1 00:00:02,520 --> 00:00:07,040 Speaker 1: Bloomberg Audio Studios, podcasts, radio news. 2 00:00:20,239 --> 00:00:23,439 Speaker 2: This is Wall Street Week. I'm David Weston, bringing you 3 00:00:23,720 --> 00:00:27,720 Speaker 2: stories of capitalism. Vice President Vance tells the world the 4 00:00:27,880 --> 00:00:31,000 Speaker 2: US will lead in artificial intelligence, but there are some 5 00:00:31,160 --> 00:00:33,360 Speaker 2: hurdles to get over in the race to get there. 6 00:00:34,720 --> 00:00:38,000 Speaker 2: Plus the story of the tax on stock buybacks that 7 00:00:38,159 --> 00:00:41,000 Speaker 2: was going to make sure the Inflation Reduction Act lived 8 00:00:41,080 --> 00:00:43,440 Speaker 2: up to its name. But we start with a story 9 00:00:43,479 --> 00:00:46,760 Speaker 2: on everyone's mind this week on Global Wall Street, the 10 00:00:46,800 --> 00:00:49,879 Speaker 2: story of countries and companies trying to sort out with 11 00:00:49,960 --> 00:00:53,279 Speaker 2: the growing range of tariffs President Trump promises will mean 12 00:00:53,360 --> 00:00:56,960 Speaker 2: for them. With the US auto industry front and center, 13 00:00:57,400 --> 00:01:01,200 Speaker 2: at least for the tariffs threatened on Canada in Mexico. 14 00:01:01,200 --> 00:01:06,000 Speaker 3: We're going to bring companies and jobs in at levels. 15 00:01:05,640 --> 00:01:06,560 Speaker 4: That you've never seen. 16 00:01:06,760 --> 00:01:09,399 Speaker 5: The only way you can do it is through the 17 00:01:09,440 --> 00:01:10,840 Speaker 5: threat of tariffs. 18 00:01:11,520 --> 00:01:14,000 Speaker 2: In his first few weeks in office, much of President 19 00:01:14,040 --> 00:01:17,240 Speaker 2: Trump's focus has been on tariffs. He announced and then 20 00:01:17,280 --> 00:01:21,600 Speaker 2: suspended twenty five percent tariffs on Canada and Mexico. Announced 21 00:01:21,600 --> 00:01:24,640 Speaker 2: a ten percent levy on goods from China effective in March. 22 00:01:24,840 --> 00:01:27,400 Speaker 1: Make America great again, right, that's what we care about. 23 00:01:27,880 --> 00:01:30,959 Speaker 2: Announced tariffs on all steel and lunant imports from around 24 00:01:31,000 --> 00:01:34,679 Speaker 2: the world, and then reciprocal tariffs on the entire world 25 00:01:34,840 --> 00:01:35,600 Speaker 2: as of April. 26 00:01:36,080 --> 00:01:39,760 Speaker 6: So when you imposed the tariffs the first time, you 27 00:01:39,880 --> 00:01:43,640 Speaker 6: added one hundred and twenty thousand jobs, and since that 28 00:01:43,800 --> 00:01:48,000 Speaker 6: time it's been picked away and nicked away and excluded away. 29 00:01:48,080 --> 00:01:49,960 Speaker 6: You're going to bring those one hundred and twenty thousand 30 00:01:50,080 --> 00:01:53,640 Speaker 6: jobs back to America. You are the president who's standing 31 00:01:53,720 --> 00:01:55,040 Speaker 6: up for the American steel worker. 32 00:01:55,640 --> 00:01:59,120 Speaker 2: Commerce Secretary Howard Lutnik says that tariffs would be good 33 00:01:59,160 --> 00:01:59,800 Speaker 2: for jobs. 34 00:02:00,080 --> 00:02:03,600 Speaker 7: Our industry is in the midst of the disruption. 35 00:02:04,200 --> 00:02:06,880 Speaker 2: But Ford CEO Jim Farley, who went to Capitol Hill 36 00:02:06,960 --> 00:02:09,840 Speaker 2: to tell lawmakers that the tariffs on Mexico and Canada 37 00:02:10,080 --> 00:02:13,760 Speaker 2: would be a disaster for the US auto industry, I. 38 00:02:13,680 --> 00:02:17,799 Speaker 7: Think longer term is the bigger concern. These kind of tariffs, 39 00:02:17,919 --> 00:02:21,880 Speaker 7: especially in these two countries, are very significant, and if 40 00:02:21,919 --> 00:02:25,880 Speaker 7: they persist beyond months, you know, we could see billions 41 00:02:25,919 --> 00:02:30,040 Speaker 7: of billions of dollars of pressure on the industry, lost jobs, 42 00:02:30,160 --> 00:02:33,720 Speaker 7: lots of impacts to communities and our ecosystem in the industry. 43 00:02:34,480 --> 00:02:37,720 Speaker 2: The Council on Foreign Relations estimates that the US auto 44 00:02:37,760 --> 00:02:41,000 Speaker 2: industry may be among the hardest hit, so it's no 45 00:02:41,120 --> 00:02:44,360 Speaker 2: surprise that automaker stocks have underperformed the S and P 46 00:02:44,480 --> 00:02:48,760 Speaker 2: five hundred since President Trump's election, with a pronounced dip 47 00:02:48,960 --> 00:02:50,600 Speaker 2: since the announcement of tariffs. 48 00:02:51,600 --> 00:02:55,000 Speaker 8: If you look at the landscape of the auto industry, 49 00:02:55,040 --> 00:02:58,359 Speaker 8: it represents about five percent of GDP. It's about one 50 00:02:58,400 --> 00:03:04,920 Speaker 8: point two trillion dollars of activity with almost you know, 51 00:03:04,960 --> 00:03:09,280 Speaker 8: in the case of manufacturing in parts, that represents about 52 00:03:09,320 --> 00:03:10,760 Speaker 8: two million workers. 53 00:03:11,400 --> 00:03:14,640 Speaker 2: Ellen Hughes Cromwick is a senior fellow at Third Way 54 00:03:14,919 --> 00:03:17,320 Speaker 2: and spent much of her career as the chief Global 55 00:03:17,320 --> 00:03:20,680 Speaker 2: economist at Ford before serving in the Department of Commerce 56 00:03:20,960 --> 00:03:22,160 Speaker 2: under President Obama. 57 00:03:22,840 --> 00:03:26,160 Speaker 8: There's no question that tariffs raise inflation. 58 00:03:27,240 --> 00:03:27,519 Speaker 1: S and P. 59 00:03:27,680 --> 00:03:31,480 Speaker 2: Global Mobility estimates that the average twenty five thousand dollars 60 00:03:31,520 --> 00:03:35,320 Speaker 2: price of a car imported from Mexico or Canada could 61 00:03:35,320 --> 00:03:38,440 Speaker 2: go up by six two hundred and fifty dollars if 62 00:03:38,480 --> 00:03:41,960 Speaker 2: tariffs take effect. The fifty best selling models in the 63 00:03:42,080 --> 00:03:45,400 Speaker 2: US market account for about sixty percent of the market volume, 64 00:03:45,920 --> 00:03:49,320 Speaker 2: half of which would be directly affected by the tariffs. 65 00:03:49,880 --> 00:03:57,400 Speaker 8: The importer pays the tariff, not the company that's exporting. 66 00:03:56,720 --> 00:03:58,200 Speaker 2: To the United States. 67 00:03:58,760 --> 00:04:02,040 Speaker 8: So number one, that business has a choice to make. 68 00:04:02,680 --> 00:04:06,400 Speaker 8: Either they pay the tariff and import the goods, or 69 00:04:06,440 --> 00:04:11,920 Speaker 8: they begin to substitute away from those imported product and 70 00:04:12,080 --> 00:04:16,679 Speaker 8: try to find other sources. They could also pass along 71 00:04:17,320 --> 00:04:21,440 Speaker 8: that increase in their cost because of the import tariff 72 00:04:21,640 --> 00:04:27,119 Speaker 8: to their and market customers, and it in general will 73 00:04:27,320 --> 00:04:29,720 Speaker 8: just simply raise prices. 