Economist Alex Tabarrok on AI's economic impact: productivity gains will be broad, jobs won't collapse — but change will take longer than technologists think

were wondering where he would sit on Nvidia. He laid out pretty convincing case. Uh you can go listen to the interview. It uh it aired yesterday on TVPN. But without further ado, we have Alex Tabarok in the waiting room. Let's bring him in to the TVPN Ultradom. Alex, how are you doing? I think we don't have audio. Can we check your microphone? Make sure it's working.

We're good. Okay, we are. It was something on our end. How are you doing?

I'm still doing great.

Fantastic. Fantastic.

Perfect.

Um,

it's great to have you on the show.

It's been far too long. I'm a huge fan. Uh, I've read Marginal Revolution since I studied economics back in 2010. Uh, and uh, huge fan of the marginal revolution podcast. I very much enjoyed your debate with Tyler Cowan all about the uh, cost disease or bow effect. And uh I would I I think we should start there and then I I we can go all over the place in in AI and labor and and the the economy broadly. But uh do you want to start with an introduction on uh the Bal effect? Uh maybe why it captured your interest and some of the work that you've done around it?

Sure. I mean probably a lot of people have seen this uh famous chart where you have a bunch of uh things going up in price and a bunch of things going down in price.

Yeah. And the question is is why? I mean the things that are going up in price I think we all know is like you know health care uh education right and then things are going down in price often manufactured goods like automobiles quality adjusted or televisions computers things like that and and the question is like why why do we see these big differences and what BMW pointed to was that there's a problem with service industries you know like uh education you know think about what I do uh which is teaching students and you think about what Pythagoras did like Pythagoras he's got you know 10 or 12 students around him and he you know he puts a triangle you know in in the sand and you know draws some uh draw some math there it's more or less what what I do right I mean thousands of years later maybe I'm using chalk or maybe I'm using PowerPoint but basically you know it's me and a few students and productivity really has not gone up at all in that in the education industry.

Yeah. So because of that uh prices have to go up because you take an industry where productivity is flat and you might say okay well prices are going to be flat but no no because all the other industries are improving in productivity and the education industry they have to attract labor from those industries which are getting better right so they still have to pay me as much as I would earn you know in another industry uh but my productivity hasn't gone up

you know so that means prices have to go up

so that's the basic bombl effect is that

industries especially services where productivity is not going up prices have to go up

yeah uh we have the we have the chart here uh and I imagine that there are a few logical uh push backs one is is regulation everyone will say that uh the the number of licenses to practice medicine is restricted. It's a taxi cab medallion system. It's a regulatory capture situation. Does that not play into this chart as much as people think? Uh, is that to be disregarded or is overregulation still something worth contending with if you want to avoid uh runaway inflation in or or just disproportionate inflation in important services that people have demand for but uh are maybe paying through the nose for and not happy about.

Right. Yeah. Look, look, I'm a free market guy, you know, uh I'm anti-regulation, anti-bureaucracy, all that kind of stuff. But you have to understand with these trends we're talking about increases in prices which have happened over a hundred years right

and you know medical care people were complaining about medical care going up in price in like 1920 1930 this is before you know uh Medicaid Medicare before a lot of government involvement education has been going up in price so I think it's deeper than just regulation And let me give you just one other example is think about uh car repair, okay? Uh you know or uh cobblers. When was the last time you took your shoes to a cobbler, right?

Uh you know, my mother will say, "Oh, the new generation, you just don't care about repairing things." You know,

and I'd say, "No, no, mom. I love you. But uh look, it's that the cost of repair has just gone up so much compared to just the cost of buying a new pair of shoes.

Yeah. How would you like Yeah. How would you like to, you know, spend $70 to fix your $60 pair of shoes?

Exactly. Exactly. So, you know, I had a uh my car had some uh I I bashed it in the in the parking lot, you know, and it was like not not a serious uh uh you know, just a service injury, but it was like a third the price of the car, the value of the car just to repair the side, you know, and that's pretty typical.

Yeah. So uh I mean a lot of people in in the AI world are saying that uh AI will do to services what technology has done previously to manufacture to goods to manufactured products. Uh does that mean that the the bombl effect goes away? Is it more pronounced in the industries that are AI resistant uh and you see some sort of runaway uh inflation in the things that can't be automated? because when I think about teaching a college course, I I do I do see the the sort of maybe linear scaling that you're discussing, but uh we have microphones now. We have amphitheaters. You can teach more students. There's online resources. There's ways to delegate and manage teams of homework reviewers and and dis like sort of disagregate the work. And so you would imagine that technology would be a lever on services in some ways, but I'm wondering how you think it will change in the age of AI.

