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Speaker 1: Hey, Odd Lots listeners, the Odd Lots tour continues and our next stop is in Chicago.
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Speaker 2: That's right. Joe and I will be at the City Winery Chicago on October 15th for a live Odd Lots recording. Tickets are on sale now at Bloomberg.com forward slash Odd Lots.
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Speaker 1: And of course, a special thank you to Barclays for supporting Odd Lots Live.
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Speaker 2: So that's October 15th at City Winery in Chicago. Get your tickets now.
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Speaker 1: Podcasts, radio, news. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wiesenthal.
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Speaker 3: And I'm Tracy Alloway.
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Speaker 1: Tracy, I think a comment that you've made a few times over the episodes is like, no, no, no, it's not. It's like we have these conversations and then usually or frequently, whether we're talking about trade or AI or anything, there's usually, oh, and it seems like Europe is getting the short end of the stick here. Or it seems like it's all going to end up being kind of bad for Europe. Well, yeah. Yes, I would say that. You have said this.
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Speaker 2: I'm sure I have in the past. However, what I would say is if you are bullish on AI and its ability to boost productivity across the board, in my mind, you have to be bullish on Europe because there is no region out there perhaps more motivated than Europe to try to eke out every extra ounce of of output per work hour. Like if you want a long lunch in France, if you want to, you know, take a long vacation in August, you should be very, very interested in AI. And if you think those gains are going to be like widely spread through businesses in other countries, you know.
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Speaker 1: Think about Europe. Did you purposely just say this? Did you see the red headline that just hit as you were talking?
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Speaker 2: No.
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Speaker 1: It's so surreal. So we just got a red headline the moment you were saying that. BMW targets shedding a fifth of manager roles with the help of AI. I don't think that could be more perfect because, A, it's the two sides of the coin.
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Speaker 2: Yeah, it is.
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Speaker 1: So you have a lot of big industrial behemoths in Europe that, in theory— Like you're like, I remember we've talked about this for years, actually. You know, if AI is going to diffuse across the economy, suddenly maybe these companies can be more lean, et cetera. But then this also gets to two things. OK, what does that mean about jobs themselves? And then also it's like, OK, maybe they can modestly trim some of their management layers with the help of AI. But can that actually make these European car companies competitive with the Chinese companies? That still seems like a tall order of the trajectory there. But it's very funny that you said that the second that that headline crossed the terminal.
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Speaker 2: Plugged into the zeitgeist, I guess. One other thing I would say, speaking about the zeitgeist, and since you mentioned China, we are recording this on September 30th, and Europe seems to be gearing up for to take some sort of action against China in order to boost their competitiveness against it. We're not entirely sure just yet what that's going to look like, but people are definitely talking about it.
00:03:07
Speaker 1: I mean, there's like this very deep concern about all of the industrial behemoths, a lot of the German chemical companies, the German automakers, et cetera. And like, you know, five, 10 years ago, they were like riding high. And then suddenly in a few years, people are talking about Potentially existential risk to them and so forth. And it's sort of wild to me, you know, thinking back to how much the mood has changed from, say, the first Trump administration and even the Biden administration. When, you know, the idea of like, you know, there was the European anger at the Inflation Reduction Act and so forth. And, you know, just this this concern that the trade issue that was sort of really catalyzed by the U.S. and Trump a decade ago is now just sort of it's becoming just very mainstream.
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Speaker 2: Well, you use the word diffuse the benefits of AI. And I think, you know, the idea of having to compete seriously against China and take actual steps to do so has diffused across many places in the world.
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Speaker 1: Very well put.
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Speaker 4: All right.
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Speaker 1: Well, I'm very excited to say we do have the perfect guest, someone who's writing I've admired for a long time and who has interesting takes about all these things, including debates about European economic productivity, whether they're falling behind, etc., nuanced positions on various trade questions. We're going to be speaking with Dominic Leuster, economist, policy analyst, former researcher at LSE and author of the Leuster of Last Resort Substack. So, Dominic, thank you so much for coming on OddLots.
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Speaker 4: Thanks for having me.
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Speaker 1: So AI is going to be great for Europe, right? Because then during the working hours, as Tracy said, the workers can get more output, then they can expand their lunch breaks and their vacations in August.
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Speaker 3: I mean, you know, if you look at some how Europe has done in the last few decades of the booming tech sector elsewhere, despite never having been the major innovator itself, maybe very early before the 90s, Europe may have contributed some of the foundational research that, of course, American companies are very good at extending and commercializing. It seems that consumers have pocketed the welfare nonetheless with lower prices for tech goods and services. And that's despite the fact that US tech companies have pretty decently entrenched modes in Europe, legally entrenched ones. And I think with AI, it's going to be much the same. That's my impression, at least. I think it's probably true that Europe will not be able to create a frontier model anytime soon. I think it's a good case that it shouldn't try to do so, and that it should instead.
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Speaker 4: Focus on.
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Speaker 3: This issue of sovereignty, of not being dependent on either the US or China for its tech stack, which it currently is very much, and on focusing on whatever actually suits the business needs of most European corporates. My impression talking with people who are in this field, also who regulate AI at the European level, In their opinion, near frontier models like Mistral are totally fine for the vast majority of business needs of most European firms. And the interesting fact, of course, that the fact that Mistral is launching models with a Chinese chassis, so with basically with the weights of a Chinese model, because Europe doesn't have the compute to actually train their own weights. It raises all sorts of other dependencies, I suppose. But so far, I'm pretty sanguine on Europe when it comes to.
00:06:43
Speaker 4: The AI race.
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Speaker 2: So if Europe has gained from a lot of technological developments in recent years, why all the hand-wringing over competitiveness? And when you see something like Draghi's competitiveness report, which I think came out, what, two?
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Speaker 1: 2022, 2023. 24, late 24.
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Speaker 2: It shows you how much has happened since then. But when something like that comes out, what is the basis for the existential angst, I guess?
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Speaker 4: Yeah, I mean, in a way, that was the last sort of.
00:07:20
Speaker 3: It was one strand of a set of arguments that were quite similar. They're all about, in relative terms, Europe is falling behind and it's losing a competitiveness race versus the U.S., And Jamie Dimon has been making these remarks frequently. He's saying he came to Europe last year and a couple of events this year as well and said, you're losing because European GDP was 90% of the US 10, 15 years ago. Now it's 70% and this is not good. Now, there are a couple of reasons to assume that it doesn't really matter if that were true, because as I said, it's a very producer-centric view of competitiveness and also of welfare, because the debate is kind of relating competitiveness to future welfare, saying if you're going to fall behind on competitiveness, and we define competitiveness by output or output per hour, in other words, labor productivity, your living standards are going to go down in material terms relative to the US, and you're not going to be able to maintain your social model. That's, I think, the main part of the Draghi report. My understanding that this is I think there's a different case for why Europe may not be doing well economically in its own terms. But even if you accept that this sort of relative decline is relevant, I think there's a problem with the data. So the Draghi report was published in November 2024, I believe, was commissioned by the European Commission. It's obviously authored by the hero of the euro crisis, former ECB president Draghi, who's also a distinguished economist in its own right. It argues a lot of things that I think I agree with and that many other people would agree with, that Europe has to remove internal barriers to trade and the movement of capital and credits. It has to try to get capital investment up. It's very, very low compared to the US in particular. And it's falling behind in the tech sector in particular. So Draghi, this is obviously written well into the AI boom. Draghi is emphasizing the tech sector as the main driver of the American productivity advantage. It's just the question of how big that advantage really is. And I think that the centerpiece of the report is this notion that the productivity ratio, so GDP per hour in PPP terms, has gone from 90 something percent to 70 or 85 percent, depending how you measure it. since 1995, when the tech boom in the US begins. And that implies a downward trend, a very sharply downward trend, and that it will continue if Europe doesn't do X, Y, and Z. I think that's where the problem lies, because I don't think there's really enough evidence to actually suggest that's true, really, even if you accept that Europe might not have grown as much as the US in recent years.
00:10:35
Speaker 1: Well, why don't you explain what you see as the issue with the data then, the core disagreement? So, OK, total GDP and dollar terms was at 90 percent. Now it's at 75 or 80 percent. That sounds like decline. It sounds like, quote, falling behind, unquote. That sounds alarming. I can understand why Draghi wouldn't like to see that trend. Why? What's the other spin on the same numbers? Or why do you think that's not the complete story?
00:11:04
Speaker 3: So I think you can definitely make, I mean, there's a fundamental difficulty with comparing economies. If you think that's important to organize your policy efforts around, you might want to compare yourself to your peer economies. And you can do that statically. So every given year, you can compare yourself as a ratio. So what is the US's share of global GDP? What is Europe's share of global GDP? But the specific case, statements that people make, including Jamie Dimon, everyone else, Draghi, you're also quite online, so you know that this is a constant theme online as well, is there's a trend, there's a level trend over time. And the problem is that because economies are very different, because they measure economic activity quite differently, we can't actually say anything about levels over time. So just to get to the actual source of the beef, which is the PVP adjustment of the GDP figures. You can't obviously just look at nominal GDP at market exchange rates like Diamond does, for instance, because all you're measuring is how the dollar has fluctuated over time. It doesn't do with real output or anything. So you need to control for these exchange rate fluctuations. You need control for things like the differences in working hours between the US and Europe, which are institutional. They're political choices about how you want to utilize labor inputs, how you want to trade productivity gains for leisure time. The US doesn't have any statutory limitations.