74 00:04:30,800 --> 00:04:33,520 Speaker 2: The hit the auto producers may suffer from tariffs is 75 00:04:33,560 --> 00:04:37,120 Speaker 2: already being seen not only in their stock prices, but 76 00:04:37,160 --> 00:04:40,040 Speaker 2: in their being less profitable than their suppliers for the 77 00:04:40,080 --> 00:04:44,320 Speaker 2: first time in six years, and RBC calculates that it 78 00:04:44,360 --> 00:04:48,520 Speaker 2: will be the US producers gm Ford and Stilantis that 79 00:04:48,600 --> 00:04:52,240 Speaker 2: will be hit the hardest. Imposing tariffs on inputs to 80 00:04:52,320 --> 00:04:55,279 Speaker 2: any products made in the United States will increase costs, 81 00:04:55,760 --> 00:04:58,120 Speaker 2: but in the case of tariffs on auto parts crossing 82 00:04:58,200 --> 00:05:02,200 Speaker 2: the Mexican or Canadian borders, the problem is particularly acute 83 00:05:02,720 --> 00:05:05,600 Speaker 2: given the complexity of the supply chains and the need 84 00:05:05,680 --> 00:05:08,520 Speaker 2: for parts to cross the border several times over the 85 00:05:08,560 --> 00:05:12,719 Speaker 2: course of production. Everett Eisenstadt served as the Deputy Director 86 00:05:12,760 --> 00:05:15,920 Speaker 2: of the National Economic Council under President Trump during the 87 00:05:16,040 --> 00:05:19,360 Speaker 2: last term, where he has seen trade sentiment go from 88 00:05:19,440 --> 00:05:21,080 Speaker 2: integrated to protectionists. 89 00:05:21,839 --> 00:05:23,920 Speaker 1: So the twenty five percent tariff would have a pretty 90 00:05:23,920 --> 00:05:27,680 Speaker 1: disruptive impact on the integration that has been ongoing now 91 00:05:27,720 --> 00:05:30,960 Speaker 1: for a couple of decades, and it would be quite 92 00:05:31,000 --> 00:05:33,039 Speaker 1: a dramatic shift, I think if that were to go 93 00:05:33,080 --> 00:05:35,520 Speaker 1: into effect for a sustained period of time. 94 00:05:36,360 --> 00:05:40,159 Speaker 2: One alternative, of course, might be for US automakers simply 95 00:05:40,200 --> 00:05:43,080 Speaker 2: to source all their parts in the United States. But 96 00:05:43,160 --> 00:05:47,039 Speaker 2: putting together an automobile is a complex task. Most have 97 00:05:47,200 --> 00:05:51,400 Speaker 2: tens of thousands of parts, so shifting that process entirely 98 00:05:51,440 --> 00:05:54,960 Speaker 2: back to the United States is unrealistic and certainly couldn't 99 00:05:54,960 --> 00:05:55,760 Speaker 2: be done quickly. 100 00:05:56,760 --> 00:06:01,880 Speaker 8: Any assembly of a vehicle that product cycle can be 101 00:06:02,040 --> 00:06:06,240 Speaker 8: three to five years. Now back into the supply chain 102 00:06:06,600 --> 00:06:11,119 Speaker 8: and look at a tiered three supplier. Hundreds of these 103 00:06:11,200 --> 00:06:15,760 Speaker 8: supplier businesses have to then start to think, Okay, well, 104 00:06:15,839 --> 00:06:18,800 Speaker 8: what investments do I have to make in order to 105 00:06:19,320 --> 00:06:22,640 Speaker 8: supply that part to Ford Motor Company, for example. 106 00:06:23,360 --> 00:06:25,640 Speaker 2: What makes it worse for auto companies is that they 107 00:06:25,680 --> 00:06:29,000 Speaker 2: are not working with substantial margins to begin with, which 108 00:06:29,040 --> 00:06:32,240 Speaker 2: makes fundamental changes in the way they produce that much 109 00:06:32,320 --> 00:06:33,039 Speaker 2: more difficult. 110 00:06:33,920 --> 00:06:39,839 Speaker 8: There's enough excess capacity to generate a very competitive industry 111 00:06:40,440 --> 00:06:42,880 Speaker 8: with you know, when you look at many of the 112 00:06:42,960 --> 00:06:50,000 Speaker 8: companies with very thin profit margins, and if you, for example, say, okay, 113 00:06:50,480 --> 00:06:55,279 Speaker 8: I want to be more resilient for this particular component 114 00:06:55,400 --> 00:06:59,880 Speaker 8: going into my vehicle. But if I dual source or 115 00:07:00,320 --> 00:07:05,360 Speaker 8: decide I'm going to try to source over a few 116 00:07:05,560 --> 00:07:09,880 Speaker 8: different suppliers, I'm going to be adding cost. 117 00:07:11,200 --> 00:07:14,440 Speaker 2: The US auto industry has a long history of reckoning 118 00:07:14,480 --> 00:07:17,640 Speaker 2: with federal national security and trade policy. 119 00:07:18,480 --> 00:07:21,000 Speaker 1: One you had the North American Free Trade Agreement, which 120 00:07:21,080 --> 00:07:24,560 Speaker 1: was designed to enable the US auto sector to compete 121 00:07:24,560 --> 00:07:27,640 Speaker 1: with China and other markets that were starting to produce 122 00:07:27,720 --> 00:07:31,400 Speaker 1: manufacturing at a much reduced cost. And the idea was 123 00:07:31,480 --> 00:07:34,680 Speaker 1: you could create a North American supply chain that would 124 00:07:34,720 --> 00:07:37,160 Speaker 1: make the US competitive, that would enable the exports to 125 00:07:37,200 --> 00:07:41,240 Speaker 1: continue from the United States. The Transpacific Partnership Agreement, which 126 00:07:41,280 --> 00:07:44,120 Speaker 1: was something that President Obama negotiated, which was one of 127 00:07:44,120 --> 00:07:47,280 Speaker 1: the last efforts to really bring integration at the highest 128 00:07:47,360 --> 00:07:51,560 Speaker 1: levels among many economies. That agreement was hanned pretty badly 129 00:07:51,640 --> 00:07:55,800 Speaker 1: by both then presidential candidate Hillary Clinton but also soon 130 00:07:55,800 --> 00:07:58,480 Speaker 1: to be President Trump. That was really the end of 131 00:07:58,520 --> 00:08:00,720 Speaker 1: the integrated effort for the United Slime States. So this 132 00:08:01,200 --> 00:08:05,120 Speaker 1: kind of shipped away towards integration just in time. Delivery 133 00:08:05,880 --> 00:08:09,240 Speaker 1: towards a more unilateral trade approach has been brewing for 134 00:08:09,320 --> 00:08:12,200 Speaker 1: quite some time. Now we're into an acceleration of that 135 00:08:12,840 --> 00:08:19,040 Speaker 1: unilateral trade pattern. So it's a trajectory that's been ongoing 136 00:08:19,080 --> 00:08:20,880 Speaker 1: for a while. I think it will be ongoing for 137 00:08:21,000 --> 00:08:21,760 Speaker 1: quite some time. 138 00:08:22,760 --> 00:08:26,040 Speaker 2: The higher costs and disruption that the threatened tariffs represent 139 00:08:26,120 --> 00:08:29,800 Speaker 2: for US automakers come to an industry already struggling to 140 00:08:29,840 --> 00:08:34,240 Speaker 2: deal with a massive transition to electric vehicles. GM committed 141 00:08:34,240 --> 00:08:36,839 Speaker 2: to shift fifty percent of its fleet to evs by 142 00:08:36,880 --> 00:08:40,720 Speaker 2: twenty thirty, but delayed plans for a new electric Buick 143 00:08:40,880 --> 00:08:46,120 Speaker 2: last year, setting lower than expected EV adoption. Policies under 144 00:08:46,160 --> 00:08:50,720 Speaker 2: the Biden administration, namely the Inflation Reduction Act, attempted to 145 00:08:50,760 --> 00:08:54,559 Speaker 2: support EV adoption, but the Trump administration is now saying 146 00:08:54,679 --> 00:08:57,040 Speaker 2: it will pull back on those initiatives. 147 00:08:57,440 --> 00:09:01,320 Speaker 1: When you have situations where policy moves back and forth, 148 00:09:01,400 --> 00:09:04,000 Speaker 1: and you saw it most recently. You know, under President Biden, 149 00:09:04,040 --> 00:09:06,520 Speaker 1: you had a lot of incentives to go to electric vehicles, 150 00:09:07,080 --> 00:09:10,319 Speaker 1: and with the emissions requirements that really almost force them 151 00:09:10,360 --> 00:09:12,480 Speaker 1: to produce a certain type of vehicle. Now you've got 152 00:09:12,520 --> 00:09:15,280 Speaker 1: an administration with a very different perspective that is not 153 00:09:15,320 --> 00:09:18,640 Speaker 1: as focused on those emission standards. That actually is putting 154 00:09:18,679 --> 00:09:21,480 Speaker 1: a different type of pressure on the industry. It takes 155 00:09:21,520 --> 00:09:23,280 Speaker 1: time to adapt, and I think it puts a lot 156 00:09:23,280 --> 00:09:27,600 Speaker 1: of pressure on the ability to plan a long term 157 00:09:27,640 --> 00:09:30,679 Speaker 1: trajectory for the industry. And at some point that's going 158 00:09:30,760 --> 00:09:31,520 Speaker 1: to be impactful. 