Luis Garicano on Spain, Europe, and the Future of Work

Conversations with Tyler is produced by the Mercatus Center at George Mason University, bridging the gap between academic ideas and real-world problems. Learn more at mercatus.org. For a full transcript of every conversation enhanced with helpful links, visit conversationswithtyler.com. Hello everyone, and welcome back to Conversations with Tyler. Today I am honored to be speaking with Luis Garicano. He is a Spanish economist, one of the best known and also best economists in Europe. He was also a member of the European Parliament. He taught at the University of Chicago Business School. He is now for the second time at London School of Economics. He has a new and excellent book out, as far as I know, the best book on AI and the job market. It is called Messy Jobs, and it is co-authored with Jim Lee and Yanhui Wu. Luis, welcome.

Thanks very much for having me. It's really a pleasure.

We will get to Messy Jobs, but first I have so many questions about Spain. So why is it that Spain has become so NIMBY? Before the great financial crisis, there's so many homes being built, right? There's overbuilding, everyone goes crazy, and now it seems to be land of NIMBY. What's been the switch in the political equilibrium?

There is part of it which is ideas matter. So Spain was pretty permissive about housing. There was a pretty elastic supply and people were building all over the place, up to 800,000 houses a year, which is a lot for a country. And what happened is that we got a housing bubble. It exploded. There was a lot of overbuilding at the time for many reasons, but basically there was a triangle between promoters and politicians, local politicians and the savings banks, a bit like your SNL crisis. And so people identified easy building with corruption and people identify easy building with high prices. Believe it or not, there really is a serious debate in the Spanish media. Maybe, I guess you're not so surprised with Mamá Dami in New York, but there is a very serious debate on whether building more houses would lower prices. And there is people saying, no, no, it has nothing to do with how many houses you have. So people think that building wouldn't solve it and they think that you need to restrict tourist floods and so on. There has been some of There's also been after the bubble a big restriction on the rights of municipalities to make decisions on land, which because it was supposed to lead to corruption. So this is something has happened in many areas that you're trying to make people accountable and you end up making people scared and making people unempowering the people who could make the decisions. And you end up with a completely rigid supply, which is what we have now, hundreds of thousands of migrants per year. Only 100,000, less than 100,000 houses built per year. And indeed, as you said, no YIMBY movement at all. It's complete NIMBY. There is nobody in Spain, maybe just a very few people including me, saying, hey, let's build more housing.

If you drive through Spain, which I'm sure you've done more than I have, but a lot of it is really quite empty, right? And you see those big billboards with the black bull and nothing else for miles. What are you going to do with all that land? What does that equilibrium look like? That simply people crowd into a few cities and the rest just dwindles?

Yes. The current way that housing is built is basically very much by agglomerating in the center. So a very large share, I don't remember the exact number, but a very large share of the most dense census tracts in square kilometers in Europe are in Spain, in Madrid and in Barcelona, which is surprising for a country that is completely empty. First, we are putting a lot of solar energy on those empty land. But second, there is a lot of restrictions on what you can do with it because of biodiversity. There's a ring around Madrid where you cannot build like around London. Barcelona, people think you couldn't build. People think Barcelona is full. In fact, all the area around the airport is empty and it's agricultural land, but people in Barcelona are convinced it's impossible to grow the city. So a lot of it has to do with biodiversity regulations and effort to keep nature and so on. And you know, it's, I mean, my other country is England, of course, where I'm And England, the United Kingdom, has this view that if you touch any bird, that construction has to be completely stopped. Spain is not at that extreme, but all of those concerns matter a lot.

Why is there a current productivity crisis in Spain?

Productivity indeed hasn't grown for 3 decades, more or less. We've had a lot of extensive growth. We have immigration, we have tourism, but we don't really have productivity. And a lot of it has to do with the political economy. If you want to explain the West, not just Spain, you have to understand who's voting and who is it being governed for. Spain is a particularly low fertility, high life expectancy country. We have the 5th lowest fertility and the 5th highest life expectancy in the world, grosso modo, very high pensions. Essentially, 100% of the GDP growth we had since 2008 has gone to pensions, to the pensioners. And in terms of investment, there is very little in terms of investment, productive investment. We had this fantastic highway network and this high-speed rail network. It's not really getting the maintenance it needs. Just as one example, the country is basically being governed by and for the older retired people.

So what does the optimistic scenario look like? You don't have to predict it's going to happen, but lay out for me how it could all go well. And you would get productivity growth of 1.5% a year and economic growth a bit higher than that.