00:12:39
Speaker 4: On working hours.
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Speaker 3: And Europe has consistently decided to work less, but has remained employed at the same rates, basically. So this is totally a choice to try to work less.
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Speaker 4: And if you.
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Speaker 3: Adjust for working hours and if you adjust for the relative price levels, which is what purchasing power parity should do. So in other words, what does a French Euro, how many French Euros do you need to buy a dollar worth of consumption basically? These are constructed by the World Bank and you have sort of a, now you have a comparison that allows you to compare price levels.
00:13:28
Speaker 4: Across time, in theory, at least.
00:13:31
Speaker 3: The problem is with the Draghi measure, which is a frighteningly common measure, but I think it's well documented to be the wrong measure, that it does so by fixing prices at a given year. So basically it's measured in the Draghi report in 2010 dollars. So PPPs are expressed as in international dollars, which is a synthetic currency that has the same purchasing power as the US dollar. And it's benchmark to a PPP year in which people have gone around and collected prices in different countries and created these ratios that are consistent with each other.
00:14:09
Speaker 4: But if you fix.
00:14:10
Speaker 3: Prices to a certain year, you have to use something to extrapolate between these different benchmarks. And the Draghi measure uses the real growth measures that the national accounts produce in the US and the European countries. What happens as a result is is that you get this upward trend that shows as a decline over time that you don't see in PPP measures that don't use the national accounts real growth rate, but they use relative inflation ratios. So how is the inflation ratio and inflation rates, how are they compared to the US inflation rates and Europe? And the problem is that we calculate those real rates differently. So in the US, what the... the BEA does more aggressively than the European offices for economic analysis is that they adjust prices, particularly in the tech sector, this is why this is very relevant for Draghi's particular argument, much more aggressively for improvements in quality. If the computer that I'm currently on, a MacBook, for instance, sells at the same or a similar nominal price, even though the specs are much better, that's measured as a decline in the quality adjusted price. The same amount of nominal spending on tech services or goods shows up as more real growth in the US than in the EU, because applying that deflator more aggressively means that the inflation in that sector is lower, so real growth is higher. That might amount, we don't know exactly how much it is, it might amount to 0.2 or 0.3% annually, according to some studies. But over time, it compounds every year, and that creates this wedge between the EU and the US. And that is, at least in theory, to a large part due to simply these method differences rather than actual economic underlying productivity growth. And that's, I think, the main issue. And then from there on, I think the other issue is Well, should we then look at the economy in purchasing power terms at all, or should we look at it purely in real growth terms? That's a whole different discussion altogether. That's, I think, where the discussion has been going between Paul Krugman and some European economists who are trying to argue between each other over whether we should reform and become a bit more like the US, which would result in loosening labor regulations, cutting welfare spending, and of course, making it easier for tech startups and so on to spend and invest in everything.
00:17:00
Speaker 2: Wait, can you say a little bit more about political choices here? Because it does strike me when we make these comparisons that it often feels very apples to oranges. And if, as you say, the US is choosing basically to work more and European countries are choosing.
00:17:17
Speaker 2: Use productivity gains so that they can go enjoy an extra glass of wine to redeploy that cliche or whatever at lunchtime, then it might make sense to focus on real growth and output for the US and something else for Europe. So how do you, I guess, incorporate political economy differences when it comes to these different stats?
00:17:43
Speaker 3: What the GDP discussion ends up as, I think, is Do you think PPPs are more reliable than real growth measures for measuring the relative performance over time? And it really depends on whether you think these differences in deflators between countries are actually that severe and why they actually occur.
00:18:05
Speaker 4: But you can, of course, and.
00:18:09
Speaker 3: We end up, by the way, with the notion that we don't have a good measure to compare trends over time. So whatever your judgment call is, the The thing that's presented as a robust stylized fact in the Drago report, but also by Diamond and other people is simply no such thing. It's not established by any sort of solid economic data. What we can do is we can use PPPs in current prices to compare level snapshots. So we can say in the year 2024, what is GDP per hour? purchasing power adjusted in the EU and in.
00:18:51
Speaker 4: The US.
00:18:52
Speaker 3: That comparison, I think, puts the US slightly above the Western European aggregates. I also show that if you actually then exclude the top 10% of the income distribution, that advantage goes away entirely. So the US is slightly richer in aggregates, at least on this measure, but not quite as at the level of Germany and some of the sort of low countries, Nordic countries, but it's very top heavy. And indeed, the bottom half is actually significantly worse off than any single European country, but for Portugal.
00:19:28
Speaker 4: Now, we can say, well, this is the most defensible.
00:19:32
Speaker 3: Output measure in my view, comparatively, but we can say, well, maybe people care about income, money in the bank and Maybe politically we're so different that people don't care about leisure time that much and people are fine with living in a more top-heavy society. How much money do the US individuals and households actually have? Because, I mean, consumption is a large part of what we could define as material well-being, right? So I think it makes sense to look at consumption, particularly what's called actual individual consumption, which is, I think, a better measure than income because income is hard to compare as well. It's measured differently, but also actual individual consumption includes in-kind benefits.
00:20:18
Speaker 4: It includes.
00:20:20
Speaker 3: The benefits of publicly provided healthcare and so on and so forth. So it should control for these political differences, Tracey, that you were hinting at, the fact that in Europe there are sizable welfare states and credit unions larger protections and a greater amount of public good provision. If you adjust that for working hours, the US is pretty.
00:20:49
Speaker 4: Unremarkable.
00:20:50
Speaker 3: And what you also have to do, because of these political differences, you have to look at the way these consumption figures are distorted by some of the things that the US is completely unique in. I choose, I think, healthcare as an example in writing about this because It is quite unusual. It's the only advanced country that doesn't have a publicly funded system, despite it being very well established for many, many years by American economists that actuarial insurance or private insurance doesn't work for healthcare for various reasons. And you end up with very high costs and poor provisions. And indeed, the US spends much more on healthcare, both as a It spends, I think, much more, 5% more at least, as a share of GDP than most other European countries. It's a function of having this private system that costs a great deal and still doesn't provide the same kind of coverage or quality. It's, I think, quite useful to look at empirically how healthcare spending actually compares to other OECD countries over time. And one model that I run myself on this is that the U.S. spends around 50% more on health care per person than you would expect relative to what advanced countries actually spend on health care, what their consumption implies, in other words. So the level of consumption that you have, so how rich you are, in other words, predicts a certain amount of spending, but the U.S., residual, say the difference is 50% higher. And in total, that results in around between $ 1. 7 and about $ 1. 9 trillion a year that are spent in excess of what would happen, what you would expect of a country at that income level. And the difference is, I think this goes back to these political economy differences, the reason is prices, really, and the fact which is well established by people like the Uwe Reinhardt, a great Princeton professor and health economist, that the US prices per unit of care is much higher and.
00:23:11
Speaker 4: Utilization is very, very poor.
00:23:12
Speaker 3: And outcomes are generally worse if you look at average life expectancy and mortality rate for certain procedures. So this is part of this political economy, which is more dominated by rent extraction and middlemen. So prices are high in the healthcare sector because you have hospitals, insurers, these trade associations that can take a cut, administrative costs, and all these things which make a large part of the income distribution, the top 10 or 20% very wealthy, but create these enormous costs for much of the rest of the population, especially those uninsured, which I think 27 million by some accounting. And even those who are insured by their employers have large out-of-pocket costs. And the headline is, well, some people object to using purchasing power priorities to actually adjust for output figures and indeed income figures, because they say, well, it's kind of hiding something that is actually a sign of strength. In other words, they assume that the reason why costs in the non-tradable sector like healthcare are very high is because Well, you have this very powerful productivity growth in the tech sector and elsewhere and very high incomes. And people are sort of wage arbitraging themselves into the non-tradable sector. And it's their high incomes that are inflating those prices in health care, legal services, education, whatever. That assumes that these prices are not a function of rent seeking, which unfortunately I think the preponderance of the evidence shows they are.
00:24:55
Speaker 2: Yeah, Joe, I keep thinking back to the episode we did recently with the authors of Main Street Millionaires. And if you looked at their list of top earning professions in the U.S., How much of that was an industry like health care or legal services that you could tie either directly to rent extraction or some form of regulatory capture where, for instance, you know, a dealer has the rights to a particular locality or something like that?
00:25:24
Speaker 1: On some level, when I think about how crazy our health and health care system and health insurance system is, I'm even more impressed that the U.S. is by the rest of the U.S. economy that we have this sort of that we have this, you know, big, what's the.
00:25:41
Speaker 2: We've succeeded despite.
00:25:42
Speaker 1: Of hobbling ourselves. Yeah, the albatross around our neck, healthcare, and still we do okay. It actually kind of makes me impressed. So, you know, let's go back to the cliche about the long lunches with wine, because I actually think this is, you know, it's a joke, but it's also real. So the diamonds of the world, et cetera, and they say, you got to stop with the long lunches and work hours. And then, the dominics of the world say, no, like we're just as productive or very close to as productive as you. And we enjoy life and we convert that leisure, that productivity into more leisure, which is arguably what the whole point is, et cetera. But then the counter would be like, that's just cope. Um, And I, yeah, like in the sense that like, yeah, I know people who live a leisure life and stuff in Europe and they take nice long August vacations, et cetera, but I'm only getting access to an elite slice because I work in media and journalism and finance, and I don't really have a good look into like the broad European middle and lower classes, et cetera. Is there like, in your view, does it diffuse like this thing? I know it from, you know, my elite contacts like you and elsewhere. in Europe, but can we substantially say that the broad European middle class does in fact have substantially more leisure and time than their counterparts here?
