WEBVTT - Joseph Stiglitz on How to Build Shock-Proof Supply Chains 0:00:03.120 --> 0:00:18.440 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:20.160 --> 0:00:23.599 Hello and welcome to another episode of the All Bots podcast. 0:00:23.720 --> 0:00:25.160 I'm Tracy Alloway. 0:00:24.880 --> 0:00:26.080 And I'm Joe Wisenthal. 0:00:26.480 --> 0:00:29.479 Joe, you did international relations at university, didn't you. 0:00:30.680 --> 0:00:31.360 Yeah. I did. 0:00:31.720 --> 0:00:35.280 I don't remember any of it actually, technically at University 0:00:35.280 --> 0:00:37.680 of Texas, the major was called government, which was sort 0:00:37.680 --> 0:00:41.479 of polysci international relations. I don't remember any of it 0:00:41.600 --> 0:00:45.479 at a good time. But yeah, anyway, yes, it is. 0:00:45.479 --> 0:00:47.280 All a blur for me as well. 0:00:48.040 --> 0:00:49.640 Just to be clear, it's not because I was like 0:00:49.720 --> 0:00:52.040 partying like crazy. I didn't have much fun in college, 0:00:52.320 --> 0:00:53.920 you know. It's just one of those sort of liberal 0:00:54.040 --> 0:00:56.240 arts degrees that you remember a few ideas from and. 0:00:56.160 --> 0:00:56.720 Then you move on. 0:00:56.920 --> 0:00:58.480 Okay, Well, I don't want to make it seem like 0:00:58.520 --> 0:01:00.320 I was like, oh, it's all a blue to me, 0:01:00.360 --> 0:01:02.280 because it's such a no. It's just I wasn't a 0:01:02.280 --> 0:01:03.320 great student, Okay. 0:01:03.360 --> 0:01:04.840 Well, to be fair, I feel like one of the 0:01:04.880 --> 0:01:07.760 things about international relations is that I don't know about you, 0:01:07.800 --> 0:01:09.760 but I feel like I didn't learn very much. I 0:01:09.800 --> 0:01:13.240 basically learned how to write essays and arguments, and I 0:01:13.400 --> 0:01:16.559 don't feel like I actually internalized a lot of what's 0:01:16.600 --> 0:01:20.080 going on in the world. That said, I remember in 0:01:20.160 --> 0:01:22.880 my first year there was one book that was on 0:01:22.920 --> 0:01:25.600 our reading list, and it kind of blew my mind. 0:01:26.080 --> 0:01:26.679 At the time. 0:01:26.920 --> 0:01:27.920 I was like, whoa. 0:01:28.000 --> 0:01:32.319 So it was Globalization and It's Discontents by Joseph Stiglitz. 0:01:32.440 --> 0:01:33.360 Do you remember that one. 0:01:33.440 --> 0:01:35.800 I did not read it at the time. I probably 0:01:36.000 --> 0:01:38.600 should have. I think that came out in early two thousand, 0:01:38.800 --> 0:01:41.840 two thousand and two. It looks like according to Wikipedia, 0:01:42.520 --> 0:01:45.559 and it feels very ahead of its time because now 0:01:45.600 --> 0:01:47.280 this is just such a pervasive theme. 0:01:47.560 --> 0:01:49.280 It does. And the thing that kind of blew my 0:01:49.320 --> 0:01:51.360 mind about it was, you know, I had done a 0:01:51.360 --> 0:01:54.920 little bit of international relations at my high school in Tokyo. 0:01:55.080 --> 0:01:57.880 They have, of course, but most of it felt very history. 0:01:57.960 --> 0:02:00.040 It was like, you know, World War One happened, and 0:02:00.040 --> 0:02:02.480 then World War two happen, and then all these international 0:02:02.480 --> 0:02:05.600 institutions got set up, and here are all their various 0:02:05.720 --> 0:02:09.040 names and acronyms. But Globalization and Its Discontents was the 0:02:09.080 --> 0:02:13.200 first time I had read an actual, like critical study 0:02:13.600 --> 0:02:16.440 of some of these institutions, and I thought it was 0:02:16.480 --> 0:02:18.799 so good. I was like, oh, hey, like these weren't 0:02:18.960 --> 0:02:22.720 inevitable by any means, and we can have a discussion 0:02:22.840 --> 0:02:25.239 over what it is they do and how they should function. 