.240 --> 0:13:41.040 This speech was given I think in nineteen twenty eight. 0:13:41.320 --> 0:13:43.960 Here's the former president of the London School of Economics, 0:13:43.960 --> 0:13:46.319 and he said, it is generally agreed that Adam Smith, 0:13:46.320 --> 0:13:48.960 when you suggested the division of labor leads to inventions 0:13:49.000 --> 0:13:52.760 because workmen engaged in specialized routine operations come to see 0:13:52.800 --> 0:13:55.600 better ways of accomplishing the same results miss the main point. 0:13:55.800 --> 0:13:57.800 The important thing, of course, is that with the division 0:13:57.800 --> 0:14:00.960 of labor, a group of complex processes is transformed into 0:14:00.960 --> 0:14:03.960 a succession of simpler process. So therefore making something with 0:14:04.040 --> 0:14:07.040 eggs is simpler because someone else doing the simple job 0:14:07.120 --> 0:14:09.840 of making of growing eggs, I'm making the simple job 0:14:09.880 --> 0:14:12.360 of maybe making an omelet or something. Something becomes a 0:14:12.400 --> 0:14:15.800 succession of simpler jobs. But the question I have is, 0:14:16.240 --> 0:14:19.320 does that mean that sort of like sheer market size 0:14:19.840 --> 0:14:22.960 as measured by even by things like population, et cetera, 0:14:23.080 --> 0:14:27.040 become important in these questions because if we're going to 0:14:27.120 --> 0:14:31.680 make complex things, doesn't that on some level require either 0:14:31.760 --> 0:14:35.520 through our population or our friends population, a decent number 0:14:35.520 --> 0:14:38.840 of people who can then do all of these individually 0:14:38.880 --> 0:14:39.680 simple tasks. 0:14:40.520 --> 0:14:44.120 Well, I mean, if that's the reason why value chains 0:14:44.120 --> 0:14:48.560 have become longer, where you just slice it into more modules, 0:14:48.600 --> 0:14:52.200 and then you bring those modules together, and then some OEM, 0:14:52.400 --> 0:14:57.360 some original equipment manufacturer that is putting fifty thousand pieces together, 0:14:57.440 --> 0:15:00.160 and then each one of the fifty thousand pieces, it 0:15:00.200 --> 0:15:05.120 becomes a more manageable task. But some industries require a 0:15:05.160 --> 0:15:08.240 lot of a lot of talent that has to come together. 0:15:09.000 --> 0:15:12.560 And for example, when you go to the do you 0:15:12.600 --> 0:15:16.640 see a film? In the movies, sometimes they put at 0:15:16.640 --> 0:15:19.040 the end of a movie it says the end, but 0:15:19.720 --> 0:15:22.360 it's a misnomer because after they put the end, they 0:15:22.400 --> 0:15:25.520 start showing you the credits, and the credits go on 0:15:25.640 --> 0:15:28.640 for minutes and minutes. You know, there's there's the casting, 0:15:28.760 --> 0:15:32.600 there's the sound effects, there's the visual effects, there's editing, 0:15:32.840 --> 0:15:37.440 director of photography. So you need a whole massive team 0:15:37.480 --> 0:15:41.840 of people that are involved in that in that movie 0:15:41.880 --> 0:15:46.400 making industry. Well, an industry that requires this deep pool 0:15:46.440 --> 0:15:51.920 of differentiated talent tends to locate only in very large cities, 0:15:51.920 --> 0:15:55.480 say like Los Angeles or New York. That's the only 0:15:55.560 --> 0:15:58.720 place where you would you could put together all that 0:15:58.880 --> 0:16:04.000 necessary talent that is required. So industries that require a 0:16:04.040 --> 0:16:07.960 more diverse pool of talent tend to locate themselves in 0:16:08.040 --> 0:16:12.200 