Odd Lots - Ricardo Hausmann on What it Takes to Win a Trade War

Episode Date: June 12, 2025

The focus of Trump's trade policies is clearly China. There are tariffs on everyone, of course, but it's the growing Chinese manufacturing might, and the various perceived risks associated with that, which have catalyzed this impulse to rethink how America trades with the rest of the world. But can the US actually move the manufacturing center of gravity? On this episode we welcome back Harvard Professor Ricardo Hausmann. We've had him on before to talk about the importance of economic complexity -- the capacity to build complex things -- in measuring the wealth of nations. On this episode we use that lens to discuss tariffs and the trade war, and the risks that the new administration's policies will play in reducing our capacity to build the most advanced things. Only Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox now delivered every weekday plus unlimited access to the site and app. Subscribe at  bloomberg.com/subscriptions/oddlotsSee omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. Bloomberg Audio Studios. Podcasts Radio News. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthal. And I'm Tracy Alloway. In this ongoing trade war, I don't know, I guess it's a trade war, all the trade headlines. I have to say one of the things I always think about is, and I write about it. And we reference it, the two of us reference it all the time, the complexity and the importance of sort of building complex things as a marker of a sort of country's capacity for wealth

and the sort of complex international trade webs that undergird the production of complex things. Joe, I know what you think about. It's monkeys and trees. That's what you think about. That's what you think about. I do think about that. Okay, the reason I think about monkeys and trees is because, you think about. a couple years ago, we had Ricardo Hausman on the podcast, and he used this metaphor to describe

why some countries are richer, more economically developed than others. And the metaphor was that certain products or industries are like trees in a forest, and the firms are like monkeys. And so businesses kind of jump from tree to tree. And so what you find is if a country gets good at one particular product, then the business, the monkey will jump to the next tree, the next adjacent product, and use that experience to build out their offerings. And so you tend to see, you know, the more complex economies, the bigger forests, the more monkeys swinging from trees are indicative of greater advancement and more wealth. Right. And this is how you can have a, you know, a country that at one point specialized in rubber becoming a major player in cell

or a economy that at one point made T-shirts, which requires some level of coordination of supply chains from the thread and the electricity to power the looms, suddenly become much more advanced than any number of things. Anyway, I think this is a very powerful idea, but when I think about, you know, the idea that, okay, now there's this trade barrier between the U.S. and Canada, for example, and we have these complex webs of supply chains in which goods cross the border multiple times. do we constrain our capacity to do complex things? Are the monkeys going to slam head first into a trade wall? Yeah, it's literally it, right? Like they're swinging around and they're making these webs and densifying. And then suddenly they slam into a wall in a very real way. What does it mean for American wealth if America sort of like constrains this ecology of trade?

I think it's a very valid question. Well, I'm very excited back on the podcast that we're going to to be speaking with Ricardo Hausman, professor at the Harvard Kennedy School, and the founding director of the Harvard Growth Lab. So Professor Hausman, thank you so much for coming back on Odlots. Thank you for having me. I'm really happy to be back. It does not seem like if we're thinking from the complexity framework, right, if we're going to start like putting up nets, maybe it's nets, if we're going to start putting up nets in the forest between the trees from place, it does seem harder for the monkeys to swing.

Well, the way I think about the problem is that the complexity that you were talking about in the introduction is really the amount of knowledge that you have to put together in order to be able to do things. And the question is a little bit, you know, how mobile is that knowledge, how easy it is for you to get to that knowledge. And that knowledge takes, if you want three forms. It takes the form of embodied knowledge and tools and materials. So when you buy a cookbook, it says, if you want to make an omelet, it says, you know, take eggs, take milk, take this, take that. It doesn't tell you how to make eggs. It doesn't tell you how to make milk. You just buy the eggs and you don't, you disregard all the technologies that go into making chickens and to making eggs into feeding the chickens.

sense. So you disregard all of that. You just buy the eggs, right? And all the knowledge that was embedded in it, it's just in the egg. So embodied knowledge is one form of knowledge, and trade is one way to get it, right? Codified knowledge is the knowledge that exists in recipes, formulas, algorithms, do files, you know, you just need to have the code and follow the instructions if you are. And then the third form of knowledge is know-how in brains. And the problem with knowledge is that there's very little knowledge that fits in a brain. So if you want to run a company, you need a lot of knowledge. You need knowledge about accounting, about finance, about human resource management, about procurement, about production, about branding, about marketing, about taxes, about contracts.