0:02:25.440 --> 0:02:30.240 Yeah, the lack of inevitability when it comes to policy choices, 0:02:30.600 --> 0:02:33.560 I think really important people make decisions and things don't 0:02:33.600 --> 0:02:37.519 necessarily unfold on some path that must have always been 0:02:37.760 --> 0:02:41.440 the case. Very easy to forget that. And also, you know, 0:02:41.600 --> 0:02:44.480 all of this stuff is very new and it has 0:02:44.720 --> 0:02:47.080 none of these things are ancient by any stritch. You 0:02:47.080 --> 0:02:50.960 could argue none. Nothing has really proven the test of 0:02:51.040 --> 0:02:54.079 time as of yet. And so the possibility that things 0:02:54.160 --> 0:02:57.880 could disintegrate, that globalization could go in reverse, that institutions 0:02:57.919 --> 0:03:01.000 lose credibility, feels like these are we're all open questions 0:03:01.040 --> 0:03:01.240 to me. 0:03:01.639 --> 0:03:04.800 Absolutely, So I am very happy to say that today 0:03:04.840 --> 0:03:07.400 we do, in fact have the perfect guest on all thoughts. 0:03:07.480 --> 0:03:10.960 We are going to be speaking with Professor Joseph Stickletz. 0:03:10.960 --> 0:03:13.960 He is, of course a Nobel Prize winning economist, the 0:03:14.040 --> 0:03:16.800 author of Globalization and It's Discontents, and he has a 0:03:16.840 --> 0:03:19.080 new book out now as well. It is called The 0:03:19.160 --> 0:03:23.480 Road to Freedom, Economics and the Good Society. So Professor Stickltz, 0:03:23.520 --> 0:03:25.840 thank you so much for coming on all thoughts go 0:03:26.160 --> 0:03:28.960 ahad to be here. So I have to say your 0:03:29.000 --> 0:03:32.600 book actually featured in one of my most annoying and 0:03:32.720 --> 0:03:37.280 overconfident international relations essays of all time, where I wrote 0:03:37.320 --> 0:03:41.600 that Stiglitz made a fair criticism of international institutions, but 0:03:41.680 --> 0:03:44.760 he should have gone even further. Maybe in the outro, 0:03:44.840 --> 0:03:47.560 I'll spare you this professor, but maybe in the outro 0:03:47.680 --> 0:03:50.320 I'll read some of it to the other Joe here. 0:03:50.560 --> 0:03:52.040 To my co host, looking forward to that. 0:03:52.160 --> 0:03:54.640 Yeah, But one of the reasons we wanted to have 0:03:54.720 --> 0:03:57.960 you on the show was not necessarily because of the 0:03:58.000 --> 0:04:00.520 new book, although it looks really interesting, but you also 0:04:00.640 --> 0:04:04.120 just published a working paper over at the Federal Reserve, 0:04:04.320 --> 0:04:09.480 and it's called our Supply Networks Efficiently Resilient. How did 0:04:09.520 --> 0:04:10.560 that get on your radar? 0:04:12.320 --> 0:04:17.400 All went through the pandemic and the post pandemic inflation, 0:04:18.200 --> 0:04:22.440 and a lot of the problems in the pandemic and 0:04:22.839 --> 0:04:27.039 after the pandemic were about supply chains. Car companies couldn't 0:04:27.040 --> 0:04:30.159 get chips, a lot of people couldn't get one thing 0:04:30.240 --> 0:04:34.800 or another. There was a shortage of women, feminine products, divers, 0:04:34.960 --> 0:04:39.040 all kinds of things, the baby formula, and in many 0:04:39.080 --> 0:04:42.080 of the cases people said, well, I couldn't produce it 0:04:42.120 --> 0:04:45.799 because somebody else couldn't supply me with what I needed. 0:04:45.839 --> 0:04:48.080 And they said, well I couldn't do it because what 0:04:48.200 --> 0:04:51.280 I was supposed to get was from somebody else. And 0:04:52.160 --> 0:04:55.720 that brought me back to work I had done earlier 0:04:56.440 --> 0:05:01.120 on the question of how interdependent we are in our economy, 0:05:01.880 --> 0:05:05.800 and we saw it in the financial system. I did 0:05:05.839 --> 0:05:10.280 a lot of work on financial interdependence. Went do you 0:05:10.360 --> 0:05:15.920 remember when Layman Brothers went down? It looked like that. 0:05:15.920 --> 0:05:18.760 That looked like that whole banking system was going to 0:05:18.760 --> 0:05:23.080 go down. We were all very interdependent. And the question 0:05:23.240 --> 0:05:26.640 then was was this a one off or was there 0:05:26.680 --> 0:05:32.520 something systematically wrong, systemically wrong with the way our economy 0:05:32.720 --> 0:05:38.680 was organized that led firms to make decisions that led 0:05:38.720 --> 0:05:43.760 the economy to be insufficiently resilient. And