bigger cities, and the ones that are kind of simpler, 0:16:12.240 --> 0:16:15.400 lower complexity, they can afford to locate in a smaller 0:16:15.440 --> 0:16:18.600 city because in that smaller city they could probably find 0:16:19.360 --> 0:16:24.640 the more limited diversity of skills that they need. Now, 0:16:25.680 --> 0:16:28.200 one of the things that is a feature of the 0:16:28.240 --> 0:16:32.760 American economy over the last twenty years is that the 0:16:32.960 --> 0:16:37.000 industries that tend to locate in large cities have done 0:16:37.080 --> 0:16:40.600 dramatically better than the industries that tend to locate in 0:16:40.680 --> 0:16:45.280 smaller cities. The industries that tend to locate in smaller cities, 0:16:45.840 --> 0:16:49.240 they tend to demand more land and not that diverse 0:16:49.360 --> 0:16:52.440 labor force. So they're not willing to pay the high 0:16:52.440 --> 0:16:56.280 prices of land of big cities so they can buy 0:16:56.280 --> 0:16:58.760 more land and they don't rely so much on this 0:16:58.920 --> 0:17:02.560 diverse labor force. But the industries that require a deep, 0:17:03.600 --> 0:17:06.800 diverse pool of talent, they are willing to pay the 0:17:06.880 --> 0:17:11.080 higher price of land in larger cities because they don't 0:17:11.160 --> 0:17:14.600 use that much land. So what I would put it 0:17:14.600 --> 0:17:16.639 to you is that part of the drama of the 0:17:16.800 --> 0:17:20.840 US is the fact that there's been this shift in 0:17:20.960 --> 0:17:24.280 demand in favor of the things that happened to be 0:17:24.280 --> 0:17:27.040 done in bigger cities. And by the way, let me 0:17:27.080 --> 0:17:30.639 make a very important point. We just saw the elections 0:17:30.640 --> 0:17:35.040 in Poland, and the elections in Poland meant that, you know, 0:17:35.960 --> 0:17:39.000 the president that won that election is a more called it, 0:17:39.040 --> 0:17:43.479 a more trump like figure, and in fact, his party 0:17:43.560 --> 0:17:47.679 pis he got elected more or less ten years or 0:17:47.680 --> 0:17:50.639 eleven years before Trump, so there was already kind of 0:17:50.720 --> 0:17:55.800 like a Trumpian motivation behind the election of that party. 0:17:56.560 --> 0:18:02.679 They were upset about Trey and globalization, and Europe and 0:18:02.760 --> 0:18:06.520 so on. Now, the interesting thing about Poland is that 0:18:06.600 --> 0:18:11.639 Poland is at the exact opposite experience of the US. 0:18:11.680 --> 0:18:18.080 In terms of trade. Poland has seen rising market share 0:18:18.600 --> 0:18:23.480 across the board in all industries, in agriculture and manufacturing, 0:18:23.560 --> 0:18:28.120 in cars, in machinery, in textiles, they have made out 0:18:28.320 --> 0:18:33.760 like Bandits. Trade has exploded positively in Poland. But the 0:18:34.760 --> 0:18:39.280 thing that has exploded in Poland has benefited these larger 0:18:39.480 --> 0:18:46.879 urban areas and has has heard the smaller, less metropolitan 0:18:46.920 --> 0:18:50.760 parts of the country, and that has generated a political backlafe. 0:19:06.200 --> 0:19:09.919 So even even if the gains have been absolute for 0:19:10.080 --> 0:19:13.919 Poland overall, I guess the relative differences within the country 0:19:14.080 --> 0:19:16.480 are are have become a grievance. 0:19:17.119 --> 0:19:22.040 Yes, let me say one point that we often they 0:19:22.080 --> 0:19:25.520 do not emphasize. No, we often think of countries as 0:19:25.560 --> 0:19:27.960 small open economies. They are small in the sense that 0:19:28.040 --> 0:19:30.400 what they do is not going to change the global economy. 