Bloomberg Audio Studios, podcasts, radio news.

Bloomberg Audio Studios, podcasts, radio news.

This is Wall Street Week. I'm David Weston, bringing you stories of capitalism. Vice President Vance tells the world the US will lead in artificial intelligence, but there are some hurdles to get over in the race to get there. Plus the story of the tax on stock buybacks that was going to make sure the Inflation Reduction Act lived up to its name. But we start with a story on everyone's mind this week on Global Wall Street, the story of countries and companies trying to sort out with the growing range of tariffs President Trump promises will mean for them. With the US auto industry front and center, at least for the tariffs threatened on Canada in Mexico.

This is Wall Street Week. I'm David Weston, bringing you stories of capitalism. Vice President Vance tells the world the US will lead in artificial intelligence, but there are some hurdles to get over in the race to get there. Plus the story of the tax on stock buybacks that was going to make sure the Inflation Reduction Act lived up to its name. But we start with a story on everyone's mind this week on Global Wall Street, the story of countries and companies trying to sort out with the growing range of tariffs President Trump promises will mean for them. With the US auto industry front and center, at least for the tariffs threatened on Canada in Mexico.

We're going to bring companies and jobs in at levels.

We're going to bring companies and jobs in at levels.

That you've never seen.

That you've never seen.

The only way you can do it is through the threat of tariffs.

The only way you can do it is through the threat of tariffs.

In his first few weeks in office, much of President Trump's focus has been on tariffs. He announced and then suspended twenty five percent tariffs on Canada and Mexico. Announced a ten percent levy on goods from China effective in March.

In his first few weeks in office, much of President Trump's focus has been on tariffs. He announced and then suspended twenty five percent tariffs on Canada and Mexico. Announced a ten percent levy on goods from China effective in March.

Make America great again, right, that's what we care about.

Make America great again, right, that's what we care about.

Announced tariffs on all steel and lunant imports from around the world, and then reciprocal tariffs on the entire world as of April.

Announced tariffs on all steel and lunant imports from around the world, and then reciprocal tariffs on the entire world as of April.

So when you imposed the tariffs the first time, you added one hundred and twenty thousand jobs, and since that time it's been picked away and nicked away and excluded away. You're going to bring those one hundred and twenty thousand jobs back to America. You are the president who's standing up for the American steel worker.

So when you imposed the tariffs the first time, you added one hundred and twenty thousand jobs, and since that time it's been picked away and nicked away and excluded away. You're going to bring those one hundred and twenty thousand jobs back to America. You are the president who's standing up for the American steel worker.

Commerce Secretary Howard Lutnik says that tariffs would be good for jobs.

Commerce Secretary Howard Lutnik says that tariffs would be good for jobs.

Our industry is in the midst of the disruption.

Our industry is in the midst of the disruption.

But Ford CEO Jim Farley, who went to Capitol Hill to tell lawmakers that the tariffs on Mexico and Canada would be a disaster for the US auto industry, I.

But Ford CEO Jim Farley, who went to Capitol Hill to tell lawmakers that the tariffs on Mexico and Canada would be a disaster for the US auto industry, I.

Think longer term is the bigger concern. These kind of tariffs, especially in these two countries, are very significant, and if they persist beyond months, you know, we could see billions of billions of dollars of pressure on the industry, lost jobs, lots of impacts to communities and our ecosystem in the industry.

Think longer term is the bigger concern. These kind of tariffs, especially in these two countries, are very significant, and if they persist beyond months, you know, we could see billions of billions of dollars of pressure on the industry, lost jobs, lots of impacts to communities and our ecosystem in the industry.

The Council on Foreign Relations estimates that the US auto industry may be among the hardest hit, so it's no surprise that automaker stocks have underperformed the S and P five hundred since President Trump's election, with a pronounced dip since the announcement of tariffs.

The Council on Foreign Relations estimates that the US auto industry may be among the hardest hit, so it's no surprise that automaker stocks have underperformed the S and P five hundred since President Trump's election, with a pronounced dip since the announcement of tariffs.

If you look at the landscape of the auto industry, it represents about five percent of GDP. It's about one point two trillion dollars of activity with almost you know, in the case of manufacturing in parts, that represents about two million workers.

If you look at the landscape of the auto industry, it represents about five percent of GDP. It's about one point two trillion dollars of activity with almost you know, in the case of manufacturing in parts, that represents about two million workers.

Ellen Hughes Cromwick is a senior fellow at Third Way and spent much of her career as the chief Global economist at Ford before serving in the Department of Commerce under President Obama.

Ellen Hughes Cromwick is a senior fellow at Third Way and spent much of her career as the chief Global economist at Ford before serving in the Department of Commerce under President Obama.

There's no question that tariffs raise inflation.

There's no question that tariffs raise inflation.

S and P.

S and P.

Global Mobility estimates that the average twenty five thousand dollars price of a car imported from Mexico or Canada could go up by six two hundred and fifty dollars if tariffs take effect. The fifty best selling models in the US market account for about sixty percent of the market volume, half of which would be directly affected by the tariffs.

Global Mobility estimates that the average twenty five thousand dollars price of a car imported from Mexico or Canada could go up by six two hundred and fifty dollars if tariffs take effect. The fifty best selling models in the US market account for about sixty percent of the market volume, half of which would be directly affected by the tariffs.

The importer pays the tariff, not the company that's exporting.

The importer pays the tariff, not the company that's exporting.

To the United States.

To the United States.

So number one, that business has a choice to make. Either they pay the tariff and import the goods, or they begin to substitute away from those imported product and try to find other sources. They could also pass along that increase in their cost because of the import tariff to their and market customers, and it in general will just simply raise prices.

So number one, that business has a choice to make. Either they pay the tariff and import the goods, or they begin to substitute away from those imported product and try to find other sources. They could also pass along that increase in their cost because of the import tariff to their and market customers, and it in general will just simply raise prices.