Yeah. So the big question is robots, right? If you can replace labor with capital,

Yeah.

then a lot of the bomb effect uh uh goes away.

Um which would be great. I mean that would be great. uh basically you know anything that improves productivity uh is good but I think people also get a little bit too upset about the the bombl effect because

uh really why another way of putting it is why are services getting more expensive it's because manufactured goods are getting cheaper

right yeah

it's because what we have to pay for the services in terms of giving up other goods has gone up in price but still we're richer than ever before which is why people keep buying more education and more healthare right so that's another reason why I don't buy entirely the regulation story yeah because if it was sort of regulation and the price of health care was going up people would buy less of it

but actually they're buying more of it

so it's the fact that you know our productivity is going up. We can afford more of it. That's really why the price of medical care is going up is because the price of computers and other things is going down.

Yeah. How how are you processing uh the the the latest and greatest in behavioral economics around uh maybe this concept of the vibe session? This idea that yes, we are richer than we have been in history. And yet uh I mean right now consumer confidence is very low. there seems to be a lot of dissatisfaction with the uh with the progress that the economy is making. How much of that is grounded in uh in real economic data versus psychological factors?

I've I'm amazed at the amount of psychological factors. It's something I've changed my mind on how big the psychological factors can be.

Yeah. Um, I mean, if you just look around the world today, no other country has done as well from globalization as the United States.

I mean, it was it it was us which kept open the sea lanes and uh globalized uh uh the world to our benefit. And we're the richest country in the history of the world, the richest at at any point in our history. And yet somehow we're upset about free trade and globalization. And again, no other country has done as well at assimilating immigrants

and doing well with immigrants than the United States. And yet we're upset about immigrants.

Uh so I think it's very uh disappointing. I hope we I hope we get over the bad vibes because the US has a lot to be proud of.

Yeah. and uh a lot to be feel good about.

Yeah.

Uh

is uh is one of those psychological factors uh uh you know the average American's perception of de debt to GDP? We seem to anchor uh debt like nominal values of debt to GDP which is a sort of an income stream and we get very uh irritated or or anxious when uh debt sort of touches GDP in relative values. uh how are you thinking about the level of indebtedness that is appropriate for uh a modern economy to to sustain itself?

I'm not happy about the debt. Um you know, we still don't know. The US has a big choice. Do they want higher taxes or do they want less spending?

And the US voter just keeps saying, "How about neither?" you know this is sorry this is not working right you know have your cake and eat it too no you cannot do that so the American public has just not decided which way it it it

that is what is driving um the malaise I don't know I'm not I'm not sure see I don't know whether I don't know whether it's cell phones I don't know whether it's Instagram you know um But it does seem that there is an anger, a a grievance culture in the United States. At first, you know, I thought it was just on the left,

right? you know, when we had everyone's complaining, oh, African-Americans are treated so poorly, the women are treated so poorly, the poor are treated so poorly, you know, and then with Trump, we've just changed our set of grievances, you know, and so now, oh, it's it's it's the the uh the foreigners who are ripping us off, you know, crime is terrible, which of course it's not.

Uh, you know, all of these things. we've just changed our set of grievances uh without actually uh focusing on

is that yeah is that

how much does uh the fact that you know so many people are downwardly mobile I mean I I was born in the '9s and and I remember as a as a probably an early teenager hearing like you know statistically this is the first generation where you're more likely to to do less well economically than than your parents did and I feel like Part of the challenge with that is that America's culture is so progressoriented, right? Like the American dream is just centered around uh doing uh doing doing more, doing better. You know, if your if your father was a was a cobbler, like you own a a shoe store, that that kind of thing. And and so now when you have you know still this like massive wealth and and as you said you know the richest country in history uh uh there's this constant comparison to uh to the past and I think frustration from that which is making like you know huge swaths of the country frustrated and you want to you want to blame it you want to blame it on on like you said foreigners or or free trade. etc. But uh but it's just like this sort of latent um frustration.

Yeah, there's definitely frustration. I agree with that. Um compared to the past, we are doing better.

Yeah,

there's no question of that. Now, to be sure, there are some key areas like housing, right? Housing is much more expensive, you know, than it should be. You know, that's a that's a zoning problem. Um, that's a choice people have been making. I think a bad choice. Uh, I think we should ought to do something about it. But even with housing, uh, you know, houses are so much better today. They're larger. Kids have their own rooms. You know, uh, you know, parking.

Yeah. In 1960. Yeah.

Yeah. A large fraction of the housing stock in 1960 didn't have indoor toilet, didn't have indoor plumbing.

