Marketplace - Measuring uncertainty

Episode Date: January 10, 2025

Is economic uncertainty a feeling or a fact? Though you may think uncertainty defies measure, in this episode, we call up some economists who put a number on it. And, as wildfires rage in Los Angeles County, insurance firms — including California’s insurer of last resort, the FAIR Plan — brace for catastrophic payouts. Plus: President Joe Biden may further restrict the flow of AI technology to China, and Thailand’s auto sector finds hope in manufacturing Chinese electric vehicles.

On the show today, AI and national security, insurance in the climate crisis, and uncertainty as an economic indicator. From American public media, this is Marketplace. In Baltimore, I'm Amy Scott in for Kai Rizdal. It's Thursday, January 9th. Good to have you with us. With just days left in his administration, President Joe Biden is reportedly preparing new rules to limit the flow of U.S. artificial intelligence technology around the world. The rules are aimed at preventing adversaries like China and Russia from accessing AI chips. The tech industry that makes and sells those chips though is not too pleased. Marketplace's Sabri Beneshor reports.

AI chips can go into phones. They can also go into drones. Scott Jones is a senior non-resident fellow at the Stimson Center. Semiconductors really will be at the very heart of our fighting capability the next generation. He says that concern has been at the heart of the Biden administration's efforts to limit the spread of AI chips and chip making capabilities. Any day now, it's expected to announce a new set of rules. What it does is it buckets countries into different groups.

Gregory Allen is with the Center for Strategic and International Studies. Some US allies would get advanced AI chips, no problem. Other countries, including China, wouldn't be allowed to get them at all. And then finally, there's the group of countries that are in the middle. And they are subject to certain restrictions

on the conditions under which those exports of AI chips can take place and also the overall quantities of AI chips that can be sold. These rules go further than previous attempts to control AI tech. Peter Lichtenbaum is a partner at law firm Covington in Berlin. It started out with China, but now we're looking at the U.S. seeking to regulate globally the diffusion of these chips. Some tech companies are not happy with what's known so far about the rules. It's a really bad idea. Jason Oxman is president of the Information Technology Industry Council, which represents, among others, Apple, Intel and Amazon.

We're not just talking about limiting access to countries of concern. We're talking about limiting access to our allies around the world. Forcing them, he says, to look elsewhere and undermining U.S. industrial dominance. So far, the Biden administration's efforts to control the spread of AI tech have actually slowed China's development of the technology, says CSIS's Gregory Allen. China is looking pretty stuck. But China may retaliate with its own export controls and sanctions against the U.S.

In New York, I'm Sabri Benashur for Marketplace. On Wall Street, no numbers from U.S. stock markets today, which closed for the national day of mourning for former president Jimmy Carter. We'll have other details when we do the numbers. The wildfires continue to burn in Los Angeles County today with dangerous weather conditions expected through tomorrow night. At least five people have died. An early estimate suggests the economic damage could exceed $50 billion. The fires will be a huge test for California's already shaky property insurance market. Ben Keyes is a professor of real estate and finance at the Wharton School. Welcome to the program. Ben Keyes Thanks for having me.

So Ben, these fires are burning as California is in the midst of a really a homeowners insurance crisis. How would you describe the situation there? Yeah, I think the crisis really comes from the household level. California's insurance market has been very tightly regulated for a long time and that's made the market generally favorable for consumers. But climate change induced disasters in recent years have really stressed that system. It's led a number of large insurers to exit the state or circumscribe where they write policies. And it's pushed a lot of homeowners into the state's insurer of last resort, the Fair Plan.

Yeah, I read, I think in the Financial Times today, that the Fair Plan, as of the end of September, had almost $6 billion of exposure just in the Pacific Palisades area where, you know, these fires are burning. How does California absorb these losses? Well, historically, these types of fair plans were designed to be a bandaid on the insurance market. And in the last few years, they have expanded way beyond their initial intended use. The fair plan in California has grown from about $50 billion of exposure in 2018, up to over $450 billion of exposure as of this September.

So a ninefold increase. And I think the question is going to be whether that system is able to handle a shock as large as this one. We'll see what the final tally is in terms of damages. But this is a system where the commissioner of the system has been very clear about saying that the rates are not set in a competitive manner, and they also don't have much of a capital cushion. And so that means that the rest of the state is likely on the hook if the losses are large enough. And you can think of that as an indirect tax on other California homeowners. AMT – At the end of last year, California's insurance commissioner, Ricardo Lara, put in some new policies to try to stabilize the market and expand coverage in areas prone to wildfires.