So you need a lot of knowledge. And to bring that knowledge together, you need a team. of people that you need to put together. And complexity comes from, you know, the breadth of the team that you have to put together. Yeah. Now, the more you can kind of codify stuff, then you don't need to put the brains together because it's all in the code.

That's one of the things that we may talk about, artificial intelligence. It makes things in some sense simpler because the knowledge is in the machine. It's no longer, you no longer need a brain to do it. Now, what these trade barriers are doing is that they are preventing you from, say, buying the eggs, right? So that now you need to know how to do the eggs yourself.

So in some sense, it's making things harder to do. As Larry Summers has pointed out, there are about 60 times more jobs using steel than jobs making steel. So, you know, you protect steel. You're making it easier for all those guys that were going to make omelets by making now the eggs harder to get. And that's going to come at a detriment. You're going to get maybe more jobs and steelmaking in the U.S.

And you're going to make all the people who use steel have more trouble competing in the domestic market with their products and more trouble selling their products abroad because now they're buying more expensive eggs, more expensive steel in this metaphor. So in some sense, yes, what you're saying is that break barriers are going to make the ability to put things together harder in the U.S. It's going to incentivize some of the things that are being protected, but it's going to create

difficulties for everybody who uses those things to make other things. Is there a way to design tariffs or other protectionist trade measures in such a way that you would preserve knowledge and, I guess, preserve access to some of the components? you need to build out more complex industries? I mean, an interesting question is, what is the case for intervening in the market? Why would you need a policy? Then the second question is, would trade, would tariffs be your instrument? Okay.

So I would say that economic theory gives you at least three good reasons to intervene in the market that might justify something you might want to call industrial policy. And then the question is, is tariffs the right industrial policy? Because now they're putting tariffs on steel and aluminum. They want more steel and aluminum being made in the U.S. If you wanted more steel and aluminum made in the U.S., what instruments could you have used? And is tariffs the right one?

Okay. So first, there is the argument that in order to make something, you have to know how to make it. You know, it's hard to make things you don't know how to make. And typically when you start something, you're not particularly good at it, but maybe over time you become better at it. There are some learning curves. And you want to get into those learning curves. And that's a compelling reason maybe to intervene in a relatively new industry where you haven't yet to figure things out, say maybe like solar panels or batteries or something that's relatively new that you still have yet to figure out.

You wouldn't do it for a mature industry, like, say, like electric gas turbines, because, you know, they've optimized that to death. And, you know, there's no significant breakthroughs for decades now. So still would not be the obvious thing that would come to mind, right? It's a 19th century technology. It's an industry that has, that's quite mature, et cetera. But you might have, I don't know, national security reasons to protect it or something. But definitely not learning curves. By the way, those learning curves, if they are inside the company,

if it's something that the company is learning and the company owns, markets have been super happy to fund that. I mean, markets have funded Amazon for decades while the company was losing money because they were saying, no, no, the company is figuring out how to sell stuff on the internet. Eventually, when they do figure it out, they will have access to a human, among us market, and that's going to be super valuable. So market supported, you know, negative cash flows in Amazon for a very long time. So you have to argue that these learning curves somehow spill over into the value chain, spill over into more complicated things to coordinate,

and that's why you need some kind of action. Sometimes the reason why industry is getting to trouble is that you have chicken and egg problems, that, you know, the supplier is not there, because you are not there and you're not there because the supplier is not there. So there's a good equilibrium in which both you and your suppliers are there, and there's a bad equilibrium in which neither of you is there. So how do you go from the bad equilibrium where none is there to the good equilibrium where both are there? And that's a problem that we know how to solve. In each one of these cases, chiros may not be the right instrument.

