Mary Childs

I know I have things to complain about, but... Mary Childs. We should all be on the same time zone. Which would mean, like, nighttime is daytime for some people. That would mean that perhaps you and I wake up at what is called 10 p.m. and we go to work and the sun is out and it's shining. I'm just going to squash this one right away. You don't want to go to work at 10 p.m.

I know I have things to complain about, but... Mary Childs. We should all be on the same time zone. Which would mean, like, nighttime is daytime for some people. That would mean that perhaps you and I wake up at what is called 10 p.m. and we go to work and the sun is out and it's shining. I'm just going to squash this one right away. You don't want to go to work at 10 p.m.

and it's daylight outside. It's just called 10 p.m. What do you care what it's called? A.M., p.m.? That's just made up. You were a baby when you learned that. It doesn't matter. I don't know.

and it's daylight outside. It's just called 10 p.m. What do you care what it's called? A.M., p.m.? That's just made up. You were a baby when you learned that. It doesn't matter. I don't know.

Mary Childs. Oh, you know, I wish that we had peace on Earth.

Mary Childs. Oh, you know, I wish that we had peace on Earth.

So heads of universities across the country are watching to see if a whole system of independent research, decades in the making, is going to be dismantled, grant by grant, cut by cut. And they're trying to figure out what to do.

So heads of universities across the country are watching to see if a whole system of independent research, decades in the making, is going to be dismantled, grant by grant, cut by cut. And they're trying to figure out what to do.

People who run universities, they talk all the time. They have big meetings all over the country. And the chancellor of Washington University says that this year they have a different vibe. What are those meetings like?

People who run universities, they talk all the time. They have big meetings all over the country. And the chancellor of Washington University says that this year they have a different vibe. What are those meetings like?

So between meetings, Andrew Martin says there's a whole lot of texting going on.

So between meetings, Andrew Martin says there's a whole lot of texting going on.

The project is to watch what happens to DNA over time. And he needs all kinds of materials.

The project is to watch what happens to DNA over time. And he needs all kinds of materials.

Last year's total pie was a little over $5 billion. So first up, what portion of the pie came from the federal government?

Last year's total pie was a little over $5 billion. So first up, what portion of the pie came from the federal government?

And all that money could be in jeopardy. The grants, the percentage they get on top of those grants, it has all been thrown into question in recent months.

And all that money could be in jeopardy. The grants, the percentage they get on top of those grants, it has all been thrown into question in recent months.

There were basically three other major sources of revenue, and the first one was kind of surprising. Washington University's biggest source of revenue actually comes from what their physicians charge for seeing patients.

There were basically three other major sources of revenue, and the first one was kind of surprising. Washington University's biggest source of revenue actually comes from what their physicians charge for seeing patients.

So next up in the pie of revenue, all the payments the school collects, everything from parking to serving lattes in the cafe to the biggest part, tuition.

So next up in the pie of revenue, all the payments the school collects, everything from parking to serving lattes in the cafe to the biggest part, tuition.

OK, so we've got the income from hospitals, the income from payments, and there is one more big chunk of the pie. It's the one that people always imagine is going to solve all the problems at big universities. the endowment.

OK, so we've got the income from hospitals, the income from payments, and there is one more big chunk of the pie. It's the one that people always imagine is going to solve all the problems at big universities. the endowment.

biggest endowment in the country and the thing to understand about endowments is that lots of that money is earmarked for specific purposes that the donors choose like specific scholarships or named professor chairs and the other thing to understand about endowments is that the endowment itself is making money for the university every year that endowment money is invested

biggest endowment in the country and the thing to understand about endowments is that lots of that money is earmarked for specific purposes that the donors choose like specific scholarships or named professor chairs and the other thing to understand about endowments is that the endowment itself is making money for the university every year that endowment money is invested

Oh my goodness. If he gets the money, it's not like he gets some big check in the mail for $300,000. Yeah, yeah.

Oh my goodness. If he gets the money, it's not like he gets some big check in the mail for $300,000. Yeah, yeah.

So if they spend it down, they're going to reduce their yearly revenue.

So if they spend it down, they're going to reduce their yearly revenue.

Andrew told us the endowment is there to generate more interest. They need it to grow, not dwindle.

Andrew told us the endowment is there to generate more interest. They need it to grow, not dwindle.

Yeah, $2 billion could make up for a couple years of research. And he says he could use some of that cash reserve. But then what?

Yeah, $2 billion could make up for a couple years of research. And he says he could use some of that cash reserve. But then what?

So in this precarious moment, Andrew is making some difficult and complicated decisions. Figuring out what staff he can lose. Deciding not to break ground on a new building. Changing how the endowment is invested. But he sees even those as short-term solutions.

So in this precarious moment, Andrew is making some difficult and complicated decisions. Figuring out what staff he can lose. Deciding not to break ground on a new building. Changing how the endowment is invested. But he sees even those as short-term solutions.

This episode was produced by Willa Rubin and edited by Marianne McKeown. It was fact-checked by Sierra Juarez and engineered by Harry Paul. Alex Goldmark is our executive producer. I'm Mary Childs.

This episode was produced by Willa Rubin and edited by Marianne McKeown. It was fact-checked by Sierra Juarez and engineered by Harry Paul. Alex Goldmark is our executive producer. I'm Mary Childs.

But since January, the federal government has been threatening to cancel massive amounts of university funding. And in some cases, they already have. Harvard is battling over billions of dollars. Columbia lost $400 million. And Johns Hopkins has laid off 2,000 people because of cuts.

But since January, the federal government has been threatening to cancel massive amounts of university funding. And in some cases, they already have. Harvard is battling over billions of dollars. Columbia lost $400 million. And Johns Hopkins has laid off 2,000 people because of cuts.

Okay. He studies how our DNA influences diseases like cancer. And he's been doing pretty great. But lately, university life has been...

Okay. He studies how our DNA influences diseases like cancer. And he's been doing pretty great. But lately, university life has been...

And I'm Mary Childs. American universities have long been the envy of the world. But this fight over federal funding, it could change that. So is this the beginning of the end of universities as we know them?

And I'm Mary Childs. American universities have long been the envy of the world. But this fight over federal funding, it could change that. So is this the beginning of the end of universities as we know them?

This episode is part of our occasional series looking at how the Trump administration and others are challenging a set of economic ideas that date back to World War II. Ideas that placed the U.S. at the center of the economic universe. Things like it's good for the U.S. if dollars are the world's currency. Or in this episode, investing in university research will pay off.

This episode is part of our occasional series looking at how the Trump administration and others are challenging a set of economic ideas that date back to World War II. Ideas that placed the U.S. at the center of the economic universe. Things like it's good for the U.S. if dollars are the world's currency. Or in this episode, investing in university research will pay off.

We're calling our series Pax Americana. Washington University is a 172-year-old elite private university in St. Louis, Missouri. The administration building looks like a literal castle with battlements on top and everything. And it is out of that building that the chancellor of Washington University works.

We're calling our series Pax Americana. Washington University is a 172-year-old elite private university in St. Louis, Missouri. The administration building looks like a literal castle with battlements on top and everything. And it is out of that building that the chancellor of Washington University works.

Andrew Martin is guiding the ship on which our DNA researcher is just one of many sailors.

Andrew Martin is guiding the ship on which our DNA researcher is just one of many sailors.

Now, a university is two big things. One, a place where people go to learn, but also it's a research incubator. And the system we have where universities get tons of federal funding has been in place for the last eight decades.

Now, a university is two big things. One, a place where people go to learn, but also it's a research incubator. And the system we have where universities get tons of federal funding has been in place for the last eight decades.

Mike is one of thousands of researchers all around the country who are suddenly at risk of losing their jobs because the Trump administration is cutting or threatening to cut funding for their research. In some cases, huge pieces of it.

Mike is one of thousands of researchers all around the country who are suddenly at risk of losing their jobs because the Trump administration is cutting or threatening to cut funding for their research. In some cases, huge pieces of it.

Vannevar was the first presidential science advisor. He ran the Office of Scientific Research and Development during the war.

Vannevar was the first presidential science advisor. He ran the Office of Scientific Research and Development during the war.

That endeavor is not so fondly remembered as the Manhattan Project. And though that project itself was controversial, it threw a spotlight on the power of research. So after the war ended, Vannevar was like, federal government, what else could we develop if we threw some money at the great minds at all these universities? Let's do it. Let's start funding research at universities.

That endeavor is not so fondly remembered as the Manhattan Project. And though that project itself was controversial, it threw a spotlight on the power of research. So after the war ended, Vannevar was like, federal government, what else could we develop if we threw some money at the great minds at all these universities? Let's do it. Let's start funding research at universities.

And people from both sides of the aisle were on board.

And people from both sides of the aisle were on board.

Elizabeth says before the war, universities were almost entirely funded privately or by states. And there was some research at those universities, but most happened instead in private companies. Westinghouse, Bell Labs, they were paying scientists to invent things that they could sell, like early semiconductors, transistors, or the railway airbrake.

Elizabeth says before the war, universities were almost entirely funded privately or by states. And there was some research at those universities, but most happened instead in private companies. Westinghouse, Bell Labs, they were paying scientists to invent things that they could sell, like early semiconductors, transistors, or the railway airbrake.

The point was we should take risks on research, invest in it even before we know its outcome. And Vannevar believed the best place for that research was American universities. they'd be able to train the next generation.

The point was we should take risks on research, invest in it even before we know its outcome. And Vannevar believed the best place for that research was American universities. they'd be able to train the next generation.

He wrote, if the colleges, universities, and research institutes are to meet the rapidly increasing demands of industry and government for new scientific knowledge, their basic research should be strengthened by use of public funds.

He wrote, if the colleges, universities, and research institutes are to meet the rapidly increasing demands of industry and government for new scientific knowledge, their basic research should be strengthened by use of public funds.

There was some debate about how exactly to throw light into which dark corners. Like, would this new federal funding system be top down? Would government officials decide what research should be done and who should do it, as in the Manhattan Project?

There was some debate about how exactly to throw light into which dark corners. Like, would this new federal funding system be top down? Would government officials decide what research should be done and who should do it, as in the Manhattan Project?

And it wasn't just about research for research's sake. This was also about fostering American influence around the world. The U.S. was taking on this new worldwide leadership role. The dollar became the world's reserve currency. The U.S. was helping European countries rebuild after the war.

And it wasn't just about research for research's sake. This was also about fostering American influence around the world. The U.S. was taking on this new worldwide leadership role. The dollar became the world's reserve currency. The U.S. was helping European countries rebuild after the war.

And now the federal government would start funding research at universities for the sake of learning and also to place the U.S. at the center of the intellectual and economic universe. So a new research economy was born.

And now the federal government would start funding research at universities for the sake of learning and also to place the U.S. at the center of the intellectual and economic universe. So a new research economy was born.

And over the decades, the federal government did a couple things that strengthened that symbiotic relationship even further. First, in the 1960s, the U.S. passed Medicare and Medicaid. Healthcare was suddenly this growing industry. And with that came millions more dollars in research funding, this time from another federal agency, the National Institutes of Health.

And over the decades, the federal government did a couple things that strengthened that symbiotic relationship even further. First, in the 1960s, the U.S. passed Medicare and Medicaid. Healthcare was suddenly this growing industry. And with that came millions more dollars in research funding, this time from another federal agency, the National Institutes of Health.

Yeah, that's not an emoji.

Yeah, that's not an emoji.

And Elizabeth, who wrote the book about all this, she says all this federal money going into universities also grew other big industries. Silicon Valley. Biotech.

And Elizabeth, who wrote the book about all this, she says all this federal money going into universities also grew other big industries. Silicon Valley. Biotech.

Mike's got nine researchers in his lab, and right now he's gearing up to get this crucial grant from the National Institutes of Health, the NIH.

Mike's got nine researchers in his lab, and right now he's gearing up to get this crucial grant from the National Institutes of Health, the NIH.

They changed who could own the ideas that university researchers came up with. Before this, federally funded research was thought to be for the public good.

They changed who could own the ideas that university researchers came up with. Before this, federally funded research was thought to be for the public good.

Then Congress changed the law to say, actually, universities can patent their inventions and research. So now universities could profit from licensing the innovations created in their labs.

Then Congress changed the law to say, actually, universities can patent their inventions and research. So now universities could profit from licensing the innovations created in their labs.

So that big idea that Vannevar Bush had after World War II to fund independent research at American universities— grew into the system that we have now.

So that big idea that Vannevar Bush had after World War II to fund independent research at American universities— grew into the system that we have now.

Over the past few decades, there have been many criticisms of how big, rich and powerful some universities have become. Like, should we really classify some of these institutions as nonprofits? And how much does the public benefit from federally funded, slow, painstaking scientific research?

Over the past few decades, there have been many criticisms of how big, rich and powerful some universities have become. Like, should we really classify some of these institutions as nonprofits? And how much does the public benefit from federally funded, slow, painstaking scientific research?

At Washington University, the grants that have been rescinded are related to diversity, equity, and inclusion efforts, like a STEM-focused training grant for students from underrepresented backgrounds, research focused on minority populations, women, gender, vaccines.

At Washington University, the grants that have been rescinded are related to diversity, equity, and inclusion efforts, like a STEM-focused training grant for students from underrepresented backgrounds, research focused on minority populations, women, gender, vaccines.