going back to 0:05:43.800 --> 0:05:49.200 the book Galization Discontexts, one of my discontents with that 0:05:49.279 --> 0:05:53.080 book was I didn't give the view my views about 0:05:53.080 --> 0:05:56.680 what could be done. And I wrote a sequel called 0:05:57.120 --> 0:06:04.240 Making Glorization Work, and in that sequel I discussed some 0:06:04.440 --> 0:06:09.320 aspects of this issue. I pointed out that Germany had 0:06:09.360 --> 0:06:15.240 become excessively dependent on Russian gas and you know it. 0:06:15.279 --> 0:06:18.160 Maybe the President Bush looked in the eyes of Bouten 0:06:18.240 --> 0:06:21.640 and said he's somebody I can trust. A lot of 0:06:21.680 --> 0:06:25.760 other people looked at his eyes and came to other conclusions. 0:06:26.080 --> 0:06:30.000 And whether you did or not trust Bouten, it was 0:06:30.040 --> 0:06:33.599 a risk, and putting all your eggs in that basket 0:06:33.839 --> 0:06:38.440 was just a mistake. So the question was that I 0:06:38.480 --> 0:06:44.799 wanted to pose bark generally, was our markets efficiently resilient? 0:06:46.320 --> 0:06:49.680 So when it comes to I mean, the pandemic hit, 0:06:49.960 --> 0:06:53.360 everyone sort of woke up to the fragility of our 0:06:53.560 --> 0:06:57.359 supply chains and experienced shortages of various things for probably 0:06:57.560 --> 0:07:01.000 for many people, least in rich Western cones for the 0:07:01.000 --> 0:07:04.080 first time in their lives. And so then we say, okay, 0:07:04.240 --> 0:07:07.440 we want to have more buffers and more inventories, more 0:07:07.480 --> 0:07:11.720 resilient supply chain. That being said, this type of shock 0:07:12.120 --> 0:07:14.360 seems to I don't know, you could say once in 0:07:14.400 --> 0:07:17.080 a century type of thing. And there is an argument 0:07:17.120 --> 0:07:20.280 to be made perhaps that companies should not be designing 0:07:20.320 --> 0:07:23.240 systems or you know, you're over optimizing or you're going 0:07:23.280 --> 0:07:26.040 to be overly inefficient if you're thinking about once in 0:07:26.080 --> 0:07:28.920 a century type of shocks. But In your paper you 0:07:29.040 --> 0:07:32.800 talk about how some of the lessons from the pandemic 0:07:32.840 --> 0:07:36.560 are generalizable to non crisis times as well. So can 0:07:36.600 --> 0:07:39.840 you explain a little bit this sort of theoretical argument 0:07:40.320 --> 0:07:43.720 that you make that it's not just about these megashocks, 0:07:43.960 --> 0:07:46.760 but that a persistent feature across the economy is this 0:07:46.960 --> 0:07:49.720 under investment in supply chain resilience. 0:07:50.280 --> 0:07:55.200 That's right. I mean, it's basically that firms don't think 0:07:55.240 --> 0:08:05.840 about the consequences of underinvesting in capacity for others. They 0:08:05.880 --> 0:08:12.040 may take the price distributions as given, but their independent 0:08:12.200 --> 0:08:17.200 actions actually change the price distributions, and they change them 0:08:17.320 --> 0:08:22.400 in ways that basically they're free writing on others. But 0:08:22.480 --> 0:08:25.760 when they all are free riding on others on the 0:08:25.760 --> 0:08:29.640 fact that somebody will have built that capacity, there's a 0:08:29.720 --> 0:08:34.800 problem of under capacity. So that would, in a nutshell, 0:08:35.200 --> 0:08:38.560 is the argument that if each firm says, well, if 0:08:38.600 --> 0:08:41.360 I need it, I can always get it from somebody else, 0:08:41.720 --> 0:08:45.080 and they all go around doing that, in the end 0:08:46.120 --> 0:08:49.400 there won't be enough capacity. Capacity is like a public 0:08:49.480 --> 0:08:54.120 good that we all benefit from, and there's a general 0:08:54.160 --> 0:09:01.319 proposition in economics that there will be under investments with goods. 0:09:01.880 --> 0:09:04.400 Here is something I always wanted to ask a Nobel 0:09:04.440 --> 0:09:08.760 Prize winning economist, but when you're modeling something like firm 0:09:08.880 --> 0:09:13.880 behavior and the tendency to over or underinvest, how do 0:09:13.960 --> 0:09:17.480 you actually go about doing that? 0:09:17.480 --> 0:09:21.560 That's a very good question. The way we do that 0:09:22.080 --> 0:09:24.000 is complex. 