So, for example, if you wanted the supplier and you to be there, well, maybe the garment comes and says, you know, I'm going to give a supplier the guarantee that you're going to buy from them. And I'm going to give you a guarantee that the supplier is going to be there to sell you. So you install your plant, he installs his plant, and the guarantee expires worthless. So the garment can coordinate on the good equilibrium, essentially spending no money and taxing nobody. A set of guarantees would do the trick.

If you want the firm to learn, I mean, one thing is to have these temporary, what they call infant protection. And the term in the literature is infant industry protection. So you take an industry at its infancy and you give it some protection until it finds its way and then you open up. An alternative to that is you subsidize their capital investment or you guarantee their demand. maybe government procurement or something else, or you give it a special tax treatment. So you have other ways to intervene. The moment you intervene with tariffs,

you're essentially dumping the cost on the consumers of that industry. And the consumers of that industry are going to become less competitive and their size will shrink. And they may become vulnerable to other attacks. So it's not the ideal instrument. There's an additional reason why it may not be the right thing to do. The U.S. is, and politically, part of all this policy is based on the fact that the Midwest did very poorly. The Rust Belt did very poorly.

They lost a lot of manufacturing jobs, and you would like jobs to go back to the Midwest. Pittsburgh lost its steel industry. Gary, Indiana lots of steel industry. Youngstown, Ohio, Cleveland, Detroit. these cities lost jobs in some industries. Now you put the barriers, you put tariffs at the national level. It doesn't mean that the industries are going to go to the Midwest. They may go to right to work states in the south.

They may go to the southwest. So it's not an obvious solution to the places that we're trying to help. Those might be better dealt with. using place-based instruments. The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gurra.

Join us every Saturday and Sunday for the new Bloomberg this weekend. I'm Christina Rafini. We'll bring you the latest headlines, in-depth analysis, and big interviews. All the stories that hit home on your days off. And I'm Lisa Mateo. Watch and listen to Bloomberg this weekend for thoughtful, enlightening conversations about business, lifestyle, people, and culture. On Saturday mornings, we put the past week's events into context, examining what happened in the markets and the world.

Then on Sundays, we speak with journalists, columnists, and key political figures to prepare you for the week ahead. Join us as soon as you wake up and bring us with you wherever your weekend plans take you. Watch us on Bloomberg Television. Listen on Bloomberg Radio, stream the show live on the Bloomberg business app, or listen to the podcast. That's Bloomberg this weekend. Saturdays and Sundays starting at 7 a.m. East Make us part of your weekend routine on Bloomberg Television, radio, and wherever you get your podcasts. You know, I really like this idea of physical products as embedded knowledge so that if I'm making some recipe that calls for eggs, that the eggs that I buy are the end result of all the knowledge of the farmers. I don't have to have that knowledge myself. It makes it simpler process. I was reading a speech recently. Ellen Young, this speech was given, I think, in 1928. Here's the 4th.

former president of the London School of Economics, and he said, it's generally agreed that Adam Smith, when he suggested the division of labor leads to inventions because workmen engaged in specialized routine operations come to see better ways of accomplishing the same results, missed the main point. The important thing, of course, is that with the division of labor, a group of complex processes is transformed into a succession of simpler process. So therefore, making something with eggs is simpler because someone else is doing the simple job of making of growing eggs. I'm making the simple job of maybe making an omelet or something. becomes a succession of simpler jobs. But the question I have is, does that mean that sort of like sheer market size as measured by, even by things like population, et cetera, become important in these questions? Because if we're going to make complex things, doesn't that on some level require either through our population or our friend's population, a decent number of people who can then do all of these individually simple tasks? Well, I mean, That's the reason why value chains have become longer, you just slice it into more modules,

and then you bring those modules together, and then some OEM, some original equipment manufacturer that is putting 50,000 pieces together, and then each one of the 50,000 pieces, it becomes a more manageable task. But some industries require a lot of talent that has to come together. And for example, when you go to a, do you see a film in the movies?