There's no reason you should understand what Rufus just said there. But let me try to explain it because it tells you a bit about how this old school sports gambling world works. The line is just the odds or the point spread. The true price is what the odds would be if you somehow knew every possible relevant bit of information about some upcoming game.

There's no reason you should understand what Rufus just said there. But let me try to explain it because it tells you a bit about how this old school sports gambling world works. The line is just the odds or the point spread. The true price is what the odds would be if you somehow knew every possible relevant bit of information about some upcoming game.

Of course, no one ever knows everything, so there is in reality never a perfect true price, just some number that the smartest and best-informed bettors agree on. Say they agree that the Packers should be eight-point favorites over the Cowboys, but most of the gamblers are Cowboys fans— And the Cowboys fans think the Cowboys are only three-point underdogs.

Of course, no one ever knows everything, so there is in reality never a perfect true price, just some number that the smartest and best-informed bettors agree on. Say they agree that the Packers should be eight-point favorites over the Cowboys, but most of the gamblers are Cowboys fans— And the Cowboys fans think the Cowboys are only three-point underdogs.

Rufus was asking if he can entice the public to make more stupid bets if he set the line not at the true price of eight points, but at, say, five points. Because Cowboys fans will think the Cowboys are better than they actually are and bet even more.

Rufus was asking if he can entice the public to make more stupid bets if he set the line not at the true price of eight points, but at, say, five points. Because Cowboys fans will think the Cowboys are better than they actually are and bet even more.

Rufus Peabody, recently of Yale, is no one's idea of a hustler. He's too sweet-natured and even-tempered, and way too open to telling other people about the stuff he's learned. He finishes up at Yale and moves back to Vegas to work full-time at Las Vegas Sports Consultants. But now Rufus thinks he might have an edge, and people in and around Roxy's firm think that maybe he's right.

Rufus Peabody, recently of Yale, is no one's idea of a hustler. He's too sweet-natured and even-tempered, and way too open to telling other people about the stuff he's learned. He finishes up at Yale and moves back to Vegas to work full-time at Las Vegas Sports Consultants. But now Rufus thinks he might have an edge, and people in and around Roxy's firm think that maybe he's right.

The Super Bowl was my first big break, Super Bowl 2009.

The Super Bowl was my first big break, Super Bowl 2009.

Short for proposition bets. Rufus wasn't betting the whole game, but pieces of the game. His pro football model spits out odds for all this weird stuff that Vegas bookies are now offering bets on. The odds that Steelers running back Gary Russell will score the game's first touchdown, for example. Rufus has vast troves of data to mine. He can do stuff with it that Roxy would never imagine.

Short for proposition bets. Rufus wasn't betting the whole game, but pieces of the game. His pro football model spits out odds for all this weird stuff that Vegas bookies are now offering bets on. The odds that Steelers running back Gary Russell will score the game's first touchdown, for example. Rufus has vast troves of data to mine. He can do stuff with it that Roxy would never imagine.

He could do stuff that even the people who run the Pittsburgh Steelers would never imagine doing. I mean, even Gary Russell likely has no idea that you can calculate the odds that he will score the game's first touchdown. But Rufus can. His model puts those odds much higher than the bookie's odds. So in Rufus's mind, it's a great bet. He makes dozens of similar bets.

He could do stuff that even the people who run the Pittsburgh Steelers would never imagine doing. I mean, even Gary Russell likely has no idea that you can calculate the odds that he will score the game's first touchdown. But Rufus can. His model puts those odds much higher than the bookie's odds. So in Rufus's mind, it's a great bet. He makes dozens of similar bets.

Bets where his model tells him that the bookies are giving him better odds than they should.

Bets where his model tells him that the bookies are giving him better odds than they should.

Rufus figures out how much he's won. Then he physically retraces his steps to the many casinos that had taken his many bets, still driving an old Honda Civic. You had all these little tickets. You go cash them. Each one individually. So you must have had 100 tickets.

Rufus figures out how much he's won. Then he physically retraces his steps to the many casinos that had taken his many bets, still driving an old Honda Civic. You had all these little tickets. You go cash them. Each one individually. So you must have had 100 tickets.

After that, lots of people in Vegas wanted to lend money to Rufus and take a cut of his bets. Rufus, for his part, was still sitting in his office in Las Vegas Sports Consultants. But pretty soon he was directing an army of people to lay bets in sports books across the city. Sportsbooks that got their odds from Las Vegas sports consultants.

After that, lots of people in Vegas wanted to lend money to Rufus and take a cut of his bets. Rufus, for his part, was still sitting in his office in Las Vegas Sports Consultants. But pretty soon he was directing an army of people to lay bets in sports books across the city. Sportsbooks that got their odds from Las Vegas sports consultants.

Rufus was in effect betting against the lines created by Roxy's firm. Roxy himself had moved on at this point, but he watched what Rufus was doing, and he admired it.

Rufus was in effect betting against the lines created by Roxy's firm. Roxy himself had moved on at this point, but he watched what Rufus was doing, and he admired it.

To get his edge, Roxy had used weather reports. Rufus was using the spin rates on pitchers' curveballs.

To get his edge, Roxy had used weather reports. Rufus was using the spin rates on pitchers' curveballs.

Rufus had become the card counter at the blackjack table, only it was richer than that. He was generating new insight about why things happened in sports. A blackjack dealer knows where the card counter gets his edge. The sports bookie couldn't really tell where Rufus was getting his, which made Rufus and what he was doing even more unsettling.

Rufus had become the card counter at the blackjack table, only it was richer than that. He was generating new insight about why things happened in sports. A blackjack dealer knows where the card counter gets his edge. The sports bookie couldn't really tell where Rufus was getting his, which made Rufus and what he was doing even more unsettling.

And did the M at any point say, we're not taking your bets? The M Casino was one of Rufus's favorite sports books.

And did the M at any point say, we're not taking your bets? The M Casino was one of Rufus's favorite sports books.

Then comes the Supreme Court decision of 2018. 23 states soon legalized sports gambling. Rufus now has the M Casino and a lot of others right in his pocket.

Then comes the Supreme Court decision of 2018. 23 states soon legalized sports gambling. Rufus now has the M Casino and a lot of others right in his pocket.

And Rufus, of course, stands to make a killing. The bigger the markets, the more he can bet.

And Rufus, of course, stands to make a killing. The bigger the markets, the more he can bet.

But as it turns out, that's not how it's going to go down. This ecosystem is going to change in ways Rufus didn't predict. And he began to sense it in late 2020.

But as it turns out, that's not how it's going to go down. This ecosystem is going to change in ways Rufus didn't predict. And he began to sense it in late 2020.

Rufus had a girlfriend in Massachusetts. Massachusetts hadn't yet legalized sports betting. So he needed to cross state lines to use the betting app on his phone. The drive took him like 45 minutes. But it was actually easier than running all over Vegas trying to get cash down. He and his process were built for this new type of casino. He could bet on golf basically all day long.

Rufus had a girlfriend in Massachusetts. Massachusetts hadn't yet legalized sports betting. So he needed to cross state lines to use the betting app on his phone. The drive took him like 45 minutes. But it was actually easier than running all over Vegas trying to get cash down. He and his process were built for this new type of casino. He could bet on golf basically all day long.

Until one day, he couldn't.

Until one day, he couldn't.

He'd lost $30,000, and DraftKings stopped taking his big bets. By the way, we've reached out to DraftKings, and so far they have declined to talk with us. Anyway, it was clear to Rufus back in 2020 that this was definitely no longer his old sports gambling world.

He'd lost $30,000, and DraftKings stopped taking his big bets. By the way, we've reached out to DraftKings, and so far they have declined to talk with us. Anyway, it was clear to Rufus back in 2020 that this was definitely no longer his old sports gambling world.

Hello, Mary.

Hello, Mary.

Rufus used data to predict what athletes were going to do. DraftKings was using data to predict what Rufus would do. When they looked at the data, they saw that after Rufus placed his bets, the odds nearly always moved in his favor. These were the bets of someone who knew things before the market knew them. And the new bookies were not like the old bookies.

Rufus used data to predict what athletes were going to do. DraftKings was using data to predict what Rufus would do. When they looked at the data, they saw that after Rufus placed his bets, the odds nearly always moved in his favor. These were the bets of someone who knew things before the market knew them. And the new bookies were not like the old bookies.

They only wanted to take certain kind of bets. Bets that were more like the bet you make when you press the buttons on a slot machine. Bets that if you made them often enough, you were sure to lose. The sort of bets a fan would make. The sort of bets Rufus Peabody never made.

They only wanted to take certain kind of bets. Bets that were more like the bet you make when you press the buttons on a slot machine. Bets that if you made them often enough, you were sure to lose. The sort of bets a fan would make. The sort of bets Rufus Peabody never made.

This is what drew me to the subject in the first place. It's like, what an incredible social experiment we're engaged in without anybody paying it much attention that sports gambling goes from being, I mean, not just illegal, it's a taboo. It's like Pete Rose can't be in the Hall of Fame because he gambled on sports. All the commissioners of the sports league say sports gambling is evil.

This is what drew me to the subject in the first place. It's like, what an incredible social experiment we're engaged in without anybody paying it much attention that sports gambling goes from being, I mean, not just illegal, it's a taboo. It's like Pete Rose can't be in the Hall of Fame because he gambled on sports. All the commissioners of the sports league say sports gambling is evil.

Being smarter than the market didn't used to get you kicked out of the market. But the market's changed.

Being smarter than the market didn't used to get you kicked out of the market. But the market's changed.

Anybody who watches sports knows you can't turn on your TV without being bombarded by ads from, you know, DraftKings and FanDuel. Every ad is like some celebrity. It's like back when crypto was like Matt Daniels.

Anybody who watches sports knows you can't turn on your TV without being bombarded by ads from, you know, DraftKings and FanDuel. Every ad is like some celebrity. It's like back when crypto was like Matt Daniels.

It's all over again. Some of the same people. And it's just so in your face.

It's all over again. Some of the same people. And it's just so in your face.

No, you shouldn't just do it. No, you shouldn't just do it. And if you do it, you shouldn't do it the way they're trying to encourage you to do it. I mean, so if you listen to the bets, they're essentially trying to coach you into making the kind of bets that make them the most money, which is the kind of bets you're most likely to lose.

No, you shouldn't just do it. No, you shouldn't just do it. And if you do it, you shouldn't do it the way they're trying to encourage you to do it. I mean, so if you listen to the bets, they're essentially trying to coach you into making the kind of bets that make them the most money, which is the kind of bets you're most likely to lose.

And it's long shot parlay bets is what they're selling you on. It isn't like you're going to bet the Chiefs against the Raiders. It's no, you're going to bet the Chiefs and Patrick Mahomes throwing for 300 yards and Travis Kelsey catching two touchdowns. And all of that has to come right or you don't win.

And it's long shot parlay bets is what they're selling you on. It isn't like you're going to bet the Chiefs against the Raiders. It's no, you're going to bet the Chiefs and Patrick Mahomes throwing for 300 yards and Travis Kelsey catching two touchdowns. And all of that has to come right or you don't win.

And what they're doing is sort of nudging you into a land where your mind is not very good at judging probabilities and getting you to do the probabilistically stupid thing. And effectively, Americans are making stupider and stupider sports bets. And we've yet to hit the limit, like how much worse Americans will get at sports betting.

And what they're doing is sort of nudging you into a land where your mind is not very good at judging probabilities and getting you to do the probabilistically stupid thing. And effectively, Americans are making stupider and stupider sports bets. And we've yet to hit the limit, like how much worse Americans will get at sports betting.

Well, we're about to see, right? It's like what will come with this is lots of social problems. You know, there are already these kind of natural experiments that are going on because some states have not legalized it. So, you know, you have Alabama next to Mississippi and one's legalized sports gambling and one hasn't. You can kind of study the effects.

Well, we're about to see, right? It's like what will come with this is lots of social problems. You know, there are already these kind of natural experiments that are going on because some states have not legalized it. So, you know, you have Alabama next to Mississippi and one's legalized sports gambling and one hasn't. You can kind of study the effects.

And and they're respectable, you know, papers that have shown that bankruptcies rise and savings rates plummet, you know, where sports gambling has been legalized. So there will be these social problems going on, bubbling along while this industry booms.

And and they're respectable, you know, papers that have shown that bankruptcies rise and savings rates plummet, you know, where sports gambling has been legalized. So there will be these social problems going on, bubbling along while this industry booms.

And at the same time, they'll be pushing the social problems because they'll be nudging Americans into doing dumber and dumber things with their money. So I guess you asked me, should you do this? Of course, if you can do it in moderation, I mean, I guess, you know.

And at the same time, they'll be pushing the social problems because they'll be nudging Americans into doing dumber and dumber things with their money. So I guess you asked me, should you do this? Of course, if you can do it in moderation, I mean, I guess, you know.

As famously we are good as humans.

As famously we are good as humans.

Anytime a player gets near it, they're tossed from the game.

Anytime a player gets near it, they're tossed from the game.

I'm Mary Childs.

I'm Mary Childs.

They go from being, you know, really loudly hostile to sports gambling to this is the future.

They go from being, you know, really loudly hostile to sports gambling to this is the future.

You mean introduce your show?