00:27:01
Speaker 3: Yeah, I mean, there are some asterisks here. So especially in countries like Spain and Italy, there are a lot of informal hours that are not captured by the headline figures. There are adjusted series for that, but my own crunching with numbers says it doesn't make that much of a difference. For the bulk of the European economy, the richer parts of the European economy, so the central Europe, the lowlands, the low countries, the Nordic countries, they do work much, much less. And if indeed it meant that Europeans were employed at lower rates, it would be concerning. And it would probably point to the fact, oh, this is a labor market failure and people may not be able to work or they're not working because they're getting diminishing returns. But there's... Again, there's good empirical evidence, including by people who co-authored the long-run productivity figures that go into the Draghi reports that show, well, actually, it's sort of a substitution effect where productivity is causing hours to go down and hours going down is actually increasing productivity. So it's not really, there's no evidence to think that, so first of all, it is real. People do work less and it's no reason to think that that's somehow a sign of dysfunction underlying it. I think I would also just say it's kind of Econ 101. So labor is a disutility, and it's precisely that because the value of leisure time is greater than nil. If you assume those, you're sort of countervening to very basic macro principles. What I should say is that there's good reason to suggest that Western Europe is probably more wealthy than the US in the aggregates, even if it has probably declined relatively over the last six, seven years. And I do think there's robust evidence to show that. But of course, internally, there are huge differences. I think we should care that Europe, in its own terms, has been doing incredibly poorly over the last 10, 15 years. But that's due to policy choices, especially macro policy, which the US does comparatively very well. And of course, there are internal differences. We should care that the Italian South is extraordinarily poor. It has been declining in absolute terms, even when the entire economy has been stagnating for 20 years, unique in the G7 economies. But we shouldn't care, for instance, that Michigan... In the US, you wouldn't care that Michigan has been outgrown by California for 20 years, even if Michigan has been doing well and it's been diversifying its economy. And I think that is the main takeaway between when comparing.
00:29:47
Speaker 4: The EU as an aggregate to the US. We have our own problems.
00:29:51
Speaker 3: The relative picture shouldn't matter that much, I don't think. There's a lot of work to be done, but it needs to actually mean becoming more like the U.S., which may not be politically amenable to most people here anyway.
00:30:21
Speaker 2: Do political choices or issues concerns slash incentives start to change in our current era, though, such that maybe it was acceptable that Europe didn't have to be on the front line of technological advancements, making its own frontier models or making massive productivity gains in the same way as China or the US. But now that there's renewed security concerns in the region, now that we've had years and years of worries about resource allocation and choke points in the global economy that actually, if you really want to re-industrialize, if you want to build some sort of resource security, if you want to build up your defense industry, that actually economic growth starts to matter and strategic tech development starts to matter in the same way.
00:31:12
Speaker 3: I mean, one thing out of, I mean, just to make one other thing clear, economic growth matters. I mean, even advanced countries in the long-term Yeah.
00:31:19
Speaker 2: I realized as soon as I said that, I shouldn't have said economic growth, but the idea of, I guess, relative gains start to matter more.
00:31:27
Speaker 3: I think they do matter, not necessarily on output, but obviously there are relative shifts in Europe's competitive position that have a consequence for employment and long-term productivity prospects.
00:31:44
Speaker 4: And, you know, the U.S.
00:31:45
Speaker 3: Is... Of course, it has a sectoral advantage in tech and other places, pharma, for instance. But really, the EU is, I think, quite stronger in manufacturing, merchandise trade. And unlike the US, it's the biggest economic bloc that's still open to the world economy because there haven't been real tariffs instituted so far. And that, I think, opens up the question of how is Europe doing competitively with regard to China? And we talked about AI. People in the Europe-US discussion have sort of shifted the goalposts a few times by saying, well, I can forget about PPPs, forget about real growth, then whatever, even if there hasn't been any decline, relatively speaking, so far, Europe is sort of renting the future and will miss out on the big, you know, capital expenditure generating technology of the day, which is AI and these frontier models. Again, I don't think that the sort of near frontier models are really bad and that they can service most of the needs of European corporates. But I don't think that there is a competitive race specifically in the area of AI. But I think that in legacy manufacturing sectors and other high-tech manufacturing sectors, there is, of course, and it is still a large part of value added in Europe, particularly in countries like Germany, of course, which is the largest chunk of European GDP and which is currently experiencing, I think it's fair to say, what looks like a disorderly decline in industrial employment. So the first China shock, so to say, was positive for Germany, but it It was the provider of high-tech manufacturing goods for China, and it benefited from Chinese demand.
00:33:48
Speaker 4: More than any other European country. This is flipped entirely.
00:33:53
Speaker 3: China has moved up in value chain while remaining in other parts of the manufacturing value chain. I should also mention that IP transfer, legal or otherwise, to China is by far the greatest from Germany. The fact that the industrial heartland of Central Europe still is declining at this rate because it's still exposed to China.
00:34:18
Speaker 4: China, I should also mention, is.
00:34:21
Speaker 3: Undergoing domestic inflation, particularly export price deflation after the housing bubble burst. It has intensified this network of subsidies for the manufacturing sector. experiencing its own dislocations domestically, like half of the economy, a third of the labor force works in the gig economy. So it's weakening domestically. Demand for cars and other manufacturing products is going down or trending down. And it's become quite reliant on net exports for annual GDP growth. A friend of mine and a friend of the show, I think, Brad Setzer, has done great work on sketching out the empirical.
00:35:06
Speaker 3: Position here, both in terms of what's going on in China domestically, so that more than half of GDP growth might depend on net exports, and what the effects in Europe are. And it does seem that, according to my own work, Germany alone has had over a million jobs in the manufacturing sector since 2021. So since we see that big shift in Chinese industrial policy, of course, it coincides with the the energy crisis, and that hits Germany very hard too, because this is a different discussion, but European energy policy is appalling for many reasons and that has damaged its own prospects quite a bit. But I should say that these employment figures are also actually understating the extent of the shock, because if you look at the chemical industry, you mentioned earlier, Joe, which is one of the crown jewels of the German industrial sector. Among the biggest big five sectors, employment has fallen the least there, even though it's.
00:36:10
Speaker 4: Most exposed to both the energy crisis and Chinese trade.
00:36:18
Speaker 3: I looked into it myself. We don't have a Chinese trade number for volume. They don't publish the appropriate price indices, but it seems that trade values for chemical exports have been sharply down in both Germany and China. while trade volumes for chemical products have been sharply up from China and, of course, down from Germany. And it corresponds also to the main export destinations of Germany. So China is exporting more to those destinations. Germany is exporting less to them, whereas Chinese imports from Germany and Europe are sharply down and exports to it are sharply up in many other sectors as well. And in that sector, employment has been studied, but only because the labor market is so dysfunctional. So because they're labor hoarding, because they can't find qualified employees. So in really, it's sort of masking the extent of all of this. And this has led to some really sharp divisions within Europe about how to respond to China and what will happen, especially after the US, I think, actually sought this confrontation with China over trade. And I think quite thoroughly... had to concede defeat last year.
00:37:31
Speaker 1: Let's talk about like, okay, I don't know if you just talk to random trade ministers in Europe today about the global trade picture, maybe the degree, the optimal degree of openness, et cetera. What are they saying in September 26th? If that they, you know, versus what they would have been saying and say, September 2016, or maybe we should say September 27th or September 2017, since by that point, Trump had already been the president and sharply sort of changed the global conversation appalling to Europe in many ways. But how have they all become either a little bit more Trumpist? Or who is the guy that wrote Death by China? The economist, Peter Navarro. This is the thing that's crazy. So Peter Navarro years ago writes Death by China. And in 2016, everyone's like, oh, he's a crank. He can't be anywhere near the White House. And now I feel like everyone is a Navarroist on some level. It feels to me like complete Peter Navarro victory in that there's so much consensus is basically, yes, the sort of his Death by China narrative. Maybe they put a little bit more spin on it. to make it sound more professional. But it feels like in both Europe and the US, everyone has become a Navarroist.
00:38:53
Speaker 4: Yeah.
00:38:53
Speaker 3: I mean, I think you could actually even say that the fact that this door was opened by Trump and his advisors first, it became politically a bit unpalatable for other people. So the actual evidence of the effects of China's The worsening of China's mercantilist turn in the late 2010s and 2020s was ignored for a while because it was associated with a different political camp.
00:39:23
Speaker 1: It's one way to put it, yeah.
00:39:25
Speaker 3: I should add to that the Europeans are also very much stuck in the past when it comes to thinking about trade. So the U.S. policy sector is much more open to changes and ideas. But in Europe, another friend, and I think also a recent former guest on your show is Adam Tooze.
00:39:44
Speaker 4: Yeah, of course.