0:09:24.520 --> 0:09:28.440 We like complexity on this show in detail Feel Free. 0:09:28.600 --> 0:09:33.480 So the basic idea is you apothesized a world in 0:09:33.559 --> 0:09:40.040 which you have somebody sitting up there coordinating various activities, 0:09:40.559 --> 0:09:45.360 looking at saying, Okay, I know there's going to be shocks. 0:09:45.640 --> 0:09:48.760 I want to make sure I don't want to overinvest, 0:09:48.760 --> 0:09:51.720 as you say, you don't want to build capacity for 0:09:52.280 --> 0:09:54.800 once in a thousand year, but I'm willing to pay 0:09:55.120 --> 0:09:59.000 something because some big shocks are really going to have 0:09:59.360 --> 0:10:05.440 very very negative consequence. And so I can solve for 0:10:06.480 --> 0:10:11.240 the level of capacity that is desirable for the shocks, 0:10:11.280 --> 0:10:16.280 given a reasonable assumptions about how big different shocks are 0:10:16.320 --> 0:10:20.959 going to occur, with what probabilities, And then I ask 0:10:21.920 --> 0:10:30.160 will decentralize markets? Each firm maximizing its own profits lead 0:10:30.280 --> 0:10:34.600 to the same solution that somebody trying to coordinate it all. 0:10:35.120 --> 0:10:42.440 The basis of a modern market economy is decentralization. Each 0:10:42.480 --> 0:10:45.400 firm goes ahead and does a thing. And Adam Smith 0:10:45.440 --> 0:10:48.640 had this idea that individuals in the pursuit of their 0:10:48.640 --> 0:10:52.240 own self interest lead, as if by an invisible hand, 0:10:52.360 --> 0:10:56.720 to the well being of society. That concept is really 0:10:56.760 --> 0:11:02.360 fundamental to economic reasoning, and Adam Smith didn't actually test 0:11:02.400 --> 0:11:06.160 whether it was true. He just asserted it. And what 0:11:06.200 --> 0:11:10.800 we can do with modern, more complicated models is to say, well, 0:11:11.160 --> 0:11:14.680 in these more complicated situations where you have these shocks, 0:11:15.160 --> 0:11:20.680 you are responding to the shocks. The lack of coordination 0:11:21.520 --> 0:11:26.719 lead to a problem, And the answer is yes. And 0:11:26.920 --> 0:11:30.000 that's where the free riding comes in. And that's why 0:11:30.800 --> 0:11:34.800 the way we model it, we compare what a decentralized 0:11:35.120 --> 0:11:40.160 outcome would look like worth one where say somebody is 0:11:40.559 --> 0:11:46.559 aware of the need for greater resilience than each individual would. 0:11:46.840 --> 0:11:49.520 Let me give you one example where this has played 0:11:49.520 --> 0:11:53.440 out in an important way. We have a lot of 0:11:53.480 --> 0:11:58.960 capacity and oil and gas, but we have to draw 0:11:59.040 --> 0:12:05.080 on the oil reserve that the government has created to 0:12:05.080 --> 0:12:08.199 help stabilize it. Even more so, we as a country 0:12:08.360 --> 0:12:12.719 have realized that the markets are not the solution by themselves, 0:12:13.200 --> 0:12:18.800 and have put a lot of oil into these strategic 0:12:18.960 --> 0:12:24.920 reserves which we would take out when there's a shock 0:12:24.960 --> 0:12:29.240 where we need it, and we then when times are normal, 0:12:29.600 --> 0:12:35.480 we will refill it. So that illustrates the other extreme 0:12:36.200 --> 0:12:39.160 that our economy went to, where you can see where 0:12:39.200 --> 0:12:43.200 it was not resilient enough, is we had just in 0:12:43.280 --> 0:12:47.760 time inventories. I don't know if you remember that idea, 0:12:48.880 --> 0:12:52.199 and it was the idea that it was more efficient 0:12:52.920 --> 0:12:55.680 to wait till you need it apart or you needed 0:12:56.840 --> 0:13:02.080 then you call it up and so I'd send it over. Well, 0:13:02.120 --> 0:13:07.920 it saved on inventory costs, but it assumed that everything 0:13:08.360 --> 0:13:14.280 in the logistic network was working. Parts were working, ships 0:13:14.280 --> 0:13:17.840 