You mean introduce your show?

Okay. Hello and welcome to Planet Money. Can we do this now?

Okay. Hello and welcome to Planet Money. Can we do this now?

Hello and welcome to Planet Money. I'm Michael Lewis.

Hello and welcome to Planet Money. I'm Michael Lewis.

There will be two characters, one from the distant past in Vegas and one from the current modern world of sports gambling, each of whom figured out how to get an edge in the game.

There will be two characters, one from the distant past in Vegas and one from the current modern world of sports gambling, each of whom figured out how to get an edge in the game.

He grew up in the 1950s in Canada in a nice upper-middle-class family. He's now Zooming with me from a home in rural Thailand with the AC blasting in the background and a straw fedora on his head. and the emotional feel of a man in a witness protection program, a placeless man.

He grew up in the 1950s in Canada in a nice upper-middle-class family. He's now Zooming with me from a home in rural Thailand with the AC blasting in the background and a straw fedora on his head. and the emotional feel of a man in a witness protection program, a placeless man.

Outcomes in sports were obviously far less regular and predictable than outcomes inside slot machines, or even at blackjack tables. But that didn't mean you couldn't learn stuff about sports that would allow you to make better predictions. Not perfect predictions, but better predictions than everyone else betting on games in the 1970s. Roxy had baseball in mind.

Outcomes in sports were obviously far less regular and predictable than outcomes inside slot machines, or even at blackjack tables. But that didn't mean you couldn't learn stuff about sports that would allow you to make better predictions. Not perfect predictions, but better predictions than everyone else betting on games in the 1970s. Roxy had baseball in mind.

The guys who booked baseball, legally in Nevada and illegally everywhere else, offered gamblers the chance to bet on not just who would win the game, but how many runs both teams would score. Roxy had an insight that seems obvious now. The number of runs scored in any baseball game depended on factors like the weather at game time and the size of the fields. San Diego's was a good example.

The guys who booked baseball, legally in Nevada and illegally everywhere else, offered gamblers the chance to bet on not just who would win the game, but how many runs both teams would score. Roxy had an insight that seems obvious now. The number of runs scored in any baseball game depended on factors like the weather at game time and the size of the fields. San Diego's was a good example.

The idea that the people who run sports teams don't know what they're doing has probably never been a new idea. Fans have always thought that they know better. What was new is that someone in the stands was actually figuring something out. The effects of the wind and the humidity and the barometric pressure on a ball that was flying through the air.

The idea that the people who run sports teams don't know what they're doing has probably never been a new idea. Fans have always thought that they know better. What was new is that someone in the stands was actually figuring something out. The effects of the wind and the humidity and the barometric pressure on a ball that was flying through the air.

Roxy moves to Vegas full-time in 1975 to bet on sports. And just by taking into account the weather and the size of ballparks, he's able to make a killing while trying to avoid the people who know a thing or two about actual killing. Were the Nevada legal bookmakers effectively run by the mob? They would have had a hand until about, until about, well, late 70s probably, yeah.

Roxy moves to Vegas full-time in 1975 to bet on sports. And just by taking into account the weather and the size of ballparks, he's able to make a killing while trying to avoid the people who know a thing or two about actual killing. Were the Nevada legal bookmakers effectively run by the mob? They would have had a hand until about, until about, well, late 70s probably, yeah.

In that environment, was it dangerous to win too much?

In that environment, was it dangerous to win too much?

The old sports gambling market inside the United States was shady, but it had its unwritten rules. And one was that they always took your bets. If you bet a lot, they eventually moved the lines. These betting lines were all set in Vegas. For a very long stretch, they were actually set in a single Vegas casino, the Stardust.

The old sports gambling market inside the United States was shady, but it had its unwritten rules. And one was that they always took your bets. If you bet a lot, they eventually moved the lines. These betting lines were all set in Vegas. For a very long stretch, they were actually set in a single Vegas casino, the Stardust.

The bookie at the Stardust set the odds, and everyone else just followed his lead. There was a bank of payphones outside the Stardust that were said to be the most profitable in the country for the phone company because sports gamblers used them to relay the odds to the illegal bookies and bettors across the country. Communications back then was just a phone call.

The bookie at the Stardust set the odds, and everyone else just followed his lead. There was a bank of payphones outside the Stardust that were said to be the most profitable in the country for the phone company because sports gamblers used them to relay the odds to the illegal bookies and bettors across the country. Communications back then was just a phone call.

In the late 1970s, the Nevada Gaming Control Board tossed the mob out of Vegas and out of sports gambling. And pretty soon, Roxy became old news. By the early 1980s, everyone knew that the weather and the size of ballparks had big effects on baseball scores. And Roxy never found another systematic edge. and his life became a bit of a mess. He'd been arrested for violating the Wire Act.

In the late 1970s, the Nevada Gaming Control Board tossed the mob out of Vegas and out of sports gambling. And pretty soon, Roxy became old news. By the early 1980s, everyone knew that the weather and the size of ballparks had big effects on baseball scores. And Roxy never found another systematic edge. and his life became a bit of a mess. He'd been arrested for violating the Wire Act.

He'd taken crazy risks as an illegal bookmaker, and he'd run through two marriages. Is a gambling business hard on relationships?

He'd taken crazy risks as an illegal bookmaker, and he'd run through two marriages. Is a gambling business hard on relationships?

It's interesting because when you think about why a person would drift into gambling in the first place, it would be because you think it might be an easy way to make money. Yes. It ends up being a harder way to make money.

It's interesting because when you think about why a person would drift into gambling in the first place, it would be because you think it might be an easy way to make money. Yes. It ends up being a harder way to make money.

People said that. Roxy now knew it. So in 1982, he quits gambling. He creates a company called Las Vegas Sports Consultants. This new company will effectively replace the Stardust Casino in setting the odds for all major sports contests. Roxy's just better at it, and pretty soon he's selling his odds to all the sports bookies, including the Stardust. This makes sense to everybody in Las Vegas.

People said that. Roxy now knew it. So in 1982, he quits gambling. He creates a company called Las Vegas Sports Consultants. This new company will effectively replace the Stardust Casino in setting the odds for all major sports contests. Roxy's just better at it, and pretty soon he's selling his odds to all the sports bookies, including the Stardust. This makes sense to everybody in Las Vegas.

Hiring Roxy to set the odds in sports is like hiring the first card counter to guard the blackjack tables.

Hiring Roxy to set the odds in sports is like hiring the first card counter to guard the blackjack tables.

Sports gambling isn't exactly a financial market, but it rhymes with financial markets. What happens on Wall Street somehow eventually also happens in sports gambling. And Wall Street's about to undergo dramatic change. First computers and then the Internet will allow the markets to become a lot more complicated and the bets a lot more complex.

Sports gambling isn't exactly a financial market, but it rhymes with financial markets. What happens on Wall Street somehow eventually also happens in sports gambling. And Wall Street's about to undergo dramatic change. First computers and then the Internet will allow the markets to become a lot more complicated and the bets a lot more complex.

The world's about to speed up and a new kind of person with a different kind of education is going to enter it. Old school traders with high school degrees are about to be replaced by PhDs from MIT with computer models, who as kids thought they'd grow up to be professors, not traders. On Wall Street in the late 1980s, smart old school guys served as a kind of bridge between the two cultures.

The world's about to speed up and a new kind of person with a different kind of education is going to enter it. Old school traders with high school degrees are about to be replaced by PhDs from MIT with computer models, who as kids thought they'd grow up to be professors, not traders. On Wall Street in the late 1980s, smart old school guys served as a kind of bridge between the two cultures.

In sports gambling, Roxy was that bridge, but it took a while for anyone to cross it. We're here to see Rufus Peabody. We're in the right place. We're still in Vegas, but far from the strip. The real action is no longer on the strip. The real action is basically invisible. But here, on the 17th floor, with a sweeping view of the distant casinos, Rufus Peabody lives and works.

In sports gambling, Roxy was that bridge, but it took a while for anyone to cross it. We're here to see Rufus Peabody. We're in the right place. We're still in Vegas, but far from the strip. The real action is no longer on the strip. The real action is basically invisible. But here, on the 17th floor, with a sweeping view of the distant casinos, Rufus Peabody lives and works.

Rufus grew up outside of Washington, D.C., Always loved sports. Thought he might like to be a sports journalist. But even when he was a kid, his mind took him places that journalism usually doesn't.

Rufus grew up outside of Washington, D.C., Always loved sports. Thought he might like to be a sports journalist. But even when he was a kid, his mind took him places that journalism usually doesn't.

In 2004, Rufus graduated from high school and went to Yale. He was still obsessed with figuring out why. He studied statistics and built models that predicted the performance of athletes and the outcomes of sporting events. Not because he wanted to gamble on them, just because it was cool to figure out stuff that even people who run sports teams don't know.

In 2004, Rufus graduated from high school and went to Yale. He was still obsessed with figuring out why. He studied statistics and built models that predicted the performance of athletes and the outcomes of sporting events. Not because he wanted to gamble on them, just because it was cool to figure out stuff that even people who run sports teams don't know.

He wanders around Yale looking for someone to teach him more.

He wanders around Yale looking for someone to teach him more.

His name is Cade Massey. He's a professor of organizational behavior.

His name is Cade Massey. He's a professor of organizational behavior.

Rufus just kept asking questions about the behavior of sports gamblers. He still wasn't placing bets himself. He was just working with his professor to build a model to predict college football scores. They pitched it to the Wall Street Journal, and the journal agreed to publish their college football picks of the week. It was just how they would bet were they to bet on college football.

Rufus just kept asking questions about the behavior of sports gamblers. He still wasn't placing bets himself. He was just working with his professor to build a model to predict college football scores. They pitched it to the Wall Street Journal, and the journal agreed to publish their college football picks of the week. It was just how they would bet were they to bet on college football.

Which is to say the sports gambling market would see their picks and move in response.

Which is to say the sports gambling market would see their picks and move in response.

Because he wanted to bet it himself. Because he wanted to bet it. I mean, it was bound to eventually occur to Rufus that if he could predict the scores of college football games, then he should just bet on them himself. But it's funny how he got there in his head. Roxy Roxborough had started as a gambler, who then set out to find some kind of edge to bet.

Because he wanted to bet it himself. Because he wanted to bet it. I mean, it was bound to eventually occur to Rufus that if he could predict the scores of college football games, then he should just bet on them himself. But it's funny how he got there in his head. Roxy Roxborough had started as a gambler, who then set out to find some kind of edge to bet.

Rufus Peabody started by finding these edges and kind of stumbled into gambling. And then found Roxy. During Rufus's junior year at Yale, he read an article in ESPN about Roxy's sports analytics company, Las Vegas Sports Consultants. Roxy's company wasn't used to getting resumes from Yale juniors.

Rufus Peabody started by finding these edges and kind of stumbled into gambling. And then found Roxy. During Rufus's junior year at Yale, he read an article in ESPN about Roxy's sports analytics company, Las Vegas Sports Consultants. Roxy's company wasn't used to getting resumes from Yale juniors.

But they gave him a summer internship anyway and showed him their world from their offices right next to the Las Vegas airport.

But they gave him a summer internship anyway and showed him their world from their offices right next to the Las Vegas airport.

Roxy's crew would bet on everything. Rufus wasn't like that. He didn't even think of what he wanted to do as gambling. But he did want to understand this other world. this world where people bet on anything that moved.

Roxy's crew would bet on everything. Rufus wasn't like that. He didn't even think of what he wanted to do as gambling. But he did want to understand this other world. this world where people bet on anything that moved.

And that means that car prices are going to be artificially higher. Foreign cars will be subject to this, you know, import tax. But also U.S. carmakers use foreign parts, which also face the same import tax. And there will be less pressure on U.S. carmakers to keep their prices low because their foreign competitors have a big price disadvantage in the U.S. market.

And that means that car prices are going to be artificially higher. Foreign cars will be subject to this, you know, import tax. But also U.S. carmakers use foreign parts, which also face the same import tax. And there will be less pressure on U.S. carmakers to keep their prices low because their foreign competitors have a big price disadvantage in the U.S. market.

So, yeah, likely higher prices all around. And that means consumers will likely buy fewer cars.

So, yeah, likely higher prices all around. And that means consumers will likely buy fewer cars.

And the rollout of many of these tariffs has been a little chaotic. This year alone, we have seen Trump go back and forth on tariffs on different countries, and that uncertainty has a cost. It makes it hard for businesses to make decisions about which plant to build or where to hire, and waiting is expensive.

And the rollout of many of these tariffs has been a little chaotic. This year alone, we have seen Trump go back and forth on tariffs on different countries, and that uncertainty has a cost. It makes it hard for businesses to make decisions about which plant to build or where to hire, and waiting is expensive.

And one study found that the washing machine tariffs actually did create jobs. 1,800 new jobs in the USA making washing machines at an average cost to U.S. consumers of more than $800,000 per job, even after accounting for the revenue raised from the tariffs.

And one study found that the washing machine tariffs actually did create jobs. 1,800 new jobs in the USA making washing machines at an average cost to U.S. consumers of more than $800,000 per job, even after accounting for the revenue raised from the tariffs.

But there is this whole other side to the way Trump is using tariffs. Like earlier this year, Trump wanted to deport Colombian citizens who were in the U.S. to send them back to Colombia. The normal course is apparently to send people on commercial flights. But in January, the Trump administration sent two military planes.