Right. that was still pretty common not to have in indoor plumbing. So, so I don't think it's compar I think when if people are saying that we are worse off in the past, I think that's incorrect. Maybe what's going on is that inequality has gone up somewhat. Not as much as people often think, but it has gone up somewhat. And of course we have more access to uh seeing inequality you know Instagram and stuff like that which is sort of a fake you know the Lamborghini might be rented.

No I completely agree people.

Yeah. The other the other uh the other factor is that the forms of entertainment that are constantly being chosen today like doom scrolling right when you maybe had the hippie generation it was like hey we don't have jobs let's go to yuseite and just live there right and like what that what that would do to your sense of well-being versus like I don't have a job I'm going to sit on my phone

all day long or or you know last week there

nobody really hitchhikes across America America when they're in between gigs anymore. What happened? Yeah.

Yeah. But like just just I don't have anything going on. I don't have opportunity. I'm going to go outside. I'm going to touch grass is like going to have a wildly different impact on your psyche.

I know a super successful corporate lawyer today that like was in the middle of a career transition, spent a year like surfing in southern in South America and like that is unheard of by today's standards. Like that just doesn't happen. Sorry, did you have uh Yeah. Yeah. I have also been thinking about like if there was a there was an if there was an alien that showed up and had a quadrillion dollars like like if you include that alien in the genie coefficient it skyrockets it but the existence of that alien doesn't affect your perception until you're made aware of the the diamond spaceship that the the alien comes to town with and starts flexing on you on Instagram. But the mere existence doesn't change your your economic well-being or anything real. Uh, but it does change your psychology once you see them flexing on you. Um, I'm I'm interested in the housing thing though. I want to go back to Boml effect because housing seems to potentially fall in the middle. Like there's manufactured goods that go into building a house. There are also services that go into a house. Like how do we apply the thinking of the bombl effect and what you've learned to what would happen to housing? Like is there a is there a second step? Everyone when they talk about housing will say, "Let's fix the zoning rules. Let's make it easier to build." But is that enough?

Yeah. I mean, look, with housing, it's not the construction of housing, which has gotten so much more, you know, expensive. It's almost almost 100% the land.

Okay.

The cost of the land.

Yeah. So, uh, and you look, I mean, you just go to, you know, San Francisco, San Jose, uh, which ought to be, right, some glorious metropolis, you know, of the future with, you know, sky-high buildings and people traveling around in, you know, uh, fantastic, uh,

look like a Chinese city where there's LED walls and Yeah, we have that on Salesforce Tower, but outside of that, there aren't these massive skyscrapers and it just it just has

it's a it's a land of strip malls. Yeah.

You know, Silicon Valley is a land of strip malls.

It really is.

And and trip alter is extremely extremely expensive. They're just lying on Yeah.

Uh you know, this very valuable land that people are not allowed to build.

Yeah.

So, I'm hopeful of something like California Forever, you know, uh where they're trying to uh get permission to, you know, start a new city. Um I'm hopeful for things of that nature. Uh but none of this is all policy. This is all of this is under our control in some sense. This is not uh like we've we haven't been hit by, you know, or a tornado and we're all poor and have no housing is because we've said no, you cannot build.

Yeah. I've I've I've been thinking about the the the the push into cities uh which which makes so much sense in the sense that the economic opportunity is in the cities and so we've seen uh you know successful college graduates leave their hometowns go to San Francisco, Los Angeles, New York, Miami, Austin, these these mega hubs that have been very expensive if they aren't building. Uh, but I was I was really optimistic that between remote work, self-driving cars, like faster highways, like we would get just an extension because I think as you look through history, uh, the 45minute commute is sort of a sweet spot. Before the horse and carriage, people would live a couple miles because that's what they could walk in 45 minutes. We got the horse and carriage. Once we went to 60 m hour, it became, okay, you live, you know, 30 miles away from your from your uh, workplace. But I was hoping that we would get another leg up on that. Maybe it's coming, but uh we certainly haven't seen it yet. Have you been surprised by any of the the fallout or or or lack thereof of the COVID era, the shift to remote work, any any changes uh technology or otherwise in just the the housing and and labor markets?

Yeah, I I agree with you. I've been a little bit surprised that um we haven't seen another city really uh take off. I mean, we used to build new cities, right? you know, uh, like and you know, Chicago, you know, not that long ago was a city of 50,000 people.

Yeah.

Um, and Trump briefly talked about freedom cities for a while, which I thought was a a good idea, but it's sort of gone away.

Okay.

Um, it does tell you that there's something very strong about these so-called elomeration, the technical term in economics, elomeration effects. Yeah. that uh like people just get more productive when they're near other productive people.

Yeah.