were working. And of course we've had a number of 0:13:17.880 --> 0:13:22.120 events that show well that's not true. We've had wars 0:13:22.320 --> 0:13:26.199 like in the Middle East, and we had the pandemic 0:13:26.720 --> 0:13:31.720 where there were logistical nightmares and just in time. Those 0:13:31.760 --> 0:13:36.120 companies that relied on just in time inventories were in 0:13:36.240 --> 0:13:41.040 big trouble, showing that our and with big consequences for 0:13:41.120 --> 0:13:45.240 our economy. Our economy wasn't resilient and we experienced inflation 0:13:45.960 --> 0:13:49.600 as a consequence of that. That was a social cost 0:13:50.240 --> 0:13:54.199 that individual firms didn't take into account when they were 0:13:54.200 --> 0:13:56.679 making those calculations, but. 0:13:57.000 --> 0:13:59.960 On just in time, you can argue that the economy 0:14:00.120 --> 0:14:04.199 or society as a whole suffered because of those decisions 0:14:04.240 --> 0:14:07.360 that tendency to be as efficient as possible. But a 0:14:07.400 --> 0:14:11.959 lot of the individual companies were rewarded by shareholders or 0:14:12.160 --> 0:14:16.360 profits for being as efficient and just in time as 0:14:16.360 --> 0:14:19.600 they could possibly be. And I guess there's that tension 0:14:19.720 --> 0:14:26.680 between individual rewards for being extremely streamlined versus negative externalities 0:14:26.720 --> 0:14:29.440 for the whole of the economy and society. How do 0:14:29.480 --> 0:14:32.200 you square those two things. You talk about it in 0:14:32.240 --> 0:14:32.640 the paper. 0:14:34.480 --> 0:14:38.560 You're precisely on point there that this is the tension 0:14:38.960 --> 0:14:45.360 that what is rational for the individual maximizing or firm 0:14:45.480 --> 0:14:51.400 maximizing its profits, is not efficient for society. There's another 0:14:51.520 --> 0:14:55.840 aspect of that that I should emphasize that markets are 0:14:55.880 --> 0:15:00.240 often excessively short term. So you say they're maximized seeing 0:15:00.240 --> 0:15:04.800 their profits, they're not really maximizing long term profits. A 0:15:04.840 --> 0:15:10.760 lot of that just in time was maximizing short term profits, 0:15:11.200 --> 0:15:16.040 and then when you can't produce, you lose a lot 0:15:16.080 --> 0:15:20.600 of profits, and they didn't take that fully into account. 0:15:21.600 --> 0:15:25.440 Part of the reason for this is we don't really 0:15:26.080 --> 0:15:30.760 have good prices for risk. You know, there's a lot 0:15:30.760 --> 0:15:35.120 of discussion today about one of the reasons why we 0:15:35.240 --> 0:15:40.360 have too much pollution, too much carbon climate changes, that 0:15:40.400 --> 0:15:44.520 we don't charge for carbon emissions or other forms of pollution, 0:15:45.160 --> 0:15:50.720 so there isn't a price associated with certain negative externalities 0:15:50.800 --> 0:15:54.160 or the pollution is one, and there's not a price 0:15:54.240 --> 0:15:59.360 associated with or a reward with risk. So the firms 0:15:59.600 --> 0:16:05.360 that don't really just in time aren't rewarded for their 0:16:05.680 --> 0:16:09.680 avoidings of the risk, and particularly if the stock market 0:16:09.960 --> 0:16:13.480 is too short term, figuring out what to do about 0:16:13.520 --> 0:16:18.040 that is really difficult. One of the things is to 0:16:18.280 --> 0:16:22.160 try to encourage firms to take more long term decisions 0:16:22.440 --> 0:16:27.360 and rewarding more long term behavior. Taxes affect that. The 0:16:27.440 --> 0:16:31.600 fact that you can get if you get more favorable 0:16:32.000 --> 0:16:35.920 treatment on capital gains, if exceled long term, can encourage 0:16:35.960 --> 0:16:40.280 people to hold on to investments long term, and that 0:16:40.400 --> 0:16:44.440 will encourage more long term thinking as most of the 0:16:44.520 --> 0:16:49.960 short term thinking that's being so dominant and so much 0:16:49.960 --> 0:17:00.120 of the market economy. 