But there is this whole other side to the way Trump is using tariffs. Like earlier this year, Trump wanted to deport Colombian citizens who were in the U.S. to send them back to Colombia. The normal course is apparently to send people on commercial flights. But in January, the Trump administration sent two military planes.

So tariffs, we have long heard from economists about how and why they are bad. Today, we investigate what they can actually do, what they can be good for.

So tariffs, we have long heard from economists about how and why they are bad. Today, we investigate what they can actually do, what they can be good for.

That was Sunday morning, and by that evening, Colombia and Trump had reached an understanding. Colombia would allow deportation flights without restriction. No tariffs. Though the White House said that the threat of tariffs would be, quote, held in reserve in case Colombia reneges.

That was Sunday morning, and by that evening, Colombia and Trump had reached an understanding. Colombia would allow deportation flights without restriction. No tariffs. Though the White House said that the threat of tariffs would be, quote, held in reserve in case Colombia reneges.

And the reason the U.S. can act like this, the thinking goes, is because we're rich. There are so many of us and we spend so much money. We don't rely on trade as much as our trade partners do.

And the reason the U.S. can act like this, the thinking goes, is because we're rich. There are so many of us and we spend so much money. We don't rely on trade as much as our trade partners do.

I mean, to put a sort of another like blunt frame on it, it's like using a richness as a country, as leverage, a bullying tactic.

I mean, to put a sort of another like blunt frame on it, it's like using a richness as a country, as leverage, a bullying tactic.

And because we have this power, thinking goes, if we're going to trade with someone, we should get something we want for it. The Trump administration did this with Mexico, too, threatening tariffs and then delaying them because Mexico did something he wanted, agreed to send troops to the border.

And because we have this power, thinking goes, if we're going to trade with someone, we should get something we want for it. The Trump administration did this with Mexico, too, threatening tariffs and then delaying them because Mexico did something he wanted, agreed to send troops to the border.

Now the U.S. is operating with a slightly different idea. Instead of free trade as an incentive to be our friend and join our democracy club, the U.S. is threatening to close trade to incentivize, strongly incentivize people to do what it wants. Like, nice economy you got there.

Now the U.S. is operating with a slightly different idea. Instead of free trade as an incentive to be our friend and join our democracy club, the U.S. is threatening to close trade to incentivize, strongly incentivize people to do what it wants. Like, nice economy you got there.

We have a new perk for Planet Money Plus supporters. You can now listen to some of our classic series from the Planet Money archive. Like when we wanted to understand the global financial crisis and bought a toxic asset we named Toxie. You can now find all eight Toxie episodes in one playlist. And there are more playlists to come this year.

We have a new perk for Planet Money Plus supporters. You can now listen to some of our classic series from the Planet Money archive. Like when we wanted to understand the global financial crisis and bought a toxic asset we named Toxie. You can now find all eight Toxie episodes in one playlist. And there are more playlists to come this year.

If you're already a Planet Money Plus supporter, you can check them out. If you're not, you can sign up at plus.npr.org. You also get bonus episodes, sponsor-free listening, and know that you're supporting our work.

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And I'm Mary Childs. This is NPR. Thanks for listening.

And I'm Mary Childs. This is NPR. Thanks for listening.

And through the decades of that argument, there's been an economist who argued that the dominant voices in economics were wrong. That free trade actually sometimes held countries back and protectionism could help make them richer.

And through the decades of that argument, there's been an economist who argued that the dominant voices in economics were wrong. That free trade actually sometimes held countries back and protectionism could help make them richer.

Ha-Joon Chang wrote a book called Kicking Away the Ladder in 2002 about how rich countries used protectionist policies like tariffs back when they were developing and then told everyone else they couldn't do that. They had to do free trade.

Ha-Joon Chang wrote a book called Kicking Away the Ladder in 2002 about how rich countries used protectionist policies like tariffs back when they were developing and then told everyone else they couldn't do that. They had to do free trade.

I love Lord of the Rings.

I love Lord of the Rings.

When Ha-Joon was a little kid growing up in South Korea, Hyundai was not yet an automobile company.

When Ha-Joon was a little kid growing up in South Korea, Hyundai was not yet an automobile company.

So first, Hyundai had to figure out how to make a car. Hadjoun says it started by placing an order with Ford for something called a knockdown kit, which is just a big wooden box full of all the parts you could ever need to build one car. The box arrives, you open it up, and it's just full of car parts, large and small. A door, a bolt, two headlights.

So first, Hyundai had to figure out how to make a car. Hadjoun says it started by placing an order with Ford for something called a knockdown kit, which is just a big wooden box full of all the parts you could ever need to build one car. The box arrives, you open it up, and it's just full of car parts, large and small. A door, a bolt, two headlights.

Yeah, the government was like, actually, we want our car industry to be real companies, global players. Assembling a Ford car is not our end goal here. Can you level up a little bit?

Yeah, the government was like, actually, we want our car industry to be real companies, global players. Assembling a Ford car is not our end goal here. Can you level up a little bit?

The looming tariffs had sent chills down the spines of many economists around the world.

The looming tariffs had sent chills down the spines of many economists around the world.

So they had a ways to go, and they got a lot of help.

So they had a ways to go, and they got a lot of help.

A total import ban, like a tariff to infinity, the tariff of all tariffs. Because the South Korean government's really serious. They want this to happen.

A total import ban, like a tariff to infinity, the tariff of all tariffs. Because the South Korean government's really serious. They want this to happen.

And this is a canonical example of what's called infant industry protection.

And this is a canonical example of what's called infant industry protection.

Right. Like a country uses tariffs to support a sweet little baby industry to protect it from the harsh world so it can safely grow bigger and stronger.

Right. Like a country uses tariffs to support a sweet little baby industry to protect it from the harsh world so it can safely grow bigger and stronger.

And that's what South Korea did. It eventually took off the tariffs and the import ban and the subsidies.

And that's what South Korea did. It eventually took off the tariffs and the import ban and the subsidies.

And for centuries, they've been used to make a country's population buy its own stuff instead of another country's stuff.

And for centuries, they've been used to make a country's population buy its own stuff instead of another country's stuff.

And the U.S. has a history of doing this, of trying to nurture little baby industries that policymakers have believed are the industries of the future, like solar energy and electric vehicles.

And the U.S. has a history of doing this, of trying to nurture little baby industries that policymakers have believed are the industries of the future, like solar energy and electric vehicles.

Right, because for this to work, the government has to pick the right industry to nurture and then nurture it correctly.

Right, because for this to work, the government has to pick the right industry to nurture and then nurture it correctly.

Like, what if your citizens need medicines or microchips or drone batteries, and the only people who make those things live thousands of miles away in a place with different, maybe opposing, national security goals? Even the most free trade of economists seem to agree that, yeah, maybe paying a little bit of a premium to support a slightly uneconomic domestic industry in these cases is a good idea.

Like, what if your citizens need medicines or microchips or drone batteries, and the only people who make those things live thousands of miles away in a place with different, maybe opposing, national security goals? Even the most free trade of economists seem to agree that, yeah, maybe paying a little bit of a premium to support a slightly uneconomic domestic industry in these cases is a good idea.

Today is a big day. For weeks, we have been hearing about April 2nd. The Trump administration had promised that today would be the day that they put new tariffs on goods coming in from, I don't know, maybe every country in the world.

Today is a big day. For weeks, we have been hearing about April 2nd. The Trump administration had promised that today would be the day that they put new tariffs on goods coming in from, I don't know, maybe every country in the world.

Over the last 10 years, more economists have come around to Ha-Joon's way of seeing tariffs and protectionist policies.

Over the last 10 years, more economists have come around to Ha-Joon's way of seeing tariffs and protectionist policies.

So Ha-Joon Chang's lonely argument? It's less lonely. A lot of economists agree now. Infant industry, national security, sure, tariffs can maybe help. But the Trump administration has more ideas. We get into that after the break. OK, so tariffs could be useful for infant industry protection, for national security interests and to combat unfair trade practices.

So Ha-Joon Chang's lonely argument? It's less lonely. A lot of economists agree now. Infant industry, national security, sure, tariffs can maybe help. But the Trump administration has more ideas. We get into that after the break. OK, so tariffs could be useful for infant industry protection, for national security interests and to combat unfair trade practices.

And the economics world has really woken up to this over the last decade or so. There's this series of blockbuster studies on something known as the China shock. The shock happened when China joined the World Trade Organization in 2001.

And the economics world has really woken up to this over the last decade or so. There's this series of blockbuster studies on something known as the China shock. The shock happened when China joined the World Trade Organization in 2001.

That's Mark Summerlin. He's an economist, consultant, and longtime friend of Trump's treasury secretary.

That's Mark Summerlin. He's an economist, consultant, and longtime friend of Trump's treasury secretary.

But surely, tariffs have been useful ever, or they wouldn't exist, right? Right? Hello and welcome to Planet Money. I'm Mary Childs.

But surely, tariffs have been useful ever, or they wouldn't exist, right? Right? Hello and welcome to Planet Money. I'm Mary Childs.

Now we have massive trade deficits with China and other countries where we're importing way more than we export. Trump world sees this as a huge economic problem and tariffs as a solution, one that will help correct the trade imbalances and bring back manufacturing jobs.

Now we have massive trade deficits with China and other countries where we're importing way more than we export. Trump world sees this as a huge economic problem and tariffs as a solution, one that will help correct the trade imbalances and bring back manufacturing jobs.

So the administration's idea seems to be to choose a different tradeoff, to accept higher prices with the hope of eventually bringing back some of those good jobs.

So the administration's idea seems to be to choose a different tradeoff, to accept higher prices with the hope of eventually bringing back some of those good jobs.

Judy has been making the case for correcting the U.S. trade imbalance for years. In his first term, Trump nominated her for the Federal Reserve Board of Governors. She did not get confirmed. A bunch of economists and Fed employees wrote letters saying her views were extreme and too partisan on monetary policy.

Judy has been making the case for correcting the U.S. trade imbalance for years. In his first term, Trump nominated her for the Federal Reserve Board of Governors. She did not get confirmed. A bunch of economists and Fed employees wrote letters saying her views were extreme and too partisan on monetary policy.

To Judy, redirecting that spending is the best part of tariffs.

To Judy, redirecting that spending is the best part of tariffs.

We talk to an economist who has been making the lonely argument for protectionism for the past 30 years.

We talk to an economist who has been making the lonely argument for protectionism for the past 30 years.

And this is one more benefit the administration points to, to solving our problems using tariffs. They say it will help rebalance the government's budget. Right now, more money goes out of the government than comes in. If tariffs raise beautiful revenue, that's money in our pocket.

And this is one more benefit the administration points to, to solving our problems using tariffs. They say it will help rebalance the government's budget. Right now, more money goes out of the government than comes in. If tariffs raise beautiful revenue, that's money in our pocket.

Now, all that, that has been basically their argument for why they want to use tariffs. And the way Trump is applying these tariffs is pretty different from the prescription that many economists are now on board with.

Now, all that, that has been basically their argument for why they want to use tariffs. And the way Trump is applying these tariffs is pretty different from the prescription that many economists are now on board with.

Last week, Trump announced 25 percent tariffs on all imported cars and certain car parts. Cars made in the U.S., even by foreign companies, no tariff. And the stated goal is to get Americans to buy cars made in the U.S. because they would be comparatively cheaper. And the U.S. gets those good manufacturing jobs.

Last week, Trump announced 25 percent tariffs on all imported cars and certain car parts. Cars made in the U.S., even by foreign companies, no tariff. And the stated goal is to get Americans to buy cars made in the U.S. because they would be comparatively cheaper. And the U.S. gets those good manufacturing jobs.

And this was something else that their perfectly rational models had failed to predict. That their peers and competitors had been jealous and were more than willing to help them fail.

And this was something else that their perfectly rational models had failed to predict. That their peers and competitors had been jealous and were more than willing to help them fail.

So they called up all their clients and all the people who had been beating their door down to give them money to invest.

So they called up all their clients and all the people who had been beating their door down to give them money to invest.

And people were interested even at that point, but not if they were going to be the only ones doing it.

And people were interested even at that point, but not if they were going to be the only ones doing it.

And this chapter, this is the steamroller part. Their model had not predicted the panic over Russia's default. It didn't understand how people act when they're scared. And now, by the summer of 1998, people were too scared to save them.

And this chapter, this is the steamroller part. Their model had not predicted the panic over Russia's default. It didn't understand how people act when they're scared. And now, by the summer of 1998, people were too scared to save them.

And Victor and his friends made so much money.

And Victor and his friends made so much money.

By late September, long-term capital management was effectively over. Because sometimes, emotions triumph over math.

By late September, long-term capital management was effectively over. Because sometimes, emotions triumph over math.

There is this saying attributed to industrialist J. Paul Getty. If you owe the bank $100, that's your problem. If you owe the bank $100 million, that's the bank's problem. And by the fall of 1998, long-term capital management had loved leverage so much that the fund had borrowed from the banks over $100 billion. They weren't just the bank's problem. They were everyone's problem.