Can you talk about some of those changes and whether you expect that to help in this situation? BD – Yeah. I mean, California has been very tightly regulated in a number of ways. And part of this goes back to a proposition that was passed in the 1980s. It's been difficult for insurers to operate in the ways that they would like when it comes to setting their policy premiums and also the types of information that they're allowed to use when setting those premiums. And so California has been very restrictive in terms of relying only on backwards looking

data rather than on some of the sophisticated catastrophe models. And we've seen the climate evolving so rapidly, especially for disasters like wildfires, insurers have been desperate to use more information that they have at their fingertips when setting premiums. I think these reforms are likely to bring more insurers back to the table. This is largely what they were looking for. But a large disaster like this one is going to make them question whether it makes sense to write policies in some of these risky areas and then ultimately what's the right price? What's the right premium for policies that are exposed to wildfires?

As you and I have talked before, this is not just a California issue. You know, people around the country are seeing their premiums go up or getting non-renewal notices. As these disasters increase, do you think we're any closer to solving this problem? Well, we haven't really set out a list of policy solutions. We're still at a very early stage when it comes to addressing these problems. I think we're still in the diagnosis phase. And you look at a very splintered regulatory landscape. Insurance is regulated at the state level. The federal

government plays a relatively small role in insurance markets. And so I think we need a much more holistic approach that combines local, state, and federal data and information from policymakers and from industry to wrap our hands around the problem. And then we need to think about broad-based measures to stabilize the market, make it much more affordable and accessible for the average homeowner. All right. Ben Keys teaches real estate and finance at Wharton. Thank you so much for your time. Thanks so much. If you were to tally up the most common words we've used on this show over the last handful

of years, uncertainty would surely rank high on the list. We've used that word to describe what's happening in the housing market, the labor market, the stock market, really any corner of the economy. I mean, honestly, I can't remember a time when things didn't feel uncertain. Right now, though, with the climate crisis and wars and a new administration coming in, promising some big policy changes, it feels maybe extra uncertain. But how do you even measure that? Marketplace's Kristin Schwab talked to some people who try. Uncertainty is a tricky thing to measure because is it a feeling or is it a fact? Turns out it's a bit

of both. You really want to measure uncertainty because you want to know what's in people's heads. Nick Bloom is an economist at Stanford and he says, yeah, you can survey people's sentiment. Economists do this to, say, predict consumer spending. But to measure uncertainty about everything is a big, expensive task. So you have to get something as kind of a proxy for this. Bloom's actually developed a method of measurement called the Economic Policy Uncertainty Index, and it gets its data from the news. It actually counts the number of articles that talk about the economy, talk about policy, and mention the word uncertainty.

Yep, I am an uncertainty influencer, which kind of makes sense if you think about who we interview. Policymakers, business owners, and consumers. Laura Jackson-Young, an economist at Bentley University, says there are some other ways to measure uncertainty. Volatility in financial markets, professional forecasters looking at variation in their forecast errors, or we can really just think about how it's affecting firm and household decision making. Measuring uncertainty is similar to measuring the economy, but economists separate the two because of uncertainty's effect. For example, a high level of uncertainty might mean companies

hire less and consumers spend less. And it's kind of like that can lead to this like snowball situation where it even further exacerbates uncertainty. Uncertainty breeds uncertainty, which is maybe why lately it kind of feels like everything has been uncertain all the time forever. Like when's the last time you didn't feel uncertain about the economy? That's an excellent question. Oh gosh. Right now, according to the Economic Policy Uncertainty Index, uncertainty is down from its all-time high in May of 2020, but still twice the historical average. I'm Kristin Schwab for Marketplace. place. It's in its early stage. So most of the parts they are import. It takes time building up a local industry. First though, let's do the numbers.