The hit the auto producers may suffer from tariffs is already being seen not only in their stock prices, but in their being less profitable than their suppliers for the first time in six years, and RBC calculates that it will be the US producers gm Ford and Stilantis that will be hit the hardest. Imposing tariffs on inputs to any products made in the United States will increase costs, but in the case of tariffs on auto parts crossing the Mexican or Canadian borders, the problem is particularly acute given the complexity of the supply chains and the need for parts to cross the border several times over the course of production. Everett Eisenstadt served as the Deputy Director of the National Economic Council under President Trump during the last term, where he has seen trade sentiment go from integrated to protectionists.

The hit the auto producers may suffer from tariffs is already being seen not only in their stock prices, but in their being less profitable than their suppliers for the first time in six years, and RBC calculates that it will be the US producers gm Ford and Stilantis that will be hit the hardest. Imposing tariffs on inputs to any products made in the United States will increase costs, but in the case of tariffs on auto parts crossing the Mexican or Canadian borders, the problem is particularly acute given the complexity of the supply chains and the need for parts to cross the border several times over the course of production. Everett Eisenstadt served as the Deputy Director of the National Economic Council under President Trump during the last term, where he has seen trade sentiment go from integrated to protectionists.

So the twenty five percent tariff would have a pretty disruptive impact on the integration that has been ongoing now for a couple of decades, and it would be quite a dramatic shift, I think if that were to go into effect for a sustained period of time.

So the twenty five percent tariff would have a pretty disruptive impact on the integration that has been ongoing now for a couple of decades, and it would be quite a dramatic shift, I think if that were to go into effect for a sustained period of time.

One alternative, of course, might be for US automakers simply to source all their parts in the United States. But putting together an automobile is a complex task. Most have tens of thousands of parts, so shifting that process entirely back to the United States is unrealistic and certainly couldn't be done quickly.

One alternative, of course, might be for US automakers simply to source all their parts in the United States. But putting together an automobile is a complex task. Most have tens of thousands of parts, so shifting that process entirely back to the United States is unrealistic and certainly couldn't be done quickly.

Any assembly of a vehicle that product cycle can be three to five years. Now back into the supply chain and look at a tiered three supplier. Hundreds of these supplier businesses have to then start to think, Okay, well, what investments do I have to make in order to supply that part to Ford Motor Company, for example.

Any assembly of a vehicle that product cycle can be three to five years. Now back into the supply chain and look at a tiered three supplier. Hundreds of these supplier businesses have to then start to think, Okay, well, what investments do I have to make in order to supply that part to Ford Motor Company, for example.

What makes it worse for auto companies is that they are not working with substantial margins to begin with, which makes fundamental changes in the way they produce that much more difficult.

What makes it worse for auto companies is that they are not working with substantial margins to begin with, which makes fundamental changes in the way they produce that much more difficult.

There's enough excess capacity to generate a very competitive industry with you know, when you look at many of the companies with very thin profit margins, and if you, for example, say, okay, I want to be more resilient for this particular component going into my vehicle. But if I dual source or decide I'm going to try to source over a few different suppliers, I'm going to be adding cost.

There's enough excess capacity to generate a very competitive industry with you know, when you look at many of the companies with very thin profit margins, and if you, for example, say, okay, I want to be more resilient for this particular component going into my vehicle. But if I dual source or decide I'm going to try to source over a few different suppliers, I'm going to be adding cost.

The US auto industry has a long history of reckoning with federal national security and trade policy.

The US auto industry has a long history of reckoning with federal national security and trade policy.

One you had the North American Free Trade Agreement, which was designed to enable the US auto sector to compete with China and other markets that were starting to produce manufacturing at a much reduced cost. And the idea was you could create a North American supply chain that would make the US competitive, that would enable the exports to continue from the United States. The Transpacific Partnership Agreement, which was something that President Obama negotiated, which was one of the last efforts to really bring integration at the highest levels among many economies. That agreement was hanned pretty badly by both then presidential candidate Hillary Clinton but also soon to be President Trump. That was really the end of the integrated effort for the United Slime States. So this kind of shipped away towards integration just in time. Delivery towards a more unilateral trade approach has been brewing for quite some time. Now we're into an acceleration of that unilateral trade pattern. So it's a trajectory that's been ongoing for a while. I think it will be ongoing for quite some time.

One you had the North American Free Trade Agreement, which was designed to enable the US auto sector to compete with China and other markets that were starting to produce manufacturing at a much reduced cost. And the idea was you could create a North American supply chain that would make the US competitive, that would enable the exports to continue from the United States. The Transpacific Partnership Agreement, which was something that President Obama negotiated, which was one of the last efforts to really bring integration at the highest levels among many economies. That agreement was hanned pretty badly by both then presidential candidate Hillary Clinton but also soon to be President Trump. That was really the end of the integrated effort for the United Slime States. So this kind of shipped away towards integration just in time. Delivery towards a more unilateral trade approach has been brewing for quite some time. Now we're into an acceleration of that unilateral trade pattern. So it's a trajectory that's been ongoing for a while. I think it will be ongoing for quite some time.

The higher costs and disruption that the threatened tariffs represent for US automakers come to an industry already struggling to deal with a massive transition to electric vehicles. GM committed to shift fifty percent of its fleet to evs by twenty thirty, but delayed plans for a new electric Buick last year, setting lower than expected EV adoption. Policies under the Biden administration, namely the Inflation Reduction Act, attempted to support EV adoption, but the Trump administration is now saying it will pull back on those initiatives.

The higher costs and disruption that the threatened tariffs represent for US automakers come to an industry already struggling to deal with a massive transition to electric vehicles. GM committed to shift fifty percent of its fleet to evs by twenty thirty, but delayed plans for a new electric Buick last year, setting lower than expected EV adoption. Policies under the Biden administration, namely the Inflation Reduction Act, attempted to support EV adoption, but the Trump administration is now saying it will pull back on those initiatives.

When you have situations where policy moves back and forth, and you saw it most recently. You know, under President Biden, you had a lot of incentives to go to electric vehicles, and with the emissions requirements that really almost force them to produce a certain type of vehicle. Now you've got an administration with a very different perspective that is not as focused on those emission standards. That actually is putting a different type of pressure on the industry. It takes time to adapt, and I think it puts a lot of pressure on the ability to plan a long term trajectory for the industry. And at some point that's going to be impactful.