There is this saying attributed to industrialist J. Paul Getty. If you owe the bank $100, that's your problem. If you owe the bank $100 million, that's the bank's problem. And by the fall of 1998, long-term capital management had loved leverage so much that the fund had borrowed from the banks over $100 billion. They weren't just the bank's problem. They were everyone's problem.

The Fed president said, please come in for a visit. He gathered the banks in a conference room and said, let's figure this out. Long-term capital was not invited.

The Fed president said, please come in for a visit. He gathered the banks in a conference room and said, let's figure this out. Long-term capital was not invited.

I envision this Fed meeting as a group of somewhat guilty children, like their siblings, their cousins or something. And a parent has locked them in a room and said, OK, maybe you didn't make the mess, but you have a mess. How are you going to clean it up?

I envision this Fed meeting as a group of somewhat guilty children, like their siblings, their cousins or something. And a parent has locked them in a room and said, OK, maybe you didn't make the mess, but you have a mess. How are you going to clean it up?

A couple of the banks were still like, thank you for this opportunity, but no, and left the room.

A couple of the banks were still like, thank you for this opportunity, but no, and left the room.

In the end, the 14 banks bought all the stuff that long-term capital had at an enormous discount. Eventually, those prices would recover and the banks made money.

In the end, the 14 banks bought all the stuff that long-term capital had at an enormous discount. Eventually, those prices would recover and the banks made money.

For the partners at long-term capital, including Victor, this was personally and financially painful.

For the partners at long-term capital, including Victor, this was personally and financially painful.

Victor's professional reputation was invested in the fund. His career was in the fund. And he'd had money in the fund.

Victor's professional reputation was invested in the fund. His career was in the fund. And he'd had money in the fund.

But that Fed-orchestrated funeral, it worked. It stopped the panic. And Roger says there are two main reasons why it worked.

But that Fed-orchestrated funeral, it worked. It stopped the panic. And Roger says there are two main reasons why it worked.

Were there like game nights?

Were there like game nights?

The rescue effort was a rescue of the financial system, not of long-term capital management.

The rescue effort was a rescue of the financial system, not of long-term capital management.

Victor says this was a private recapitalization. The 14 private banks got to buy a bunch of assets at buyer sale prices from a private company. Victor says while the Fed did babysit, it was just hosting a hedge fund yard sale.

Victor says this was a private recapitalization. The 14 private banks got to buy a bunch of assets at buyer sale prices from a private company. Victor says while the Fed did babysit, it was just hosting a hedge fund yard sale.

Yeah, that does sound bad.

Yeah, that does sound bad.

By intervening, the Fed set a precedent because just 10 years later, in 2008, the financial system would again be on the brink of collapse. Except this time, the problem was much bigger.

By intervening, the Fed set a precedent because just 10 years later, in 2008, the financial system would again be on the brink of collapse. Except this time, the problem was much bigger.

Poker during the day, poker at night, different types of poker. They would turn their desk chairs away from their computer screens of price charts and yield curves to face each other and ante up. They got to play games of risk and probability with actual living legends Bob Merton and Myron Scholes.

Poker during the day, poker at night, different types of poker. They would turn their desk chairs away from their computer screens of price charts and yield curves to face each other and ante up. They got to play games of risk and probability with actual living legends Bob Merton and Myron Scholes.

Victor and Roger agree on this point. Yes, the Fed or the government has some interest in a stable financial system. But because in 1998 the Fed intervened and orchestrated long-term capital's funeral, we didn't see what would have happened had it been allowed to fail chaotically. We didn't really feel the consequences of all that risk taking and all that leverage.

Victor and Roger agree on this point. Yes, the Fed or the government has some interest in a stable financial system. But because in 1998 the Fed intervened and orchestrated long-term capital's funeral, we didn't see what would have happened had it been allowed to fail chaotically. We didn't really feel the consequences of all that risk taking and all that leverage.

So we didn't really learn that maybe that was too much risk.

So we didn't really learn that maybe that was too much risk.

And Roger says it is folly to think that anyone would ever solve that age-old dream of a perfect mathematical solution to risk. Being able to predict the future. Because you can't. That's the only thing that history does promise us.

And Roger says it is folly to think that anyone would ever solve that age-old dream of a perfect mathematical solution to risk. Being able to predict the future. Because you can't. That's the only thing that history does promise us.

But maybe this time, Roger.

But maybe this time, Roger.

This episode of Planet Money was produced by Sam Yellow Horse Kessler and edited by Jess Jang. It was fact-checked by Sierra Juarez and engineered by Robert Rodriguez. Alex Goldmark is our executive producer. I'm Mary Childs.

This episode of Planet Money was produced by Sam Yellow Horse Kessler and edited by Jess Jang. It was fact-checked by Sierra Juarez and engineered by Robert Rodriguez. Alex Goldmark is our executive producer. I'm Mary Childs.

They applied their lofty, perfect academic models of cold rationality to the busy, chaotic, real financial markets to great, great profit.

They applied their lofty, perfect academic models of cold rationality to the busy, chaotic, real financial markets to great, great profit.

And then it all came crashing down. Hello and welcome to Planet Money. I'm Mary Childs.

And then it all came crashing down. Hello and welcome to Planet Money. I'm Mary Childs.

Perfect, safe, clever bets that turn into a perfect disaster that threatened the entire financial system. And how we have learned perfectly nothing from it.

Perfect, safe, clever bets that turn into a perfect disaster that threatened the entire financial system. And how we have learned perfectly nothing from it.

Yeah, what is cheap if it's just by itself?

Yeah, what is cheap if it's just by itself?

Because they weren't just buying a stock because they thought it was going to go up. They were betting on a discrepancy. They saw that one bond or stock cost too little relative to another very similar bond or stock. They were balancing the price of one thing off of another, like some kind of asset price parkour.

Because they weren't just buying a stock because they thought it was going to go up. They were betting on a discrepancy. They saw that one bond or stock cost too little relative to another very similar bond or stock. They were balancing the price of one thing off of another, like some kind of asset price parkour.

Like, for example, they bet on Russian debt denominated in rubles because everyone else was more scared of it than they needed to be. And they bet against Russian debt denominated in dollars because it was overpriced. That is called a relative value trade.

Like, for example, they bet on Russian debt denominated in rubles because everyone else was more scared of it than they needed to be. And they bet against Russian debt denominated in dollars because it was overpriced. That is called a relative value trade.

Hold on to the trade for the long term. That's how they managed the capital. You get it?

Hold on to the trade for the long term. That's how they managed the capital. You get it?

So step one, find an opportunity, like Russian debt in dollars is overpriced relative to Russian ruble debt. Step two, explain why that opportunity exists. Come up with a good explanation and understand what directions the prices should go.

So step one, find an opportunity, like Russian debt in dollars is overpriced relative to Russian ruble debt. Step two, explain why that opportunity exists. Come up with a good explanation and understand what directions the prices should go.

What is leverage?

What is leverage?

Borrowing money to double up on the trade or triple up. So if you have $1, you could invest $2 or $3 or $20. And if your bet is correct, you get, you know, 20 times the profit you were gonna with your just $1. Leverage amplifies whatever you're doing. You can win that much more, but you can also lose that much more. Most hedge funds do this, but long-term capital did it to the extreme.

Borrowing money to double up on the trade or triple up. So if you have $1, you could invest $2 or $3 or $20. And if your bet is correct, you get, you know, 20 times the profit you were gonna with your just $1. Leverage amplifies whatever you're doing. You can win that much more, but you can also lose that much more. Most hedge funds do this, but long-term capital did it to the extreme.

So step four, put on the trade. Take the opportunity. They'd call their bank or broker and say, hello, I have $20, 19 of it borrowed, and I'd like to use it to bet on this bond or option or whatever, please. And so that is a game that Victor and the group at Long-Term Capital Management were playing. And it was working.

So step four, put on the trade. Take the opportunity. They'd call their bank or broker and say, hello, I have $20, 19 of it borrowed, and I'd like to use it to bet on this bond or option or whatever, please. And so that is a game that Victor and the group at Long-Term Capital Management were playing. And it was working.

This is Roger Lowenstein. He wrote the book on Long-Term Capital Management. And he says in the beginning, this fund was verging on mystical.

This is Roger Lowenstein. He wrote the book on Long-Term Capital Management. And he says in the beginning, this fund was verging on mystical.

And in its first few years, their bets were right. Nickels upon nickels upon nickels. Long-term capital started in February 1994 with $1.3 billion of investor money. By late 1997, that was over $7 billion. But with all that success came a few problems.

And in its first few years, their bets were right. Nickels upon nickels upon nickels. Long-term capital started in February 1994 with $1.3 billion of investor money. By late 1997, that was over $7 billion. But with all that success came a few problems.

In the mid-1990s, a group of people thought they'd finally achieved this dream that had existed since the dawn of financial markets. They'd figured out how to take risk. They built a model that could help them generate great investment returns consistently over time. Perhaps unsurprisingly, they were math nerds.

In the mid-1990s, a group of people thought they'd finally achieved this dream that had existed since the dawn of financial markets. They'd figured out how to take risk. They built a model that could help them generate great investment returns consistently over time. Perhaps unsurprisingly, they were math nerds.

They'd wrung so much profit out of the markets. In 95, they generated 43% in returns. And the next year, 41%. And another thing about too much success? Everyone else notices. Everyone else started copying them. Trading desks at other hedge funds, at banks. Long-term capital now had more competition. More people buying up the same stuff, scooping up those nickels.

They'd wrung so much profit out of the markets. In 95, they generated 43% in returns. And the next year, 41%. And another thing about too much success? Everyone else notices. Everyone else started copying them. Trading desks at other hedge funds, at banks. Long-term capital now had more competition. More people buying up the same stuff, scooping up those nickels.

It was math over emotions. Risk-taking had always been an art, but now they could turn risk-taking into a science.

It was math over emotions. Risk-taking had always been an art, but now they could turn risk-taking into a science.

That phenomenon was starting to show up in the returns for their clients. Instead of 40-something percent returns, in 1997, they generated just 17 percent, which didn't even beat the S&P 500.

That phenomenon was starting to show up in the returns for their clients. Instead of 40-something percent returns, in 1997, they generated just 17 percent, which didn't even beat the S&P 500.

first, financial markets were getting interesting. There was a financial crisis roiling Asia, sparked in Thailand, now hitting Indonesia and South Korea. Long-term capital's models haven't really predicted that, but so far, not that big a deal. The trouble was pretty contained.

first, financial markets were getting interesting. There was a financial crisis roiling Asia, sparked in Thailand, now hitting Indonesia and South Korea. Long-term capital's models haven't really predicted that, but so far, not that big a deal. The trouble was pretty contained.

Okay, little stuff. All fine. Not that big a deal for long-term capital management.

Okay, little stuff. All fine. Not that big a deal for long-term capital management.

Which, OK, maybe some buying opportunities in there, you know?

Which, OK, maybe some buying opportunities in there, you know?

In August of 1998, things really got started. Russia acted in a way that was unexpected. It defaulted on its ruble debt and devalued its currency.

In August of 1998, things really got started. Russia acted in a way that was unexpected. It defaulted on its ruble debt and devalued its currency.

Victor had gone from working at an investment bank to getting hired into this elite, illustrious group. A group that included Myron Scholes and Bob Merton, the guys who'd figured out how to mathematically derive prices for stock options, bets on a stock's future price. For this work, Myron Scholes and Bob Merton would go on to win a Nobel Prize in economics.

Victor had gone from working at an investment bank to getting hired into this elite, illustrious group. A group that included Myron Scholes and Bob Merton, the guys who'd figured out how to mathematically derive prices for stock options, bets on a stock's future price. For this work, Myron Scholes and Bob Merton would go on to win a Nobel Prize in economics.

Not a lot. Losses they could handle. That wasn't the problem.

Not a lot. Losses they could handle. That wasn't the problem.

And this is when and why things went so sideways for long term capital. Risk managers, people whose jobs were to make sure their firm wasn't doing anything crazy, they were suddenly acting in a way that no model had predicted. They were like, whoa, this Russia default really surprised us. That's scary. Can we ratchet down how much money we have out there?

And this is when and why things went so sideways for long term capital. Risk managers, people whose jobs were to make sure their firm wasn't doing anything crazy, they were suddenly acting in a way that no model had predicted. They were like, whoa, this Russia default really surprised us. That's scary. Can we ratchet down how much money we have out there?

Can we sell the riskier stuff until we feel better?

Can we sell the riskier stuff until we feel better?

The group was still able to function to sell things to other people into a very falling market. Stock markets in Europe dropped more than 5% in a day. For the month of August, the Dow Jones Industrial Average dropped 15%.

The group was still able to function to sell things to other people into a very falling market. Stock markets in Europe dropped more than 5% in a day. For the month of August, the Dow Jones Industrial Average dropped 15%.

And then one day we look at our screens. Their screens start showing something weird. Some of the things they owned, their positions that shouldn't be affected at all by Thailand or Russia, they're also having huge swings.

And then one day we look at our screens. Their screens start showing something weird. Some of the things they owned, their positions that shouldn't be affected at all by Thailand or Russia, they're also having huge swings.

And then their offsetting bet in the other direction? Shouldn't that bet be working out?

And then their offsetting bet in the other direction? Shouldn't that bet be working out?

Because in all their beautiful, perfect mathematical models of risk-taking and risk-not-taking, Roger could see that long-term capital had failed to account for something. A big thing.