0:19:30.440 --> 0:19:34.040 The US is relatively bigger, but many countries think a 0:19:34.080 --> 0:19:37.439 smaller open economy. When you think of a city, a 0:19:37.480 --> 0:19:40.520 city tends to be an even smaller and even more 0:19:40.560 --> 0:19:45.080 open economy. It's smaller, right, much smaller than the country 0:19:45.080 --> 0:19:48.880 it's in right, and it's more open because it trades 0:19:48.960 --> 0:19:50.919 with not only the rest of the world, but the 0:19:50.920 --> 0:19:54.800 rest of the country, and the labor force can either 0:19:55.040 --> 0:19:57.080 come from the rest of the country or leave to 0:19:57.119 --> 0:20:01.879 the rest of the country. Right, So what tends to 0:20:02.000 --> 0:20:05.120 characterize a city. And you know, for a country, its 0:20:05.160 --> 0:20:10.200 export base is super important. For a city, its export 0:20:10.240 --> 0:20:16.360 base is even more important because a city is less 0:20:16.720 --> 0:20:20.120 self sufficient than a country. A city needs to consume 0:20:20.280 --> 0:20:24.159 a lot of things that it doesn't make. Most cities 0:20:24.160 --> 0:20:28.240 don't make cars, don't make antibiotics, most cities don't make 0:20:28.720 --> 0:20:31.479 X ray machines, they don't make, you know, eggs. So 0:20:31.560 --> 0:20:33.959 all of these things have to be brought in and 0:20:34.040 --> 0:20:36.159 to pay for these things that they want to consume 0:20:36.160 --> 0:20:39.200 in the city, they need to earn money from outside 0:20:39.240 --> 0:20:42.119 the city. They need to export in order to be 0:20:42.160 --> 0:20:46.480 able to import. So the set of export activities in 0:20:46.560 --> 0:20:51.720 a city determines very much the life of the city. 0:20:51.840 --> 0:20:55.320 If those export activities in the city get into trouble, 0:20:56.680 --> 0:20:59.639 then it's not just that those jobs in those exports, 0:20:59.680 --> 0:21:04.359 in thus trees getting, you know, are lost, but those 0:21:04.400 --> 0:21:07.360 workers used to you know, go to the barber, go 0:21:07.440 --> 0:21:09.919 to a grocer go to the dentist. So all those 0:21:10.000 --> 0:21:14.040 jobs in all of these local services also get lost, 0:21:14.080 --> 0:21:18.040 and you get this multiplier local effect and people start 0:21:18.119 --> 0:21:20.800 leaving the city. The moment people start leaving the city, 0:21:20.880 --> 0:21:25.080 their housing prices go down. There's less money to pay 0:21:25.160 --> 0:21:28.879 for education, so the quality of education, the theories, and 0:21:28.920 --> 0:21:33.720 you get all of these negative local effects in the city. Okay, 0:21:34.200 --> 0:21:38.399 that's associated with the export industry of your city getting 0:21:38.400 --> 0:21:41.719 into trouble. So what I'm saying is that the shift 0:21:41.760 --> 0:21:48.160 in demand has it hurt cities. The kinds of industries 0:21:48.160 --> 0:21:51.199 that tend to locate in smaller cities, the kind of 0:21:51.200 --> 0:21:53.960 industries that need less of a deep pool of talent 0:21:54.160 --> 0:21:58.000 and more land. And the current industry is a good example. 0:21:58.680 --> 0:22:02.880 The whole still you skill is a dirty, complicated, large thing. 