So Spain has amazing fundamentals for the current situation, meaning we could easily be very electricity energy rich due to solar, wind, and nuclear. We have all this empty space where you could put nuclear plants without much resistance. In fact, we are closing them for political reasons, but the energy could be a big advantage. It's a really amazing place to live. There is no more diverse geography and climate and nature anywhere in Europe, I think, or close to and beautiful. And you could easily see a situation where Spain becomes Florida or Texas, Austin, you know, like Texas. Think of Texas. Attract technology, attract talent who wants to live there, attract energy, build the data centers, et cetera, et cetera. That scenario is not impossible. The political economy is the tricky part.

But doesn't that mean you actually don't have good fundamentals? You said you don't even have a YIMBY movement. Life there really is quite good. I've been many times. It's one of my favorite countries to visit. Isn't that like a kind of resource curse where there's no sense of crisis? Old people live for a long time. It's very comfortable. The weather's great. The food is amazing. Aren't those in fact liabilities in a time of very rapid change?

I think that's a great point. The political economy is the constraint. We have had reforms in Spain, including during the dictatorship when the crisis situation was unsustainable. Spain opened up under American pressure and '59 and had the highest growth rate in the '60s. It reformed in mid-'80s and early '80s with a socialist government that was very actual pro-growth and pro-development, a YIMBY socialist government. It eliminating— imagine the socialist government that eliminated housing rent control, which right now is coming back everywhere. It reformed again in the upcoming to the euro, although as Tano Santos and Jesús Hernández-Biebraden have shown in the Journal of Economic Perspectives article, that pro-reform movement before the euro was gone in all Southern Once the euro made the urgency go away. And it has reformed again in 2012 under the euro crisis and the Spanish crisis. So it could do the reforms it needs. It's going to have to be through a crisis, I'm afraid.

Now, you come from Valladolid, which as you know, for a long time has been an automotive center. Should the European Union impose strict tariffs and quotas on, say, Chinese electric vehicles, self-driving cars?

I don't have a religious view on these and other industrial policies. I think that you have to evaluate them. There is an article by Danny Rodrik and co-authors' recent review, which says industrial policies work under some conditions, not under others. We know they have worked in Korea at some point, et cetera. What do they need? They need to be able to have the conditions to let losers fail, and you need to have an objective, a clear-cut objective. Now, is Europe in a situation to have an industrial policy where losers are let fail? In the car industry, and where Europe has a clear view of where we should go, I think the answer is no on both. In terms of what the losers' power is, basically any industrial policy would be governed for and by the losers. Basically, as we have seen, traditional car companies are receiving all the help and all the aid. And on whether we know what the objective is, we have a mélange of conflicting environmental, labor, industrial security objectives. So I wouldn't be very optimistic about the chances of success of an industrial policy on large scale, tax these cars, try to make the legacy companies suddenly become cutting edge. And I also think that what we are seeing is the European companies are getting destroyed in third country markets. In Latin America, you only see BYDs now, in Africa, everywhere else. So I don't think that would solve much. I can see the short-run pressure and I understand it, but I think our problems are different. Our problems are about labor regulations that allow people to adapt fast are about lack of innovation and are about lack of incentives for radical as opposed to incremental innovation. Europe is very good at incremental, little by little innovation. We are really not good at making radical changes, and I think that's where the problem is.

But let's say the automotive sector leaves Valladolid, which is a city of what, 300,000, 400,000 people? It's not huge. It would be a major blow. What would actually replace it? What would the place look like? 10 years later.

For Valladolid, it would be devastating. It would be devastating. We are both— Valladolid and Valencia are big centers for Renault and Michelin, the car tire company and the car manufacturing brand. It would be devastating. So we would need— the other industry that Valladolid has has been the capital of Castile y León. It's a very kind of bureaucratic-intensive country. You know, Spain had a bureaucracy before anybody else had a bureaucracy. Well, I guess China also had a bureaucracy. So that's the other industry, which is not a very promising industry. I think What we need to do is to give a chance to innovation and to change. And the way we are doing it is just slowing down all change and all adaptation.

But there was a media article recently. It said something like, well, Americans don't read anymore, texts aside, but the Spanish, they still read. Do you agree? Books and novels, right? Not, not on your smartphone.

I guess there's quite a lot of reading among females, much more than men. I think it happens women more than men. I think it happens everywhere in the world, but even then it's relatively meaning that also the publishing world is adapting to that, which I'm not sure I understand why women are remaining a more loyal constituency of books. I don't know the figures. My sense is that Spain is going through the same shorter attention span, TikTok short videos. When you're in the public transport and you see what people are doing, they're just hitting the videos with the same finger as everywhere else in the world.

If I walk into a bookstore in Spain, I'm struck by how much the front tables are mostly fiction and there's a relative paucity of nonfiction.

That's correct.

The US is actually moving in that direction, but we used to be very much the other way around. Why that difference?