Because in all their beautiful, perfect mathematical models of risk-taking and risk-not-taking, Roger could see that long-term capital had failed to account for something. A big thing.

Yeah, the sell-off may have started with Russia, but then the human factor. People got spooked across the board. And then when long-term capital started to stumble, Wall Street saw an opening.

Yeah, the sell-off may have started with Russia, but then the human factor. People got spooked across the board. And then when long-term capital started to stumble, Wall Street saw an opening.

You feel as far as our money supply, we've got that about as far as we can turn it right now, have we? I mean, as far as my influence on him, that's what I'm really asking. Well, you know, he said that they voted to increase it. I know. And he said, what was his words? He said, and I'm on the line on that. I'm on the line. That it increased, and that's what he said. I put that in my little note.

You feel as far as our money supply, we've got that about as far as we can turn it right now, have we? I mean, as far as my influence on him, that's what I'm really asking. Well, you know, he said that they voted to increase it. I know. And he said, what was his words? He said, and I'm on the line on that. I'm on the line. That it increased, and that's what he said. I put that in my little note.

All right. Well, you watch it and then remind me if I have to talk to him again, and I'll do it. Well, I'm sure next time I'll just bring him in. What? I'm sure we'll have to keep after him, huh? Yeah.

All right. Well, you watch it and then remind me if I have to talk to him again, and I'll do it. Well, I'm sure next time I'll just bring him in. What? I'm sure we'll have to keep after him, huh? Yeah.

Oh, one other thing. I told John to have put on on the White House Theater Monday night the Brian song. I don't know whether you saw it. You probably didn't. But it's an ABC hour and a half movie on Brian Piccolo and Gail Sayre. It's the best thing in race relations that's been done in my memory. And it's a beautiful movie.

Oh, one other thing. I told John to have put on on the White House Theater Monday night the Brian song. I don't know whether you saw it. You probably didn't. But it's an ABC hour and a half movie on Brian Piccolo and Gail Sayre. It's the best thing in race relations that's been done in my memory. And it's a beautiful movie.

So be sure to have you, your kids, anybody that are around, go Monday night to the theater to see it. Will you do that? I'll do that. It's a really wonderful movie. Okay. Bye.

So be sure to have you, your kids, anybody that are around, go Monday night to the theater to see it. Will you do that? I'll do that. It's a really wonderful movie. Okay. Bye.

This will be the last conservative administration in this city, in Washington.

This will be the last conservative administration in this city, in Washington.

Just bullshit.

Just bullshit.

Just a note, in this episode, we will at some point talk about specific AI and tech companies, including Meta, Google, Microsoft, and Anthropic, all of which are current financial supporters of NPR. Here's the show. This is Planet Money from NPR. Imagine us at Planet Money, rolling out of bed late on Monday morning, still in our cozy pajamas.

Just a note, in this episode, we will at some point talk about specific AI and tech companies, including Meta, Google, Microsoft, and Anthropic, all of which are current financial supporters of NPR. Here's the show. This is Planet Money from NPR. Imagine us at Planet Money, rolling out of bed late on Monday morning, still in our cozy pajamas.

There you go.

There you go.

And then the AI adopters. Those are all the companies that stand to benefit from using AI. And really, what this week was about was like a shift away from the enablers and arguably a bit towards the adopters.

And then the AI adopters. Those are all the companies that stand to benefit from using AI. And really, what this week was about was like a shift away from the enablers and arguably a bit towards the adopters.

And I think there is one other huge assumption that was challenged this week. Up until Monday, the market seemed to be confident that American AI companies had a moat around this technology, that the barriers to entry were just so enormous that no one else was going to win this arms race.

And I think there is one other huge assumption that was challenged this week. Up until Monday, the market seemed to be confident that American AI companies had a moat around this technology, that the barriers to entry were just so enormous that no one else was going to win this arms race.

After the break, we sit down with someone actively trying to build DeepSeek from scratch to see how much of all of this is real. And did the world really change on Monday?

After the break, we sit down with someone actively trying to build DeepSeek from scratch to see how much of all of this is real. And did the world really change on Monday?

I can see that it is a very cute logo, but it is a kind of AI company where Leandro Fonvera works, and he describes the basic business model this way.

I can see that it is a very cute logo, but it is a kind of AI company where Leandro Fonvera works, and he describes the basic business model this way.

But there's an enterprise edition that costs money, and that's how they make money. But the point is, hugging face, cute logo, AI. like an AI sharing platform. They do not build gigantic proprietary AI models to compete with open AI or anthropic or Google or whatever.

But there's an enterprise edition that costs money, and that's how they make money. But the point is, hugging face, cute logo, AI. like an AI sharing platform. They do not build gigantic proprietary AI models to compete with open AI or anthropic or Google or whatever.

And what's been useful lately is DeepSeek or, you know, playing around with DeepSeek's new chatbot that partially freaked the markets out about the future of AI.

And what's been useful lately is DeepSeek or, you know, playing around with DeepSeek's new chatbot that partially freaked the markets out about the future of AI.

So let's take these one by one. Is DeepSeq actually as good as the fancy American AIs? Well, Landros says we have ways to test this. There are these like standardized tests, benchmarks for AI models. They used to be like pretty simple math problems or whatever, but as the models have been trained more and more and have gotten better and better,

So let's take these one by one. Is DeepSeq actually as good as the fancy American AIs? Well, Landros says we have ways to test this. There are these like standardized tests, benchmarks for AI models. They used to be like pretty simple math problems or whatever, but as the models have been trained more and more and have gotten better and better,

So is DeepSeq passing PhD-level coding, PhD-level math?

So is DeepSeq passing PhD-level coding, PhD-level math?

here i will just interject to note we do have on staff one person who has a math degree and it's kenny true not an olympiad but i was excited quickly downloaded some math olympiad questions pulled them up on my screen for leandro this is such a big day for you i feel like oh yeah this never gets to happen the first all right hold on show that for each n we can find an n digit number with all its digits odd which is divisible by five to the nth power

here i will just interject to note we do have on staff one person who has a math degree and it's kenny true not an olympiad but i was excited quickly downloaded some math olympiad questions pulled them up on my screen for leandro this is such a big day for you i feel like oh yeah this never gets to happen the first all right hold on show that for each n we can find an n digit number with all its digits odd which is divisible by five to the nth power

Yeah. Deep seek can do that? Sometimes. I mean, I can only sometimes do that. So yeah. All right. Fair enough.

Yeah. Deep seek can do that? Sometimes. I mean, I can only sometimes do that. So yeah. All right. Fair enough.

Okay. So that's what we're talking about here, huh?

Okay. So that's what we're talking about here, huh?

Yeah, no apparent gaps between how DeepSeq's model performs and how the other models perform.

Yeah, no apparent gaps between how DeepSeq's model performs and how the other models perform.

Okay. So this is the classic, are they teaching to the test?

Okay. So this is the classic, are they teaching to the test?

Or as Jim Cramer so artfully put it. This week has been a tectonic shift in assumptions about how the world is going to look. So let us first discuss how those assumptions became assumed. We shall visit a simpler ancient time.

Or as Jim Cramer so artfully put it. This week has been a tectonic shift in assumptions about how the world is going to look. So let us first discuss how those assumptions became assumed. We shall visit a simpler ancient time.

So, OK, appears to be good. That answers everybody's first question about DeepSeek, whether it was playing at the same level as other big AI models. But the second question is, do we really think that this thing is more efficient in some way?

So, OK, appears to be good. That answers everybody's first question about DeepSeek, whether it was playing at the same level as other big AI models. But the second question is, do we really think that this thing is more efficient in some way?

When you sit down to like replicate DeepSeek, I don't even know, like, what do you, do you sit down and you open up a computer and you're like, all right, crack your fingers, open up a Microsoft Word document. You're like DeepSeek V2, let's go.

When you sit down to like replicate DeepSeek, I don't even know, like, what do you, do you sit down and you open up a computer and you're like, all right, crack your fingers, open up a Microsoft Word document. You're like DeepSeek V2, let's go.

Are the claims that have been made about DeepSeq, the cheapness, the fact that it can run on less powerful processors, do all of these things seem to be checking out?

Are the claims that have been made about DeepSeq, the cheapness, the fact that it can run on less powerful processors, do all of these things seem to be checking out?

Yeah, in the ballpark, which is notable because there had kind of been some murmurs of skepticism around the specific numbers DeepSeq was putting out.

Yeah, in the ballpark, which is notable because there had kind of been some murmurs of skepticism around the specific numbers DeepSeq was putting out.

I've heard people talk about this moment as a shift towards AI models as a commodity. And that is a completely different vision than what markets seem to be betting on before this week. Like seemingly overnight, we went from an imagined future where a handful of gigantic American companies controlled the most powerful AI models.

I've heard people talk about this moment as a shift towards AI models as a commodity. And that is a completely different vision than what markets seem to be betting on before this week. Like seemingly overnight, we went from an imagined future where a handful of gigantic American companies controlled the most powerful AI models.

to a future where it seems very powerful AI models can be built and used by maybe anyone, anywhere, someday?

to a future where it seems very powerful AI models can be built and used by maybe anyone, anywhere, someday?

Yeah, investors are, of course, still betting on a version of the AI revolution, which, of course, will be excitedly televised. If you want to nerd out more on what an AI future might look like, you can subscribe to our newsletter. Newsletter author Greg Rosalski is working on a piece about why the AI community is suddenly obsessed with a 160-year-old paradox, Jevons Paradox.

Yeah, investors are, of course, still betting on a version of the AI revolution, which, of course, will be excitedly televised. If you want to nerd out more on what an AI future might look like, you can subscribe to our newsletter. Newsletter author Greg Rosalski is working on a piece about why the AI community is suddenly obsessed with a 160-year-old paradox, Jevons Paradox.

He's got the history of that idea and the latest AI ideas. Subscribe at npr.org slash planetmoneynewsletter.

He's got the history of that idea and the latest AI ideas. Subscribe at npr.org slash planetmoneynewsletter.

Special thanks this week to Chaim Israel from Bank of America. I'm Kenny Malone.

Special thanks this week to Chaim Israel from Bank of America. I'm Kenny Malone.

Now, that AI model was developed by an American company called OpenAI. And their AI model, ChatGPT, had taken a ton of time to develop. OpenAI had spent billions of dollars creating it, and as the model developed, it became clear that running better and better versions of GPT would be so expensive because it required the best semiconductors in the world, lots of them.

Now, that AI model was developed by an American company called OpenAI. And their AI model, ChatGPT, had taken a ton of time to develop. OpenAI had spent billions of dollars creating it, and as the model developed, it became clear that running better and better versions of GPT would be so expensive because it required the best semiconductors in the world, lots of them.

And newer companies got more competitive, too. Anthropic, perplexity, also with gigantic AI models requiring unearthly amounts of compute, as they say, and money, as they also say.

And newer companies got more competitive, too. Anthropic, perplexity, also with gigantic AI models requiring unearthly amounts of compute, as they say, and money, as they also say.

If there was a way to win the AI arms race, it seemed pretty clear you needed the scale of a gargantuan company to do so.

If there was a way to win the AI arms race, it seemed pretty clear you needed the scale of a gargantuan company to do so.

Was Monday a bummer of a day for you? In the grand scheme of days, how does that shape up?

Was Monday a bummer of a day for you? In the grand scheme of days, how does that shape up?

And he says on Monday, there were bad signs even before the stock market opened in the United States.

And he says on Monday, there were bad signs even before the stock market opened in the United States.

Well, so yeah, deep seek was happening. Here's the backstory. This Chinese company, a subsidiary of a hedge fund actually, had been developing an AI model just, you know, for fun, for its own hedge fundy uses, I guess. And this was not a secret. Lots of people in the AI tech world knew about this, Angelo included, because the hedge fund had been sort of open sourcing what it was doing.

Well, so yeah, deep seek was happening. Here's the backstory. This Chinese company, a subsidiary of a hedge fund actually, had been developing an AI model just, you know, for fun, for its own hedge fundy uses, I guess. And this was not a secret. Lots of people in the AI tech world knew about this, Angelo included, because the hedge fund had been sort of open sourcing what it was doing.

After all, the parent company was not an AI company. It was a hedge fund.

After all, the parent company was not an AI company. It was a hedge fund.

Yeah. Number one, the DeepSeek AI had been training, getting better and better. And it seems that the newest version, released just 11 days ago, had got real good. It hit certain benchmarks that showed it was possibly, allegedly, undervalued. As good or nearly as good as the gigantic, fancy, expensive AI models being built by the American AI companies.

Yeah. Number one, the DeepSeek AI had been training, getting better and better. And it seems that the newest version, released just 11 days ago, had got real good. It hit certain benchmarks that showed it was possibly, allegedly, undervalued. As good or nearly as good as the gigantic, fancy, expensive AI models being built by the American AI companies.

And then big thing number three, according to Angelo Zeno, news of all of this starts to spread. And over the weekend, last weekend, lots of people download a DeepSeek app, presumably to see what this buzzy new AI model is really like.

And then big thing number three, according to Angelo Zeno, news of all of this starts to spread. And over the weekend, last weekend, lots of people download a DeepSeek app, presumably to see what this buzzy new AI model is really like.