When you have situations where policy moves back and forth, and you saw it most recently. You know, under President Biden, you had a lot of incentives to go to electric vehicles, and with the emissions requirements that really almost force them to produce a certain type of vehicle. Now you've got an administration with a very different perspective that is not as focused on those emission standards. That actually is putting a different type of pressure on the industry. It takes time to adapt, and I think it puts a lot of pressure on the ability to plan a long term trajectory for the industry. And at some point that's going to be impactful.

Now, if you pull the rugout from under that brand new industry with thousands of jobs, we're basically making all that capital investment just way inefficient and wasted. And that isn't really a way to run the country either. I mean, we want to support businesses to be competitive and to grow and to create jobs. We don't want to destroy wealth by penalizing companies that made those investments over the last several years. And I think you know that's just a misguided business policy approach.

Now, if you pull the rugout from under that brand new industry with thousands of jobs, we're basically making all that capital investment just way inefficient and wasted. And that isn't really a way to run the country either. I mean, we want to support businesses to be competitive and to grow and to create jobs. We don't want to destroy wealth by penalizing companies that made those investments over the last several years. And I think you know that's just a misguided business policy approach.

While the US goes back and forth on its commitment to electric vehicles, the rest of the world moves ahead, with US EV adoption largely flatlining since hitting the tipping point of five percent of new car sales in twenty twenty one. But wherever the government ends up on tariffs or on ev incentives. The one thing that is certain is that for the industry to thrive, it needs the certainty that it is not getting.

While the US goes back and forth on its commitment to electric vehicles, the rest of the world moves ahead, with US EV adoption largely flatlining since hitting the tipping point of five percent of new car sales in twenty twenty one. But wherever the government ends up on tariffs or on ev incentives. The one thing that is certain is that for the industry to thrive, it needs the certainty that it is not getting.

We need to remember that the US auto industry doesn't sit in isolation. We're part of a global economy and there's a lot of other actors in the world. And while we may wish that we had the auto industry we did in the early ages and the US was completely dominant, the reality is there's a lot of other players in this sector now. There's a lot of other countries that have very, very productive, robust automobile exports. And I hope there are ancillary policies that come into play that enable the industry to make the kind of adjustments they're going to need, both with capital investments and make sure they're able to get the technology they need here in the United States, the workforce they need in the United States, the the ability need to get products, and regulations. You know, to move quickly in getting facilities up and running, because you can't wait a year or two for everything to be perfect. You got to constantly be running in this industry.

We need to remember that the US auto industry doesn't sit in isolation. We're part of a global economy and there's a lot of other actors in the world. And while we may wish that we had the auto industry we did in the early ages and the US was completely dominant, the reality is there's a lot of other players in this sector now. There's a lot of other countries that have very, very productive, robust automobile exports. And I hope there are ancillary policies that come into play that enable the industry to make the kind of adjustments they're going to need, both with capital investments and make sure they're able to get the technology they need here in the United States, the workforce they need in the United States, the the ability need to get products, and regulations. You know, to move quickly in getting facilities up and running, because you can't wait a year or two for everything to be perfect. You got to constantly be running in this industry.

While President Trump was talking tariffs again in Washington, this week, his Vice President JD. Vance had returned from Europe, where he talked about the US winning the race in artificial intelligency and though the prize may be great, there are some hurdles on the way to the vice President's goal. That's next on Wall Street Week. This is a story about a race, a race to be the fastest and the biggest, but with hurdles to overcome on the way to the prize. Companies are in a frenzy to get ahead in artificial intelligence. But it's not just companies in the race, its entire countries, led by the United States.

While President Trump was talking tariffs again in Washington, this week, his Vice President JD. Vance had returned from Europe, where he talked about the US winning the race in artificial intelligency and though the prize may be great, there are some hurdles on the way to the vice President's goal. That's next on Wall Street Week. This is a story about a race, a race to be the fastest and the biggest, but with hurdles to overcome on the way to the prize. Companies are in a frenzy to get ahead in artificial intelligence. But it's not just companies in the race, its entire countries, led by the United States.

The United States of America is the leader in AI in.

The United States of America is the leader in AI in.

Our administration plans to keep it that way.

Our administration plans to keep it that way.

So what could the prize of winning the race in the so called Fourth Industrial Revolution be? What could it do for productivity and therefore economic growth? And who stands to benefit? We posed those questions to doctor Jeffrey Hinton, who won the Nobel Prize for his work on large language models and is often called the godfather of AI.

So what could the prize of winning the race in the so called Fourth Industrial Revolution be? What could it do for productivity and therefore economic growth? And who stands to benefit? We posed those questions to doctor Jeffrey Hinton, who won the Nobel Prize for his work on large language models and is often called the godfather of AI.

It will be a wonderful thing for productivity, that's true. Whether it be a wonderful thing for society is something else. Wild Together in a decent society. If you increase productivity a lot, everybody's better off. But here what's going to happen. If you increase productivity a lot. The rich and the big companies are going to get much richer, and ordinary people are probably going to be worse off because they lose their jobs.

It will be a wonderful thing for productivity, that's true. Whether it be a wonderful thing for society is something else. Wild Together in a decent society. If you increase productivity a lot, everybody's better off. But here what's going to happen. If you increase productivity a lot. The rich and the big companies are going to get much richer, and ordinary people are probably going to be worse off because they lose their jobs.

AI's ability to drive productivity could give new life to economies whose productivity has stalled. US productivity grew at only one point five percent a year for twenty years and then shot up to two point seven percent in twenty twenty three, and economists anticipate that widespread adoption of AI could keep the momentum going, with Goldman Sachs expecting AI to be a key driver of productivity growth in developed economies. In particular, when wider adoption does come, Hinton says, it won't come equally to all involved. It will have very different effects on different parts of the workforce.