That's a great question. There is not a long tradition of nonfiction. If you think of what are your remarkable 150 or 200 books from Spain, none of them will be nonfiction. And in fact, it is also related to the fact that Spain doesn't have a big tradition on research and innovation. So Spain has always had a humanistic, artistic— think of our powers in the 16th, 17th, best painters, best writers from Cervantes to— I mean, I was thinking Velázquez and Goya as painters, Cervantes, Calderón. I mean, all the 20th century fantastic writers from Lorca, et cetera. But if you try to think of, well, just for example, who is the last Nobel Prize winner in science from Spain, you will have to go back to 1905. It's a long, long time in coming. So pioneers are, the culture doesn't reward a lot nonfiction, science. It rewards sports very well, market-driven excellence, big rewards, big concentration at the top, very large, high labor mobility. And it rewards all these artistic expressions, which by the way, 2 things where you won't see AI encroach, or AI will encroach much more slowly. So maybe that's protecting Spain.

Other than some obvious choices, like say Cervantes, what in Spanish language fiction is especially meaningful to you?

There is a lot of writing from the Latin American boom that I have enjoyed enormously. I have enjoyed García Márquez. I have enjoyed Rulfo Pedro Páramo. I have enjoyed Vargas Llosa. I have laughed, I have cried with Vargas Llosa, who, by the way, very free market thinker as well, wrote an essay, a nonfiction collection on liberal thinkers. I've enjoyed a lot of that Latin American writing. In terms of Spanish writing, I mean, the poetry from the 1929 generation, García Lorca, Miguel Hernández, those people are amazing as well.

And I like Javier Cercas. Do you like him?

I love Cercas. He has some really good kind of mystery novels, which are fantastic, but he also has this Anatomía de un instante, this kind of nonfiction novelized book that I would recommend very strongly to people to read about the Spanish coup d'état in 1981, that he writes from the perspective of 3 main characters who are 3 people coming from the Civil War who were all 3 betrayers of their own cause. The communist leader who actually was in favor of the monarchy, the Falangist, the ex-prime minister from the franquista part. Well, the Secretary General of the party, who was the Prime Minister, who made the transition, and the general who was on the Franco side, who made the military accept the transition. And those were the only 3 people coincidentally who didn't go under the desks when the guys, the Civil Guards with the guns came storming into the house, which was in session to vote the successor of Suárez, of the Prime Minister. And he manages to weave those lives and that story beautifully, I really I really recommend that book.

That's a great book. I also like Soldiers of Salamis and the recent one about the trip with the Pope.

Yes, he's all around really, really fantastic.

Why is the Spanish Civil War still so focal? And I'm thinking of your literature, but also your politics. Why is that stuck as such a thing in Spain? It's a long time ago now.

It's true. It frustrates me very much and it frustrates many of us. It probably is because many people think it wasn't a really well-closed episode. It wasn't an episode where, if you think of, say, maybe the South Africa reconciliation, there was an explicit reconciliation. If you think of German dictatorship, there was the actual surrender. Franco died in bed. He started the Civil War, he won the Civil War, He installed a dictatorship and he died in bed. There was no revolution like in Portugal that pushed him out. And so I think that people feel that the transition to democracy was not a true people-driven transition, but it was driven by the Franco elites. The truth is there were many people in Spain at that time, including the communist leader I mentioned, Carrillo, who thought Never again. Let's try to do things now peacefully and well. And they handled the transition admirably. I think it's time to put all that behind us.

Today, how is it that you understand the public choice economics of Catalonia?