I've been thinking about, like, should Monday have a name? Like, Black Friday had a name, you know? And I've been trying to make this one work. Yeah. Monday-eye apocalypse. It's not bad. It's not bad. You know... And so we shall now dissect and make meaning of the Monday-i apocalypse, starting with Angelo's specialty, the tech sector.

I've been thinking about, like, should Monday have a name? Like, Black Friday had a name, you know? And I've been trying to make this one work. Yeah. Monday-eye apocalypse. It's not bad. It's not bad. You know... And so we shall now dissect and make meaning of the Monday-i apocalypse, starting with Angelo's specialty, the tech sector.

So for a lot of the people who were interested in investing in the brave new AI future, NVIDIA seemed like a good place to do it, especially because it has actually been quite hard to invest directly in the AI companies. Like some of the biggest companies developing the models, OpenAI, Anthropic, they do not have shares you can just go and buy. They're not publicly listed, not yet at least.

So for a lot of the people who were interested in investing in the brave new AI future, NVIDIA seemed like a good place to do it, especially because it has actually been quite hard to invest directly in the AI companies. Like some of the biggest companies developing the models, OpenAI, Anthropic, they do not have shares you can just go and buy. They're not publicly listed, not yet at least.

Basically, because the only way the AI revolution can happen is with the fancy AI chips from NVIDIA. And in fact, NVIDIA was seemingly so important that in 2022, the United States banned NVIDIA's most powerful chips from being sent to China to preserve America's AI advantage for national security reasons.

Basically, because the only way the AI revolution can happen is with the fancy AI chips from NVIDIA. And in fact, NVIDIA was seemingly so important that in 2022, the United States banned NVIDIA's most powerful chips from being sent to China to preserve America's AI advantage for national security reasons.

Which... The markets seemed to think perhaps meant NVIDIA was not quite as important to the AI revolution as they thought. And on Monday, NVIDIA's stock price fell so much, nearly 20%.

Which... The markets seemed to think perhaps meant NVIDIA was not quite as important to the AI revolution as they thought. And on Monday, NVIDIA's stock price fell so much, nearly 20%.

Now, historically, had you been bullish on NVIDIA? Had you been telling these European investors like, hey, go long NVIDIA?

Now, historically, had you been bullish on NVIDIA? Had you been telling these European investors like, hey, go long NVIDIA?

If you were a week ago telling people bullish on Nvidia and then on Monday it plummets, how does that, like, what's that like when you're in your chair?

If you were a week ago telling people bullish on Nvidia and then on Monday it plummets, how does that, like, what's that like when you're in your chair?

It is, however, a conversation that many investors needed to have with themselves on Monday because... DeepSeek's prevalence suddenly did seem to undermine the core assumption that in order to build god-tier AI, you needed god-tier AI chips. But DeepSeek had apparently pulled it off with cheaper chips and fewer of them.

It is, however, a conversation that many investors needed to have with themselves on Monday because... DeepSeek's prevalence suddenly did seem to undermine the core assumption that in order to build god-tier AI, you needed god-tier AI chips. But DeepSeek had apparently pulled it off with cheaper chips and fewer of them.

As for Angelo, what did he tell his angry European investors and other investors during the Monday Eye apocalypse?

As for Angelo, what did he tell his angry European investors and other investors during the Monday Eye apocalypse?

Okay, so you didn't change that through the cliff.

Okay, so you didn't change that through the cliff.

Because, he says, the AI revolution will still need lots and lots of processing power. Just, you know, whose chips and how many and what kind? Well, the markets seem a bit less sure about all of that than they were one week ago.

Because, he says, the AI revolution will still need lots and lots of processing power. Just, you know, whose chips and how many and what kind? Well, the markets seem a bit less sure about all of that than they were one week ago.

Yeah, because on Monday, AI-related stocks started plummeting and TV-related people started grasping for big metaphors. It was an earthquake today in the world of artificial intelligence. The seismic AI event, a new-ish AI model from a company called DeepSeek.

Yeah, because on Monday, AI-related stocks started plummeting and TV-related people started grasping for big metaphors. It was an earthquake today in the world of artificial intelligence. The seismic AI event, a new-ish AI model from a company called DeepSeek.

I'm going to share my screen and I'm just going to explain in one second.

I'm going to share my screen and I'm just going to explain in one second.

I just want you to read a headline that you wrote from like about two weeks ago.

I just want you to read a headline that you wrote from like about two weeks ago.

Well, Jennifer, it seems you know what I'm going to do next, which is two weeks later, I'm just going to pull up a graph of their stock price.

Well, Jennifer, it seems you know what I'm going to do next, which is two weeks later, I'm just going to pull up a graph of their stock price.

Yeah.

Yeah.

Yes. Okay. So in case you have not heard this, the AI revolution is going to require a lot of energy. And this goes back to the market assumption we just discussed about how training AI models and running them requires really high-tech processors, which use loads of electricity, and

Yes. Okay. So in case you have not heard this, the AI revolution is going to require a lot of energy. And this goes back to the market assumption we just discussed about how training AI models and running them requires really high-tech processors, which use loads of electricity, and

And then AI uses loads of those fancy processors using loads of electricity and they put them all together and I guess in giant big buildings.

And then AI uses loads of those fancy processors using loads of electricity and they put them all together and I guess in giant big buildings.

Should we imagine it like having the electrical meter outside and it's just spinning so fast you can't see the hand?

Should we imagine it like having the electrical meter outside and it's just spinning so fast you can't see the hand?

And for reasons, Jennifer says some of the tech companies have become fixated on nuclear as a great option for the huge AI power needs.

And for reasons, Jennifer says some of the tech companies have become fixated on nuclear as a great option for the huge AI power needs.

Apparently that is how nuclear power works. Consistent energy 24-7.

Apparently that is how nuclear power works. Consistent energy 24-7.

Oh, 100%. But anyway, the point is that we have a similar story here to what we had with NVIDIA and other chip makers. People wanted a way to invest in the AI future, and so they were pouring money into nuclear stocks, including, of course, our nation's biggest nuclear provider, Constellation Energy.

Oh, 100%. But anyway, the point is that we have a similar story here to what we had with NVIDIA and other chip makers. People wanted a way to invest in the AI future, and so they were pouring money into nuclear stocks, including, of course, our nation's biggest nuclear provider, Constellation Energy.

And then on Monday, because of DeepSeek, the markets were forced to perhaps rethink that assumption. You had this high quality AI apparently needing less energy. The market starts selling Constellation off of the cliff. And at one point on Monday, the stock was down 20%.

And then on Monday, because of DeepSeek, the markets were forced to perhaps rethink that assumption. You had this high quality AI apparently needing less energy. The market starts selling Constellation off of the cliff. And at one point on Monday, the stock was down 20%.

Yeah. So that cliff you described, the stock price of Constellation dropping off, that is a market collectively saying, oh, crap, maybe the future doesn't require as much electricity as I was betting on.

Yeah. So that cliff you described, the stock price of Constellation dropping off, that is a market collectively saying, oh, crap, maybe the future doesn't require as much electricity as I was betting on.

And to be clear, nuclear power has been getting lots of headlines, but the markets had also been pouring into really like any company that makes and sells any kind of electricity.

And to be clear, nuclear power has been getting lots of headlines, but the markets had also been pouring into really like any company that makes and sells any kind of electricity.

And I'm Kenny Malone. Today on the show, call it an artificial intelligence earthquake, call it an AI apocalypse, but Monday was not just a market freakout. I mean, it was that. Markets lost hundreds of billions of dollars, but it was also a teachable moment.

And I'm Kenny Malone. Today on the show, call it an artificial intelligence earthquake, call it an AI apocalypse, but Monday was not just a market freakout. I mean, it was that. Markets lost hundreds of billions of dollars, but it was also a teachable moment.

The Monday Eye Apocalypse. was not about whether or not there will be an AI revolution. If anything, the introduction of deep seek means more AI, lowering the barrier to AI, making it cheaper to use for, I don't know, whatever your AI mind can dream up.

The Monday Eye Apocalypse. was not about whether or not there will be an AI revolution. If anything, the introduction of deep seek means more AI, lowering the barrier to AI, making it cheaper to use for, I don't know, whatever your AI mind can dream up.

Hi, this is Mary Childs. There's the saying about artificial intelligence that right now AI is the worst it will ever be. It screws up a lot now, but it is only going to get better. So how to even answer questions like will AI replace jobs or change jobs? We talked about this on the show last year and especially in the Planet Money newsletter, which our beloved Greg Wazowski writes.

Hi, this is Mary Childs. There's the saying about artificial intelligence that right now AI is the worst it will ever be. It screws up a lot now, but it is only going to get better. So how to even answer questions like will AI replace jobs or change jobs? We talked about this on the show last year and especially in the Planet Money newsletter, which our beloved Greg Wazowski writes.

Subscribe if you haven't already. It's very good. So today we are sharing something that Greg uncovered for the newsletter this summer. He figured out a clever way to investigate AI progress for jobs. Look at something AI is already good at. Translation. Greg interviewed an AI innovator who also is the head of the language learning app Duolingo.

Subscribe if you haven't already. It's very good. So today we are sharing something that Greg uncovered for the newsletter this summer. He figured out a clever way to investigate AI progress for jobs. Look at something AI is already good at. Translation. Greg interviewed an AI innovator who also is the head of the language learning app Duolingo.

We regularly publish Greg's newsletter chats as bonus episodes for our Planet Money Plus subscribers. So if that is you, you already got a chance to hear this. Bonus content is just one perk of signing up for Planet Money Plus. You also get every episode of Planet Money without sponsor messages. And you get exclusive Planet Money merch at the NPR shop.

We regularly publish Greg's newsletter chats as bonus episodes for our Planet Money Plus subscribers. So if that is you, you already got a chance to hear this. Bonus content is just one perk of signing up for Planet Money Plus. You also get every episode of Planet Money without sponsor messages. And you get exclusive Planet Money merch at the NPR shop.

So while you listen today, consider supporting us by signing up. Just go to plus.npr.org. Okay, here's Greg.

So while you listen today, consider supporting us by signing up. Just go to plus.npr.org. Okay, here's Greg.

If you liked this, you can hear more of Greg's newsletter interviews and other bonus episodes like the Planet Money Movie Club by signing up for Planet Money Plus. In these times of uncertain advertising revenue, subscriptions are the steadiest, best way to support our work and help keep us going. Again, just go to plus.npr.org for details. We are very grateful. I'm Mary Childs. This is NPR.

If you liked this, you can hear more of Greg's newsletter interviews and other bonus episodes like the Planet Money Movie Club by signing up for Planet Money Plus. In these times of uncertain advertising revenue, subscriptions are the steadiest, best way to support our work and help keep us going. Again, just go to plus.npr.org for details. We are very grateful. I'm Mary Childs. This is NPR.

Oh, thank you, Alexi. Good to be back.

Oh, thank you, Alexi. Good to be back.

That is correct. I went shopping out of necessity and Sweden won.

That is correct. I went shopping out of necessity and Sweden won.

I know, right?

I know, right?

No, I wish, Alexi. I don't understand why no one has called me. I remain open to employment in Sweden. But here is my update. My episode was about benefits that parents can get in different countries, but I did not talk at all about the benefits for parents of multiples, which is the term of art among those of us who have had more than one baby at one time.

No, I wish, Alexi. I don't understand why no one has called me. I remain open to employment in Sweden. But here is my update. My episode was about benefits that parents can get in different countries, but I did not talk at all about the benefits for parents of multiples, which is the term of art among those of us who have had more than one baby at one time.

Like, you know, twins or triplets or, God forbid, quadruplets. Multiples. Yes, multiples. I actually learned that the offering in Sweden is even better than I realized because they give additional leave for each additional baby.

Like, you know, twins or triplets or, God forbid, quadruplets. Multiples. Yes, multiples. I actually learned that the offering in Sweden is even better than I realized because they give additional leave for each additional baby.

When it comes to multiples, it's kind of buy one, buy another. So I don't know that it's like a deal. But in Sweden, they really do offer 180 days more per marginal child. On top of their existing offer of 480 days for a baby. Not bad. I know. So only a few countries in the world do this.

When it comes to multiples, it's kind of buy one, buy another. So I don't know that it's like a deal. But in Sweden, they really do offer 180 days more per marginal child. On top of their existing offer of 480 days for a baby. Not bad. I know. So only a few countries in the world do this.

The Scandinavian countries, as again, you might expect, but also Poland, Laos, Azerbaijan, Lithuania, Andorra. But again, this is unusual because in most countries, it doesn't matter how many babies you grew. It is just one birth event.

The Scandinavian countries, as again, you might expect, but also Poland, Laos, Azerbaijan, Lithuania, Andorra. But again, this is unusual because in most countries, it doesn't matter how many babies you grew. It is just one birth event.

That's exactly right, Alexi, and I'm so glad that you see this. Rome famously needs more days to be built. Obviously, there are more babies to care for and to bond with. But here's why more leave may be medically indicated. Because it's typically a more complicated pregnancy for whoever is growing the babies. And it is also riskier for the infants themselves because twins, triplets, etc.