Sometimes they put at the end of the movie, it says the end. But it's a misnomer because after they put the end, they start showing you the credits. And the credits go on for minutes and minutes. You know, there's the casting, there's the sound effects, there's the visual effects, there's editing, director of photography. So you need a whole massive team of people that are involved in that movie. making industry. Well, an industry that requires this deep pool of differentiated talent

tends to locate only in very large cities, say like Los Angeles or New York. That's the only place where you could put together all that necessary talent that is required. So industries that require a more diverse pool of talent tend to locate themselves in bigger cities. And the ones that are kind of simpler, lower complexity, they can afford to locate in a smaller city because in that smaller city, they could probably find the more limited diversity of skills that they need. Now, one of the things that is a feature of the American economy over the last 20 years is that the industries that tend to locate in large cities have done dramatically better than the industries that tend to locate in smaller cities.

The industries that tend to locate in smaller cities, they tend to demand more land and not that diverse labor force. So they're not willing to pay the high prices of land of big cities so they can buy more land, and they don't rely so much on this diverse labor force. But the industries that require a deep, you know, diverse pool of talent,

they are willing to pay the higher price of land in larger cities because they don't use that much land. So what I would put it to you is that part of the drama of the U.S. is the fact that there's being this shift in demand in favor of the things that happen to be done in bigger cities. And by the way, let me make a very important point. We just saw the elections in Poland. And the elections in Poland meant that, you know, the president that won that election is a more, call it a more Trump-like figure.

And in fact, his party, PIS, got elected more or less 10 years or 11 years before Trump. So there was already kind of like a Trumpian motivation behind the election of that party. They were upset about trade and globalization and Europe and so on. Now, the interesting thing about Poland is that Poland is at the end. exact opposite experience of the U.S. in terms of trade. Poland has seen rising market share across the board in all industries, in agriculture, in manufacturing, in cars, in machinery, in textiles. They have made out like bandits.

Trade has exploded positively in Poland. But the thing that has exploded in Poland has benefited these larger urban areas and has hurt the smaller, less metropolitan parts of the country, and that has generated a political backlash. This is Caroline Hyde. And I'm Ed Ludlow inviting you to join us for Bloomberg Tech, a daily podcast focusing exclusively on technology, innovation and the future of business. Every weekday we bring you the top headlines from the world's biggest tech companies.

From finance to defense, AI to entertainment and from startups to the magnificent seven. We highlight the latest stories of the people and companies pushing the tech sector to new frontiers and the politics that shape global tech markets. We do this all every weekday. Then bring you the most important conversations and analysis in our podcast. Search for Bloomberg Tech on YouTube, Apple, Spotify, or anywhere else you listen. Join us every afternoon on your commute home and stay ahead of the tech news cycle. That's the Bloomberg Tech podcast. I'm Caroline Hyde in New York. And I'm Ed Ludlow in San Francisco.

Subscribe today wherever you get your podcasts. So even if the gains have been absolute for Poland overall, I guess the relative differences within the country have become a grievance. Yes. Let me say one point that we often... They do not emphasize. No, we often think of countries as small open economies. They're small in the sense that what they do is not going to change the global economy. The U.S. is relatively bigger, but many countries are, I think, a smaller open economy. When you think of a city, a city tends to be an even smaller and even more open economy.

It's smaller, right, much smaller than the country it's in, right? And it's more open because it trades with not only the rest of the world, but the rest of the country. And the labor force can either come from the rest of a country or leave to the rest of a country. Right. So what tends to characterize a city, for a country, its export base is super important. For a city, its export base is even more important. Because a city is less self-sufficient than a country. A city needs to consume a lot of things. that it doesn't make. Most cities don't make cars.