There is a very clear historical inequality, which is the Basques had a terrorist movement, and because they had a terrorist movement, they managed to preserve a confederal system of financing in the constitution. They say it's because of historical reasons. That's BS. I mean, this, when you do a constitution, you redo the history. I mean, you start from scratch. But because people were scared of this terrorist movement, they were allowed the following bizarre exception. Everybody gets financing through the taxation system and you get some taxes that go to your region and some taxes that go to the central government, except the Basque Country. Which has itself collects all the taxes and negotiates bilaterally. Imagine Texas negotiating bilaterally with the US government how much Texas is going to contribute to the US budget. Now here's the smart thing or the terrible thing. They have enough votes to flip government every few years. They wait for that negotiation till the moment when they actually can decide that this government is going to continue, is going to drop. And they do always a negotiation in that moment, which means that what is called the cupo, the contribution of the Basque Country to Spain, is basically frozen. In fact, even when the pensions go up, the rest of the country pays them. The Basques don't actually pay more. And so they actually are net recipients from Spain, even though they are the biggest, one of the richest regions. Catalonia sees this and says, hey, we want the same system. The problem is, And the Basque Country is small. Catalonia is very large. It's not sustainable to do a system like that because it will break the budget. If you have like 2 of the biggest regions kind of bargaining bilaterally with the state over how much they're going to contribute every 5 or 10 years, that's going to be unsustainable. So that's the reason this basic inequality in state constitution has created a system that is unstable and that doesn't actually What did the University of Chicago teach you about politics that Spain ended up proving wrong? I think what I learned at the University of Chicago helps very much with understanding politics. Politicians are pretty smart maximizers. I guess voters are pretty inattentive. I think that your colleague Brian Caplan wrote a beautiful book about it, The Myth of the Rational Voter, which is perfectly rational. That they are inattentive, if we doubt why do they have the incentive to stand up and vote, why would they have the incentive to figure out what the program of the different parties is? So they're inattentive. I think that that's not clear enough from the rational models of political economy. The thing that I think I understood when I was actually doing politics better than I understood before, and I actually wrote a paper about it, is the importance of the party discipline. The mechanism that connects the voters to the politicians is very weak because we have in many countries in Europe, we have even in other countries happens through other means like in the UK, but we don't need to discuss that. But that mechanism that connects the voters and the parties is a mechanism that is mediated, sorry, the voters and the law is mediated by internal party discipline. The parties don't look for the smartest person for the job or the most competent person for the job or the person who can They actually want people who owe their position to the party so they won't complain. So it's not the one who in the town hall votes more smartly or proposes the smartest things who gets to the next layer of the proportional representation system. It's the one who's been most subordinate to the party decisions. And that's why the Socialist Party, which is now in enormous corruption scandals, unprecedented in all directions, there is nobody in the party and definitely nobody in the Congress support of the prime Sánchez, who's actually making any noise because their alternative option is zero. So the parties look for people whose outside option is zero in order to make sure that they keep the control. That's, I think, completely rational and it would've been predicted by any Chicago economist on the basis of the incentives, but it's not something that I was as aware. For example, how do parties in Europe choose the president of the European Commission? Do they choose the smartest person that is going to make the best calls?

No.

The leaders of the different countries, they actually want to keep the power. They don't want somebody in Brussels who is shadowing them. So they look for somebody who won't give them any trouble. And we've had 2 Luxembourg people, one failed defense minister from Germany who is the current president. I mean, we have people who just not able to lead, and that is by design. And I think that part of how the party machines and the insight of the way that this promotion, adverse selection, you could say, these promotions to higher office get done was something that I didn't understand well before politics, I think, not sufficiently well.

As I've mentioned, you've served in the European Parliament. Should the EU keep its unanimity rule for major decisions?

The EU has majority rule in single market decisions and unanimity rules in things that fall out of its core, meaning taxes, defense, foreign policy. In a sense, you could say all the core functions of the state. The states don't want win-lose decisions here. So let me give you an example. Armament procurement. You would say, hey guys, you're making like multiple tanks. You spend more in defense, many times more in defense than Russia. Just make one tank, make One plane and one cannon. What happens? Well, let's say that Germany wants to export to Israel. France doesn't want that, and let's say, or Spain doesn't want that. Germany doesn't want Spain and France to make a coalition and veto it and vice versa. So what happens is the countries want to have the ultimate right to decide on all defense matters. And that means that you get multiple procurement decisions, incompatible shells, in their canons, all of these things. Now, should we have it? Yes. Should we understand that? Should we have the majority vote that you proposed? Yes. Should we understand the politics that make it very hard? And those politics are the core of the state sovereignty, which is taxation, defense, foreign affairs, the functions that the state of 1600 or 1700 had originally. Are all not in Europe. The politics make it very, very hard. And I told you defense, but I could go through many other examples and show you why, even though you would want to think that the gains from a single market, single procurement, et cetera, would be enormous, the politics make it really, really hard. Right now, what we're doing is harmonizing the shells. You have a big meeting group, people, they say, oh, I want the 55 millimeters to be like this. And somebody says, no, I want it like this, 55 and a half. And they meet for weeks. weeks and weeks and weeks and come up with pages and pages and people, the citizens are upset. But the truth of the matter is there is a political reason for this and it's the one I mentioned. So in those unanimity areas, so fiscal, Ireland wants to do a separate tax and Luxembourg separate tax policy that basically attracts multinationals and lowers tax bases and all of those things. The rest would want no arbitrage on tax bases, but this is by unanimity. So as long as there's one loser, loser, no change takes place. And in all of these policies, there's always one loser. Pareto improvements are the only ones that can happen.

So you have your finger on a button and you can press the button and the unanimity rule goes away and it's replaced by 2/3 majority rule. Do you press the button?

Everything, everything. Europe becomes a— not even the US has that, right?

Not even the US.

So let's say Europe gets the same intercommerce clause as the US on the functions. Let me put it like this. On the function that the US government has, Europe loses unanimity, I would say yes.

Could a euro bond work at a significant level under current institutions?