159 00:09:32,520 --> 00:09:36,040 Speaker 8: Now, if you pull the rugout from under that brand 160 00:09:36,080 --> 00:09:41,120 Speaker 8: new industry with thousands of jobs, we're basically making all 161 00:09:41,160 --> 00:09:46,760 Speaker 8: that capital investment just way inefficient and wasted. And that 162 00:09:46,920 --> 00:09:50,520 Speaker 8: isn't really a way to run the country either. I mean, 163 00:09:50,080 --> 00:09:56,560 Speaker 8: we want to support businesses to be competitive and to 164 00:09:56,800 --> 00:10:00,600 Speaker 8: grow and to create jobs. We don't want to destroy 165 00:10:00,840 --> 00:10:07,120 Speaker 8: wealth by penalizing companies that made those investments over the 166 00:10:07,200 --> 00:10:10,679 Speaker 8: last several years. And I think you know that's just 167 00:10:10,720 --> 00:10:15,679 Speaker 8: a misguided business policy approach. 168 00:10:16,720 --> 00:10:19,560 Speaker 2: While the US goes back and forth on its commitment 169 00:10:19,600 --> 00:10:22,560 Speaker 2: to electric vehicles, the rest of the world moves ahead, 170 00:10:23,120 --> 00:10:26,880 Speaker 2: with US EV adoption largely flatlining since hitting the tipping 171 00:10:26,920 --> 00:10:29,880 Speaker 2: point of five percent of new car sales in twenty 172 00:10:30,000 --> 00:10:34,120 Speaker 2: twenty one. But wherever the government ends up on tariffs 173 00:10:34,240 --> 00:10:37,480 Speaker 2: or on ev incentives. The one thing that is certain 174 00:10:37,720 --> 00:10:40,280 Speaker 2: is that for the industry to thrive, it needs the 175 00:10:40,360 --> 00:10:42,240 Speaker 2: certainty that it is not getting. 176 00:10:43,120 --> 00:10:45,640 Speaker 1: We need to remember that the US auto industry doesn't 177 00:10:45,720 --> 00:10:49,080 Speaker 1: sit in isolation. We're part of a global economy and 178 00:10:49,120 --> 00:10:51,680 Speaker 1: there's a lot of other actors in the world. And 179 00:10:51,720 --> 00:10:54,520 Speaker 1: while we may wish that we had the auto industry 180 00:10:54,559 --> 00:10:56,640 Speaker 1: we did in the early ages and the US was 181 00:10:56,679 --> 00:10:59,640 Speaker 1: completely dominant, the reality is there's a lot of other 182 00:10:59,640 --> 00:11:01,920 Speaker 1: players in this sector now. There's a lot of other 183 00:11:01,920 --> 00:11:06,200 Speaker 1: countries that have very, very productive, robust automobile exports. And 184 00:11:06,240 --> 00:11:09,360 Speaker 1: I hope there are ancillary policies that come into play 185 00:11:09,920 --> 00:11:12,240 Speaker 1: that enable the industry to make the kind of adjustments 186 00:11:12,240 --> 00:11:15,120 Speaker 1: they're going to need, both with capital investments and make 187 00:11:15,160 --> 00:11:17,360 Speaker 1: sure they're able to get the technology they need here 188 00:11:17,360 --> 00:11:19,840 Speaker 1: in the United States, the workforce they need in the 189 00:11:19,920 --> 00:11:23,839 Speaker 1: United States, the the ability need to get products, and regulations. 190 00:11:23,880 --> 00:11:27,560 Speaker 1: You know, to move quickly in getting facilities up and running, 191 00:11:27,600 --> 00:11:29,960 Speaker 1: because you can't wait a year or two for everything 192 00:11:30,000 --> 00:11:32,200 Speaker 1: to be perfect. You got to constantly be running in 193 00:11:32,240 --> 00:11:32,960 Speaker 1: this industry. 194 00:11:35,440 --> 00:11:39,040 Speaker 2: While President Trump was talking tariffs again in Washington, this week, 195 00:11:39,320 --> 00:11:42,520 Speaker 2: his Vice President JD. Vance had returned from Europe, where 196 00:11:42,559 --> 00:11:45,520 Speaker 2: he talked about the US winning the race in artificial 197 00:11:45,520 --> 00:11:48,920 Speaker 2: intelligency and though the prize may be great, there are 198 00:11:48,920 --> 00:11:51,320 Speaker 2: some hurdles on the way to the vice President's goal. 199 00:11:51,920 --> 00:12:04,600 Speaker 2: That's next on Wall Street Week. This is a story 200 00:12:04,600 --> 00:12:07,280 Speaker 2: about a race, a race to be the fastest and 201 00:12:07,440 --> 00:12:10,560 Speaker 2: the biggest, but with hurdles to overcome on the way 202 00:12:10,600 --> 00:12:14,000 Speaker 2: to the prize. Companies are in a frenzy to get 203 00:12:14,000 --> 00:12:17,199 Speaker 2: ahead in artificial intelligence. But it's not just companies in 204 00:12:17,240 --> 00:12:20,679 Speaker 2: the race, its entire countries, led by the United States. 205 00:12:22,200 --> 00:12:25,160 Speaker 9: The United States of America is the leader in AI in. 206 00:12:25,120 --> 00:12:27,240 Speaker 1: Our administration plans to keep it that way. 207 00:12:28,160 --> 00:12:30,599 Speaker 2: So what could the prize of winning the race in 208 00:12:30,640 --> 00:12:34,600 Speaker 2: the so called Fourth Industrial Revolution be? What could it 209 00:12:34,679 --> 00:12:39,079 Speaker 2: do for productivity and therefore economic growth? And who stands 210 00:12:39,080 --> 00:12:43,120 Speaker 2: to benefit? We posed those questions to doctor Jeffrey Hinton, 211 00:12:43,440 --> 00:12:46,040 Speaker 2: who won the Nobel Prize for his work on large 212 00:12:46,160 --> 00:12:50,199 Speaker 2: language models and is often called the godfather of AI. 213 00:12:51,000 --> 00:12:54,360 Speaker 10: It will be a wonderful thing for productivity, that's true. 214 00:12:54,600 --> 00:12:56,839 Speaker 10: Whether it be a wonderful thing for society is something else. 215 00:12:56,840 --> 00:13:02,040 Speaker 10: Wild Together in a decent society. If you increase productivity 216 00:13:02,040 --> 00:13:05,920 Speaker 10: a lot, everybody's better off. But here what's going to happen. 217 00:13:06,320 --> 00:13:11,120 Speaker 10: If you increase productivity a lot. The rich and the 218 00:13:11,120 --> 00:13:15,240 Speaker 10: big companies are going to get much richer, and ordinary 219 00:13:15,280 --> 00:13:17,360 Speaker 10: people are probably going to be worse off because they 220 00:13:17,520 --> 00:13:18,240 Speaker 10: lose their jobs. 221 00:13:18,840 --> 00:13:22,280 Speaker 2: AI's ability to drive productivity could give new life to 222 00:13:22,360 --> 00:13:26,640 Speaker 2: economies whose productivity has stalled. US productivity grew at only 223 00:13:26,720 --> 00:13:29,800 Speaker 2: one point five percent a year for twenty years and 224 00:13:29,840 --> 00:13:32,640 Speaker 2: then shot up to two point seven percent in twenty 225 00:13:32,720 --> 00:13:37,000 Speaker 2: twenty three, and economists anticipate that widespread adoption of AI 226 00:13:37,200 --> 00:13:41,079 Speaker 2: could keep the momentum going, with Goldman Sachs expecting AI 227 00:13:41,160 --> 00:13:45,040 Speaker 2: to be a key driver of productivity growth in developed economies. 228 00:13:45,120 --> 00:13:48,840 Speaker 2: In particular, when wider adoption does come, Hinton says, it 229 00:13:48,920 --> 00:13:52,360 Speaker 2: won't come equally to all involved. It will have very 230 00:13:52,400 --> 00:13:55,239 Speaker 2: different effects on different parts of the workforce. 