0:17:08.280 --> 0:17:11.640 You know, one of the criticisms obviously of a sort 0:17:11.680 --> 0:17:15.080 of taking a view of what the ideal distribution of 0:17:15.119 --> 0:17:18.600 outcomes or the ideal supply chain from the perspective of 0:17:18.640 --> 0:17:21.720 a planner is planners don't know everything, and planners get 0:17:21.720 --> 0:17:25.480 things wrong. And you mentioned, you know, the strategic Petroleum Reserve, 0:17:25.720 --> 0:17:28.920 and of course oil is an input into almost every 0:17:29.000 --> 0:17:30.919 aspect of the economy, and so yeah, it kind of 0:17:31.440 --> 0:17:34.600 makes sense for the government to have this buffer stock 0:17:34.640 --> 0:17:38.840 of oil. How do you systematize the identification of these areas, 0:17:38.840 --> 0:17:41.240 because presumably the government is not going to have an 0:17:41.359 --> 0:17:45.760 spr equivalent of literally every product that exists, But how 0:17:45.760 --> 0:17:50.879 would you go about thinking identifying the key areas in which, 0:17:51.080 --> 0:17:55.359 through some policy measure, we want to encourage the build 0:17:55.440 --> 0:17:58.480 up of greater inventories, less reliance on just in time 0:17:58.480 --> 0:17:59.080 and so forth. 0:18:00.000 --> 0:18:04.480 We first point out, you're absolutely right that this is 0:18:04.520 --> 0:18:09.280 a systemic problem, and that's why it began by emphasizing 0:18:09.840 --> 0:18:13.840 encouraging long term thinking, for instance, by using the tax 0:18:13.880 --> 0:18:18.920 system to encourage long term holding on shares, so that 0:18:19.040 --> 0:18:21.920 the people who hold their shares aren't just trying to 0:18:22.000 --> 0:18:24.840 think about how I make a buck today, but what's 0:18:24.880 --> 0:18:27.440 going to be good for the company over the next ten, 0:18:27.840 --> 0:18:33.280 ten years, fifteen, twenty years. So that's part of getting 0:18:33.400 --> 0:18:38.480 better risk taking systemically built it into the system balancing 0:18:38.560 --> 0:18:42.280 the costs and the benefits. There's another way that is 0:18:42.320 --> 0:18:47.840 important is changing corporate governance. One of my colleagues at 0:18:47.840 --> 0:18:53.560 Columbia pushing an idea called loyalty shares, where if you 0:18:54.680 --> 0:19:00.040 hold your shares longer, you get proportionally more votes, so 0:19:00.400 --> 0:19:05.800 that it says in the governance of corporations, those who 0:19:06.160 --> 0:19:10.199 have are long term investors should have more saying what 0:19:10.240 --> 0:19:12.880 the firm does, rather than the guy who comes in 0:19:12.920 --> 0:19:16.119 the day trader or even the short term trader is 0:19:16.119 --> 0:19:20.840 trying to make an arbitrage profit. Now, on the specific 0:19:20.960 --> 0:19:27.600 question of how do you identify particularly strategic sectors, one 0:19:27.640 --> 0:19:30.600 way you do that is, again this is a little 0:19:30.600 --> 0:19:37.240 bit complex, but you have a matrix that shows how 0:19:37.560 --> 0:19:41.399 various inputs go into each output of the economy. It's 0:19:41.440 --> 0:19:47.359 called an input output matrix. And in an input output matrix, 0:19:47.760 --> 0:19:54.240 you can identify where a perturbation, where a shock might 0:19:54.880 --> 0:20:00.679 ripple more through the system. Example would be some final 0:20:00.760 --> 0:20:05.600 products that are used by consumers are not an input 0:20:05.800 --> 0:20:09.959 anywhere else in the system, and the problem in those 0:20:09.960 --> 0:20:14.720 industries is of no consequence for the system. Oil is 0:20:14.920 --> 0:20:20.960 obviously very consequential. Basic primary goods tend to be consequential. 0:20:21.080 --> 0:20:25.760 Steel aluminum logistics we were talking about. You have to 0:20:25.760 --> 0:20:28.639 think of not only about goods, but services. If you 0:20:28.680 --> 0:20:33.800 can't move from one place another. Trucking airlines are very 0:20:34.400 --> 0:20:38.760 They go into absolutely every industry because every industry has 0:20:38.840 --> 0:20:41.399 goods moving from one place to another. So if you 0:20:41.480 --> 0:20:45.160 have an interruption in those industries, you have real consequences. 