US markets are closed today as part of the National Day of Mourning for former president Jimmy Carter. There is also no regular mail delivery, but banks were open. After falling 1 percent yesterday, oil prices gained back that and then some by midday today. That was partially in response to a cold snap in parts of the U.S. and Europe. Brent crude futures were up more than $1 to more than $77 a barrel. U.S. West Texas intermediate crude futures were up almost $1 well to more than $74 a barrel. The 30-year mortgage rate climbed to its highest level since July, 6.93%,

Freddie Mac reported today. As we often talk about on the show, mortgage rates tend to relate to the yield on 10-year Treasury bonds, which have been rising for the past month, but fell a bit today to 4.68%. You're listening to Marketplace. Hi, this is Nicole from Camp Hill, Pennsylvania. I'm always surprised how much content Marketplace can pack into 30 minutes. Listening is part of my daily routine. I love the way they make the content digestible and relatable for us folks who don't have

a strong background in economics or business. Join me by making a gift to Marketplace today at marketplace.org slash donate. This is Marketplace. I'm Amy Scott. As we talked about earlier, the damage from the wildfires raging in Southern California could reach $50 billion or more. It's expected to be the costliest wildfire disaster ever in this country. That's partly because of climate-driven weather conditions and also because of shortcomings in infrastructure that make it harder to prevent and respond to fires. Marketplace's Kaylee Wells looked at what it would take to avoid a catastrophe like this in the future.

Let's start with the immediate answer. Fire- areas could use more firefighters, says Greg Pierce. He's an urban planning professor at UCLA. There's a course of reason why we don't have more firefighting is incredibly expensive. And most of the time you wouldn't need those extra people. For example, the Lahaina fire in Hawaii lasted less than a day. There's also the issue of getting enough water to the flames. The water systems are quote unquote over designed to address your run of the mill house fires, mall fires, but not near the capacity that you'd have to have for a wildfire. In LA, some fire hydrants ran dry. Pierce says once the fire sparked, it was going to

be devastating no matter what. As for avoiding the devastation next time, Erica Fisher says the key is mitigation. She teaches civil and construction engineering at Oregon State University. The whole goal of home hardening and mitigation within the community is to decrease the intensity of the fire and make it so that we can fight the fire. And since most buildings are homes, that means getting residents on board. Stephen Collier is a professor of city and regional planning at UC Berkeley who says one deterrent is cost. I mean, if we're talking about home hardening, that's tens of thousands of dollars, even

hundreds of thousands of dollars. Another deterrent, he says, is aesthetic. Residents resist home hardening because they don't want to destroy the big tree in the front yard or get rid of their beautiful wooden porch. For better or worse, Collier says the insurance crisis in wildfire-prone areas has started to force these mitigation efforts to happen anyway. Whether it's because you've got non-renewed or because all of a sudden you're paying $5,000 or $12,000 in insurance, people are just aware

that this is something that they need to do because of insurance. Collier says the last solution that nobody wants to talk about is rethinking our current land use, because fewer homes in fire prone areas means fewer resources spent fighting to save and rebuild them. I'm Kayley Wells for Marketplace. In Thailand, the economy is still recovering from widespread flooding last year. It's estimated to have cost around two and a half billion dollars. The Thai government recently announced more help for small businesses and more spending on infrastructure.

Even before the floods, a key part of Thailand's plan to boost its economy has been growing the country's production of electric vehicles. Marketplace's Jennifer Pak has that story. Jennifer Pak Thailand is a regional auto manufacturing hub, mainly for Japanese gas-powered cars and pickup trucks. That's why it's sometimes called the Detroit of Southeast Asia. But times are tough, at least for those who work making gas-powered cars, says motorcycle taxi driver Natapul Balopant. He lives near a cluster of auto factories and suppliers

in eastern Thailand. Business is very bad. A lot of people have lost their jobs. Factories have closed down. Overall vehicle production dropped by 20 percent in the first 11 months of last year compared to the previous year. Thailand's weak economy means banks are tightening the criteria for car loans and fewer consumers are buying new cars. But sales of EVs are holding up better than those of gas vehicles. So Thailand is betting on EV manufacturing. Of more than a million vehicles produced in the country in the first 10 months of last year, 170,000 were electric or hybrid.

It has a policy. By 2030, 30% of all vehicles manufactured in Thailand will be electric. And to meet that goal, it needs help from a country with an advanced EV industry. You can see that Thailand goes all out in pursuing the Chinese investor. Pavita Pannanond is a professor of international business at Thammasat University in Bangkok. She says the Thai government not only offers EV makers tax incentives to set up factories, but also tariff cut for completely built car in China. Cars built in China, she says, can also

be imported into Thailand with zero tariffs. It's part of an existing free trade agreement between China and 10 Southeast Asian countries. China's EV makers have invested over $1.4 billion in Thailand over the last couple of years. Chinese giant BYD unveiled a sprawling factory last year in Raiung province. The firm and other Chinese EV makers are keen to find more markets since their cars face 100% tariffs in the US and are effectively shut out.