231 00:13:55,679 --> 00:13:59,400 Speaker 10: Many people say, you know, ille crate more jobs for 232 00:13:59,480 --> 00:14:03,480 Speaker 10: this particular thing. I'm not convinced of that. What we're doing. 233 00:14:04,200 --> 00:14:09,280 Speaker 10: In the Industrial Revolution, we made human strength irrelevant. Now 234 00:14:09,280 --> 00:14:13,839 Speaker 10: we're making human intelligence irrelevant, and that's very scary. So 235 00:14:13,880 --> 00:14:18,640 Speaker 10: there's some areas where demand is very elastic. An example 236 00:14:18,679 --> 00:14:21,600 Speaker 10: would be healthcare. If I could get ten hours a 237 00:14:21,600 --> 00:14:24,720 Speaker 10: week talking to my doctor, I'm over seventy, I'd be 238 00:14:24,840 --> 00:14:28,880 Speaker 10: very happy. So if you take someone and make them 239 00:14:28,960 --> 00:14:31,560 Speaker 10: much more efficient by having them work with a very 240 00:14:31,560 --> 00:14:35,640 Speaker 10: intelligent AI, they're not going to become unemployed. It's not 241 00:14:35,680 --> 00:14:37,280 Speaker 10: that you're now only going to need a few of them. 242 00:14:37,440 --> 00:14:40,960 Speaker 10: You're just going to get much more healthcare. Great. So 243 00:14:41,120 --> 00:14:42,560 Speaker 10: in elastic areas, it's great. 244 00:14:43,320 --> 00:14:47,160 Speaker 2: But for all the talk of AI's sweeping effects, economic 245 00:14:47,240 --> 00:14:51,360 Speaker 2: change has been slow to materialize. That same Goldman report 246 00:14:51,440 --> 00:14:54,200 Speaker 2: says that only five percent of companies claim to use 247 00:14:54,320 --> 00:14:58,920 Speaker 2: generative AI in regular production, with tech and information businesses 248 00:14:59,040 --> 00:15:02,040 Speaker 2: leading the way. Whatever hurdles may hold us back in 249 00:15:02,040 --> 00:15:04,560 Speaker 2: the race to AI, it doesn't look like it will 250 00:15:04,560 --> 00:15:07,760 Speaker 2: be for lack of spending. AI spending by four of 251 00:15:07,800 --> 00:15:11,800 Speaker 2: America's biggest tech companies surged sixty three percent last year 252 00:15:12,280 --> 00:15:16,120 Speaker 2: and should rise even higher this year. Chris Miller is 253 00:15:16,160 --> 00:15:19,000 Speaker 2: the author of Chip War. He says the challenge for 254 00:15:19,080 --> 00:15:22,400 Speaker 2: big tech companies isn't the money being spent, but lack 255 00:15:22,480 --> 00:15:23,280 Speaker 2: of capacity. 256 00:15:24,000 --> 00:15:26,480 Speaker 9: There are two limiting factors right now. One is the 257 00:15:26,720 --> 00:15:30,040 Speaker 9: chips and servers themselves, which are less and shortage than 258 00:15:30,040 --> 00:15:33,240 Speaker 9: they were eighteen months ago, but are still hard to 259 00:15:33,240 --> 00:15:35,000 Speaker 9: come by for some of the biggest tech firms and 260 00:15:35,040 --> 00:15:38,360 Speaker 9: the vast quantities that they need. The second hurdle, which 261 00:15:38,400 --> 00:15:42,480 Speaker 9: is new, is actually the power. To make the data 262 00:15:42,520 --> 00:15:44,600 Speaker 9: centers function the way they need to. They need huge 263 00:15:44,680 --> 00:15:48,280 Speaker 9: quantities of power. And is AI gets more advanced, that 264 00:15:48,320 --> 00:15:51,800 Speaker 9: requires bigger and bigger data centers. And so now if 265 00:15:51,840 --> 00:15:55,240 Speaker 9: you listen to companies like open Ai or Google, they're 266 00:15:55,240 --> 00:15:58,240 Speaker 9: talking about bringing online data centers that use a gig 267 00:15:58,240 --> 00:16:00,440 Speaker 9: awot of power. You need a whole power plant to 268 00:16:00,480 --> 00:16:02,640 Speaker 9: power some of these facilities, and it just takes time 269 00:16:02,760 --> 00:16:04,280 Speaker 9: to build all that infrastructure. 270 00:16:04,480 --> 00:16:08,600 Speaker 2: For some time, chip manufacturing capacity has been concentrated in 271 00:16:08,680 --> 00:16:12,760 Speaker 2: Southeast Asia. That began to change with the Biden administrations 272 00:16:12,880 --> 00:16:17,240 Speaker 2: Chips and Science Act encouraging investment in US chip manufacturing. 273 00:16:17,760 --> 00:16:20,800 Speaker 2: Samsung is investing in a chip plan in Texas, while 274 00:16:20,840 --> 00:16:24,960 Speaker 2: TSMC is opening a new plant in Arizona. Alissa Apsel 275 00:16:25,160 --> 00:16:29,080 Speaker 2: is the director of Electrical and Computer Engineering at Cornell University. 276 00:16:29,400 --> 00:16:35,640 Speaker 11: The Chips Act is a response to a covid era 277 00:16:36,120 --> 00:16:39,200 Speaker 11: supply chain interruptions that made it very very clear that 278 00:16:39,240 --> 00:16:43,000 Speaker 11: the US needs to be competitive in semiconductors. Otherwise we're 279 00:16:43,000 --> 00:16:45,280 Speaker 11: going to lose out to other countries because we can't 280 00:16:45,280 --> 00:16:49,040 Speaker 11: supply our own semi conductors and will be beholden to 281 00:16:49,320 --> 00:16:52,080 Speaker 11: other countries to supply them for US, and that that 282 00:16:52,080 --> 00:16:55,000 Speaker 11: puts US in a precarious position in terms of national security. 283 00:16:55,200 --> 00:17:01,640 Speaker 11: The infusion of funding into the US, both on the 284 00:17:01,680 --> 00:17:08,960 Speaker 11: research side and for companies to develop products, but also 285 00:17:09,080 --> 00:17:11,560 Speaker 11: for small companies to be able to compete in this 286 00:17:11,640 --> 00:17:15,680 Speaker 11: space in order to support growing this infrastructure has been 287 00:17:16,720 --> 00:17:20,119 Speaker 11: quite significant and it's really changed the game in this space. 288 00:17:20,359 --> 00:17:23,480 Speaker 2: Building more chip making and power plans is one way 289 00:17:23,520 --> 00:17:27,040 Speaker 2: to get over the AI capacity hurdles. Another could be 290 00:17:27,080 --> 00:17:30,360 Speaker 2: finding ways to achieve the benefits of AI without requiring 291 00:17:30,440 --> 00:17:34,440 Speaker 2: the same supplies of chips or energy. Wall Street was 292 00:17:34,560 --> 00:17:37,640 Speaker 2: rattled in recent weeks by a new, more efficient AI 293 00:17:37,680 --> 00:17:39,120 Speaker 2: model out of China. 294 00:17:39,200 --> 00:17:41,320 Speaker 9: I think in Silicon Valley there was actually a lot 295 00:17:41,320 --> 00:17:43,760 Speaker 9: of surprise as to why Deep Sea garnered so much 296 00:17:43,760 --> 00:17:47,119 Speaker 9: attention in the media and on Wall Street. Deepsek was 297 00:17:47,520 --> 00:17:49,960 Speaker 9: part of the AI conversation for most of the last 298 00:17:50,000 --> 00:17:51,800 Speaker 9: half of twenty twenty four, and then just in the 299 00:17:51,840 --> 00:17:55,639 Speaker 9: past couple of weeks it gathered attention in the media 300 00:17:55,680 --> 00:17:57,800 Speaker 9: and in Wall Street. I think what you'd find is 301 00:17:57,840 --> 00:18:01,320 Speaker 9: that compared to open AI, or compared to Nthropic, the 302 00:18:01,400 --> 00:18:04,520 Speaker 9: number of paying customers is far, far lower. And that's 303 00:18:04,560 --> 00:18:07,240 Speaker 9: where the US firms have a real advantage. They've already 304 00:18:07,240 --> 00:18:10,719 Speaker 9: got the distribution channels, they've already got the market reputation 305 00:18:11,119 --> 00:18:13,960 Speaker 9: to be the real leaders