Most cities don't make antibiotics. Most cities don't make x-ray machines. They don't make, you know, eggs. So all of these things have to be brought in. And to pay for these things that they want to consume in the city, they need to earn money from outside the city. They need to export in order to be able to import. So the set of export activities in a city

determines very much the life of the city. If those export activities in the city get into trouble, then it's not just that those jobs in those export industries are lost, but those workers used to go to the barber, go to a grocer, go to the dentist. So all those jobs in all of these local services also get lost and get this multiplier local effect. And people start leaving the city, the moment people start leaving the city, their housing prices go down, there's less money to pay for education. So the quality of the education deteriorates and you get all of these negative local effects in the city. Okay. That's associated with the export industry of your city getting into trouble. So what I'm saying is that the shift in demand has it hurt cities.

the kinds of industries that tend to locate in smaller cities. The kind of industries that need less of a deep pool of talent and more land. And the car industry is a good example. The whole steel is a dirty, complicated, large thing. So it may hire a lot of workers, but it doesn't want to have too many people around them. They need a lot of land. So they're not going to go to Los Angeles. They're going to go to a place where they can acquire a lot of land

to put their big plant. And it's the fact that the export sector of cities in the Midwest, say, got into trouble, the fact that the export activities in some parts of Poland got into trouble, that they got into this negative spiral. As people, you know, left because they had better opportunities and maybe other parts of the country in larger cities, they leave behind a deteriorating economic and social situation. I promise not to get too hung up on metaphors and monkeys, but I just want to go back to the egg

analogy for one second. So I understand, you know, division of labor, expertise can lead to efficiency and absolute gains economically for everyone. However, you know, I'm thinking back to when egg prices were very high in the U.S. earlier this year. And I joked on this podcast that I was going to get my own chickens so that I could declare egg independence, egg autarky and have my own supply. Are there not arguments, you know, for certain things that you would want to have the capacity to build those components at home in order to enable you to build more complex items? Well, no, you would want to make sure that you have a diversified source of supply so that if there's a problem in Brazil, you can buy from somewhere else, right? So this whole thing about food security, that some countries say,

you know, we need to have food security, so we need to produce food in our country at three times the international price. Well, I mean, that's not food security. That's exacerbated risk, because, you know, your country can be hit by a drought, by a storm, by, et cetera, many things that could destroy your food production. So you're going to face much less risk if you have a diversified source of materials. And that's one reason why you would want to have good trading relationships with many countries, because that way, you know, if you get in trouble, you can buy from somewhere else. So, no, in general, this idea that if the price of wheat worldwide goes up,

that that's a reason for you to have your own wheat production. That doesn't follow at all. your wheat production might be, it might subject you to even more risks than a diversified source of wheat from across the world. It's a different thing if you're talking militarily, right? Yeah, I was going to say, what about something like I want to build semiconductors domestically because I think they're a very important part of our defense strategy? Well, I can perfectly understand that you have an incredible concentration. of semiconductors in Taiwan. And it's very easy to imagine a situation

where you no longer have access to those semiconductors. So in that case, I can see the case. That would justify things like the Chips Act, not necessarily things like tariff on chips, because tariffs on chips would make all industries that use chips less competitive, et cetera. But, you know, in creating an encouragement, for, and by the way, convincing TSM, you know, the Taiwan Semiconductor manufacturing company,

which is the best foundry in the world, to come and see if they can figure out how to make it in Arizona. And by the way, it's very interesting. And it shows you the importance of knowledge and know-how that sometimes it's very, very difficult for the same firm that supposedly the firm knows how to do something, say, Boeing knows how to make airplanes in Seattle? Well, guess what? Making airplanes in South Carolina,

making Boeing airplanes in South Carolina proved to be much harder than making airplanes in Seattle. And transporting the knowledge was a big headache. And right now TSM is facing serious challenges and transporting the knowledge to Arizona. So