00:39:45
Speaker 3: The Europeans are the Taliban of neoliberalism, at least with regard to their attitudes towards trade, and that has certainly inflected their position on China. And it's one of the reasons why they took so long in actually doing something about this. A couple of my friends, Brad Setzer, whom you know, of course, and Sander Todorov, have, I think, almost single-handedly responsible for pushing that consensus over the last 18 months, at least in Germany and elsewhere, towards Getting people to recognize that this is a problem, by the way. No, you can't hang on. It's too late to hang on to visions of level playing fields in international trade. You have to do something before this gets out of control. And it's now showing to have real political consequences in Germany electorally with regard to these regional elections in which the far right is doing very, very well in these elections. And the incumbents are polling very poorly because the far right has managed to frame the issue of industrial decline, not really around China, but around a failure of the incumbents and the failure of green policies and energy policy, which play a role, certainly. But there's evidence to believe that this is mostly driven by the external trade shock at the moment. So people are doing something now. You may not be surprised to know that nothing really has happened, though. despite there being a lot of noise. So the core of the European efforts to counter Chinese trade is the so-called Industrial Accelerator Act, which is proposed earlier this year. It's currently in review and it might be implemented earlier next year.
00:41:34
Speaker 4: That shows you how.
00:41:34
Speaker 3: Long the timelines are in Europe as well. It's suffering from internal divisions. So there was the more protectionist camp around France And the initially more skeptical around Germany, because Germany obviously is also, there's a lot of exporter interests in Germany that are opposed to any sort of trade restrictions, but they're quite conservative around these issues. There are also internal divisions like the labor unions in Germany also don't disagree on these things. And of course, the problem with European politics, as opposed to the US and particularly China, is that it has this terrible sort of joint decision trap where domestically there are these aggregation problems where you have internal coalitions and of course at the european intergovernmental level you have 27 countries that all sort of hate each other but all have different um uh different veto powers and you operate in the situation where you have to have um sometimes you have to have unanimous voting or qualified majority voting and eventually you have a lot of consensus bargaining and you end up with very suboptimal policy outcomes that are often too little, too late. The policy responses are slow, dysfunctional, and even if they produce something, it regresses to the.
00:42:48
Speaker 4: Lowest common denominator.
00:42:50
Speaker 3: That Industrial Accelerator Act could have teeth in that it has these by Europe provisions. It has certain provisions that essentially has formulated only, not in name, but they only really Only China clears those hurdles in terms of what imports are actually allowed. That's the attempt to actually protect the German and the European auto market in particular.
00:43:16
Speaker 4: Some people say it doesn't have enough scope.
00:43:19
Speaker 3: But China, of course, has immediately gone on the offensive on this matter, immediately filed a complaint with the European Commission, very interestingly actually outlining their own position, saying, our capacity utilization rate domestically is normal for economies that are still growing and that are not yet adjusting to, you know, being driven by internal demand. So there's sort of a concession that these imbalances domestically in China are real and are seen as a real problem by Chinese authorities. And I do agree with that. And I also think that it's a political economy obstacle for Chinese policymakers to do something about this. To sort of, Lower the temperature a bit, there's a separate mechanism in Europe called the Trade and Investment Consultation Mechanism. It's between the European Trade Chief and the corresponding minister in China. It was supposed to deliver something now-ish. I think in early October, there's going to be a meeting in Beijing. Nothing concrete has come of it really, apart from some assurances around rare earths, which are quite vague and Europeans have been a bit unhappy about it.
00:44:34
Speaker 4: There's some sort of.
00:44:35
Speaker 3: Franco-German thing about monitoring these imbalances.
00:44:40
Speaker 4: Nothing much has happened. My worry is that either the.
00:44:47
Speaker 3: Because there's a separate part about the foreign exchange mechanism. happened that Brad Setter again and Shaheen Ville have written about is really a separate issue is that China in addition to industrial policy is also really resisting any appreciation of the UN and that is further contributing to the imbalances. The Europeans are also slowly thinking about countering China on revaluation. My fear is that they're strategically they're their willingness to escalate might outrun their ability to actually be resilient to Chinese responses, retaliations to whatever they end up doing. And the Chinese have shown that they're, unlike the very dysfunctional European process that I just outlined, their retaliation has been institutionalized, rapid, really extensive and increasingly comprehensive. For instance, I think in late July, the Commission, the Europeans, placed a few more Chinese entities on the sanctions list because they were deemed to be supporting the Russian war effort. The day after, the Chinese responded by immediately putting a whole bunch of major European industrial firms on the same equivalent entity list that they have. We don't have that kind of ability to respond. I think a likely scenario is that the EU does something eventually next year, that because of these problems in finding decisions, it will be too little to actually do something about the situation, and that the Chinese will respond with some sort of concession. Because I think it's clear that because indeed they are dependent on export growth and the EU is a very big market, the only big market open at the moment. But this concession will not be, it will not really change the momentum behind the shift in industrial activity. But the EU will accept it because it can't actually find a consensus at home for anything else than they propose. And that probably... will not really change anything about this. And then that's, I think, the best scenario. The worst scenario is a full-blown trade war.
00:47:21
Speaker 1: Dominic, we could go on for a very long time. We could talk a lot more about the 27 governments that all hate each other. We could talk about how Eastern Europe and they have probably different perspectives than Central Europe and so forth. But that was a fantastic overview. Really appreciate you coming on Odd Lots, and let's do it again sometime.
00:47:41
Speaker 4: Thanks so much for having me, guys. It was a pleasure.
00:47:55
Speaker 1: Tracy, I thought that was really interesting conversation. You don't really get I thought that, you know, cliche nuance, you know, actual nuance that like there is a lot of aspects of the conversation that are either misunderstood or something like that. I feel like I actually learned something in that conversation.
00:48:11
Speaker 2: I like the line, the value of my leisure is above zero, because mine certainly is. But once you start framing it that way, then the set of economic choices that are being made start to look exceedingly different, right?
00:48:25
Speaker 1: No, I totally think that. And if you actually take that idea seriously, then... Yes, that's really good. That's sort of the goal. We want to like have high productivity or we want to have wealth so that we can enjoy life. It's kind of crazy how that's like. Otherwise, what are we doing? What are we doing here? What's the point of all this?
00:48:47
Speaker 2: This brings me to a question I've been asking everyone when we were out in L.A. and I'm sure actually you're going to San Francisco soon. Yeah. What exactly– like there's going to be this huge wave of money hitting San Francisco thanks to all these IPOs that are being filed and just like general stock market buoyancy. What is everyone doing with that money? Like I get that they buy nice houses and maybe a nice car. But other than that, like what is– what's the consumption?
00:49:15
Speaker 1: No, it's just like people who are in that are just going to– they're not going to do anything. with their money. They're just going to keep, like, staying up on ChachiBT, vibe coding, if they can still 3 a.m.
00:49:25
Speaker 2: Or work.
00:49:25
Speaker 1: Yeah, I know, I know. Everyone in this space, they just talk about, oh, I'm working more than ever. There's some sort of, we need to coin a new paradox or something like that.
00:49:35
Speaker 2: But I do think, one thing I will say is, a lot of this depends on your worldview, your very deep, basic worldview. You can argue that, okay, Europe has come up with this social welfare system where leisure is valued above zero, all of that, in an era of absolute trade gains and in an era of neoliberalism and I must say only Adam Tooze could get away with it.
00:50:04
Speaker 1: Yeah, the Taliban of neoliberalism. Yeah.
00:50:07
Speaker 2: But now maybe things are changing and maybe priorities start to change too. And that I think is like an actual real vulnerability for some of the arguments being made here.
00:50:17
Speaker 1: Totally. And I think it's sort of like it'll be an interesting sort of chapter for the history books.
00:50:25
Speaker 2: Yeah.
00:50:26
Speaker 1: If like, OK, there are these industrial giants in Europe that are core to wealth and the ability to have a welfare state, et cetera. And it turns out that they like sort of got obliterated by sort of open trade. And the reason they got obliterated is because everyone refused to recognize the competitive pressure because Donald Trump was the first person to really talk about it. And it was too much to stomach that to be on the same side of a sort of perspective as Donald Trump. And therefore... Like that would be a, you know, that's that's a good that's a whole book. It's not just a chapter. It's a whole book.
00:51:03
Speaker 2: Trump was not the first person to talk about it.
00:51:06
Speaker 1: But I think he really mainstreamed it in a very serious way.
00:51:09
Speaker 2: He meme-ified it for sure.
00:51:11
Speaker 1: For sure.
00:51:11
Speaker 4: Yeah.
00:51:12
Speaker 2: All right. Shall we leave it there?
00:51:13
Speaker 1: Let's leave it there.
00:51:14
Speaker 2: This has been another episode of the All Thoughts Podcast.
00:51:17
Speaker 1: I'm Traci Allaway.
00:51:18
Speaker 2: You can follow me at Traci Allaway.
00:51:20
Speaker 1: And I'm Joe Weisenthal. You can follow me at The Stalwart. Follow our guest, Dominic Loyster, at New Lefty Views. Follow our producers, Carmen Rodriguez at Carmen Armin, Dashiell Bennett at Dashbot, Cale Brooks at Cale Brooks, and Kevin Lozano at Kevin Lloyd Lozano. And for more OddLots content, check out our newsletter. You can find that at Bloomberg.com slash OddLots. And you can chat about all these topics 24-7 in our Discord group. discord.gg.
00:51:45
Speaker 2: And if you enjoyed this conversation, if you like it when we talk about the nuances of Europe's economic decline, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening. Thank you.
Speaker 1: Hey, Odd Lots listeners, the Odd Lots tour continues and our next stop is in Chicago.