AI's ability to drive productivity could give new life to economies whose productivity has stalled. US productivity grew at only one point five percent a year for twenty years and then shot up to two point seven percent in twenty twenty three, and economists anticipate that widespread adoption of AI could keep the momentum going, with Goldman Sachs expecting AI to be a key driver of productivity growth in developed economies. In particular, when wider adoption does come, Hinton says, it won't come equally to all involved. It will have very different effects on different parts of the workforce.

Many people say, you know, ille crate more jobs for this particular thing. I'm not convinced of that. What we're doing. In the Industrial Revolution, we made human strength irrelevant. Now we're making human intelligence irrelevant, and that's very scary. So there's some areas where demand is very elastic. An example would be healthcare. If I could get ten hours a week talking to my doctor, I'm over seventy, I'd be very happy. So if you take someone and make them much more efficient by having them work with a very intelligent AI, they're not going to become unemployed. It's not that you're now only going to need a few of them. You're just going to get much more healthcare. Great. So in elastic areas, it's great.

Many people say, you know, ille crate more jobs for this particular thing. I'm not convinced of that. What we're doing. In the Industrial Revolution, we made human strength irrelevant. Now we're making human intelligence irrelevant, and that's very scary. So there's some areas where demand is very elastic. An example would be healthcare. If I could get ten hours a week talking to my doctor, I'm over seventy, I'd be very happy. So if you take someone and make them much more efficient by having them work with a very intelligent AI, they're not going to become unemployed. It's not that you're now only going to need a few of them. You're just going to get much more healthcare. Great. So in elastic areas, it's great.

But for all the talk of AI's sweeping effects, economic change has been slow to materialize. That same Goldman report says that only five percent of companies claim to use generative AI in regular production, with tech and information businesses leading the way. Whatever hurdles may hold us back in the race to AI, it doesn't look like it will be for lack of spending. AI spending by four of America's biggest tech companies surged sixty three percent last year and should rise even higher this year. Chris Miller is the author of Chip War. He says the challenge for big tech companies isn't the money being spent, but lack of capacity.

But for all the talk of AI's sweeping effects, economic change has been slow to materialize. That same Goldman report says that only five percent of companies claim to use generative AI in regular production, with tech and information businesses leading the way. Whatever hurdles may hold us back in the race to AI, it doesn't look like it will be for lack of spending. AI spending by four of America's biggest tech companies surged sixty three percent last year and should rise even higher this year. Chris Miller is the author of Chip War. He says the challenge for big tech companies isn't the money being spent, but lack of capacity.

There are two limiting factors right now. One is the chips and servers themselves, which are less and shortage than they were eighteen months ago, but are still hard to come by for some of the biggest tech firms and the vast quantities that they need. The second hurdle, which is new, is actually the power. To make the data centers function the way they need to. They need huge quantities of power. And is AI gets more advanced, that requires bigger and bigger data centers. And so now if you listen to companies like open Ai or Google, they're talking about bringing online data centers that use a gig awot of power. You need a whole power plant to power some of these facilities, and it just takes time to build all that infrastructure.

There are two limiting factors right now. One is the chips and servers themselves, which are less and shortage than they were eighteen months ago, but are still hard to come by for some of the biggest tech firms and the vast quantities that they need. The second hurdle, which is new, is actually the power. To make the data centers function the way they need to. They need huge quantities of power. And is AI gets more advanced, that requires bigger and bigger data centers. And so now if you listen to companies like open Ai or Google, they're talking about bringing online data centers that use a gig awot of power. You need a whole power plant to power some of these facilities, and it just takes time to build all that infrastructure.

For some time, chip manufacturing capacity has been concentrated in Southeast Asia. That began to change with the Biden administrations Chips and Science Act encouraging investment in US chip manufacturing. Samsung is investing in a chip plan in Texas, while TSMC is opening a new plant in Arizona. Alissa Apsel is the director of Electrical and Computer Engineering at Cornell University.

For some time, chip manufacturing capacity has been concentrated in Southeast Asia. That began to change with the Biden administrations Chips and Science Act encouraging investment in US chip manufacturing. Samsung is investing in a chip plan in Texas, while TSMC is opening a new plant in Arizona. Alissa Apsel is the director of Electrical and Computer Engineering at Cornell University.

The Chips Act is a response to a covid era supply chain interruptions that made it very very clear that the US needs to be competitive in semiconductors. Otherwise we're going to lose out to other countries because we can't supply our own semi conductors and will be beholden to other countries to supply them for US, and that that puts US in a precarious position in terms of national security. The infusion of funding into the US, both on the research side and for companies to develop products, but also for small companies to be able to compete in this space in order to support growing this infrastructure has been quite significant and it's really changed the game in this space.

The Chips Act is a response to a covid era supply chain interruptions that made it very very clear that the US needs to be competitive in semiconductors. Otherwise we're going to lose out to other countries because we can't supply our own semi conductors and will be beholden to other countries to supply them for US, and that that puts US in a precarious position in terms of national security. The infusion of funding into the US, both on the research side and for companies to develop products, but also for small companies to be able to compete in this space in order to support growing this infrastructure has been quite significant and it's really changed the game in this space.

Building more chip making and power plans is one way to get over the AI capacity hurdles. Another could be finding ways to achieve the benefits of AI without requiring the same supplies of chips or energy. Wall Street was rattled in recent weeks by a new, more efficient AI model out of China.

Building more chip making and power plans is one way to get over the AI capacity hurdles. Another could be finding ways to achieve the benefits of AI without requiring the same supplies of chips or energy. Wall Street was rattled in recent weeks by a new, more efficient AI model out of China.

I think in Silicon Valley there was actually a lot of surprise as to why Deep Sea garnered so much attention in the media and on Wall Street. Deepsek was part of the AI conversation for most of the last half of twenty twenty four, and then just in the past couple of weeks it gathered attention in the media and in Wall Street. I think what you'd find is that compared to open AI, or compared to Nthropic, the number of paying customers is far, far lower. And that's where the US firms have a real advantage. They've already got the distribution channels, they've already got the market reputation to be the real leaders in AI. Certainly they've got high quality technology, but they've also got these other factors in their business model which give them a real head start visa a deep Seek. And so if you ask yourself what will deep Seek's revenue be in six months time from paying subscribers outside of China, I would bet that number is going to be pretty low.