if you put the accent on moving the knowledge, things look a little bit different than just a discussion about tariffs. Yeah. Supposedly the yields on the Arizona fabs are quite impressive and they're starting together momentum. Of course, your point is taken. But actually, this does raise some question. I mean, you're talking about, okay, the importance of diversity of your supply chain. To my mind, actually, when I hear that, I think, okay, there's something legitimate about, like,

the anxiety about China specifically because what's happening in manufactured goods is that it's not a globally diverse supply chain. It's becoming in many areas a China-only supply chain, that China's lead in this, that its network effects, that it's internal, whatever, is becoming so concentrated in one country for such a big range of goods, that at least from a non-China perspective, it feels like, from a risk management standpoint, et cetera, that there probably is a very good imperative to put forth effort towards not necessarily having an American production capacity, but a non-China production capacity? Well, we went through a Japan scare in the 1980s, right?

And what ended up happening in Japan is that Japan kept on progressing and becoming good at everything to a point that wages in Japan went up a lot, and Japan started to move their industries outside, a phenomenon that was called flying geese, right? And so Toyota started to make cars in Thailand and put things in Korea and so on and so forth. And then they went into poor states like Vietnam or Indonesia. So what you have is that the more advanced manufacturing or the more advanced parts of the value chain like R&D, design, etc., are retained in headquarters. and you move the more labor intensive, the less skill intensive, the less complex parts, the more standardized parts, you move to locations that pay lower wages.

And everybody is better off because for those locations, it's a step up. For you, it's a way to save on labor costs that you cannot afford in your country because you want to pay your workers very, very well. And you can afford to do that because you have plenty of jobs for them in the more complex part of a value chain, you don't need to hire them in the less complex part of a value chain. So there is a world in which this is a process. China is getting richer. A lot of the things that are being done in China. By the way, initially they were done in the coast. And so now the coast has become too expensive. They're moving to elsewhere in the country and to elsewhere

in the region. And now there's more production in Vietnam. There's more production. Even in Cambodia, there's more production in poor other countries, simply because the Chinese worker is now too expensive. So there's a world in which this is just part of, just a repetition of what happened in Japan. But let me make an important point. When a production is happening elsewhere, it may be happening in a country. A good question is, where does the knowledge that they're using come from? Because what is happening in the world today is that the rich countries are becoming more and more concentrated in producing knowledge. And then in order to monetize that knowledge, they need to put brick and mortar things that they prefer to put them

in other parts of the world. So Japan, for example, has come up with a lot of innovations and a lot of R&D and a lot of patents. But the way they monetize their patents is not by hiring Japanese workers that, you know, Japanese labor force is declining and so on, and they're at full employment anyway, they monetize their knowledge by deploying that knowledge elsewhere with foreign direct investments and so on. And that means that a lot of the accounting of how this process happens is not well captured by our standard accounting techniques. For example, if Japan does R&D, and that improves the productivity of their foreign investment, it doesn't show up as higher Japanese productivity. It is increasing productivity, but not just not in Japan, in the places where

Japan has its plants. And the same is happening in the U.S. If you think of the magnificent seven. Yeah. The magnificent seven, for example, Google, when Google sort of like this places all the, all the small newspapers of the world, because all advertising revenue is more. moving to, it's moving online and Google is capturing a good chunk of that, that doesn't count as a U.S. export because it's some subsidiary that Google put in, I don't know, in South Africa or wherever, that is collecting that revenue. And that revenue, you could count it as a U.S. export, but it's not being counted as a U.S. export. It turns into U.S. market cap.