00:00:04
Speaker 2: That's right. Joe and I will be at the City Winery Chicago on October 15th for a live Odd Lots recording. Tickets are on sale now at Bloomberg.com forward slash Odd Lots.
00:00:15
Speaker 1: And of course, a special thank you to Barclays for supporting Odd Lots Live.
00:00:19
Speaker 2: So that's October 15th at City Winery in Chicago. Get your tickets now.
00:00:29
Speaker 1: Podcasts, radio, news. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wiesenthal.
00:00:47
Speaker 3: And I'm Tracy Alloway.
00:00:48
Speaker 1: Tracy, I think a comment that you've made a few times over the episodes is like, no, no, no, it's not. It's like we have these conversations and then usually or frequently, whether we're talking about trade or AI or anything, there's usually, oh, and it seems like Europe is getting the short end of the stick here. Or it seems like it's all going to end up being kind of bad for Europe. Well, yeah. Yes, I would say that. You have said this.
00:01:11
Speaker 2: I'm sure I have in the past. However, what I would say is if you are bullish on AI and its ability to boost productivity across the board, in my mind, you have to be bullish on Europe because there is no region out there perhaps more motivated than Europe to try to eke out every extra ounce of of output per work hour. Like if you want a long lunch in France, if you want to, you know, take a long vacation in August, you should be very, very interested in AI. And if you think those gains are going to be like widely spread through businesses in other countries, you know.
00:01:45
Speaker 1: Think about Europe. Did you purposely just say this? Did you see the red headline that just hit as you were talking?
00:01:50
Speaker 2: No.
00:01:50
Speaker 1: It's so surreal. So we just got a red headline the moment you were saying that. BMW targets shedding a fifth of manager roles with the help of AI. I don't think that could be more perfect because, A, it's the two sides of the coin.
00:02:07
Speaker 2: Yeah, it is.
00:02:07
Speaker 1: So you have a lot of big industrial behemoths in Europe that, in theory— Like you're like, I remember we've talked about this for years, actually. You know, if AI is going to diffuse across the economy, suddenly maybe these companies can be more lean, et cetera. But then this also gets to two things. OK, what does that mean about jobs themselves? And then also it's like, OK, maybe they can modestly trim some of their management layers with the help of AI. But can that actually make these European car companies competitive with the Chinese companies? That still seems like a tall order of the trajectory there. But it's very funny that you said that the second that that headline crossed the terminal.
00:02:45
Speaker 2: Plugged into the zeitgeist, I guess. One other thing I would say, speaking about the zeitgeist, and since you mentioned China, we are recording this on September 30th, and Europe seems to be gearing up for to take some sort of action against China in order to boost their competitiveness against it. We're not entirely sure just yet what that's going to look like, but people are definitely talking about it.
00:03:07
Speaker 1: I mean, there's like this very deep concern about all of the industrial behemoths, a lot of the German chemical companies, the German automakers, et cetera. And like, you know, five, 10 years ago, they were like riding high. And then suddenly in a few years, people are talking about Potentially existential risk to them and so forth. And it's sort of wild to me, you know, thinking back to how much the mood has changed from, say, the first Trump administration and even the Biden administration. When, you know, the idea of like, you know, there was the European anger at the Inflation Reduction Act and so forth. And, you know, just this this concern that the trade issue that was sort of really catalyzed by the U.S. and Trump a decade ago is now just sort of it's becoming just very mainstream.
00:03:55
Speaker 2: Well, you use the word diffuse the benefits of AI. And I think, you know, the idea of having to compete seriously against China and take actual steps to do so has diffused across many places in the world.
00:04:06
Speaker 1: Very well put.
00:04:07
Speaker 4: All right.
00:04:07
Speaker 1: Well, I'm very excited to say we do have the perfect guest, someone who's writing I've admired for a long time and who has interesting takes about all these things, including debates about European economic productivity, whether they're falling behind, etc., nuanced positions on various trade questions. We're going to be speaking with Dominic Leuster, economist, policy analyst, former researcher at LSE and author of the Leuster of Last Resort Substack. So, Dominic, thank you so much for coming on OddLots.
00:04:37
Speaker 4: Thanks for having me.
00:04:38
Speaker 1: So AI is going to be great for Europe, right? Because then during the working hours, as Tracy said, the workers can get more output, then they can expand their lunch breaks and their vacations in August.
00:04:48
Speaker 3: I mean, you know, if you look at some how Europe has done in the last few decades of the booming tech sector elsewhere, despite never having been the major innovator itself, maybe very early before the 90s, Europe may have contributed some of the foundational research that, of course, American companies are very good at extending and commercializing. It seems that consumers have pocketed the welfare nonetheless with lower prices for tech goods and services. And that's despite the fact that US tech companies have pretty decently entrenched modes in Europe, legally entrenched ones. And I think with AI, it's going to be much the same. That's my impression, at least. I think it's probably true that Europe will not be able to create a frontier model anytime soon. I think it's a good case that it shouldn't try to do so, and that it should instead.
00:05:46
Speaker 4: Focus on.
00:05:49
Speaker 3: This issue of sovereignty, of not being dependent on either the US or China for its tech stack, which it currently is very much, and on focusing on whatever actually suits the business needs of most European corporates. My impression talking with people who are in this field, also who regulate AI at the European level, In their opinion, near frontier models like Mistral are totally fine for the vast majority of business needs of most European firms. And the interesting fact, of course, that the fact that Mistral is launching models with a Chinese chassis, so with basically with the weights of a Chinese model, because Europe doesn't have the compute to actually train their own weights. It raises all sorts of other dependencies, I suppose. But so far, I'm pretty sanguine on Europe when it comes to.
00:06:43
Speaker 4: The AI race.
00:06:46
Speaker 2: So if Europe has gained from a lot of technological developments in recent years, why all the hand-wringing over competitiveness? And when you see something like Draghi's competitiveness report, which I think came out, what, two?
00:07:02
Speaker 1: 2022, 2023. 24, late 24.
00:07:07
Speaker 2: It shows you how much has happened since then. But when something like that comes out, what is the basis for the existential angst, I guess?
00:07:16
Speaker 4: Yeah, I mean, in a way, that was the last sort of.
00:07:20
Speaker 3: It was one strand of a set of arguments that were quite similar. They're all about, in relative terms, Europe is falling behind and it's losing a competitiveness race versus the U.S., And Jamie Dimon has been making these remarks frequently. He's saying he came to Europe last year and a couple of events this year as well and said, you're losing because European GDP was 90% of the US 10, 15 years ago. Now it's 70% and this is not good. Now, there are a couple of reasons to assume that it doesn't really matter if that were true, because as I said, it's a very producer-centric view of competitiveness and also of welfare, because the debate is kind of relating competitiveness to future welfare, saying if you're going to fall behind on competitiveness, and we define competitiveness by output or output per hour, in other words, labor productivity, your living standards are going to go down in material terms relative to the US, and you're not going to be able to maintain your social model. That's, I think, the main part of the Draghi report. My understanding that this is I think there's a different case for why Europe may not be doing well economically in its own terms. But even if you accept that this sort of relative decline is relevant, I think there's a problem with the data. So the Draghi report was published in November 2024, I believe, was commissioned by the European Commission. It's obviously authored by the hero of the euro crisis, former ECB president Draghi, who's also a distinguished economist in its own right. It argues a lot of things that I think I agree with and that many other people would agree with, that Europe has to remove internal barriers to trade and the movement of capital and credits. It has to try to get capital investment up. It's very, very low compared to the US in particular. And it's falling behind in the tech sector in particular. So Draghi, this is obviously written well into the AI boom. Draghi is emphasizing the tech sector as the main driver of the American productivity advantage. It's just the question of how big that advantage really is. And I think that the centerpiece of the report is this notion that the productivity ratio, so GDP per hour in PPP terms, has gone from 90 something percent to 70 or 85 percent, depending how you measure it. since 1995, when the tech boom in the US begins. And that implies a downward trend, a very sharply downward trend, and that it will continue if Europe doesn't do X, Y, and Z. I think that's where the problem lies, because I don't think there's really enough evidence to actually suggest that's true, really, even if you accept that Europe might not have grown as much as the US in recent years.
00:10:35
Speaker 1: Well, why don't you explain what you see as the issue with the data then, the core disagreement? So, OK, total GDP and dollar terms was at 90 percent. Now it's at 75 or 80 percent. That sounds like decline. It sounds like, quote, falling behind, unquote. That sounds alarming. I can understand why Draghi wouldn't like to see that trend. Why? What's the other spin on the same numbers? Or why do you think that's not the complete story?
00:11:04
Speaker 3: So I think you can definitely make, I mean, there's a fundamental difficulty with comparing economies. If you think that's important to organize your policy efforts around, you might want to compare yourself to your peer economies. And you can do that statically. So every given year, you can compare yourself as a ratio. So what is the US's share of global GDP? What is Europe's share of global GDP? But the specific case, statements that people make, including Jamie Dimon, everyone else, Draghi, you're also quite online, so you know that this is a constant theme online as well, is there's a trend, there's a level trend over time. And the problem is that because economies are very different, because they measure economic activity quite differently, we can't actually say anything about levels over time. So just to get to the actual source of the beef, which is the PVP adjustment of the GDP figures. You can't obviously just look at nominal GDP at market exchange rates like Diamond does, for instance, because all you're measuring is how the dollar has fluctuated over time. It doesn't do with real output or anything. So you need to control for these exchange rate fluctuations. You need control for things like the differences in working hours between the US and Europe, which are institutional. They're political choices about how you want to utilize labor inputs, how you want to trade productivity gains for leisure time. The US doesn't have any statutory limitations.