0:20:45.800 --> 0:20:51.240 Now there are further questions you then need to ask. 0:20:51.800 --> 0:20:53.640 Some of these you don't have to worry about. They're 0:20:53.680 --> 0:20:57.720 pretty steady, but some of them are more vulnerable. So 0:20:57.800 --> 0:21:01.160 you would not only look at what I've first talked 0:21:01.200 --> 0:21:04.919 about is sort of a centrality, how important are the 0:21:05.200 --> 0:21:08.440 functioning of the economic system, but also you have to 0:21:09.000 --> 0:21:13.760 also then look to some notion of vulnerability, the nature 0:21:13.760 --> 0:21:17.760 of the shocks they face, the reliability of those particular places, 0:21:17.800 --> 0:21:22.400 and your choice then is to either get a reliable 0:21:22.520 --> 0:21:26.320 supplier or to create strategic reserves. 0:21:27.080 --> 0:21:28.879 One of the reasons we wanted to talk to you 0:21:28.960 --> 0:21:32.240 about this is because a lot of your work focuses 0:21:32.359 --> 0:21:37.199 on the social benefits of different economic systems and analyzing 0:21:37.240 --> 0:21:40.479 the relationship between the two. But how do you build 0:21:40.880 --> 0:21:44.240 political consensus for something like this. You know you're talking 0:21:44.240 --> 0:21:49.240 about maybe additional subsidies for incorporating additional capacity, or some 0:21:49.280 --> 0:21:52.800 sort of tax benefit, things like that. How do you 0:21:52.880 --> 0:21:57.200 get people on board for these types of ideas well. 0:21:57.880 --> 0:22:03.600 Part of the answer to that is specific events have 0:22:03.720 --> 0:22:07.440 a way of bringing certain things home. You know, when 0:22:07.480 --> 0:22:12.400 I began my research in certain areas is often motivated 0:22:12.600 --> 0:22:16.880 by a particular event that happening someplace in the world. 0:22:17.760 --> 0:22:20.520 But for instance, I saw a lot of supply chain 0:22:20.600 --> 0:22:24.120 problems when I was Chief Economist of the World Bank 0:22:24.600 --> 0:22:29.080 working on the East Asia crisis, and we think of 0:22:29.119 --> 0:22:32.040 it often as a financial crisis, but it was also 0:22:32.080 --> 0:22:36.600 an early version of a supply chain crisis, and that's 0:22:36.680 --> 0:22:40.240 what really started me thinking about that, it'd say almost 0:22:40.280 --> 0:22:44.840 thirty years now, thinking about how to model that, how 0:22:44.880 --> 0:22:49.560 to ascertain how do you think about those kinds of interdependencies, 0:22:50.640 --> 0:22:55.080 and also at the financial interdependencies, and I wrote a 0:22:55.119 --> 0:22:59.919 lot about those financial interdependencies, the fragilities of the Danish 0:23:01.720 --> 0:23:04.800 very little on the financial side. People didn't pay much 0:23:04.840 --> 0:23:08.280 attention to it until two thousand and eight and Layman 0:23:08.320 --> 0:23:13.800 Brothers went on and an event like that brings it 0:23:13.880 --> 0:23:18.560 to the public attention. And now Congress passed a law 0:23:19.080 --> 0:23:27.359 trying to create agencies that look at systemic financial interdependence. Well, 0:23:27.720 --> 0:23:31.439 the pandemic has had the same thing on the real side, 0:23:32.119 --> 0:23:38.639 on supply chain resilience and economic resilience more generally. So 0:23:39.280 --> 0:23:42.760 the answer to your question is, as long as it's remote, 0:23:42.840 --> 0:23:46.040 as long as it's happening somewhere else, long way away, 0:23:46.560 --> 0:23:51.040 it's very hard to get attention. But the work that 0:23:51.080 --> 0:23:57.000 we do gives it means that we're better prepared when 0:23:57.119 --> 0:24:02.040 those events happen, like the pandemic, like the inflation that 0:24:02.119 --> 0:24:06.439 followed the pandemic, and the war, the Ukrainian War. People 0:24:06.920 --> 0:24:10.120 then politicians wake up and say, you know, we got 0:24:10.160 --> 0:24:13.280 to do something about this, and then we get the 0:24:13.400 --> 0:24:16.840 Science and Chips Act. If we get legislation moving us 0:24:16.880 --> 0:24:22.080 along this way and analytic whork gets more attention. 