No, you cannot have the 4 housemates of the apartment share the credit card bill without sharing anything about how the money is spent and how the money is raised. Then the incentives are for all the housemates to go around with a common credit card bill and pan it around. So joint borrowing requires, and I've been a very big proponent and I was a proponent of the sovereign reconstruction fund for Europe. We proposed it together with some revenue functions for Europe that would allow the Hamiltonian compromise. The money gets centralized for some public goods that are European public goods and you raise it in some European way. But that has not happened. We issued those bonds, which we do have, so eurobonds do exist, without really any joint revenue.

Capital markets seem to be a big problem. What could we do to make EU capital markets stronger and better?

It's very interesting because I wrote about this in Silicon Continent in my Substack, a piece with Per Stromberg. Sweden has enough money to fund startups and scale those startups. And Per Stromberg is one of the biggest world experts on private equity, and he happens to be also an expert in Sweden because he's based in Stockholm School. And the basic story that he tells and that I wanted to write in a blog for our readers with him is that it is not really about having the cash, it's about the cash and the knowledge together. So the money exists. Europe sends the money to the US. We invest in all those startups. The talent exists, all those French and Germans in Anthropic and all these other places. What is missing is the Spotify chief of marketing that actually has seen how companies run, how it scaled, et cetera, and that now has a lot of money and starts to fund startups, advise them, and help them. So it's possible that it is true, our capital markets are a problem, but it is possible that just fixing the other aspects, which is at the national level allowing for— and the big change that Sweden did is that you don't pay those taxes on the capital gains as long as they're reinvested in the new startups. So then you create this ball that starts rolling in which all these startup funders start funding the new startups, and you can do it in a country that was supposed to be one of the most socialist in Europe. In fact, it's very free market thanks to internal reform. So It's true the capital markets are not working. It's also true that the capital market changes we are doing are wrong. The main thing I learned about Europe in that respect is what we do efforts at harmonizing instead of we put this new law and eliminate the previous ones. The way it often happens in European Parliament, European Commission, European Council, the European institutions is we add this new law, which is harmonized, but leave all the lower layer laws there. For example, we are giving right now in the new capital markets package more power to the European Securities Markets Authority, the ESMA, the SEC at the European level, without removing any power from the SEC at the national level, which means you're not harmonizing anything. You're just having more hurdles for people to raise money.

You mentioned your Substack, Silicon Continent. I'm happy to recommend that strongly as well. Now, in labor markets, should severance protection rise with the tenure of the worker, or why not just let the market handle I have written and argued in favor of more flexible markets.

Denmark has found a solution that I think achieves both ends in protecting workers by having relatively or pretty high unemployment insurance, but in making it flexible and able to hire and fire. That would be to me the best solution to the current rigidity on European labor markets. The problem is that it costs quite a bit of money because you have to insure people quite significantly to make them be happy to move around. But there are solutions in Northern Europe that allow for this flexicurity, and I would wish that the rest of Europe was adopting them because I do believe that it's not just that rigid labor markets raise the cost for companies. You can then lower wages and neutralize it. The problem is they increase hugely the cost of making mistakes. That's what a new literature is recognizing. People weren't clear about that before. If Facebook makes a mistake, thinks the future is the metaverse, and the metaverse is a completely ridiculous idea, and the future's AI, Facebook can turn on a dime, fire all the engineers in metaverse, and hire all the ones in AI in a week. If Ericsson or Nokia want to do something similar, they're going to take months and months and months of negotiation with their labor council and so on, to the point that they might go under in the meantime.

Before we get to your new book, Messy Jobs, are you game for a round of overrated versus underrated?

Sure, go ahead.

Okay. Rosalía, overrated or underrated?

Rated just fine. She's amazing.

Penélope Cruz?

Also fine. A very fine actress doing very well.

Javier Marías, the author?

I am a big fan. I would say he deserves wider recognition, so I would say underrated.

The Spanish painter Antonio Saura?

Maybe just fine. Just fine. Let me just say just fine.

I think he's underrated outside of Spain, for instance.

Yes, he is big, big in Spain, but I wouldn't be able to comment on how internationally he's recognized.

The region of Spain, Extremadura, overrated or underrated?

Underrated. It has some of the best history. All the conquistadors, many of the conquistadors came from there, so when they went back, they did a lot of work and making the cities beautiful. The region stopped growing 400 years ago, so it's all frozen in time, and you have some of the most stunning experiences of walking into a portal towards the past in places like Which, by the way, has one of the best restaurants in Spain as well.

What's it called?

The restaurant in Cáceres, I don't remember. I ate there a few months ago. It's a 3-star, so people can find it.

The AIs will know. Yeah. Within the world of Beatle fandom, is the album Sgt. Pepper overrated or underrated?