in AI. Certainly they've got 306 00:18:14,000 --> 00:18:17,280 Speaker 9: high quality technology, but they've also got these other factors 307 00:18:17,320 --> 00:18:19,320 Speaker 9: in their business model which give them a real head 308 00:18:19,359 --> 00:18:21,200 Speaker 9: start visa a deep Seek. And so if you ask 309 00:18:21,240 --> 00:18:23,680 Speaker 9: yourself what will deep Seek's revenue be in six months 310 00:18:23,720 --> 00:18:26,600 Speaker 9: time from paying subscribers outside of China, I would bet 311 00:18:26,600 --> 00:18:27,840 Speaker 9: that number is going to be pretty low. 312 00:18:28,040 --> 00:18:30,960 Speaker 2: Is there any prospect that we could engineer or innovate 313 00:18:31,000 --> 00:18:32,800 Speaker 2: our way out of the problem, that is to say, 314 00:18:33,080 --> 00:18:36,800 Speaker 2: reduce the need for the computing capacity by really re 315 00:18:36,920 --> 00:18:40,040 Speaker 2: engineering as it were, generate of AI. 316 00:18:40,560 --> 00:18:44,320 Speaker 9: We've seen plenty of efforts to make AI more efficient, 317 00:18:44,600 --> 00:18:48,800 Speaker 9: in part because it requires so much extraordinarily expensive computing infrastructure. 318 00:18:49,119 --> 00:18:51,720 Speaker 9: And the trend has been that for a given quality 319 00:18:51,720 --> 00:18:53,960 Speaker 9: of AI system, it does get a lot more efficient 320 00:18:54,359 --> 00:18:56,520 Speaker 9: over time. If you look, for example, at the price 321 00:18:56,720 --> 00:18:59,680 Speaker 9: it costs to use a GPT three model, the type 322 00:18:59,680 --> 00:19:02,000 Speaker 9: of model it was released a handful of years ago 323 00:19:02,040 --> 00:19:05,520 Speaker 9: by open AI, we've seen a two order of magnitude 324 00:19:05,640 --> 00:19:08,160 Speaker 9: decrease in the price of using that model, so huge 325 00:19:08,160 --> 00:19:10,600 Speaker 9: efficiency gains. But the problem is that we also get 326 00:19:10,640 --> 00:19:14,280 Speaker 9: better models that require more computing. And the trend line 327 00:19:14,320 --> 00:19:16,280 Speaker 9: over the last couple of years has been that the 328 00:19:16,720 --> 00:19:21,000 Speaker 9: advances we gain from harnessing more computing power and throwing 329 00:19:21,040 --> 00:19:24,280 Speaker 9: all that at the problem of AI dramatically outweigh the 330 00:19:24,280 --> 00:19:27,320 Speaker 9: efficiency gains. And so long as the rate of innovation 331 00:19:27,840 --> 00:19:31,960 Speaker 9: remains so rapid and that innovation is catalyzed by computing power, 332 00:19:32,119 --> 00:19:35,159 Speaker 9: the efficiency gains are going to be outpaced by the 333 00:19:35,200 --> 00:19:38,640 Speaker 9: capability and the computing needs of these new models. That's 334 00:19:38,640 --> 00:19:40,919 Speaker 9: certainly the trend right now. It's also the trend that 335 00:19:40,960 --> 00:19:43,119 Speaker 9: all of the world's big tech companies are betting on. 336 00:19:43,320 --> 00:19:46,880 Speaker 9: That's why Amazon, Meta, Microsoft and others are building these 337 00:19:47,000 --> 00:19:51,040 Speaker 9: vast data center complexes, because they're betting that capabilities gains 338 00:19:51,160 --> 00:19:53,800 Speaker 9: enabled by more computing will be the dominant feature in 339 00:19:53,840 --> 00:19:55,480 Speaker 9: AI for the rest of the decade. 340 00:19:55,640 --> 00:19:58,480 Speaker 2: Economists talk about something called the Jivon's paradox that came 341 00:19:58,480 --> 00:20:01,480 Speaker 2: out of coal usage or fishing. You got using coal. 342 00:20:01,640 --> 00:20:04,080 Speaker 2: There was just more demand for coal, more applications of it. 343 00:20:04,520 --> 00:20:07,080 Speaker 2: Do we have that prospect that essentially, as far as 344 00:20:07,280 --> 00:20:09,399 Speaker 2: I can see, we're never going to catch up the 345 00:20:09,400 --> 00:20:10,960 Speaker 2: supply of chips with the demand. 346 00:20:11,280 --> 00:20:15,400 Speaker 11: I think it's exactly that. I think that the more, 347 00:20:15,680 --> 00:20:19,119 Speaker 11: at least from where I stand today. I don't know 348 00:20:19,160 --> 00:20:21,000 Speaker 11: that this is always going to be true. But like 349 00:20:21,080 --> 00:20:23,760 Speaker 11: in the foreseeable future, I don't see that we're going 350 00:20:23,880 --> 00:20:26,960 Speaker 11: to say, oh, okay, now I have twice the processing power, 351 00:20:26,960 --> 00:20:31,800 Speaker 11: that's enough. I think we'll wind up pushing more applications 352 00:20:32,000 --> 00:20:36,560 Speaker 11: and developing more utility and finding kind of new spaces 353 00:20:36,560 --> 00:20:39,600 Speaker 11: where we need AI or new types of jobs for 354 00:20:39,640 --> 00:20:42,760 Speaker 11: it to do that require more and more processing, and 355 00:20:43,040 --> 00:20:44,560 Speaker 11: just ride that curve in that direction. 356 00:20:44,880 --> 00:20:48,200 Speaker 9: AI and automation can have unintended consequences. 357 00:20:48,359 --> 00:20:51,439 Speaker 2: The race to win the prize in artificial intelligence is 358 00:20:51,520 --> 00:20:54,879 Speaker 2: well and truly on, but some of those who understand 359 00:20:54,920 --> 00:20:57,639 Speaker 2: the power of AI best warn that we need to 360 00:20:57,680 --> 00:21:00,359 Speaker 2: make sure it's not just a fast race, but a 361 00:21:00,400 --> 00:21:03,679 Speaker 2: safe one. That we need to build capacity, not just 362 00:21:03,720 --> 00:21:06,600 Speaker 2: to drive large language models, but to make sure that 363 00:21:06,680 --> 00:21:09,880 Speaker 2: they do what we want them to. Can governments keep 364 00:21:09,960 --> 00:21:13,720 Speaker 2: up and how do they regulate something that's advancing so quickly. 365 00:21:14,119 --> 00:21:16,159 Speaker 2: There are good people in the government, smart people, some 366 00:21:16,480 --> 00:21:19,600 Speaker 2: probably less smart, but are they up to the job 367 00:21:19,800 --> 00:21:22,879 Speaker 2: of really understanding what you're talking about and getting their 368 00:21:22,960 --> 00:21:23,560 Speaker 2: arms around it. 369 00:21:23,640 --> 00:21:27,720 Speaker 10: We need many of the smartest young researchers to be 370 00:21:27,760 --> 00:21:30,399 Speaker 10: working on this problem, and we need them to have resources. 371 00:21:30,840 --> 00:21:33,080 Speaker 10: Now the government doesn't have the resources. The big companies 372 00:21:33,080 --> 00:21:38,359 Speaker 10: have the resources. The government, i think should be insisting 373 00:21:38,440 --> 00:21:42,040 Speaker 10: that the big companies spend much more of their resources 374 00:21:42,359 --> 00:21:45,000 Speaker 10: on safety, on this safety research or how will we 375 00:21:45,080 --> 00:21:47,520 Speaker 10: stay in control? Compared with what they do now. Right 376 00:21:47,560 --> 00:21:50,440 Speaker 10: now they spend like a few percent on that and 377 00:21:51,160 --> 00:21:54,680 Speaker 10: nearly all their resources go into building even better, bigger models. 378 00:21:55,680 --> 00:21:58,320 Speaker 10: They should be spending a much bigger fraction on safety 379 00:21:58,880 --> 00:22:02,159 Speaker 10: and the government to try and mandate that. So there 380 00:22:02,160 --> 00:22:04,760 Speaker 10: was a bill in California that the governor recently vetoed 381 00:22:05,240 --> 00:22:07,520 Speaker 10: that would have gone a little bit in that direction. 