0:24:22.359 --> 0:24:25.679 You sort of anticipated my next question. But when you 0:24:25.720 --> 0:24:31.040 look at the Chips Act, which subsidizes domestic production domestic 0:24:31.040 --> 0:24:33.199 research of various sorts, or when you look at the 0:24:33.240 --> 0:24:35.760 Inflation Reduction Act, which tries to do a lot of 0:24:35.800 --> 0:24:40.520 that except on the energy side, how closely do these 0:24:40.560 --> 0:24:46.000 pieces of legislation dovetail or align with your vision of 0:24:46.040 --> 0:24:49.440 what resilience planning would look like. And you know, one 0:24:49.440 --> 0:24:52.560 of the criticisms is, you know, it's all carrot and 0:24:52.680 --> 0:24:55.000 no sticks, that there's a lot of subsidies, et cetera, 0:24:55.080 --> 0:24:58.879 but there's no sort of disciplining of capital, so to speak. 0:24:58.960 --> 0:25:01.239 Like when you think about your latest paper and what 0:25:01.280 --> 0:25:04.600 the optimal policy solutions, how close are we and what 0:25:04.640 --> 0:25:06.800 are some of Are there any drawbacks to how we 0:25:06.840 --> 0:25:09.040 went about those two big pieces of legislation. 0:25:10.200 --> 0:25:13.399 They were important pieces of legislation because they put this 0:25:13.640 --> 0:25:18.320 topic on the agenda. They began moving the country in 0:25:18.400 --> 0:25:21.919 the right direction. You know, there's an old joke about 0:25:22.040 --> 0:25:25.000 you don't want to see how sausage is made and 0:25:25.080 --> 0:25:28.520 what goes into it. What we get out of our 0:25:28.560 --> 0:25:33.439 political machines sometimes is not ideal. It's not what I 0:25:33.480 --> 0:25:37.719 would have written. But if you ask me, is it 0:25:37.760 --> 0:25:40.399 better than nothing? I say, it's way better than nothing. 0:25:41.160 --> 0:25:45.960 These were major achievements in a context of a politically 0:25:46.320 --> 0:25:50.679 fraught world where it's hard to get anything done. So 0:25:51.240 --> 0:25:54.600 let me begin by saying that they were really important 0:25:54.640 --> 0:25:57.960 pieces of legislation. They moved us a lot in the 0:25:58.040 --> 0:26:02.600 right direction of greater resilients. It would be tragic if 0:26:02.600 --> 0:26:05.720 we hadn't done that. No, I don't think they are 0:26:06.080 --> 0:26:10.520 the ideal mix of carot and stick. You know, I 0:26:10.640 --> 0:26:15.919 talked before about more fundamental changes in our structure of 0:26:15.920 --> 0:26:20.960 our economy to encourage more long term thinking, like changings 0:26:21.000 --> 0:26:25.359 in corporate governance and changes in our tax legislation. I 0:26:25.400 --> 0:26:29.320 think that would you know, those are more fundamental things 0:26:29.320 --> 0:26:33.640 that we need to do, but I would have put 0:26:33.840 --> 0:26:39.639 more weight on science. I you know, it disturbs me 0:26:39.960 --> 0:26:43.680 that we are subsidizing a company like Intel after it 0:26:43.800 --> 0:26:48.280 paid out tens of billions to shareholders. It could have 0:26:48.359 --> 0:26:51.400 taken that money and invested it. You know, it didn't 0:26:51.440 --> 0:26:55.320 need public money if it hadn't sent all that money 0:26:55.320 --> 0:27:01.200 back to their shareholders. So it disturbs me that when 0:27:01.200 --> 0:27:04.680 they make profits they are privatized. We're taxing them at 0:27:04.920 --> 0:27:09.520 very low rates, and one of the presidential candidates wants 0:27:09.520 --> 0:27:13.080 to lower the rates still further. All those things disturb me. 0:27:13.880 --> 0:27:17.399 But do I want the country to be exposed to 0:27:17.520 --> 0:27:21.800 a short ease of chips in the future. If Eving's 0:27:21.880 --> 0:27:25.239 unfold in a way that we can all imagine but 0:27:25.400 --> 0:27:28.119 hope won't happen, I think it would be criminal not 0:27:28.280 --> 0:27:32.560 to put the country in a position where it's better 0:27:32.600 --> 0:27:35.200 prepared to handle that kind of a crisis. 0:27:36.240 --> 0:27:39.639