I think it's overrated. I'm not as huge a fan of that as of Abbey Road or of Rubber Soul, or for sure the earlier ones. I am not, I don't think it's the biggest piece in There's some weak songs on it.

I think George Harrison contribution is not so wonderful. When I'm 64 is charming, but it bores me a bit.

I think there is some weakness. I would agree with you.

Is there an underrated Beatles album? Again, this is within the world of Beatle fandom.

People somehow don't like Let It Be, which I think the post, not quite last album, but the really last album. I don't know why. I always adored it. But I mean, it's kind of so relative.

I mean, their albums are all, What is the special food place in Spain that not everyone knows about?

The place where I'm sitting now, I'm in Asturias recording this from Asturias. It's the region in the north between Galicia and Cantabria and the Basque Country. It's the oldest bit of Spain in many ways because it was the last place to be conquered by the Islamic invasion in 711, and it's where the Reconquista started. So historically, it has a long history of romantic churches and all that, but it also has outstanding food everywhere, wherever you stop. It has amazing nature, unspoiled, beautiful beaches, and it's completely climate change-proof. It has amazing weather.

How will the Spanish language change?

The way it's changing is it's incorporating a lot of English language words and expressions. People, probably I am guilty of that as well, people who are very exposed to English introduce expressions and false friends. You know, we are so careful not to introduce false friends from Spanish into English, and then somehow they come back from English into Spanish, and you see words that are used. If you are an English speaker, you realize, oh, that's completely the English usage. That's the biggest word. Many words that are ambiguous, instead of shifting towards the Spanish use, they shift towards the English one.

If I'm in Latin America, I notice that the conditional and subjunctive are used much less often than in Spain. Given that Madrid now is, what, 20% Latin American? Is this going to affect Spanish in Spain?

That's a great point. We are getting a very big Latin American influx. I haven't noticed that. I haven't noticed the change in the use of subjunctive. We use, unlike the French, not just the subjunctive present. I don't want to discourage our listeners from learning, but we use a lot the past and the compound past subjunctive. So if you make a future statement that is hypothetical, The hypothetical future is subjunctive, if I were a rich man, and past subjunctive. And I haven't noticed people using it less, or at least not among people I hear regularly.

And in Mexico, at least non-learned people, they don't use the future tense very much, right? They'll use the present tense and maybe throw in the word mañana, or they'll depend on context. And Spanish in Spain, is it going to go that way as well?

I haven't noticed those changes in Spain. I think that the impact of English language is orders of magnitude higher than Latin America. That's my sense, but I would have to consult my favorite LLM before being so sure.

Okay. On Messy Jobs, your new and excellent book, you argue very persuasively, in my view, that AI will not lead to anything like mass unemployment, maybe not even to a rise in unemployment, because jobs will become messier and the AIs won't be able to do them. Is that a fair description of part of your argument?

I think that's completely right. Yes.

Now, I agree with you, but I think my worry is the opposite, that I know a lot of people, they want simple jobs. They're okay with some measure of tedium, and that if most jobs become messy jobs, for them, that's quite stressful and they're upset and disoriented. Do you worry about that?

I think that we will have to have a tolerance for human relations. Is that what your friends don't want? We'll have a tolerance for relational work that is complex, that has politics in it, that has big human components. And that's the part that is going to stay. So if people just want to be in their desk typing away, you know, I think 2 good ways to think about it is work from home and outsourcing. So if you think of which works, which jobs were outsourced in the big offshoring, which jobs were offshored, let me say offshored in the big offshoring wave to India, those are jobs that are not messy.

They're clean.

The company specifies the jobs. They said, okay, we can specify this job perfectly. Let's Those jobs are the same exact ones that are under complete threat of disruption. A lot of the work from home, when it doesn't involve a lot of Zoom meetings, I guess, has the same feature. Those jobs are clean, single task, and very often verifiable. You can just see how the performance is going and have your RL, your reinforcement learning loop, work on those. I think those are gone. The messy component that I want to emphasize. Many people will say, oh, stuff AI, we're getting to the messiness as well. I think that there is some messiness that is contingent and that AI can streamline, but there is a lot of messiness that is both relational and has to do with a deeper aspect of the knowledge problem that doesn't really go away. And that as AI advances, many aspects of Hayek and Polanyi and all these knowledge problems are But how much retraining will be required and how frequent will that retraining have to be?

So if I think of me working with agents, I have to retrain myself every month or 2, and that's difficult for me. It's not stressful given my position, but I can imagine it would be stressful. Can we really just put a big chunk of the labor force through that?