And you really need this big push to try and get this uh into the new city. I mean, Miami briefly, you know, uh seemed to be jumping ahead, but that that trend seemed to have gone away. Yeah. uh Las Vegas, you know, tried it with Zapos. Um but that

yeah,

you know, modestly only took off modestly. I am somewhat surprised that uh we can't plant our flag and say the new city is going to be here and have a lot of companies all agree to move in at once.

Yeah. Yeah. the I've heard it referred to as like the rainforest theory that why San Francisco is so resilient because you have so many different participants and uh the VCs can go to Miami, but uh they're just a phone call away while so many other key pieces of the economy are still chugging along and so uh San Francisco clearly made it through a trough and is on a major major upswing. Jordan,

what uh what data are you most obsessed with following to try to understand the current moment? We see we see AI in the GDP data primarily through capex right now, but what kind of productivity data are you looking at? You know, we've been very excited about, you know, what what what we've seen from Stripe. They have this incorporation product and they're seeing companies, you know, more companies formed, growing revenue faster. That's very exciting. But it's also like a certain type of person finds themsself incorporating you know their business with with Stripe and is not perfectly uh a reflection of of the economy more broadly. So what are you looking at to try to understand the impact uh and and and uh try to ignore maybe uh the headlines from CEOs that say oh well we we we we laid off this 20% of people because of AI uh because you know as we know oftent times it's marketing.

Yeah it's very interesting. There's a lot of theories you know about is this going to be a job apocalypse or something like that. uh not much data and of course all of the data we have so far is that AI is increasing the number of jobs not decreasing the number of jobs. What I'm most excited about and most interested in seeing is the effect of uh AI on medical care. Um so you know we just saw yesterday that uh AI had oh well you just had it on your on your show uh you know had proved a new mathematical uh theorem or counter counterproof. Uh so AI is making uh these inroads into the highest levels of mathematics. If we could do that for drug discovery, you know, if we could have an, you know, a 5% reduction in, uh, cancer mortality, uh, that would be worth trillions.

Mhm.

You know, that would be worth trillions. So the opportunities there for AI to make tremendous leaps in human welfare by improving medical care, health care, I think are really exciting and well within the realm of uh possibility. You know, one new drug like solving an aird dose problem. Uh that would be incredible.

And and what does that mean in the labor market? I'm just I'm thinking back to uh like there was a time when uh there was sort of only one track for doctors. You was just like a generic doctor. Now there's much more specialization. There's a dermatologist, a podiatrist, all sorts of different doctors. Is this like uh there's a there's a fracturing and further employment creation from the administration distribution advisory around uh new treatments as it rolls out because you could imagine okay there's a new drug that's great that's that that helps everyone live longer but I'm unclear on how it interfaces with the labor market.

Yeah. I mean I think the the the trend is uh you know division of increases in the division of labor um you know talked which Adam Smith talked about from the the pin factory.

Yeah. And when you apply that idea of the pin factory, you know, somebody shapes the pin, somebody puts in when you apply that to the knowledge economy, then it's exactly as you said, you no longer have a physician,

you have a podiatrist and you have an optometrist and you have an ear nose ear nose and throat specialist and so forth so forth. And yeah, I think that will um continue and they will all be using, you know, uh AI for sure. Right. Um but yeah, they're going to get more more specialized and the tasks which physicians do will differ will change. Um I but so far you know I'm not terribly worried about the job market uh per se.

Yeah. Um, you know, look, this is a problem of people worried about people are worried about the, oh, the AI is going to do all the jobs, right? Like, uh, this means we're going to be fabulously wealthy and, you know, even without any jobs, just being fabulously wealthy, we'll figure things out. You know, this is the sort of problem you want to have, right? Again, this is not like a tornado, a hurricane, the tsunami which destroys wealth. This is a tsunami which creates wealth. And yes, it's it could be a tsunami in the sense that it's going to be very dramatic. Okay? But it's going to be very dramatic like, you know, Santa Claus coming and leaving us goods, you know, under the under the Christmas tree. So, that's drama that we can we can handle. It won't be uh it won't be without problem. Okay. But

problems where the pie gets bigger

are problems that we can solve. You know, it's problems when the pie gets smaller when we are forced into a zero sum society of one person versus another.

That's when society breaks down, not when the pie is getting bigger. Like we'll figure out ways to make sure everyone gets a decent slice. uh if the pie is getting so much bigger, we can solve the problem of dividing it up uh with everybody being happy. I'm not I'm much less worried about that.