I think in Silicon Valley there was actually a lot of surprise as to why Deep Sea garnered so much attention in the media and on Wall Street. Deepsek was part of the AI conversation for most of the last half of twenty twenty four, and then just in the past couple of weeks it gathered attention in the media and in Wall Street. I think what you'd find is that compared to open AI, or compared to Nthropic, the number of paying customers is far, far lower. And that's where the US firms have a real advantage. They've already got the distribution channels, they've already got the market reputation to be the real leaders in AI. Certainly they've got high quality technology, but they've also got these other factors in their business model which give them a real head start visa a deep Seek. And so if you ask yourself what will deep Seek's revenue be in six months time from paying subscribers outside of China, I would bet that number is going to be pretty low.

Is there any prospect that we could engineer or innovate our way out of the problem, that is to say, reduce the need for the computing capacity by really re engineering as it were, generate of AI.

Is there any prospect that we could engineer or innovate our way out of the problem, that is to say, reduce the need for the computing capacity by really re engineering as it were, generate of AI.

We've seen plenty of efforts to make AI more efficient, in part because it requires so much extraordinarily expensive computing infrastructure. And the trend has been that for a given quality of AI system, it does get a lot more efficient over time. If you look, for example, at the price it costs to use a GPT three model, the type of model it was released a handful of years ago by open AI, we've seen a two order of magnitude decrease in the price of using that model, so huge efficiency gains. But the problem is that we also get better models that require more computing. And the trend line over the last couple of years has been that the advances we gain from harnessing more computing power and throwing all that at the problem of AI dramatically outweigh the efficiency gains. And so long as the rate of innovation remains so rapid and that innovation is catalyzed by computing power, the efficiency gains are going to be outpaced by the capability and the computing needs of these new models. That's certainly the trend right now. It's also the trend that all of the world's big tech companies are betting on. That's why Amazon, Meta, Microsoft and others are building these vast data center complexes, because they're betting that capabilities gains enabled by more computing will be the dominant feature in AI for the rest of the decade.

We've seen plenty of efforts to make AI more efficient, in part because it requires so much extraordinarily expensive computing infrastructure. And the trend has been that for a given quality of AI system, it does get a lot more efficient over time. If you look, for example, at the price it costs to use a GPT three model, the type of model it was released a handful of years ago by open AI, we've seen a two order of magnitude decrease in the price of using that model, so huge efficiency gains. But the problem is that we also get better models that require more computing. And the trend line over the last couple of years has been that the advances we gain from harnessing more computing power and throwing all that at the problem of AI dramatically outweigh the efficiency gains. And so long as the rate of innovation remains so rapid and that innovation is catalyzed by computing power, the efficiency gains are going to be outpaced by the capability and the computing needs of these new models. That's certainly the trend right now. It's also the trend that all of the world's big tech companies are betting on. That's why Amazon, Meta, Microsoft and others are building these vast data center complexes, because they're betting that capabilities gains enabled by more computing will be the dominant feature in AI for the rest of the decade.

Economists talk about something called the Jivon's paradox that came out of coal usage or fishing. You got using coal. There was just more demand for coal, more applications of it. Do we have that prospect that essentially, as far as I can see, we're never going to catch up the supply of chips with the demand.

Economists talk about something called the Jivon's paradox that came out of coal usage or fishing. You got using coal. There was just more demand for coal, more applications of it. Do we have that prospect that essentially, as far as I can see, we're never going to catch up the supply of chips with the demand.

I think it's exactly that. I think that the more, at least from where I stand today. I don't know that this is always going to be true. But like in the foreseeable future, I don't see that we're going to say, oh, okay, now I have twice the processing power, that's enough. I think we'll wind up pushing more applications and developing more utility and finding kind of new spaces where we need AI or new types of jobs for it to do that require more and more processing, and just ride that curve in that direction.

I think it's exactly that. I think that the more, at least from where I stand today. I don't know that this is always going to be true. But like in the foreseeable future, I don't see that we're going to say, oh, okay, now I have twice the processing power, that's enough. I think we'll wind up pushing more applications and developing more utility and finding kind of new spaces where we need AI or new types of jobs for it to do that require more and more processing, and just ride that curve in that direction.

AI and automation can have unintended consequences.

AI and automation can have unintended consequences.

The race to win the prize in artificial intelligence is well and truly on, but some of those who understand the power of AI best warn that we need to make sure it's not just a fast race, but a safe one. That we need to build capacity, not just to drive large language models, but to make sure that they do what we want them to. Can governments keep up and how do they regulate something that's advancing so quickly. There are good people in the government, smart people, some probably less smart, but are they up to the job of really understanding what you're talking about and getting their arms around it.

The race to win the prize in artificial intelligence is well and truly on, but some of those who understand the power of AI best warn that we need to make sure it's not just a fast race, but a safe one. That we need to build capacity, not just to drive large language models, but to make sure that they do what we want them to. Can governments keep up and how do they regulate something that's advancing so quickly. There are good people in the government, smart people, some probably less smart, but are they up to the job of really understanding what you're talking about and getting their arms around it.

We need many of the smartest young researchers to be working on this problem, and we need them to have resources. Now the government doesn't have the resources. The big companies have the resources. The government, i think should be insisting that the big companies spend much more of their resources on safety, on this safety research or how will we stay in control? Compared with what they do now. Right now they spend like a few percent on that and nearly all their resources go into building even better, bigger models. They should be spending a much bigger fraction on safety and the government to try and mandate that. So there was a bill in California that the governor recently vetoed that would have gone a little bit in that direction. But of course big companies don't want that. Big companies want to be free to make profits. That's the system we're in. And so if you take some outwore. For example, open ai was initially very concerned about safety. As time's gone by, it's got less and less concerned about safety. Some Auntmas still says he's concerned with safety, But if you look at what he does and not what he says, he's turning it into a pure for profit company. There's far less resources spent on safety, and most of the leading safety researchers who were kind of the best in the world and open AI have left. So to prevent that kind of thing happening, we need. Governments are the only thing powerful enough to prevent that. Maybe they're not even powerful enough. They should force the big companies to provide resources for safety research.