00:12:39
Speaker 4: On working hours.
00:12:41
Speaker 3: And Europe has consistently decided to work less, but has remained employed at the same rates, basically. So this is totally a choice to try to work less.
00:12:52
Speaker 4: And if you.
00:12:53
Speaker 3: Adjust for working hours and if you adjust for the relative price levels, which is what purchasing power parity should do. So in other words, what does a French Euro, how many French Euros do you need to buy a dollar worth of consumption basically? These are constructed by the World Bank and you have sort of a, now you have a comparison that allows you to compare price levels.
00:13:28
Speaker 4: Across time, in theory, at least.
00:13:31
Speaker 3: The problem is with the Draghi measure, which is a frighteningly common measure, but I think it's well documented to be the wrong measure, that it does so by fixing prices at a given year. So basically it's measured in the Draghi report in 2010 dollars. So PPPs are expressed as in international dollars, which is a synthetic currency that has the same purchasing power as the US dollar. And it's benchmark to a PPP year in which people have gone around and collected prices in different countries and created these ratios that are consistent with each other.
00:14:09
Speaker 4: But if you fix.
00:14:10
Speaker 3: Prices to a certain year, you have to use something to extrapolate between these different benchmarks. And the Draghi measure uses the real growth measures that the national accounts produce in the US and the European countries. What happens as a result is is that you get this upward trend that shows as a decline over time that you don't see in PPP measures that don't use the national accounts real growth rate, but they use relative inflation ratios. So how is the inflation ratio and inflation rates, how are they compared to the US inflation rates and Europe? And the problem is that we calculate those real rates differently. So in the US, what the... the BEA does more aggressively than the European offices for economic analysis is that they adjust prices, particularly in the tech sector, this is why this is very relevant for Draghi's particular argument, much more aggressively for improvements in quality. If the computer that I'm currently on, a MacBook, for instance, sells at the same or a similar nominal price, even though the specs are much better, that's measured as a decline in the quality adjusted price. The same amount of nominal spending on tech services or goods shows up as more real growth in the US than in the EU, because applying that deflator more aggressively means that the inflation in that sector is lower, so real growth is higher. That might amount, we don't know exactly how much it is, it might amount to 0.2 or 0.3% annually, according to some studies. But over time, it compounds every year, and that creates this wedge between the EU and the US. And that is, at least in theory, to a large part due to simply these method differences rather than actual economic underlying productivity growth. And that's, I think, the main issue. And then from there on, I think the other issue is Well, should we then look at the economy in purchasing power terms at all, or should we look at it purely in real growth terms? That's a whole different discussion altogether. That's, I think, where the discussion has been going between Paul Krugman and some European economists who are trying to argue between each other over whether we should reform and become a bit more like the US, which would result in loosening labor regulations, cutting welfare spending, and of course, making it easier for tech startups and so on to spend and invest in everything.
00:17:00
Speaker 2: Wait, can you say a little bit more about political choices here? Because it does strike me when we make these comparisons that it often feels very apples to oranges. And if, as you say, the US is choosing basically to work more and European countries are choosing.
00:17:17
Speaker 2: Use productivity gains so that they can go enjoy an extra glass of wine to redeploy that cliche or whatever at lunchtime, then it might make sense to focus on real growth and output for the US and something else for Europe. So how do you, I guess, incorporate political economy differences when it comes to these different stats?
00:17:43
Speaker 3: What the GDP discussion ends up as, I think, is Do you think PPPs are more reliable than real growth measures for measuring the relative performance over time? And it really depends on whether you think these differences in deflators between countries are actually that severe and why they actually occur.
00:18:05
Speaker 4: But you can, of course, and.
00:18:09
Speaker 3: We end up, by the way, with the notion that we don't have a good measure to compare trends over time. So whatever your judgment call is, the The thing that's presented as a robust stylized fact in the Drago report, but also by Diamond and other people is simply no such thing. It's not established by any sort of solid economic data. What we can do is we can use PPPs in current prices to compare level snapshots. So we can say in the year 2024, what is GDP per hour? purchasing power adjusted in the EU and in.
00:18:51
Speaker 4: The US.
00:18:52
Speaker 3: That comparison, I think, puts the US slightly above the Western European aggregates. I also show that if you actually then exclude the top 10% of the income distribution, that advantage goes away entirely. So the US is slightly richer in aggregates, at least on this measure, but not quite as at the level of Germany and some of the sort of low countries, Nordic countries, but it's very top heavy. And indeed, the bottom half is actually significantly worse off than any single European country, but for Portugal.
00:19:28
Speaker 4: Now, we can say, well, this is the most defensible.
00:19:32
Speaker 3: Output measure in my view, comparatively, but we can say, well, maybe people care about income, money in the bank and Maybe politically we're so different that people don't care about leisure time that much and people are fine with living in a more top-heavy society. How much money do the US individuals and households actually have? Because, I mean, consumption is a large part of what we could define as material well-being, right? So I think it makes sense to look at consumption, particularly what's called actual individual consumption, which is, I think, a better measure than income because income is hard to compare as well. It's measured differently, but also actual individual consumption includes in-kind benefits.
00:20:18
Speaker 4: It includes.
00:20:20
Speaker 3: The benefits of publicly provided healthcare and so on and so forth. So it should control for these political differences, Tracey, that you were hinting at, the fact that in Europe there are sizable welfare states and credit unions larger protections and a greater amount of public good provision. If you adjust that for working hours, the US is pretty.
00:20:49
Speaker 4: Unremarkable.
00:20:50
Speaker 3: And what you also have to do, because of these political differences, you have to look at the way these consumption figures are distorted by some of the things that the US is completely unique in. I choose, I think, healthcare as an example in writing about this because It is quite unusual. It's the only advanced country that doesn't have a publicly funded system, despite it being very well established for many, many years by American economists that actuarial insurance or private insurance doesn't work for healthcare for various reasons. And you end up with very high costs and poor provisions. And indeed, the US spends much more on healthcare, both as a It spends, I think, much more, 5% more at least, as a share of GDP than most other European countries. It's a function of having this private system that costs a great deal and still doesn't provide the same kind of coverage or quality. It's, I think, quite useful to look at empirically how healthcare spending actually compares to other OECD countries over time. And one model that I run myself on this is that the U.S. spends around 50% more on health care per person than you would expect relative to what advanced countries actually spend on health care, what their consumption implies, in other words. So the level of consumption that you have, so how rich you are, in other words, predicts a certain amount of spending, but the U.S., residual, say the difference is 50% higher. And in total, that results in around between $ 1. 7 and about $ 1. 9 trillion a year that are spent in excess of what would happen, what you would expect of a country at that income level. And the difference is, I think this goes back to these political economy differences, the reason is prices, really, and the fact which is well established by people like the Uwe Reinhardt, a great Princeton professor and health economist, that the US prices per unit of care is much higher and.
00:23:11
Speaker 4: Utilization is very, very poor.
00:23:12
Speaker 3: And outcomes are generally worse if you look at average life expectancy and mortality rate for certain procedures. So this is part of this political economy, which is more dominated by rent extraction and middlemen. So prices are high in the healthcare sector because you have hospitals, insurers, these trade associations that can take a cut, administrative costs, and all these things which make a large part of the income distribution, the top 10 or 20% very wealthy, but create these enormous costs for much of the rest of the population, especially those uninsured, which I think 27 million by some accounting. And even those who are insured by their employers have large out-of-pocket costs. And the headline is, well, some people object to using purchasing power priorities to actually adjust for output figures and indeed income figures, because they say, well, it's kind of hiding something that is actually a sign of strength. In other words, they assume that the reason why costs in the non-tradable sector like healthcare are very high is because Well, you have this very powerful productivity growth in the tech sector and elsewhere and very high incomes. And people are sort of wage arbitraging themselves into the non-tradable sector. And it's their high incomes that are inflating those prices in health care, legal services, education, whatever. That assumes that these prices are not a function of rent seeking, which unfortunately I think the preponderance of the evidence shows they are.
00:24:55
Speaker 2: Yeah, Joe, I keep thinking back to the episode we did recently with the authors of Main Street Millionaires. And if you looked at their list of top earning professions in the U.S., How much of that was an industry like health care or legal services that you could tie either directly to rent extraction or some form of regulatory capture where, for instance, you know, a dealer has the rights to a particular locality or something like that?
00:25:24
Speaker 1: On some level, when I think about how crazy our health and health care system and health insurance system is, I'm even more impressed that the U.S. is by the rest of the U.S. economy that we have this sort of that we have this, you know, big, what's the.
00:25:41
Speaker 2: We've succeeded despite.
00:25:42
Speaker 1: Of hobbling ourselves. Yeah, the albatross around our neck, healthcare, and still we do okay. It actually kind of makes me impressed. So, you know, let's go back to the cliche about the long lunches with wine, because I actually think this is, you know, it's a joke, but it's also real. So the diamonds of the world, et cetera, and they say, you got to stop with the long lunches and work hours. And then, the dominics of the world say, no, like we're just as productive or very close to as productive as you. And we enjoy life and we convert that leisure, that productivity into more leisure, which is arguably what the whole point is, et cetera. But then the counter would be like, that's just cope. Um, And I, yeah, like in the sense that like, yeah, I know people who live a leisure life and stuff in Europe and they take nice long August vacations, et cetera, but I'm only getting access to an elite slice because I work in media and journalism and finance, and I don't really have a good look into like the broad European middle and lower classes, et cetera. Is there like, in your view, does it diffuse like this thing? I know it from, you know, my elite contacts like you and elsewhere. in Europe, but can we substantially say that the broad European middle class does in fact have substantially more leisure and time than their counterparts here?