Rafael Sedun and others at HBS have been working on this. I mean, one of the things that What is frustrating about retraining programs and not just retraining individuals, but retraining programs is that they generally don't work. The favorite middle-of-the-road free market economist kind of prescription for technological change is let's retrain people. And we find that this is really, really hard to do. If you wanted to retrain a clinician, a doctor who's learned to diagnose illnesses and that suddenly gets very easy. This is not one of our examples, but just to give an example, to become a plumber. I mean, it's not that you couldn't retrain him because the plumbing skills are so hard, which they probably are, to be honest, but not just that, but because there's a lot of social identity and other aspects that are tied to the kind of jobs you do. So retraining is a huge barrier. And the way we retrain ourselves, as Kuhn said, talking about scientists, is by dying and the new generations do new things. So I share your concern about how easy it will be to get people to learn new tricks. On the other hand, my mom is 84 years old and she took to ChatGPT all the time and she has good long conversations. I've updated it so that she now has the better version that you can talk over it and argue back, the very recent improvements. And the LLMs are becoming better at eliminating all the prompting skill and all the skill that went into making agents, et cetera. It seems like it's easier to use. I think the hardest thing about LLMs, and maybe that's easier to The hardest skill about LLMs is knowing what they can do. Most people have no idea what you could do with your AI. And that's the part where a short, focused lesson to a relationship manager at a bank, which you tell him, here's the case, you're going to visit your client. Here are the 6 questions you should ask. I'm doing some work with a big bank on this exact topic, a big experiment. Here are the questions that you could ask before you have the client meeting. Maybe that retraining is easier on the use case as opposed to retraining for new jobs, which I think is very hard.

So do you think the natural rate of unemployment will go up? I don't mean cyclical, but just due to search, retraining.

My sense is that we have several hundred years of automation and we do have moments of blips, but I think the natural rate is going up much more due to other things, Well, if you allow me to group participation in, which has to do with disability and mental illness and people not feeling well and all that, rather than to a permanent increase in retraining needs.

We have some degree of recursive self-improvement right now. Arguably, there's more to come. So there's a new model out every month or 2, and for the most part, they're much better than the model that existed a month or 2 earlier. Just how exactly are people supposed to keep up with Like, do the jobs get messier at an equivalently rapid pace?

You lose certain bits of the job. Certain things get unbundled. Other things don't get unbundled. Other things, I mean, we talk about, GENE and Jianhui and me talk about strong bundles and weak bundles. Weak bundles, the job kind of breaks into pieces and some parts are done by the AI. When the job is a strong bundle, the AI kind of comes into your bundle and helps you, like in a relationship manager. An account manager for a bank who gets to prepare the meetings better, but still needs to have the cognitive task bundled with seeing the clients. And I think that part doesn't quite require staying as close to the frontier as you and me are staying. I think that part requires knowing that the LLM can help you prepare the client meeting. And you ask the client, the LLM, please help me prepare this client meeting. Here are the budgets and the balance sheet statements of the client. Help me see which accounts, which products of the bank I could offer. And I don't think that needs really to know what the actual frontier model is and how does it differ from the previous ones.

Now, as you well know, virtually all new technologies and productivity improvements, they lead to more leisure over time and in a good way. I don't mean unemployment, actual enjoyed leisure. If I think of the current day, there's some people like the two of us, we choose to work more to learn about AI. And then there's other people, they feel they have to work more to learn about AI to not lose their jobs. And so far there's no leisure dividend. People basically are working more. When is the leisure dividend going to arrive?

I'm not sure that's the case. Let me give you 2 data points. So one is a Chinese CEO I had dinner with. My 2 co-authors are from Hong Kong University, and we had dinner with this CEO who told us, She sees every one of her IT people more productive. She looks at the productivity of the overall IT department. Nothing happens. And quote, she said to us, I think they're smoking the productivity gains in the corridor. The second is from the recent NBER Summer Institute. There was a paper in health which gave doctors scribes and they all adopted. I mean, adoption is slow. People are, well, the automated scribe went up to 100% of adoption really very quickly. You see doctors scheduling more meetings and doing more stuff. And eventually, and there was a recent New York Times article from a doctor exactly arguing this, she was saying, I have more time for my yoga classes. So she was actually using the Scribe, which transcribes her meetings and which stops a lot of the bureaucratic work that is nasty for a doctor. My wife is one, so I know how much they And she was actually doing more yoga. And this actually shows up in this paper to some extent. So I do think that what we see with this usage, this shadow usage of AI in the job, which is people have their own computer and they actually ask questions that maybe their corporate AI doesn't allow them to ask, has a lot of welfare gains in the form of leisure and lower work stress. in the job because you just ask the LLM, you post it there, and you just spend some time browsing the web. So I am not as sure that the leisure is not expanding, but definitely not mine. I've never worked as much in grad school.

But say in the short run, when taxes change, almost always the substitution effect overwhelms the income effect, right? Tax cut, people work more. If taxes go up, people work less. Of course, we see this in Western So aren't these AI productivity improvements a bit like tax changes? You're more productive, and the aggregate, if doctors are more productive, they can earn more, they'll work harder. I'm not complaining about that fact, but maybe we should expect that instead of a leisure dividend?