We need many of the smartest young researchers to be working on this problem, and we need them to have resources. Now the government doesn't have the resources. The big companies have the resources. The government, i think should be insisting that the big companies spend much more of their resources on safety, on this safety research or how will we stay in control? Compared with what they do now. Right now they spend like a few percent on that and nearly all their resources go into building even better, bigger models. They should be spending a much bigger fraction on safety and the government to try and mandate that. So there was a bill in California that the governor recently vetoed that would have gone a little bit in that direction. But of course big companies don't want that. Big companies want to be free to make profits. That's the system we're in. And so if you take some outwore. For example, open ai was initially very concerned about safety. As time's gone by, it's got less and less concerned about safety. Some Auntmas still says he's concerned with safety, But if you look at what he does and not what he says, he's turning it into a pure for profit company. There's far less resources spent on safety, and most of the leading safety researchers who were kind of the best in the world and open AI have left. So to prevent that kind of thing happening, we need. Governments are the only thing powerful enough to prevent that. Maybe they're not even powerful enough. They should force the big companies to provide resources for safety research.

As you say, big companies don't like to be told by the government how to spend their money, but they are often. I mean, you have big accounting departments, for example, to comply with various regulatory requirement on accounting. If the government were to say, yes, we're in at least for the very largest tech firms involved in AI, mandate a percentage of your revenue that will be devoted towards safety. What's the right number.

As you say, big companies don't like to be told by the government how to spend their money, but they are often. I mean, you have big accounting departments, for example, to comply with various regulatory requirement on accounting. If the government were to say, yes, we're in at least for the very largest tech firms involved in AI, mandate a percentage of your revenue that will be devoted towards safety. What's the right number.

I'm not sure that's the right thing to go for. It shouldn't be a percentage of the revenue, because that's very complicated, and they put all the revenue in some other country and cheat. The thing to go for is a fraction of their computing resources. The bottleneck here is computing resources. How many Nvidia chips or how many Google tensor chips can you get? It should be a fraction of the computing resources. What's an easier thing to measure?

I'm not sure that's the right thing to go for. It shouldn't be a percentage of the revenue, because that's very complicated, and they put all the revenue in some other country and cheat. The thing to go for is a fraction of their computing resources. The bottleneck here is computing resources. How many Nvidia chips or how many Google tensor chips can you get? It should be a fraction of the computing resources. What's an easier thing to measure?

What fraction?

What fraction?

I think it would be perfectly reasonable to say a third. Now that's my starting point, and I'd settle for a quarter.

I think it would be perfectly reasonable to say a third. Now that's my starting point, and I'd settle for a quarter.

We were promised that the Inflation Reduction Act would live up to its name by collecting taxes on all those stock buybacks. But now that we've had a couple of years living with it, has it done what it promised? That's next on Wall Street Week. This is a story about names, getting them right, and making sure things live up to what we name them. When enacted by Congress, the name of the Inflation Reduction Act was derided by Republicans like then Senator Rob Portman of Ohio.

We were promised that the Inflation Reduction Act would live up to its name by collecting taxes on all those stock buybacks. But now that we've had a couple of years living with it, has it done what it promised? That's next on Wall Street Week. This is a story about names, getting them right, and making sure things live up to what we name them. When enacted by Congress, the name of the Inflation Reduction Act was derided by Republicans like then Senator Rob Portman of Ohio.

It's called the Inflation Reduction Act, but don't be fooled by the name. It doesn't actually decrease the inflationary pressure we all feel at the gas pump, at the grocery store, clothes shopping. It actually makes it worse.

It's called the Inflation Reduction Act, but don't be fooled by the name. It doesn't actually decrease the inflationary pressure we all feel at the gas pump, at the grocery store, clothes shopping. It actually makes it worse.

But some of us may have forgotten how the law got its name in the first place. It was meant to be the rare bill that included both spending and how to pay for it, in part by imposing a one percent excise tax on corporations buying back their own stock.

But some of us may have forgotten how the law got its name in the first place. It was meant to be the rare bill that included both spending and how to pay for it, in part by imposing a one percent excise tax on corporations buying back their own stock.

There are time when stock buybacks make a lot of sense. That frankly, they've made a lot of sense when interest rates have been a record low amounts, which has allowed companies even to borrow money to do stock by that that those seems like it's gaming the system. And I've been disappointed when companies have said, you know, lower our taxes and we're going to invest more in plant and equipment, and instead they use it for stock buybacks. So putting a one percent tax on those stock buybacks, I think makes sense.

There are time when stock buybacks make a lot of sense. That frankly, they've made a lot of sense when interest rates have been a record low amounts, which has allowed companies even to borrow money to do stock by that that those seems like it's gaming the system. And I've been disappointed when companies have said, you know, lower our taxes and we're going to invest more in plant and equipment, and instead they use it for stock buybacks. So putting a one percent tax on those stock buybacks, I think makes sense.

What is the purpose of stock buybacks? When are they appropriate? And when can they be a form of gaming the system? As Senator Warner warned about when the IRA was first passed, it turns out that they weren't even allowed in the United States until fairly recently.

What is the purpose of stock buybacks? When are they appropriate? And when can they be a form of gaming the system? As Senator Warner warned about when the IRA was first passed, it turns out that they weren't even allowed in the United States until fairly recently.

As simple as the name, it's when the company buys back its own stock, and there's a reason that this was illegal until nineteen eighty two.

As simple as the name, it's when the company buys back its own stock, and there's a reason that this was illegal until nineteen eighty two.

Nel Mino has spent a good deal of her career studying stock buybacks. She is now vice chair of Value Edge Advisors, where she advises institutional investors like pension plans about stock buybacks and how they can affect the value of the companies they invest in.

Nel Mino has spent a good deal of her career studying stock buybacks. She is now vice chair of Value Edge Advisors, where she advises institutional investors like pension plans about stock buybacks and how they can affect the value of the companies they invest in.