That's exactly right, Alexi, and I'm so glad that you see this. Rome famously needs more days to be built. Obviously, there are more babies to care for and to bond with. But here's why more leave may be medically indicated. Because it's typically a more complicated pregnancy for whoever is growing the babies. And it is also riskier for the infants themselves because twins, triplets, etc.

are more likely than singletons to need time in the neonatal intensive care unit. They are more likely to have health complications, etc.

are more likely than singletons to need time in the neonatal intensive care unit. They are more likely to have health complications, etc.

And guess what, Alexi? You are going to be hearing more about this because the incidence of multiple babies at a time is rising. We're getting more multiples? The multiples are multiplying. Because, yes, more people are using fertility assistance treatments, doing IVF, etc., and that increases your chances. But that's not the only reason. And no one is talking about this, but they should.

And guess what, Alexi? You are going to be hearing more about this because the incidence of multiple babies at a time is rising. We're getting more multiples? The multiples are multiplying. Because, yes, more people are using fertility assistance treatments, doing IVF, etc., and that increases your chances. But that's not the only reason. And no one is talking about this, but they should.

Another factor that increases your chances of multiples? Advanced maternal age. Okay? So as more people are having kids later in life than they used to, you can expect to see more twins and more people asking for longer parental leave.

Another factor that increases your chances of multiples? Advanced maternal age. Okay? So as more people are having kids later in life than they used to, you can expect to see more twins and more people asking for longer parental leave.

Ah, exactly right. Please come visit me.

Ah, exactly right. Please come visit me.

Perfect.

Perfect.

Steve says some very high ranking members of Congress who represented coal mining areas thought Steve's green adjusted GDP would make their regions look worse than regular GDP. And through the grapevine, he found out that Congress was proposing to slash their budget if they kept publishing their green GDP.

Steve says some very high ranking members of Congress who represented coal mining areas thought Steve's green adjusted GDP would make their regions look worse than regular GDP. And through the grapevine, he found out that Congress was proposing to slash their budget if they kept publishing their green GDP.

But, like, can they do that? Can they change how we measure the economy just like that? Hello and welcome to Planet Money. I'm Mary Childs.

But, like, can they do that? Can they change how we measure the economy just like that? Hello and welcome to Planet Money. I'm Mary Childs.

Now, Steve left his job as director of the BEA a decade ago. But we were curious about what he thought about what's been happening recently with senior administration officials, with the commerce secretary wanting to totally strip government spending out of GDP.

Now, Steve left his job as director of the BEA a decade ago. But we were curious about what he thought about what's been happening recently with senior administration officials, with the commerce secretary wanting to totally strip government spending out of GDP.

He points to a press release from the BEA about 2024 GDP. Table two shows how much each part of the formula contributed to GDP. So how much consumption and investment and net exports and government spending each contributed.

He points to a press release from the BEA about 2024 GDP. Table two shows how much each part of the formula contributed to GDP. So how much consumption and investment and net exports and government spending each contributed.

Yeah. If you want to be more serious about it, he says there are several different measures of GDP that BEA already publishes. Different slices of GDP that tell different stories. Like there's one that's GDP just not including net exports. There are a bunch of these.

Yeah. If you want to be more serious about it, he says there are several different measures of GDP that BEA already publishes. Different slices of GDP that tell different stories. Like there's one that's GDP just not including net exports. There are a bunch of these.

Steve says if he looks at that press release next month and they've announced that GDP now does not include government spending, well, that is a different story.

Steve says if he looks at that press release next month and they've announced that GDP now does not include government spending, well, that is a different story.

We're going to talk to the person who was the keeper of the stat for nearly 20 years. Turns out people from politicians to economists to special interest groups have been trying to bend GDP for decades to make whatever grand project they're working on look better. Today on the show, what's different this time and what is the same as it ever was? Okay, GDP. What is it?

We're going to talk to the person who was the keeper of the stat for nearly 20 years. Turns out people from politicians to economists to special interest groups have been trying to bend GDP for decades to make whatever grand project they're working on look better. Today on the show, what's different this time and what is the same as it ever was? Okay, GDP. What is it?

Before we go, we wanted to let you know about a new perk for Planet Money Plus supporters. We have made it easy for you to listen to some of our classic series from the Planet Money archive. Like when we wanted to understand the global financial crisis and bought a toxic asset we named Toxie. You can now find all eight Toxie episodes in one playlist with more playlists to come this year.

Before we go, we wanted to let you know about a new perk for Planet Money Plus supporters. We have made it easy for you to listen to some of our classic series from the Planet Money archive. Like when we wanted to understand the global financial crisis and bought a toxic asset we named Toxie. You can now find all eight Toxie episodes in one playlist with more playlists to come this year.

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And I'm Mary Childs. This is NPR. Thanks for listening.

And I'm Mary Childs. This is NPR. Thanks for listening.

To help us understand, we brought in someone who spent 20 years in charge at the Bureau of Economic Analysis, that federal agency that calculates GDP, Steve Landefeld.

To help us understand, we brought in someone who spent 20 years in charge at the Bureau of Economic Analysis, that federal agency that calculates GDP, Steve Landefeld.

Okay, so parents, take note. If you want your kids to follow in your footsteps, keep your job a mystery.

Okay, so parents, take note. If you want your kids to follow in your footsteps, keep your job a mystery.

The concept was developed in the 1930s, and there's a formula to calculate it that's basically remained the same for decades.

The concept was developed in the 1930s, and there's a formula to calculate it that's basically remained the same for decades.

And you add to that everything businesses invest in. Every factory, every new machine, every important office foosball table. Right.

And you add to that everything businesses invest in. Every factory, every new machine, every important office foosball table. Right.

And then, finally, combine all that with what's called net exports. Everything we export minus everything we import. The economist in crowd, people like Steve, would say the whole formula this way.

And then, finally, combine all that with what's called net exports. Everything we export minus everything we import. The economist in crowd, people like Steve, would say the whole formula this way.

Which is not bad. And GDP is important. Not only does it tell us how healthy the economy is if we're headed towards a recession or not, but also GDP influences how the government allocates money. It influences whether businesses build a new factory or hire more workers. A lot of decisions are made based on how our GDP is doing.

Which is not bad. And GDP is important. Not only does it tell us how healthy the economy is if we're headed towards a recession or not, but also GDP influences how the government allocates money. It influences whether businesses build a new factory or hire more workers. A lot of decisions are made based on how our GDP is doing.

Now, Steve, Steve wanted GDP to be as accurate as possible. He was obsessed with that mission. For 20 years, he was essentially the defender of GDP's integrity.

Now, Steve, Steve wanted GDP to be as accurate as possible. He was obsessed with that mission. For 20 years, he was essentially the defender of GDP's integrity.

Correcting GDP for inflation is really important. Because if you have 2% growth but also 2% inflation, you don't really have growth. And Steve wanted to use a new measure of inflation that better reflected how prices were factored in. So GDP would be more accurate.

Correcting GDP for inflation is really important. Because if you have 2% growth but also 2% inflation, you don't really have growth. And Steve wanted to use a new measure of inflation that better reflected how prices were factored in. So GDP would be more accurate.

And its publication is kind of always a big deal. It is closely watched because people can see how hot the economy is running or how cold, like if we're tipping into a recession. But this release, this is going to be even closerly watched.

And its publication is kind of always a big deal. It is closely watched because people can see how hot the economy is running or how cold, like if we're tipping into a recession. But this release, this is going to be even closerly watched.

In other words, the note said, we are going to make your predecessor look better and you look worse. For the sake of sound statistics.

In other words, the note said, we are going to make your predecessor look better and you look worse. For the sake of sound statistics.

After our interview, Steve checked and apparently it said, this is nuts.

After our interview, Steve checked and apparently it said, this is nuts.

But Steve was the keeper of the stat. He thought this change was really important, like important enough that he was thinking he might quit over it. So he and his team went to his boss's boss, the then commerce secretary, and told him, listen, there are a bunch of reasons why we've got to do this.

But Steve was the keeper of the stat. He thought this change was really important, like important enough that he was thinking he might quit over it. So he and his team went to his boss's boss, the then commerce secretary, and told him, listen, there are a bunch of reasons why we've got to do this.

And Steve was always protecting GDP. He says people from various industries would try to meet with him to get him to change how their industries were calculated.

And Steve was always protecting GDP. He says people from various industries would try to meet with him to get him to change how their industries were calculated.

It's good for number to go up. Why?

It's good for number to go up. Why?

The technical reason was that there had actually long been a problem with GDP. And that is it's hard to capture changes in quality when something gets better, but it doesn't always show up in the price.

The technical reason was that there had actually long been a problem with GDP. And that is it's hard to capture changes in quality when something gets better, but it doesn't always show up in the price.

Next month, a crucially important measure of the economy comes out. It's the measure, really. Gross domestic product. It's the total tally of all the goods and services bought and sold in the economy.

Next month, a crucially important measure of the economy comes out. It's the measure, really. Gross domestic product. It's the total tally of all the goods and services bought and sold in the economy.

Greenspan was fine with the hedonic adjustments BEA was doing for goods. But he had a problem with how they were doing hedonic adjustments for services. He was worried they weren't accurately capturing all the improvements in the quality of the service sector. People were doing way more in a day. In industries like healthcare, in education, and basically everything to do with the internet.

Greenspan was fine with the hedonic adjustments BEA was doing for goods. But he had a problem with how they were doing hedonic adjustments for services. He was worried they weren't accurately capturing all the improvements in the quality of the service sector. People were doing way more in a day. In industries like healthcare, in education, and basically everything to do with the internet.

And because GDP wasn't correctly capturing that, BEA was undercounting productivity growth. And they should look into that.

And because GDP wasn't correctly capturing that, BEA was undercounting productivity growth. And they should look into that.

Greenspan, as chair of the Federal Reserve, had been lowering interest rates through a lot of the 1990s, which meant that there was a lot of money sloshing around in the economy. And Greenspan seemed to think if he could convince Steve to do this hedonic adjustment for services, then inflation would seem smaller and real GDP would look stronger. And that would justify keeping interest rates low.

Greenspan, as chair of the Federal Reserve, had been lowering interest rates through a lot of the 1990s, which meant that there was a lot of money sloshing around in the economy. And Greenspan seemed to think if he could convince Steve to do this hedonic adjustment for services, then inflation would seem smaller and real GDP would look stronger. And that would justify keeping interest rates low.

In other words, Letnick is saying he's going to strip government spending out of GDP. And the stated reason for this proposed change? He doesn't think that a lot of government spending is great for the economy. He doesn't want it incentivized and he doesn't want it included in GDP.

In other words, Letnick is saying he's going to strip government spending out of GDP. And the stated reason for this proposed change? He doesn't think that a lot of government spending is great for the economy. He doesn't want it incentivized and he doesn't want it included in GDP.

And yeah, they knew that Greenspan kind of had an agenda, so they made sure to do their own research. And he wasn't wrong. So they made the changes. Now, looking back, Greenspan's easy money era is often cited as one, just one, of the reasons for the risky lending that led to the 2008 global financial crisis.

And yeah, they knew that Greenspan kind of had an agenda, so they made sure to do their own research. And he wasn't wrong. So they made the changes. Now, looking back, Greenspan's easy money era is often cited as one, just one, of the reasons for the risky lending that led to the 2008 global financial crisis.

For Steve, it's not even a question. Empirically, it was the right thing to do. He says the BEA was trying to keep GDP up to date. And Greenspan, despite his other motives, did help with that.

For Steve, it's not even a question. Empirically, it was the right thing to do. He says the BEA was trying to keep GDP up to date. And Greenspan, despite his other motives, did help with that.

So far, we've talked about how economists calculate GDP and how sometimes they make changes to that methodology. Incremental changes to capture an evolving economy.

So far, we've talked about how economists calculate GDP and how sometimes they make changes to that methodology. Incremental changes to capture an evolving economy.

But people have always known that the formula doesn't capture everything that's important. For instance, it doesn't capture any illegal activities. And in some countries, that is a big part of their economy. It also doesn't capture inequality or well-being or happiness.

But people have always known that the formula doesn't capture everything that's important. For instance, it doesn't capture any illegal activities. And in some countries, that is a big part of their economy. It also doesn't capture inequality or well-being or happiness.

One group that Steve remembers pressuring him argued that all the unpaid household labor, the cooking and the cleaning and the child rearing that often women were doing, was not getting counted in GDP. But they argued it should be. It was a huge portion of the economy and women were not getting their due.

One group that Steve remembers pressuring him argued that all the unpaid household labor, the cooking and the cleaning and the child rearing that often women were doing, was not getting counted in GDP. But they argued it should be. It was a huge portion of the economy and women were not getting their due.

Also, there was actually nothing for GDP to capture. GDP generally captures transactions that have happened, stuff that generates receipts. Just because it could or should be priced doesn't mean it makes it into GDP.

Also, there was actually nothing for GDP to capture. GDP generally captures transactions that have happened, stuff that generates receipts. Just because it could or should be priced doesn't mean it makes it into GDP.

Another group that lobbied BEA was environmentalists. They argued that if environmental degradation were included in GDP, governments would not sit idly by as, you know, coal plants polluted. But since burning coal raised GDP, they didn't have much of an incentive to stop it.

Another group that lobbied BEA was environmentalists. They argued that if environmental degradation were included in GDP, governments would not sit idly by as, you know, coal plants polluted. But since burning coal raised GDP, they didn't have much of an incentive to stop it.