382 00:22:08,080 --> 00:22:10,800 Speaker 10: But of course big companies don't want that. Big companies 383 00:22:10,840 --> 00:22:13,879 Speaker 10: want to be free to make profits. That's the system 384 00:22:13,880 --> 00:22:17,480 Speaker 10: we're in. And so if you take some outwore. For example, 385 00:22:17,960 --> 00:22:21,359 Speaker 10: open ai was initially very concerned about safety. As time's 386 00:22:21,400 --> 00:22:23,520 Speaker 10: gone by, it's got less and less concerned about safety. 387 00:22:23,680 --> 00:22:25,879 Speaker 10: Some Auntmas still says he's concerned with safety, But if 388 00:22:25,920 --> 00:22:27,720 Speaker 10: you look at what he does and not what he says, 389 00:22:28,320 --> 00:22:31,480 Speaker 10: he's turning it into a pure for profit company. There's 390 00:22:31,560 --> 00:22:34,119 Speaker 10: far less resources spent on safety, and most of the 391 00:22:34,200 --> 00:22:36,639 Speaker 10: leading safety researchers who were kind of the best in 392 00:22:36,680 --> 00:22:40,520 Speaker 10: the world and open AI have left. So to prevent 393 00:22:40,560 --> 00:22:42,960 Speaker 10: that kind of thing happening, we need. Governments are the 394 00:22:42,960 --> 00:22:45,639 Speaker 10: only thing powerful enough to prevent that. Maybe they're not 395 00:22:45,680 --> 00:22:49,040 Speaker 10: even powerful enough. They should force the big companies to 396 00:22:49,080 --> 00:22:50,679 Speaker 10: provide resources for safety research. 397 00:22:51,080 --> 00:22:52,680 Speaker 2: As you say, big companies don't like to be told 398 00:22:52,680 --> 00:22:54,880 Speaker 2: by the government how to spend their money, but they 399 00:22:54,920 --> 00:22:58,000 Speaker 2: are often. I mean, you have big accounting departments, for example, 400 00:22:58,040 --> 00:23:01,720 Speaker 2: to comply with various regulatory requirement on accounting. If the 401 00:23:01,760 --> 00:23:03,919 Speaker 2: government were to say, yes, we're in at least for 402 00:23:03,960 --> 00:23:07,399 Speaker 2: the very largest tech firms involved in AI, mandate a 403 00:23:07,480 --> 00:23:10,920 Speaker 2: percentage of your revenue that will be devoted towards safety. 404 00:23:11,000 --> 00:23:11,879 Speaker 2: What's the right number. 405 00:23:12,119 --> 00:23:14,360 Speaker 10: I'm not sure that's the right thing to go for. 406 00:23:14,840 --> 00:23:16,720 Speaker 10: It shouldn't be a percentage of the revenue, because that's 407 00:23:16,800 --> 00:23:18,679 Speaker 10: very complicated, and they put all the revenue in some 408 00:23:18,720 --> 00:23:20,800 Speaker 10: other country and cheat. The thing to go for is 409 00:23:20,840 --> 00:23:24,080 Speaker 10: a fraction of their computing resources. The bottleneck here is 410 00:23:24,160 --> 00:23:29,040 Speaker 10: computing resources. How many Nvidia chips or how many Google 411 00:23:29,520 --> 00:23:31,720 Speaker 10: tensor chips can you get? It should be a fraction 412 00:23:31,760 --> 00:23:34,480 Speaker 10: of the computing resources. What's an easier thing to measure? 413 00:23:34,720 --> 00:23:35,320 Speaker 2: What fraction? 414 00:23:36,200 --> 00:23:39,200 Speaker 10: I think it would be perfectly reasonable to say a third. 415 00:23:39,520 --> 00:23:41,720 Speaker 10: Now that's my starting point, and I'd settle for a quarter. 416 00:23:43,440 --> 00:23:46,640 Speaker 2: We were promised that the Inflation Reduction Act would live 417 00:23:46,760 --> 00:23:49,160 Speaker 2: up to its name by collecting taxes on all those 418 00:23:49,200 --> 00:23:52,159 Speaker 2: stock buybacks. But now that we've had a couple of 419 00:23:52,240 --> 00:23:55,240 Speaker 2: years living with it, has it done what it promised? 420 00:23:55,880 --> 00:24:08,240 Speaker 2: That's next on Wall Street Week. This is a story 421 00:24:08,280 --> 00:24:11,640 Speaker 2: about names, getting them right, and making sure things live 422 00:24:11,800 --> 00:24:14,960 Speaker 2: up to what we name them. When enacted by Congress, 423 00:24:15,000 --> 00:24:18,440 Speaker 2: the name of the Inflation Reduction Act was derided by 424 00:24:18,440 --> 00:24:21,720 Speaker 2: Republicans like then Senator Rob Portman of Ohio. 425 00:24:24,200 --> 00:24:28,920 Speaker 12: It's called the Inflation Reduction Act, but don't be fooled 426 00:24:28,960 --> 00:24:34,480 Speaker 12: by the name. It doesn't actually decrease the inflationary pressure 427 00:24:34,520 --> 00:24:37,840 Speaker 12: we all feel at the gas pump, at the grocery store, 428 00:24:38,280 --> 00:24:41,440 Speaker 12: clothes shopping. It actually makes it worse. 429 00:24:41,960 --> 00:24:44,120 Speaker 2: But some of us may have forgotten how the law 430 00:24:44,160 --> 00:24:47,000 Speaker 2: got its name in the first place. It was meant 431 00:24:47,040 --> 00:24:50,239 Speaker 2: to be the rare bill that included both spending and 432 00:24:50,400 --> 00:24:53,119 Speaker 2: how to pay for it, in part by imposing a 433 00:24:53,240 --> 00:24:57,439 Speaker 2: one percent excise tax on corporations buying back their own stock. 434 00:24:58,440 --> 00:25:02,280 Speaker 5: There are time when stock buybacks make a lot of sense. 435 00:25:02,280 --> 00:25:05,280 Speaker 5: That frankly, they've made a lot of sense when interest 436 00:25:05,359 --> 00:25:10,359 Speaker 5: rates have been a record low amounts, which has allowed 437 00:25:10,400 --> 00:25:12,520 Speaker 5: companies even to borrow money to do stock by that 438 00:25:12,520 --> 00:25:16,120 Speaker 5: that those seems like it's gaming the system. And I've 439 00:25:16,119 --> 00:25:19,159 Speaker 5: been disappointed when companies have said, you know, lower our 440 00:25:19,240 --> 00:25:22,160 Speaker 5: taxes and we're going to invest more in plant and equipment, 441 00:25:22,560 --> 00:25:25,199 Speaker 5: and instead they use it for stock buybacks. So putting 442 00:25:25,200 --> 00:25:28,160 Speaker 5: a one percent tax on those stock buybacks, I think 443 00:25:28,240 --> 00:25:28,720 Speaker 5: makes sense. 444 00:25:28,800 --> 00:25:31,919 Speaker 2: What is the purpose of stock buybacks? When are they appropriate? 445 00:25:32,880 --> 00:25:35,440 Speaker 2: And when can they be a form of gaming the system? 446 00:25:35,520 --> 00:25:39,119 Speaker 2: As Senator Warner warned about when the IRA was first passed, 447 00:25:39,760 --> 00:25:42,040 Speaker 2: it turns out that they weren't even allowed in the 448 00:25:42,119 --> 00:25:44,160 Speaker 2: United States until fairly recently. 449 00:25:44,680 --> 00:25:47,639 Speaker 4: As simple as the name, it's when the company buys 450 00:25:47,720 --> 00:25:51,080 Speaker 4: back its own stock, and there's a reason that this 451 00:25:51,400 --> 00:25:53,440 Speaker 4: was illegal until nineteen eighty two. 452 00:25:53,960 --> 00:25:56,520 Speaker 2: Nel Mino has spent a good deal of her career 453 00:25:56,680 --> 00:26:00,560 Speaker 2: studying stock buybacks. She is now vice chair of Value 454 00:26:00,720 --> 00:26:05,000 Speaker 2: Edge Advisors, where she advises institutional investors like pension plans 455 00:26:05,359 --> 00:26:08,240 Speaker 2: about stock buybacks and how they can affect the value 456 00:26:08,280 --> 00:26:09,760 Speaker 2: of the companies they invest in. 457 00:26:10,359 --> 00:26:13,040 Speaker 4: I think they did it because at the time they 458 00:26:13,119 --> 00:26:17,480 Speaker 4: felt that buybacks would only occur when there was excess 459 00:26:17,520 --> 00:26:20,159 Speaker 4: cash and on your valued stock. But there are a 460 00:26:20,200 --> 00:26:24,520 Speaker 4: lot of moral hazards there, because sometimes companies that should 461 00:26:24,600 --> 00:26:28,880 Speaker 4: be spending the money on operations and research and marketing 462 00:26:28,920 --> 00:26:32,159 Speaker 4: and things that are more directed at long term value 463 00:26:32,560 --> 00:26:35,760 Speaker 4: will spend them on the quick hit on the stock 464 00:26:35,800 --> 00:26:37,320 Speaker 4: price that you get from a buyback. 