I think they did it because at the time they felt that buybacks would only occur when there was excess cash and on your valued stock. But there are a lot of moral hazards there, because sometimes companies that should be spending the money on operations and research and marketing and things that are more directed at long term value will spend them on the quick hit on the stock price that you get from a buyback.

I think they did it because at the time they felt that buybacks would only occur when there was excess cash and on your valued stock. But there are a lot of moral hazards there, because sometimes companies that should be spending the money on operations and research and marketing and things that are more directed at long term value will spend them on the quick hit on the stock price that you get from a buyback.

Despite the moral hazards, economists generally favor allowing stock buybacks as one way to allocate capital efficiently. Glenn Hubbard served as the chairman of President George W. Bush's Council of Economic Advisors. He went on to serve as dean at the Columbia Business School where he remains on the faculty. His book The Wall and the Bridge set out some of his ideas about how to invest in the country and the economy.

Despite the moral hazards, economists generally favor allowing stock buybacks as one way to allocate capital efficiently. Glenn Hubbard served as the chairman of President George W. Bush's Council of Economic Advisors. He went on to serve as dean at the Columbia Business School where he remains on the faculty. His book The Wall and the Bridge set out some of his ideas about how to invest in the country and the economy.

It's a way to get cash back.

It's a way to get cash back.

You know.

You know.

Economists for years talked about so called agency problems in the company, that there may be too much in the way of internal finance that gets wasted paying the money out stops that dividends tend to be very regular. Companies don't like changing their dividends a lot and then having to bring them back down. So share we purchases are one way to get cash back to shareholders.

Economists for years talked about so called agency problems in the company, that there may be too much in the way of internal finance that gets wasted paying the money out stops that dividends tend to be very regular. Companies don't like changing their dividends a lot and then having to bring them back down. So share we purchases are one way to get cash back to shareholders.

So from an economist point of view, they might allow more efficient allocation of capital. If it's not doing so well with the company, maybe I should have it and put it all.

So from an economist point of view, they might allow more efficient allocation of capital. If it's not doing so well with the company, maybe I should have it and put it all.

They definitely do.

They definitely do.

If too much money gets trapped in let's say, an old style company, why not put it in a new company where they're better opportunities. Obviously their costs and benefits. I'm not saying it's one sided, but my own prejudice is an economist as buybacks are just fine.

If too much money gets trapped in let's say, an old style company, why not put it in a new company where they're better opportunities. Obviously their costs and benefits. I'm not saying it's one sided, but my own prejudice is an economist as buybacks are just fine.

That's what I represent shareholders. We love to hear that a stock buy back a special dividend. Absolutely if you haven't got a good idea for the money, give it to us. Let us decide what to do with the money. That's when buybacks work.

That's what I represent shareholders. We love to hear that a stock buy back a special dividend. Absolutely if you haven't got a good idea for the money, give it to us. Let us decide what to do with the money. That's when buybacks work.

To the right way, whatever their advantages or disadvantages. Stock buybacks have become a central part of corporate finance since the SEC first gave them the green light. They're estimated to have reached one trillion dollars in volume in twenty twenty four, roughly double what they were ten years ago, led by some of the Magnificent seven like Apple, Alphabet, Microsoft, and Meta, followed by some of the big banks. But the executives putting the buybacks in place have particular incentives that can influence their judgment. They can increase management compensation as the number of shares bought reduced the denominator of earnings per share without adding to the earnings numerator.

To the right way, whatever their advantages or disadvantages. Stock buybacks have become a central part of corporate finance since the SEC first gave them the green light. They're estimated to have reached one trillion dollars in volume in twenty twenty four, roughly double what they were ten years ago, led by some of the Magnificent seven like Apple, Alphabet, Microsoft, and Meta, followed by some of the big banks. But the executives putting the buybacks in place have particular incentives that can influence their judgment. They can increase management compensation as the number of shares bought reduced the denominator of earnings per share without adding to the earnings numerator.

The first red flag is when they don't adjust the EPs targets for incentive compensation. There are two ways you can hit your EPs targets. The way that we like as shareholders is to increase earnings. The way that is not as beneficial to shareholders is to decrease the number of shares outstanding, and so for a Board of Directors Compensation Committee to set the EPs targets and then do a buy back. That's a very easy way for them to hit those targets without any real benefit to shareholders. You have to remember that there's another element of manipulation, and that is that the executives control the timing of the buyback, and sometimes they do it in order to hit those EPs targets. Sometimes they do it just because they have no other idea about how to increase the stock price. But we want to see them increase the stock price by doing a better job, which.

The first red flag is when they don't adjust the EPs targets for incentive compensation. There are two ways you can hit your EPs targets. The way that we like as shareholders is to increase earnings. The way that is not as beneficial to shareholders is to decrease the number of shares outstanding, and so for a Board of Directors Compensation Committee to set the EPs targets and then do a buy back. That's a very easy way for them to hit those targets without any real benefit to shareholders. You have to remember that there's another element of manipulation, and that is that the executives control the timing of the buyback, and sometimes they do it in order to hit those EPs targets. Sometimes they do it just because they have no other idea about how to increase the stock price. But we want to see them increase the stock price by doing a better job, which.

Is where the board should come in. If it's doing its job, the.

Is where the board should come in. If it's doing its job, the.

Board has to be focused not simply on the mechanics of EPs, but really, what are the growth prospects for this company. If you were doing that, you would be eating your seed corn and you'd get caught napping by the market. So a good board should stop that.

Board has to be focused not simply on the mechanics of EPs, but really, what are the growth prospects for this company. If you were doing that, you would be eating your seed corn and you'd get caught napping by the market. So a good board should stop that.

Most often, management justifies a stock buyback as just a prudent investment, claiming that their company's stock is not getting their respect in the market it deserves. That it's undervalued, which makes it a goodbye. But it's harder to make that case when market valuations become elevated as they are now.

Most often, management justifies a stock buyback as just a prudent investment, claiming that their company's stock is not getting their respect in the market it deserves. That it's undervalued, which makes it a goodbye. But it's harder to make that case when market valuations become elevated as they are now.