Exactly. It turns into U.S. market cap. But U.S. market cap is very poorly captured by balance of payment statistics. So, for example, if you start in the year 2000, from 2000 to the present, according to official statistics, the U.S. borrowed $16 trillion from the rest of the world. It ran a cumulative current account deficit of $16 trillion. dollars. We'd say, gee, you borrow $16 trillion. Well, how much are you paying for those $16 trillion? Let's say, 4%. So, 4% would be $640 billion in interest payments, right, on the debt you borrowed. Now, if you look at the U.S. balance of payments, primary income, essentially the U.S. doesn't look like a

country that has an external debt. They are essentially. paying zero. They borrowed $16 trillion, which is, say, 60% of GDP, and they're essentially not paying anything for it. So you would say, well, if I can borrow 60% of GDP for free, I would do that. Well, in some sense, that's what the U.S. has done. The way I would like to describe it is that U.S. didn't just borrow $16 trillion. It borrowed more like $32 trillion. It used $16 trillion to cover that official deficit. and use the other $16 trillion to mix it with your knowledge and invest abroad. And that investment abroad, say Google in South Africa, mixed with U.S. knowledge, has this huge rate of return.

So when you borrow $32, $16 trillion, you borrow that 4%. But the other $16 trillion you invested at a much higher rate of return because it was mobilizing your knowledge. And so, 32 trillion, say you pay 4% over $32 trillion you borrowed, but you make 8% on the $16 trillion you invest abroad. Well, it just turns out that 8% over $16 trillion is the same as 4% over $32 trillion. You're not really running a deficit. You are monetizing your knowledge, but current accounting standards don't capture that well. This is very, this reminds me of the matrix and that scene where they say there is no spoon. What if there is no U.S. external deficit? But okay, one thing I'm struggling to understand. So, you know, you're arguing that the U.S. actually has a significant amount of knowledge and know-how that is mixed up with its foreign direct investment. And that doesn't show up in the official trade statistics. And I guess one thing I'm kind of curious. about is, and you're arguing that the statistics undervalue foreign direct investment. But I would have

thought that like foreign direct investment valuations inherently reflect market expectations. And to Joe's point, I'm channeling Joe's love of the efficient markets hypothesis here, but they should be captured in market cap and things like that. Why do we assume that the statistical agencies, the accounting systems systematically misprice these assets. Are they not included anywhere? They use book values. When you see the investment abroad, they count how many dollars you sent abroad.

And then they count how much money did you make abroad. And when you look at it, the rate of return on FBI is double the rate of return on debt in the accounts. So they're not counting the foreign direct investment. at the market value. By the way, it's very hard to calculate that market value because these are subsidiaries of companies that listed the S&P 500

and say if the price earnings ratio in the U.S. is 26 or something like that last time I checked, it means that they're thinking that all that's money that the magnificent seminar are making abroad, they multiply by 26 or an even higher number, right? But that was not, the accounting was made book value. So in most of these companies, there's a huge difference between book value and market value. Yeah. I was about to say this is the argument. I think we've even done an episode on this

about stock market valuations and how companies with a large amount of intangibles, it's not reflected in book value. Right. And that in my mind is the market's valuation of your knowledge. Exactly. So in a world where knowledge is intensive, then book value becomes less of a guide on what's actually happening in a lot of international trade statistics is book value, because that's what they have to make the statistics. I think there's a really interesting question. I have one last question, and I wasn't expecting to go here, but I thought that was so interesting what you were saying about Poland and some of the politics, not necessarily

being about the country's overall trading position vis-à-vis the rest of the world, but the internal dynamics of what is happening in these countries where the booms are happening in cities and how that. is a function to some extent of exports. But I'm curious, one of the things that people bemoan about the current environment in the United States and probably elsewhere is that cities are no longer a good place for upward mobility, that you can't be poor or middle class and move to a city and find a job and move up to career ladder in the same way you could when cities were more centers of hard industrial activity. And I'm curious, when you talk about the types of

companies that locate in big cities versus the type of companies that locate in smaller cities, etc. Are the type of companies that locate in big cities not as conducive inherently towards upward mobility because there's just so much talent required just to get in the door anywhere at these firms? No, I think that the problem of big cities in the U.S. is the fact that they have regulated urban space in such a way that. a housing supply is very inelastic.