465 00:26:37,640 --> 00:26:41,840 Speaker 2: Despite the moral hazards, economists generally favor allowing stock buybacks 466 00:26:41,880 --> 00:26:46,040 Speaker 2: as one way to allocate capital efficiently. Glenn Hubbard served 467 00:26:46,080 --> 00:26:49,040 Speaker 2: as the chairman of President George W. Bush's Council of 468 00:26:49,080 --> 00:26:52,040 Speaker 2: Economic Advisors. He went on to serve as dean at 469 00:26:52,080 --> 00:26:54,680 Speaker 2: the Columbia Business School where he remains on the faculty. 470 00:26:55,160 --> 00:26:57,919 Speaker 2: His book The Wall and the Bridge set out some 471 00:26:58,040 --> 00:27:00,880 Speaker 2: of his ideas about how to invest in the country 472 00:27:01,000 --> 00:27:02,040 Speaker 2: and the economy. 473 00:27:02,200 --> 00:27:04,480 Speaker 3: It's a way to get cash back. 474 00:27:04,560 --> 00:27:04,760 Speaker 1: You know. 475 00:27:05,520 --> 00:27:08,879 Speaker 3: Economists for years talked about so called agency problems in 476 00:27:08,920 --> 00:27:11,680 Speaker 3: the company, that there may be too much in the 477 00:27:11,720 --> 00:27:14,840 Speaker 3: way of internal finance that gets wasted paying the money 478 00:27:14,840 --> 00:27:18,960 Speaker 3: out stops that dividends tend to be very regular. Companies 479 00:27:19,000 --> 00:27:21,600 Speaker 3: don't like changing their dividends a lot and then having 480 00:27:21,640 --> 00:27:24,240 Speaker 3: to bring them back down. So share we purchases are 481 00:27:24,280 --> 00:27:26,800 Speaker 3: one way to get cash back to shareholders. 482 00:27:27,000 --> 00:27:29,280 Speaker 2: So from an economist point of view, they might allow 483 00:27:29,359 --> 00:27:31,879 Speaker 2: more efficient allocation of capital. If it's not doing so 484 00:27:31,920 --> 00:27:33,440 Speaker 2: well with the company, maybe I should have it and 485 00:27:33,440 --> 00:27:33,760 Speaker 2: put it all. 486 00:27:33,840 --> 00:27:34,879 Speaker 1: They definitely do. 487 00:27:35,400 --> 00:27:37,760 Speaker 3: If too much money gets trapped in let's say, an 488 00:27:37,760 --> 00:27:40,240 Speaker 3: old style company, why not put it in a new 489 00:27:40,240 --> 00:27:43,920 Speaker 3: company where they're better opportunities. Obviously their costs and benefits. 490 00:27:43,960 --> 00:27:47,120 Speaker 3: I'm not saying it's one sided, but my own prejudice 491 00:27:47,160 --> 00:27:49,520 Speaker 3: is an economist as buybacks are just fine. 492 00:27:49,760 --> 00:27:52,720 Speaker 4: That's what I represent shareholders. We love to hear that 493 00:27:53,440 --> 00:27:56,760 Speaker 4: a stock buy back a special dividend. Absolutely if you 494 00:27:56,760 --> 00:27:58,919 Speaker 4: haven't got a good idea for the money, give it 495 00:27:58,920 --> 00:28:00,879 Speaker 4: to us. Let us decide what to do with the money. 496 00:28:00,920 --> 00:28:02,879 Speaker 4: That's when buybacks work. 497 00:28:03,320 --> 00:28:08,080 Speaker 2: To the right way, whatever their advantages or disadvantages. Stock 498 00:28:08,160 --> 00:28:11,440 Speaker 2: buybacks have become a central part of corporate finance since 499 00:28:11,480 --> 00:28:15,040 Speaker 2: the SEC first gave them the green light. They're estimated 500 00:28:15,080 --> 00:28:18,000 Speaker 2: to have reached one trillion dollars in volume in twenty 501 00:28:18,040 --> 00:28:21,679 Speaker 2: twenty four, roughly double what they were ten years ago, 502 00:28:21,920 --> 00:28:26,760 Speaker 2: led by some of the Magnificent seven like Apple, Alphabet, Microsoft, 503 00:28:26,920 --> 00:28:30,600 Speaker 2: and Meta, followed by some of the big banks. But 504 00:28:30,720 --> 00:28:34,320 Speaker 2: the executives putting the buybacks in place have particular incentives 505 00:28:34,400 --> 00:28:38,360 Speaker 2: that can influence their judgment. They can increase management compensation 506 00:28:38,640 --> 00:28:41,760 Speaker 2: as the number of shares bought reduced the denominator of 507 00:28:41,800 --> 00:28:45,280 Speaker 2: earnings per share without adding to the earnings numerator. 508 00:28:45,480 --> 00:28:49,280 Speaker 4: The first red flag is when they don't adjust the 509 00:28:49,320 --> 00:28:53,120 Speaker 4: EPs targets for incentive compensation. There are two ways you 510 00:28:53,160 --> 00:28:55,760 Speaker 4: can hit your EPs targets. The way that we like 511 00:28:55,800 --> 00:28:59,240 Speaker 4: as shareholders is to increase earnings. The way that is 512 00:28:59,320 --> 00:29:03,720 Speaker 4: not as beneficial to shareholders is to decrease the number 513 00:29:03,920 --> 00:29:08,040 Speaker 4: of shares outstanding, and so for a Board of Directors 514 00:29:08,360 --> 00:29:11,960 Speaker 4: Compensation Committee to set the EPs targets and then do 515 00:29:12,080 --> 00:29:14,800 Speaker 4: a buy back. That's a very easy way for them 516 00:29:14,920 --> 00:29:18,200 Speaker 4: to hit those targets without any real benefit to shareholders. 517 00:29:18,680 --> 00:29:22,040 Speaker 4: You have to remember that there's another element of manipulation, 518 00:29:22,240 --> 00:29:26,080 Speaker 4: and that is that the executives control the timing of 519 00:29:26,160 --> 00:29:28,760 Speaker 4: the buyback, and sometimes they do it in order to 520 00:29:28,840 --> 00:29:32,320 Speaker 4: hit those EPs targets. Sometimes they do it just because 521 00:29:32,800 --> 00:29:34,920 Speaker 4: they have no other idea about how to increase the 522 00:29:34,960 --> 00:29:37,040 Speaker 4: stock price. But we want to see them increase the 523 00:29:37,040 --> 00:29:39,880 Speaker 4: stock price by doing a better job, which. 524 00:29:39,640 --> 00:29:42,160 Speaker 2: Is where the board should come in. If it's doing 525 00:29:42,200 --> 00:29:43,440 Speaker 2: its job, the. 526 00:29:43,400 --> 00:29:46,680 Speaker 3: Board has to be focused not simply on the mechanics 527 00:29:46,720 --> 00:29:49,760 Speaker 3: of EPs, but really, what are the growth prospects for 528 00:29:49,840 --> 00:29:52,440 Speaker 3: this company. If you were doing that, you would be 529 00:29:52,480 --> 00:29:55,920 Speaker 3: eating your seed corn and you'd get caught napping by 530 00:29:55,920 --> 00:29:58,440 Speaker 3: the market. So a good board should stop that. 531 00:29:58,960 --> 00:30:02,120 Speaker 2: Most often, management justifies a stock buyback as just a 532 00:30:02,120 --> 00:30:05,800 Speaker 2: prudent investment, claiming that their company's stock is not getting 533 00:30:05,840 --> 00:30:09,240 Speaker 2: their respect in the market it deserves. That it's undervalued, 534 00:30:09,440 --> 00:30:12,240 Speaker 2: which makes it a goodbye. But it's harder to make 535 00:30:12,280 --> 00:30:16,200 Speaker 2: that case when market valuations become elevated as they are now. 536 00:30:17,120 --> 00:30:22,000 Speaker 4: But remember that the original concept of the buyback was 537 00:30:22,160 --> 00:30:27,280 Speaker 4: exactly what you said, excess cash and the stock price 538 00:30:27,800 --> 00:30:31,120 Speaker 4: is lower than it should be. In other words, the 539 00:30:31,160 --> 00:30:34,240 Speaker 4: stock is a good investment, just like any other asset 540 00:30:34,480 --> 00:30:37,720 Speaker 4: allocation made by the executives and the board of directors 541 00:30:37,920 --> 00:30:40,520 Speaker 4: you look at in terms of return on investment. The 542 00:30:40,560 --> 00:30:42,880 Speaker 4: stock market has been very high, as you know, in 543 00:30:42,920 --> 00:30:45,120 Speaker 4: the last couple of years, and so it's really harder 544 00:30:45,160 --> 00:30:49,400 Speaker 4: to justify buybacks. It's harder to argue that the stock 545 00:30:49,440 --> 00:30:50,680 Speaker 4: is undervalued. 