But remember that the original concept of the buyback was exactly what you said, excess cash and the stock price is lower than it should be. In other words, the stock is a good investment, just like any other asset allocation made by the executives and the board of directors you look at in terms of return on investment. The stock market has been very high, as you know, in the last couple of years, and so it's really harder to justify buybacks. It's harder to argue that the stock is undervalued.

But remember that the original concept of the buyback was exactly what you said, excess cash and the stock price is lower than it should be. In other words, the stock is a good investment, just like any other asset allocation made by the executives and the board of directors you look at in terms of return on investment. The stock market has been very high, as you know, in the last couple of years, and so it's really harder to justify buybacks. It's harder to argue that the stock is undervalued.

And whatever the overall valuations, it's awfully hard to reconcile management's claim that its stock is undervalued if members of the management team themselves decide to sell their shares into the buyback.

And whatever the overall valuations, it's awfully hard to reconcile management's claim that its stock is undervalued if members of the management team themselves decide to sell their shares into the buyback.

The other one that bothers me even more is when the executives sell into the buyback, which I think should be prohibited. The whole justification for the buyback is that the stock is undervalued. Well, if it's undervalued, why are you selling well?

The other one that bothers me even more is when the executives sell into the buyback, which I think should be prohibited. The whole justification for the buyback is that the stock is undervalued. Well, if it's undervalued, why are you selling well?

In general, I think when managers are selling it's one of two things. One so called ten B five plans where they have regular opportunities to sell, and just happens to be at that period, or there could be a particular event in their personal life. But I agree with you, Yes, management in general should be holding shares during the tenure in which the manager's in charge.

In general, I think when managers are selling it's one of two things. One so called ten B five plans where they have regular opportunities to sell, and just happens to be at that period, or there could be a particular event in their personal life. But I agree with you, Yes, management in general should be holding shares during the tenure in which the manager's in charge.

So what does all this mean for the Inflation Reduction Act? Now that it's been enforced for over two years? What are the results? First of all, did it raise much needed money for the federal treasury? The Joint Committee on Taxation estimates it contributed seven point nine billion dollars in twenty twenty four, and we'll add up to about seventy four billion dollars over the ten year period ending in fiscal year twenty thirty one. Certainly a nice contribution, but not likely to put a big dent in the one point six trillion dollars the Congressional Budget Office estimates will be added to the federal debt every year for the next ten I think of the.

So what does all this mean for the Inflation Reduction Act? Now that it's been enforced for over two years? What are the results? First of all, did it raise much needed money for the federal treasury? The Joint Committee on Taxation estimates it contributed seven point nine billion dollars in twenty twenty four, and we'll add up to about seventy four billion dollars over the ten year period ending in fiscal year twenty thirty one. Certainly a nice contribution, but not likely to put a big dent in the one point six trillion dollars the Congressional Budget Office estimates will be added to the federal debt every year for the next ten I think of the.

Game showed Jeopardy, where if you give me an answer, I guess the question. So a stock buybacks one possibility for the question is what is revenue? But actually don't raise much revenue. The US buy back at one percent maybe raises about seven seven and a half billion dollars a year.

Game showed Jeopardy, where if you give me an answer, I guess the question. So a stock buybacks one possibility for the question is what is revenue? But actually don't raise much revenue. The US buy back at one percent maybe raises about seven seven and a half billion dollars a year.

And if Senator Warner thought that the tax on buybacks would reduce the appetite for them, it doesn't look like it had that intended effect either. Stock buybacks have continued to grow despite the excise tax.

And if Senator Warner thought that the tax on buybacks would reduce the appetite for them, it doesn't look like it had that intended effect either. Stock buybacks have continued to grow despite the excise tax.

I would say that stock buybacks have been bigger and bigger every year. We've seen some of the biggest companies in the country buy back more and more stock, and we've seen very little benefit to shareholders except in a very short term way, and more benefit to the executives. So I think it has become a genuine problem. One thing that I know will never help is taxing it. You know, there have been a number of proposals, it was included in some legislation. Those expenses have just passed right on to the shareholders and sometimes the consumers as well. Companies are completely indifferent to paying taxes.

I would say that stock buybacks have been bigger and bigger every year. We've seen some of the biggest companies in the country buy back more and more stock, and we've seen very little benefit to shareholders except in a very short term way, and more benefit to the executives. So I think it has become a genuine problem. One thing that I know will never help is taxing it. You know, there have been a number of proposals, it was included in some legislation. Those expenses have just passed right on to the shareholders and sometimes the consumers as well. Companies are completely indifferent to paying taxes.

When you mentioned taxes, the Inflation Reduction Act does have a one percent excise tax on stock buybacks. What effect did that have on stock buybacks?

When you mentioned taxes, the Inflation Reduction Act does have a one percent excise tax on stock buybacks. What effect did that have on stock buybacks?

Not at all. It was gasoline on the fire. They just kept growing and growing.

Not at all. It was gasoline on the fire. They just kept growing and growing.

And perhaps most basic of all, when does it ever make sense for a company to do what Senator Warner was particularly concerned about a company borrowing money to buy back its own stock, given that the entire theory of allowing buybacks was to let companies make constructive use of excess cash.

And perhaps most basic of all, when does it ever make sense for a company to do what Senator Warner was particularly concerned about a company borrowing money to buy back its own stock, given that the entire theory of allowing buybacks was to let companies make constructive use of excess cash.

In reality, like a lot of other financial structures, it got abused. I mean, when I saw that people were borrowing money, companies were borrowing money to buy backstock, when the stockboys at a record high, I realized that the original justification had just completely been forgotten.

In reality, like a lot of other financial structures, it got abused. I mean, when I saw that people were borrowing money, companies were borrowing money to buy backstock, when the stockboys at a record high, I realized that the original justification had just completely been forgotten.

That does it for us here at Wall Street Week, I'm David Weston. See you next week for more stories of capitalism.

That does it for us here at Wall Street Week, I'm David Weston. See you next week for more stories of capitalism.