00:27:01
Speaker 3: Yeah, I mean, there are some asterisks here. So especially in countries like Spain and Italy, there are a lot of informal hours that are not captured by the headline figures. There are adjusted series for that, but my own crunching with numbers says it doesn't make that much of a difference. For the bulk of the European economy, the richer parts of the European economy, so the central Europe, the lowlands, the low countries, the Nordic countries, they do work much, much less. And if indeed it meant that Europeans were employed at lower rates, it would be concerning. And it would probably point to the fact, oh, this is a labor market failure and people may not be able to work or they're not working because they're getting diminishing returns. But there's... Again, there's good empirical evidence, including by people who co-authored the long-run productivity figures that go into the Draghi reports that show, well, actually, it's sort of a substitution effect where productivity is causing hours to go down and hours going down is actually increasing productivity. So it's not really, there's no evidence to think that, so first of all, it is real. People do work less and it's no reason to think that that's somehow a sign of dysfunction underlying it. I think I would also just say it's kind of Econ 101. So labor is a disutility, and it's precisely that because the value of leisure time is greater than nil. If you assume those, you're sort of countervening to very basic macro principles. What I should say is that there's good reason to suggest that Western Europe is probably more wealthy than the US in the aggregates, even if it has probably declined relatively over the last six, seven years. And I do think there's robust evidence to show that. But of course, internally, there are huge differences. I think we should care that Europe, in its own terms, has been doing incredibly poorly over the last 10, 15 years. But that's due to policy choices, especially macro policy, which the US does comparatively very well. And of course, there are internal differences. We should care that the Italian South is extraordinarily poor. It has been declining in absolute terms, even when the entire economy has been stagnating for 20 years, unique in the G7 economies. But we shouldn't care, for instance, that Michigan... In the US, you wouldn't care that Michigan has been outgrown by California for 20 years, even if Michigan has been doing well and it's been diversifying its economy. And I think that is the main takeaway between when comparing.
00:29:47
Speaker 4: The EU as an aggregate to the US. We have our own problems.
00:29:51
Speaker 3: The relative picture shouldn't matter that much, I don't think. There's a lot of work to be done, but it needs to actually mean becoming more like the U.S., which may not be politically amenable to most people here anyway.
00:30:21
Speaker 2: Do political choices or issues concerns slash incentives start to change in our current era, though, such that maybe it was acceptable that Europe didn't have to be on the front line of technological advancements, making its own frontier models or making massive productivity gains in the same way as China or the US. But now that there's renewed security concerns in the region, now that we've had years and years of worries about resource allocation and choke points in the global economy that actually, if you really want to re-industrialize, if you want to build some sort of resource security, if you want to build up your defense industry, that actually economic growth starts to matter and strategic tech development starts to matter in the same way.
00:31:12
Speaker 3: I mean, one thing out of, I mean, just to make one other thing clear, economic growth matters. I mean, even advanced countries in the long-term Yeah.
00:31:19
Speaker 2: I realized as soon as I said that, I shouldn't have said economic growth, but the idea of, I guess, relative gains start to matter more.
00:31:27
Speaker 3: I think they do matter, not necessarily on output, but obviously there are relative shifts in Europe's competitive position that have a consequence for employment and long-term productivity prospects.
00:31:44
Speaker 4: And, you know, the U.S.
00:31:45
Speaker 3: Is... Of course, it has a sectoral advantage in tech and other places, pharma, for instance. But really, the EU is, I think, quite stronger in manufacturing, merchandise trade. And unlike the US, it's the biggest economic bloc that's still open to the world economy because there haven't been real tariffs instituted so far. And that, I think, opens up the question of how is Europe doing competitively with regard to China? And we talked about AI. People in the Europe-US discussion have sort of shifted the goalposts a few times by saying, well, I can forget about PPPs, forget about real growth, then whatever, even if there hasn't been any decline, relatively speaking, so far, Europe is sort of renting the future and will miss out on the big, you know, capital expenditure generating technology of the day, which is AI and these frontier models. Again, I don't think that the sort of near frontier models are really bad and that they can service most of the needs of European corporates. But I don't think that there is a competitive race specifically in the area of AI. But I think that in legacy manufacturing sectors and other high-tech manufacturing sectors, there is, of course, and it is still a large part of value added in Europe, particularly in countries like Germany, of course, which is the largest chunk of European GDP and which is currently experiencing, I think it's fair to say, what looks like a disorderly decline in industrial employment. So the first China shock, so to say, was positive for Germany, but it It was the provider of high-tech manufacturing goods for China, and it benefited from Chinese demand.
00:33:48
Speaker 4: More than any other European country. This is flipped entirely.
00:33:53
Speaker 3: China has moved up in value chain while remaining in other parts of the manufacturing value chain. I should also mention that IP transfer, legal or otherwise, to China is by far the greatest from Germany. The fact that the industrial heartland of Central Europe still is declining at this rate because it's still exposed to China.
00:34:18
Speaker 4: China, I should also mention, is.
00:34:21
Speaker 3: Undergoing domestic inflation, particularly export price deflation after the housing bubble burst. It has intensified this network of subsidies for the manufacturing sector. experiencing its own dislocations domestically, like half of the economy, a third of the labor force works in the gig economy. So it's weakening domestically. Demand for cars and other manufacturing products is going down or trending down. And it's become quite reliant on net exports for annual GDP growth. A friend of mine and a friend of the show, I think, Brad Setzer, has done great work on sketching out the empirical.
00:35:06
Speaker 3: Position here, both in terms of what's going on in China domestically, so that more than half of GDP growth might depend on net exports, and what the effects in Europe are. And it does seem that, according to my own work, Germany alone has had over a million jobs in the manufacturing sector since 2021. So since we see that big shift in Chinese industrial policy, of course, it coincides with the the energy crisis, and that hits Germany very hard too, because this is a different discussion, but European energy policy is appalling for many reasons and that has damaged its own prospects quite a bit. But I should say that these employment figures are also actually understating the extent of the shock, because if you look at the chemical industry, you mentioned earlier, Joe, which is one of the crown jewels of the German industrial sector. Among the biggest big five sectors, employment has fallen the least there, even though it's.
00:36:10
Speaker 4: Most exposed to both the energy crisis and Chinese trade.
00:36:18
Speaker 3: I looked into it myself. We don't have a Chinese trade number for volume. They don't publish the appropriate price indices, but it seems that trade values for chemical exports have been sharply down in both Germany and China. while trade volumes for chemical products have been sharply up from China and, of course, down from Germany. And it corresponds also to the main export destinations of Germany. So China is exporting more to those destinations. Germany is exporting less to them, whereas Chinese imports from Germany and Europe are sharply down and exports to it are sharply up in many other sectors as well. And in that sector, employment has been studied, but only because the labor market is so dysfunctional. So because they're labor hoarding, because they can't find qualified employees. So in really, it's sort of masking the extent of all of this. And this has led to some really sharp divisions within Europe about how to respond to China and what will happen, especially after the US, I think, actually sought this confrontation with China over trade. And I think quite thoroughly... had to concede defeat last year.
00:37:31
Speaker 1: Let's talk about like, okay, I don't know if you just talk to random trade ministers in Europe today about the global trade picture, maybe the degree, the optimal degree of openness, et cetera. What are they saying in September 26th? If that they, you know, versus what they would have been saying and say, September 2016, or maybe we should say September 27th or September 2017, since by that point, Trump had already been the president and sharply sort of changed the global conversation appalling to Europe in many ways. But how have they all become either a little bit more Trumpist? Or who is the guy that wrote Death by China? The economist, Peter Navarro. This is the thing that's crazy. So Peter Navarro years ago writes Death by China. And in 2016, everyone's like, oh, he's a crank. He can't be anywhere near the White House. And now I feel like everyone is a Navarroist on some level. It feels to me like complete Peter Navarro victory in that there's so much consensus is basically, yes, the sort of his Death by China narrative. Maybe they put a little bit more spin on it. to make it sound more professional. But it feels like in both Europe and the US, everyone has become a Navarroist.
00:38:53
Speaker 4: Yeah.
00:38:53
Speaker 3: I mean, I think you could actually even say that the fact that this door was opened by Trump and his advisors first, it became politically a bit unpalatable for other people. So the actual evidence of the effects of China's The worsening of China's mercantilist turn in the late 2010s and 2020s was ignored for a while because it was associated with a different political camp.
00:39:23
Speaker 1: It's one way to put it, yeah.
00:39:25
Speaker 3: I should add to that the Europeans are also very much stuck in the past when it comes to thinking about trade. So the U.S. policy sector is much more open to changes and ideas. But in Europe, another friend, and I think also a recent former guest on your show is Adam Tooze.
00:39:44
Speaker 4: Yeah, of course.