0:22:03.160 --> 0:22:05.639 So it may hire a lot of workers, but it 0:22:05.640 --> 0:22:07.880 doesn't want to have too many people around them. They 0:22:07.880 --> 0:22:10.760 need a lot of land, so they're not going to 0:22:10.760 --> 0:22:13.199 go to Los Angeles. They're going to go to a 0:22:13.200 --> 0:22:15.159 place where they can acquire a lot of land to 0:22:15.160 --> 0:22:18.600 put their big plant. And it's the fact that the 0:22:18.680 --> 0:22:23.119 export sector of cities in the Midwest, say, got into trouble. 0:22:23.440 --> 0:22:26.479 The fact that the export activities in some parts of 0:22:26.520 --> 0:22:30.880 Poland got into trouble, that they got into this negative 0:22:30.960 --> 0:22:35.240 spiral as people you know, left because they have better opportunities, 0:22:35.240 --> 0:22:38.000 and maybe other parts of the country, in larger cities, 0:22:38.400 --> 0:22:43.480 they leave behind a deteriorating economic and social situation. 0:22:44.920 --> 0:22:48.600 I promise not to get to hung up on metaphors 0:22:48.600 --> 0:22:50.679 and monkeys, but I just want to go back to 0:22:50.720 --> 0:22:54.840 the egg analogy for one second. So I understand. You know, 0:22:54.920 --> 0:22:59.840 division of labor expertise can lead to efficiency and app 0:23:00.440 --> 0:23:05.520 gains economically for everyone. However, you know, I'm thinking back 0:23:05.560 --> 0:23:08.560 to when egg prices were very high in the US 0:23:09.119 --> 0:23:12.600 earlier this year, and I joked on this podcast that 0:23:12.680 --> 0:23:14.359 I was going to get my own chickens so that 0:23:14.440 --> 0:23:18.560 I could declare egg independence, egg autarchy and have my 0:23:18.640 --> 0:23:22.600 own supply. Are there not arguments, you know for certain 0:23:22.680 --> 0:23:26.000 things that you would want to have the capacity to 0:23:26.119 --> 0:23:29.800 build those components at home in order to enable you 0:23:30.480 --> 0:23:33.240 to build more complex items. 0:23:33.880 --> 0:23:36.480 Well, no, you would want to make sure that you 0:23:36.600 --> 0:23:40.439 have a diversified source of supply, so that there's a 0:23:40.560 --> 0:23:44.480 problem in Brazil, you can buy from somewhere else. Right, 0:23:44.560 --> 0:23:49.920 So this whole thing about food security that some countries say, 0:23:49.960 --> 0:23:52.000 you know, we need to have food security, so we 0:23:52.040 --> 0:23:54.560 need to produce food in our country at three times 0:23:54.600 --> 0:23:59.119 the international price. Well, I mean that's not food security. 0:23:59.240 --> 0:24:04.000 That's exacerbated risk because you know your country can be 0:24:04.080 --> 0:24:06.400 hit by a drought, by a storm, by et cetera. 0:24:06.560 --> 0:24:09.240 Many things that could destroy your food production. So you're 0:24:09.280 --> 0:24:11.399 going to face much less risk if you have a 0:24:11.440 --> 0:24:16.439 diversified source of materials. And that's one reason why you 0:24:16.440 --> 0:24:19.960 would want to have a good trading relationships with many 0:24:19.960 --> 0:24:23.240 countries because that way, you know, if you get in trouble, 0:24:23.280 --> 0:24:27.600 you can buy from somewhere else. So no, I in general, 0:24:27.680 --> 0:24:32.120 this idea that the price of wheat worldwide goes up, 0:24:32.760 --> 0:24:35.320 that's the reason for you to have your own wheat production. 0:24:35.480 --> 0:24:39.919 That doesn't follow at all. Your wheat production might be 0:24:40.119 --> 0:24:42.560 it might subject you to even more risks than a 0:24:42.640 --> 0:24:46.879 diversified source of wheat from across the world. It's a 0:24:46.920 --> 0:24:50.560 different thing if you're talking militarily, right. 0:24:50.720 --> 0:24:53.359 Yeah, I was going to say, what about something like 0:24:53.600 --> 0:24:56.880