Both things can happen. I mean, we are seeing Jevons effects in many of our own utilities and in many of our own decisions to work. It's definitely the case for you and I, as you said. I was, just for the amusement of our readers, I guess many of you have a Whoop. I was really very happy with my Whoop. Until January this year, I was 53 years old in actual age versus 59, sorry, in physical age. Since January, it's been steadily declining. I'm now 57. I grew 4 years in 6 months. And that's because I am not sleeping a lot and I am kind of running things into the night and going to bed thinking, oh, I should have done this other thing. Why don't I try this? So yes, it definitely happens to me.

So why wouldn't it happen to those Is there a plausible scenario whereby Spain in particular, and I don't mean the EU, I mean Spain, achieves AI sovereignty? Now you've written about this on your Substack, Silicon Continent. What's your view right now? And keep in mind the whole stack in some way has to be under your control, right?

Yeah, I don't think that's a substantive objective, neither for Spain nor for Europe. Europe as a whole and Spain in particular are no We are nowhere on hardware except for ASML, which does the capital equipment. I'll go back to ASML, the producer of the machines that make the EUV chips. We are nowhere on the language models, the frontier models, neither in open weights nor on closed models. We have Mistral, but it's not really at the level of the Chinese ones. Well, we are not really there on the data centers. So all the elements that are needed are not there except for ASML, which is a Dutch company and is not under European jurisdictions, under Dutch jurisdiction if you want, and many of the supply chain, which is German. What you can aspire to, I've been defending the second mover strategy for Europe with my colleague Jesús Araquejo. What we are defending is being a fast implementer, profiting from the gigantic investment that the Americans are making in many things that will actually, like the railroads, eventually not lead to significant value capture, but will generate enormous dissipated welfare gains for everybody. And let's be the ones who enjoy those welfare gains by adopting AI very aggressively, becoming big clients. When you're a big client like China showed with Nvidia, you have bargaining power because the people who sell to you, your vendors, are going to lobby the government to keep selling to you. So become a second mover, try to make sure to have options, keep it interoperable, make sure the models can easily be switched, which at the moment is very, very easy. You just need to change the API call and API call, it becomes seamless. That's the best that we can do. I don't think sovereignty is an objective at this moment.

So how much bargaining power does Spain lose in this new world?

All countries except the US and China will be dependent on AI, which they don't control. My view is that I've disagreed with my blog co-author and son, Pieter, on this. This is the one point on which we disagree. He's very convinced that it's all about frontier models, and he's written a couple of posts on that. I think that you need frontier models in research and innovation. You need frontier models in some adversary applications like war, but that in order to have good law, good professional services, good medicine, good accounting, good companies doing proprietary research in their own servers, you don't need the frontier model. You can be 3, 4 months behind the frontier as long as you have the harness in-house, the data in-house, you're better off with that. And I think that this letter from very recently that NVIDIA CEO and Microsoft CEO stimulated and everybody else wrote goes in direction. The open weights model allows you to keep proprietary your own data and your own know-how. And a country like Spain or Europe as a whole could build a strategy on that ability to switch and to keep the market competitive and contestable.

Let's say you were liberated from your AI learning responsibilities and given 2 or 3 free weeks in life, all expenses paid to explore some corner of the world where you've never been. What's your choice and why?

I think I'll go to Vietnam. It's one of the places I've been dreaming of going for a long time. I think it has the cuisine, the landscapes, the people, the economic side, the technology to see how they're doing all this transition, the nature. I think it would be Vietnam.

And final question, what is it you want to learn about next other than Vietnam?

I'm continuously fascinated by economics. I learned a lot of price theory in Chicago from Becker and Murphy and Rosen, and those were my advisors and many others. I find that these tools are allowing me to learn much more and to be deeper on many questions and to think harder about what is it that remains messy? What is the knowledge problem once cognition is very cheap and why is it hard to reproduce with a machine. And all of those questions are infinitely interesting. I spent quite a few years outside of economics because of the politics detour. Of course, I was in charge of economic dossiers in parliament, but I was not in the frontier of economics and I realized how much I like it. So my desire is to learn more about economics and help the economics discipline and the students make this beautiful That we are going to see that suddenly it's going to accelerate all sorts of interesting research.

Luis Garicano, thank you very much.

All right. Thank you, Tyler. It was my pleasure.

Thanks for listening to Conversations with Tyler. You can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. If you like this podcast, please consider giving us a rating and leaving a review. review. This helps other listeners find the show. On Twitter, I'm @TylerCowan, and the show is @CowanConvo. Until next time, please keep listening and learning.