00:39:45
Speaker 3: The Europeans are the Taliban of neoliberalism, at least with regard to their attitudes towards trade, and that has certainly inflected their position on China. And it's one of the reasons why they took so long in actually doing something about this. A couple of my friends, Brad Setzer, whom you know, of course, and Sander Todorov, have, I think, almost single-handedly responsible for pushing that consensus over the last 18 months, at least in Germany and elsewhere, towards Getting people to recognize that this is a problem, by the way. No, you can't hang on. It's too late to hang on to visions of level playing fields in international trade. You have to do something before this gets out of control. And it's now showing to have real political consequences in Germany electorally with regard to these regional elections in which the far right is doing very, very well in these elections. And the incumbents are polling very poorly because the far right has managed to frame the issue of industrial decline, not really around China, but around a failure of the incumbents and the failure of green policies and energy policy, which play a role, certainly. But there's evidence to believe that this is mostly driven by the external trade shock at the moment. So people are doing something now. You may not be surprised to know that nothing really has happened, though. despite there being a lot of noise. So the core of the European efforts to counter Chinese trade is the so-called Industrial Accelerator Act, which is proposed earlier this year. It's currently in review and it might be implemented earlier next year.
00:41:34
Speaker 4: That shows you how.
00:41:34
Speaker 3: Long the timelines are in Europe as well. It's suffering from internal divisions. So there was the more protectionist camp around France And the initially more skeptical around Germany, because Germany obviously is also, there's a lot of exporter interests in Germany that are opposed to any sort of trade restrictions, but they're quite conservative around these issues. There are also internal divisions like the labor unions in Germany also don't disagree on these things. And of course, the problem with European politics, as opposed to the US and particularly China, is that it has this terrible sort of joint decision trap where domestically there are these aggregation problems where you have internal coalitions and of course at the european intergovernmental level you have 27 countries that all sort of hate each other but all have different um uh different veto powers and you operate in the situation where you have to have um sometimes you have to have unanimous voting or qualified majority voting and eventually you have a lot of consensus bargaining and you end up with very suboptimal policy outcomes that are often too little, too late. The policy responses are slow, dysfunctional, and even if they produce something, it regresses to the.
00:42:48
Speaker 4: Lowest common denominator.
00:42:50
Speaker 3: That Industrial Accelerator Act could have teeth in that it has these by Europe provisions. It has certain provisions that essentially has formulated only, not in name, but they only really Only China clears those hurdles in terms of what imports are actually allowed. That's the attempt to actually protect the German and the European auto market in particular.
00:43:16
Speaker 4: Some people say it doesn't have enough scope.
00:43:19
Speaker 3: But China, of course, has immediately gone on the offensive on this matter, immediately filed a complaint with the European Commission, very interestingly actually outlining their own position, saying, our capacity utilization rate domestically is normal for economies that are still growing and that are not yet adjusting to, you know, being driven by internal demand. So there's sort of a concession that these imbalances domestically in China are real and are seen as a real problem by Chinese authorities. And I do agree with that. And I also think that it's a political economy obstacle for Chinese policymakers to do something about this. To sort of, Lower the temperature a bit, there's a separate mechanism in Europe called the Trade and Investment Consultation Mechanism. It's between the European Trade Chief and the corresponding minister in China. It was supposed to deliver something now-ish. I think in early October, there's going to be a meeting in Beijing. Nothing concrete has come of it really, apart from some assurances around rare earths, which are quite vague and Europeans have been a bit unhappy about it.
00:44:34
Speaker 4: There's some sort of.
00:44:35
Speaker 3: Franco-German thing about monitoring these imbalances.
00:44:40
Speaker 4: Nothing much has happened. My worry is that either the.
00:44:47
Speaker 3: Because there's a separate part about the foreign exchange mechanism. happened that Brad Setter again and Shaheen Ville have written about is really a separate issue is that China in addition to industrial policy is also really resisting any appreciation of the UN and that is further contributing to the imbalances. The Europeans are also slowly thinking about countering China on revaluation. My fear is that they're strategically they're their willingness to escalate might outrun their ability to actually be resilient to Chinese responses, retaliations to whatever they end up doing. And the Chinese have shown that they're, unlike the very dysfunctional European process that I just outlined, their retaliation has been institutionalized, rapid, really extensive and increasingly comprehensive. For instance, I think in late July, the Commission, the Europeans, placed a few more Chinese entities on the sanctions list because they were deemed to be supporting the Russian war effort. The day after, the Chinese responded by immediately putting a whole bunch of major European industrial firms on the same equivalent entity list that they have. We don't have that kind of ability to respond. I think a likely scenario is that the EU does something eventually next year, that because of these problems in finding decisions, it will be too little to actually do something about the situation, and that the Chinese will respond with some sort of concession. Because I think it's clear that because indeed they are dependent on export growth and the EU is a very big market, the only big market open at the moment. But this concession will not be, it will not really change the momentum behind the shift in industrial activity. But the EU will accept it because it can't actually find a consensus at home for anything else than they propose. And that probably... will not really change anything about this. And then that's, I think, the best scenario. The worst scenario is a full-blown trade war.
00:47:21
Speaker 1: Dominic, we could go on for a very long time. We could talk a lot more about the 27 governments that all hate each other. We could talk about how Eastern Europe and they have probably different perspectives than Central Europe and so forth. But that was a fantastic overview. Really appreciate you coming on Odd Lots, and let's do it again sometime.
00:47:41
Speaker 4: Thanks so much for having me, guys. It was a pleasure.
00:47:55
Speaker 1: Tracy, I thought that was really interesting conversation. You don't really get I thought that, you know, cliche nuance, you know, actual nuance that like there is a lot of aspects of the conversation that are either misunderstood or something like that. I feel like I actually learned something in that conversation.
00:48:11
Speaker 2: I like the line, the value of my leisure is above zero, because mine certainly is. But once you start framing it that way, then the set of economic choices that are being made start to look exceedingly different, right?
00:48:25
Speaker 1: No, I totally think that. And if you actually take that idea seriously, then... Yes, that's really good. That's sort of the goal. We want to like have high productivity or we want to have wealth so that we can enjoy life. It's kind of crazy how that's like. Otherwise, what are we doing? What are we doing here? What's the point of all this?
00:48:47
Speaker 2: This brings me to a question I've been asking everyone when we were out in L.A. and I'm sure actually you're going to San Francisco soon. Yeah. What exactly– like there's going to be this huge wave of money hitting San Francisco thanks to all these IPOs that are being filed and just like general stock market buoyancy. What is everyone doing with that money? Like I get that they buy nice houses and maybe a nice car. But other than that, like what is– what's the consumption?
00:49:15
Speaker 1: No, it's just like people who are in that are just going to– they're not going to do anything. with their money. They're just going to keep, like, staying up on ChachiBT, vibe coding, if they can still 3 a.m.
00:49:25
Speaker 2: Or work.
00:49:25
Speaker 1: Yeah, I know, I know. Everyone in this space, they just talk about, oh, I'm working more than ever. There's some sort of, we need to coin a new paradox or something like that.
00:49:35
Speaker 2: But I do think, one thing I will say is, a lot of this depends on your worldview, your very deep, basic worldview. You can argue that, okay, Europe has come up with this social welfare system where leisure is valued above zero, all of that, in an era of absolute trade gains and in an era of neoliberalism and I must say only Adam Tooze could get away with it.
00:50:04
Speaker 1: Yeah, the Taliban of neoliberalism. Yeah.
00:50:07
Speaker 2: But now maybe things are changing and maybe priorities start to change too. And that I think is like an actual real vulnerability for some of the arguments being made here.
00:50:17
Speaker 1: Totally. And I think it's sort of like it'll be an interesting sort of chapter for the history books.
00:50:25
Speaker 2: Yeah.
00:50:26
Speaker 1: If like, OK, there are these industrial giants in Europe that are core to wealth and the ability to have a welfare state, et cetera. And it turns out that they like sort of got obliterated by sort of open trade. And the reason they got obliterated is because everyone refused to recognize the competitive pressure because Donald Trump was the first person to really talk about it. And it was too much to stomach that to be on the same side of a sort of perspective as Donald Trump. And therefore... Like that would be a, you know, that's that's a good that's a whole book. It's not just a chapter. It's a whole book.
00:51:03
Speaker 2: Trump was not the first person to talk about it.
00:51:06
Speaker 1: But I think he really mainstreamed it in a very serious way.
00:51:09
Speaker 2: He meme-ified it for sure.
00:51:11
Speaker 1: For sure.
00:51:11
Speaker 4: Yeah.
00:51:12
Speaker 2: All right. Shall we leave it there?
00:51:13
Speaker 1: Let's leave it there.
00:51:14
Speaker 2: This has been another episode of the All Thoughts Podcast.
00:51:17
Speaker 1: I'm Traci Allaway.
00:51:18
Speaker 2: You can follow me at Traci Allaway.
00:51:20
Speaker 1: And I'm Joe Weisenthal. You can follow me at The Stalwart. Follow our guest, Dominic Loyster, at New Lefty Views. Follow our producers, Carmen Rodriguez at Carmen Armin, Dashiell Bennett at Dashbot, Cale Brooks at Cale Brooks, and Kevin Lozano at Kevin Lloyd Lozano. And for more OddLots content, check out our newsletter. You can find that at Bloomberg.com slash OddLots. And you can chat about all these topics 24-7 in our Discord group. discord.gg.
00:51:45
Speaker 2: And if you enjoyed this conversation, if you like it when we talk about the nuances of Europe's economic decline, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening. Thank you.