So as people try to move to the city, housing prices go up until it's unaffordable to move into a city. That if cities had a more elastic supply of housing, a more elastic supply of urban space, this dynamic would help generate more opportunities in those cities and would help maybe raise the price of labor in the cities where people are leaving, because now they become scarcer and people would be willing to pay more for them. So that's why you're seeing so much growth in cities like Boise, Idaho, or Salt Lake City, or cities in Texas, vis-a-vis cities in California that have incredibly inelastic supply of housing.

So I would put there that, you know, on a more inclusive policy involves urban development that allows for that inclusion to happen. Ricardo Hausman, so great chatting with you. Always extremely thought provocative. Always takes us down avenues that I don't expect. Really appreciate you coming back on the hotlots. Yeah, that was great. Thank you, Ricardo.

Thank you for having me. Really? Like, every time, like, I mean, every time. We've only spoken to Ricardo twice. But I feel like every time I talk to him, there's like a bunch of ideas that are going to stick in my head for a long time that I'll be chewing on. In this one, it's this idea that, like, official trades, statistics don't capture the fact that market value of this trade and which you can see in

the stock market trading in the United States is much higher than what just sort of like what is captured in the activity. I'm really intrigued by this idea. I'm on board with that idea, but I kind of wonder how far you can stretch it and like can you stretch it all the way to oh, actually the U.S. doesn't have an external deficit or could you stretch it all the way to the idea that like, okay, well, China needs to like worry about accruing liabilities from importing U.S. expertise. Like, I don't know. What we need is a debate between Ricardo and Brad Setser obvious because one of the dimensions, like one of the counterarguments to some of this stuff would be that there are actual flows because the entity that might be set up in South Africa by a U.S.

multinational might pay licensing fees back. of the home country for the right to use the Google name and so forth. Obviously, Brad talks a lot about this in the context. I mean, he talks a lot about this actually in the context of software. But there is some, you know, the fact is that, like, Microsoft is gigantic. And so even, and there's, you know, these companies are worth trillions and trillions of dollars and have huge footholds all around the world. And whether they're accruing value to America in a way that doesn't show up strictly

in trade statistics strikes me as an important. load to continue to mine. Well, that's the other thing I was going to say, which is you see this debate in markets quite a lot. And the difficulty in analyzing intangibles is it's hard, right? Like, how do you put a price on things like brand value or soft power and stuff like that? And so you get these arguments over, okay, well, book value doesn't include intangibles, but, you know, maybe it should. But if it should, then how do you avoid the problem of overinflating because you think that this brand value is really good? And it's difficult to actually measure. Also, it doesn't matter what our trade statistics say if we can't make things critical for national security.

Like to your point, whatever. You say, oh, we don't really run any sort of trade issues, except if you don't actually have the physical capacity to make important things that are necessary for having a sovereign nation, then it kind of doesn't matter. Right. You could run surplus and it wouldn't matter. I reject the idea that I need to have a diversified supply chain of eggs. I'm going full-on egg-a-tarkey. But here's the thing, Tracy. Like, you could do egg autarky, but God forbid, like some wolves get in there.

Like, you do still have the option of going to the grocery store, right? So, like, even if you, you know, it's like... But see, then I just need a diversified supply of new chickens. It's like that pulp song about the Greek girl at the thirst for knowledge. It's like you'll never know what it's like because you always have the option to go to grocery stores. You know, it's like you can't actually replicate true autarky knowing in your head that you have that backup. Yeah, that's a good point. Yeah, that was a good one, wasn't it?

That was very good. Okay. All right. Shall we leave it there? Yeah. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

And I'm Jill Wisenthall. You can follow me at the stalwart. Follow our producers, Kerman Rodriguez at Kermen, Dashel Bennett, at Dashbot. and Kale Brooks and Kail Brooks. For more Oddlots content, go to Bloomberg.com slash oddlots. We have a daily newsletter and all of our episodes, and you can chat about all of these topics 24-7

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