BYD Thailand turned down my interview request. Further north near another Chinese EV factory for MG, some local businesses are worried that Chinese investment won't trickle down to the wider Thai economy. Chai Rat Suanpayak works at a Honda motorcycle dealership. These days I see Chinese people renting shops to do business. Their staff is Chinese, the customers are Chinese, but Chinese people wouldn't come to shops, say, like ours and buy motorcycles. And something similar could happen in EV manufacturing, says Professor Povita.

Because Chinese companies can also set up their own suppliers and then import parts in here without really creating the supply chain that the Japanese have helped create in Thailand. The Thai government requires EV makers to source 40% of car parts locally. But that isn't happening just yet, according to economist Grain Krai Tei Shakanon in Bangkok. It's in its early stage. So most of the parts, they are imported. But at least Thai consumers are getting a good deal.

The government here subsidizes EV prices to make them more affordable. Tasana Panratana Vaibhulsum paid $20,000 for her BYD model. She thought it was a fair price, and she's delighted with how much she's saving on running costs. Per month, I used to spend about $150 on petrol for my car. Now I pay just $44 to charge the EV. As a consumer, she's happy to have more choices, but as a salesperson for Japanese gas-powered cars, she's worried. person for Japanese gas-powered cars, she's worried. More Chinese EV investment is not a good thing because when Chinese brands come, they cut

prices to sell more EVs and it hurts the Japanese car industry. But the Thai government doesn't have a lot of leverage to rein in Chinese EV makers. For now, its focus is just to be a part of the global EV supply chain. In Bangkok, I'm Jennifer Pak for Marketplace. Next week, we'll get an update on retail sales after the holiday shopping season. While we wait for that, let's check in with one of our regulars. Rita Magaldi owns a Boclava Bakery, Sheer Ambrosia, in Salt Lake City. When we last spoke, she'd moved out of her home kitchen into a commercial space and hired an employee ahead of the busy season. It started off a little slow

in the beginning of November. And so I thought, oh my gosh, are people going to come back? And what am I going to do? And then right after Thanksgiving, things just kind of exploded. It was just night and day working here versus working from home. Because A, there was a little separation between home and work. Granted, I didn't spend very much time at home, but it was always a little awkward having strangers show up to my house. And so it was just nice for them to walk into this cute bakery and it just kind of set the mood for the pickup. I have a customer whose mother started buying from me when I first started the business in 2008.

She was a teenager. So then she got married. Now this year when they came to pick up the baklava, they had their baby with them. And they sent me a video feeding him baklava. And then after the video she sent me a little blurb and she goes I guess it's gonna be three generations of customers now. It was the cutest thing ever and I just thought to myself yeah I am part of

their family traditions and it's just so exciting and heartwarming. And it's just so exciting and heartwarming. Things have slowed down as they always do in January. I try not to panic. So now I'm using this downtime to strategize for the year ahead. This month, I am creating a schedule so that I can get out there, meet with hotels, meet with business owners. I can do that now that I have employees that are helping me make the baklava. I'm not stuck in the kitchen like I've been in the past. I am just over the moon excited

about the new heights Sherinbrosia will reach in 2025. Rita Magaldi, owner of Sheer Ambrosia in Salt Lake City, Utah. This final note on the way out today, a moment from the funeral for Jimmy Carter held at the National Cathedral in Washington. Among the many tributes, the former president's grandson Jason Carter had this to say about his grandfather's legacy, economic and otherwise. By the way, he cut the deficit, wanted to decriminalize marijuana, deregulated so many industries that he gave us cheap flights and as you heard, craft beer. Basically all of those years ago he was the first millennial. Jimmy Carter will be buried next to his wife of 77 years, Rosalind Carter, in his hometown

of Plains, Georgia. John Buckley, John Gordon, Noya Carr, Diantha Parker, Amanda Peacher, and Stephanie Seek are the Marketplace editing staff, and Mir Babawi is the managing editor. We also had help today from Jess Berg. I'm Amy Scott. Hope to see you back here tomorrow. This is APM. go out to all kinds of people in the community and they ask straight ahead questions like, how are you holding up these days? It's very personal and as we listen, we get a good sense of the challenges people face

as they are trying to make it from day to day. I listen to the Marketplace podcast every day and have been doing so for a number of years. It's a breath of fresh air that helps me understand the economic world better. Join me by making a gift to Marketplace at marketplace.org slash donate.