How do you how do you think about value capture uh with this technology way versus historical technologies? you know, if you uh get really good at uh inventing engines, you can sell a lot of those engines and hopefully have a nice margin and maybe other people copy the engine and also make similar engines and and benefit from that. But we're at a moment right now where Frontier intelligence is like very widely available, right? There's certain internal models that aren't uh with the public yet. uh if you have one of those erdos uh you know moments in medicine it could just be an off-the-shelf model that helps make a breakthrough and you pay for the tokens or you pay your subscription but then right now the labs are not really set up well to capture that value at all. It could be you know some uh it could be a big company that that captures the value. It could be another startup. There's small businesses. And so how are you thinking about value capture versus like public benefit of this uh technology cycle and how it would differ to prior technologies let's say like the internet and telecom and and uh all the way back to railroads and the steam engine etc. Yeah, it's a very interesting technology because this will sound odd but it doesn't seem that hard but uh you know the fundamentals is you know this linear algebra is very surprising I don't think anyone predicted uh uh this but uh and it's true of course that the frontier models are ahead you know open AI and anthropic you know have the best uh models but they're like six months ahead, you know, of open- source uh models. Um, and for most of what you want the models to do, uh, you don't even need the frontier models. Um, and you know what today is a frontier model like tomorrow, you know, it'll be much cheaper second rate model, right? like like people are worried oh you know some people have access to you know 5.5 and other people are still working with 5.4 right but the big point is that even 5.4 you know the free model is 100 times better than 3.0 0 right which was also incredible. So uh the model seemed to be getting more powerful and cheaper at a faster rate than any other technology that I have ever seen.

So I think the gains will be fairly widespread if not at first you know then then soon soon afterwards. I I mean, you know, some people are obviously open AI and anthropic, you know, the people who got in early and and the programmers there, you know, uh they're going to be fabulously uh wealthy. Uh no question about that. But the technology itself, uh so much of it is open source, so much of it is really quite accessible. There's no magic there as far as I can see. like it was just uh you had a few good ideas and then those ideas just turned out to be incredibly uh powerful. So I'm expecting to see really the technology being quite widespread.

Yeah. Uh I know I know we're we're out of time but one last question. How how do you think about the part of the reason I think we feel this insane acceleration with this technology shift maybe you know more more so than certainly mobile but you know looking back to the internet and everyone in this moment wants to figure out okay are we in 98 are we in 99 are we in early 2000 trying to figure out the moment that we're in and it feels like because we have the internet today like there's this like compression in the technology cycle because

ideas get distributed faster, products get distributed faster. If there's a breakthrough, it's instantly everywhere. There's instantly, you know, hundreds or or thousands of companies working on, you know, improving it, furthering it. And so, um, I find it hard to try to think about where where we are because it felt like in Q4 of last year, we actually did have a correction. Like we were joking uh we were joking like great the bubble popped because like there was over like maybe too much excitement around chat bots and there was somewhat of a correction and then we got agents that really worked and then it feels like in some ways we're in a new a new cycle now and and um and so I'm uh I'm curious if you have any sort of frameworks or thinking around that like compression in progress that we're getting because we're building on top of all these other uh technology cycles for this new Absolutely. And of course the AIs themselves are starting to improve the AIS, right?

So some people worry that precisely because of that we'll get a sort of a a fume uh scenario under which uh one day uh everything is fine and the next day you have a god in the laboratory, right?

Uh I'm not too worried about that, but it's not it's not insane. It's not insane. Mhm.

Um yeah, so far uh my view is that I trust the technologists when they say that the technology is going to keep getting better

uh quite rapidly. Where I think the technologists are not quite right is that uh it's going to take much longer than they think for this to start affecting you know jobs and and uh the economy at large and uh things of of that nature that'll be slower. So the economists generally are on the slow side in terms of it's going to take time to adapt to this technology. I mean we saw like with electricity for example um you know electricity was another you know incredible technology um but it took time you know it took time to uh adapt to that even when the frontier you know was very far ahead but for that to uh work its way in the economy and for people to figure out how they're going to change their production structures that took time and I think it will take time uh here as Well, um, but as far as I can see, the technology is going to keep getting better, which it does give one pause. And I will say never in my life have I felt that the window of what is possible is as large as it is today. both on the possibilities uh for super intelligence, huge gains, the boomers, and also on the doomer side. I I don't discount those entirely. My view is more in the middle, but uh those two sides, they're not they're not insane. Um so we do have to do a lot of thinking.

Yeah. Well, thank you so much for taking the time to come chat with us. We'd love to have you back on the show soon. It was long overdue. Uh, but have a great

Thanks for the time, Alex.

Rest of your week. Have a great weekend and hopefully we'll talk to you soon.

Talk to you.

Goodbye.

All right. H