546 00:30:50,560 --> 00:30:54,480 Speaker 2: And whatever the overall valuations, it's awfully hard to reconcile 547 00:30:54,520 --> 00:30:58,280 Speaker 2: management's claim that its stock is undervalued if members of 548 00:30:58,320 --> 00:31:02,120 Speaker 2: the management team themselves decide to sell their shares into 549 00:31:02,160 --> 00:31:02,720 Speaker 2: the buyback. 550 00:31:02,960 --> 00:31:05,960 Speaker 4: The other one that bothers me even more is when 551 00:31:05,960 --> 00:31:09,520 Speaker 4: the executives sell into the buyback, which I think should 552 00:31:09,520 --> 00:31:14,960 Speaker 4: be prohibited. The whole justification for the buyback is that 553 00:31:15,000 --> 00:31:18,360 Speaker 4: the stock is undervalued. Well, if it's undervalued, why are 554 00:31:18,400 --> 00:31:19,480 Speaker 4: you selling well? 555 00:31:19,520 --> 00:31:22,200 Speaker 3: In general, I think when managers are selling it's one 556 00:31:22,240 --> 00:31:25,000 Speaker 3: of two things. One so called ten B five plans 557 00:31:25,040 --> 00:31:28,920 Speaker 3: where they have regular opportunities to sell, and just happens 558 00:31:28,960 --> 00:31:31,360 Speaker 3: to be at that period, or there could be a 559 00:31:31,360 --> 00:31:34,280 Speaker 3: particular event in their personal life. But I agree with you, Yes, 560 00:31:34,360 --> 00:31:37,920 Speaker 3: management in general should be holding shares during the tenure 561 00:31:37,960 --> 00:31:39,600 Speaker 3: in which the manager's in charge. 562 00:31:39,960 --> 00:31:43,240 Speaker 2: So what does all this mean for the Inflation Reduction Act? 563 00:31:43,520 --> 00:31:45,840 Speaker 2: Now that it's been enforced for over two years? What 564 00:31:46,040 --> 00:31:49,120 Speaker 2: are the results? First of all, did it raise much 565 00:31:49,200 --> 00:31:52,720 Speaker 2: needed money for the federal treasury? The Joint Committee on 566 00:31:52,800 --> 00:31:56,480 Speaker 2: Taxation estimates it contributed seven point nine billion dollars in 567 00:31:56,520 --> 00:31:59,720 Speaker 2: twenty twenty four, and we'll add up to about seventy 568 00:31:59,760 --> 00:32:02,680 Speaker 2: four billion dollars over the ten year period ending in 569 00:32:02,720 --> 00:32:07,560 Speaker 2: fiscal year twenty thirty one. Certainly a nice contribution, but 570 00:32:07,720 --> 00:32:09,840 Speaker 2: not likely to put a big dent in the one 571 00:32:09,840 --> 00:32:13,720 Speaker 2: point six trillion dollars the Congressional Budget Office estimates will 572 00:32:13,720 --> 00:32:16,880 Speaker 2: be added to the federal debt every year for the 573 00:32:16,880 --> 00:32:18,320 Speaker 2: next ten I think of the. 574 00:32:18,640 --> 00:32:20,680 Speaker 3: Game showed Jeopardy, where if you give me an answer, 575 00:32:20,680 --> 00:32:24,080 Speaker 3: I guess the question. So a stock buybacks one possibility 576 00:32:24,080 --> 00:32:26,120 Speaker 3: for the question is what is revenue? But actually don't 577 00:32:26,160 --> 00:32:29,440 Speaker 3: raise much revenue. The US buy back at one percent 578 00:32:29,680 --> 00:32:33,000 Speaker 3: maybe raises about seven seven and a half billion dollars 579 00:32:33,040 --> 00:32:33,440 Speaker 3: a year. 580 00:32:33,520 --> 00:32:36,120 Speaker 2: And if Senator Warner thought that the tax on buybacks 581 00:32:36,160 --> 00:32:39,080 Speaker 2: would reduce the appetite for them, it doesn't look like 582 00:32:39,120 --> 00:32:43,160 Speaker 2: it had that intended effect either. Stock buybacks have continued 583 00:32:43,200 --> 00:32:45,280 Speaker 2: to grow despite the excise tax. 584 00:32:45,680 --> 00:32:49,880 Speaker 4: I would say that stock buybacks have been bigger and 585 00:32:49,920 --> 00:32:52,920 Speaker 4: bigger every year. We've seen some of the biggest companies 586 00:32:53,160 --> 00:32:57,680 Speaker 4: in the country buy back more and more stock, and 587 00:32:58,520 --> 00:33:01,440 Speaker 4: we've seen very little benefit to shareholders except in a 588 00:33:01,560 --> 00:33:07,000 Speaker 4: very short term way, and more benefit to the executives. 589 00:33:07,440 --> 00:33:11,400 Speaker 4: So I think it has become a genuine problem. One 590 00:33:11,400 --> 00:33:15,320 Speaker 4: thing that I know will never help is taxing it. 591 00:33:16,120 --> 00:33:17,960 Speaker 4: You know, there have been a number of proposals, it 592 00:33:18,000 --> 00:33:22,960 Speaker 4: was included in some legislation. Those expenses have just passed 593 00:33:23,000 --> 00:33:25,960 Speaker 4: right on to the shareholders and sometimes the consumers as well. 594 00:33:26,520 --> 00:33:29,120 Speaker 4: Companies are completely indifferent to paying taxes. 595 00:33:29,280 --> 00:33:31,760 Speaker 2: When you mentioned taxes, the Inflation Reduction Act does have 596 00:33:31,800 --> 00:33:36,080 Speaker 2: a one percent excise tax on stock buybacks. What effect 597 00:33:36,120 --> 00:33:37,560 Speaker 2: did that have on stock buybacks? 598 00:33:37,680 --> 00:33:40,040 Speaker 4: Not at all. It was gasoline on the fire. They 599 00:33:40,080 --> 00:33:41,240 Speaker 4: just kept growing and growing. 600 00:33:41,600 --> 00:33:44,760 Speaker 2: And perhaps most basic of all, when does it ever 601 00:33:44,840 --> 00:33:47,520 Speaker 2: make sense for a company to do what Senator Warner 602 00:33:47,640 --> 00:33:51,480 Speaker 2: was particularly concerned about a company borrowing money to buy 603 00:33:51,520 --> 00:33:55,160 Speaker 2: back its own stock, given that the entire theory of 604 00:33:55,200 --> 00:33:58,600 Speaker 2: allowing buybacks was to let companies make constructive use of 605 00:33:58,760 --> 00:34:00,360 Speaker 2: excess cash. 606 00:34:00,440 --> 00:34:06,760 Speaker 4: In reality, like a lot of other financial structures, it 607 00:34:06,840 --> 00:34:09,239 Speaker 4: got abused. I mean, when I saw that people were 608 00:34:09,520 --> 00:34:13,080 Speaker 4: borrowing money, companies were borrowing money to buy backstock, when 609 00:34:13,080 --> 00:34:16,120 Speaker 4: the stockboys at a record high, I realized that the 610 00:34:16,120 --> 00:34:18,880 Speaker 4: original justification had just completely been forgotten. 611 00:34:20,360 --> 00:34:22,359 Speaker 2: That does it for us here at Wall Street Week, 612 00:34:22,560 --> 00:34:25,840 Speaker 2: I'm David Weston. See you next week for more stories 613 00:34:26,080 --> 00:34:41,640 Speaker 2: of capitalism.