Key Moments
Key Moments
AI won't cause mass unemployment because it will make jobs more complex, not simpler, but this shift could alienate those who prefer routine work.
Key Insights
Spain's housing crisis, marked by a shift from overbuilding to a 'Not In My Backyard' (Nimby) attitude, stems from a past housing bubble and perceived corruption, leading to severe supply shortages with less than 100,000 homes built annually against hundreds of thousands of immigrants.
Spain's productivity has stagnated for nearly three decades, with all GDP growth since 2008 going towards pensions for its aging population, rather than productive investment.
The EU's industrial policy for electric and self-driving cars is unlikely to succeed because it lacks the conditions for failing companies to exit and has conflicting environmental, labor, and industrial goals.
The Spanish Civil War's unresolved legacy continues to haunt the nation's politics and culture due to a lack of explicit reconciliation or a revolutionary overthrow of the Franco dictatorship.
The Basque Country's unique federal financing system, a result of historical concessions tied to a past terrorist movement, creates an unsustainable fiscal imbalance within Spain as Catalonia seeks similar treatment.
AI is unlikely to cause mass unemployment because it will make jobs more complex and relational, areas where human tacit knowledge and social interaction remain crucial, unlike predictable, easily definable tasks that are susceptible to automation.
Spain's housing crisis and a 'not in my backyard' culture
Spain has shifted from a period of significant overbuilding, characterized by up to 800,000 new homes annually, to a severe housing shortage. This change is attributed to a past housing bubble that burst, linked to corruption between developers, local politicians, and savings banks, similar to the S&L crisis in the US. The public now associates easy construction with corruption and rising prices. Consequently, there's a strong 'Not In My Backyard' (Nimby) sentiment, with debates questioning if more construction will lower prices. Additionally, post-bubble, strict land-use regulations were imposed to prevent corruption, inadvertently creating rigidity. This has resulted in a stark imbalance: hundreds of thousands of immigrants arrive annually, yet fewer than 100,000 homes are built. This scarcity concentrates people in major cities like Madrid and Barcelona, despite vast empty land, much of which is protected by biodiversity regulations.
Economic stagnation and an aging population in Spain
Spain has experienced a severe productivity crisis, with growth stagnating for nearly three decades. The observed economic growth is largely expansionary, driven by immigration and tourism, rather than genuine productivity gains. This stagnation is deeply rooted in political economy. Spain has one of the world's lowest fertility rates and highest life expectancies, leading to substantial pension obligations. Alarmingly, 100% of the GDP growth since 2008 has been absorbed by pensions. Productive investment remains minimal, despite significant infrastructure like highways and high-speed rail, which suffer from poor maintenance. The country is essentially governed by and for its elderly, retired population.
An optimistic scenario for Spain amidst challenges
Despite its challenges, Spain possesses significant potential for growth. Its abundant solar and wind resources, coupled with nuclear energy capabilities, could make it a leader in electrical energy. The country's diverse geography and climate are highly attractive. Garicano envisions a scenario where Spain could emulate places like Florida or Texas, becoming a magnet for technology and talent, developing data centers, and leveraging its energy potential. However, the primary obstacle remains political economy; the country has historically only undertaken significant reforms during crises. Past examples include reforms during the dictatorship, under a socialist government in the 1980s, pre-Euro adoption, and during the 2012 Euro crisis. This pattern suggests that substantial reforms may only occur when the situation becomes unbearable.
Critique of EU industrial policy and protectionism
Garicano expresses skepticism regarding the effectiveness of EU industrial policies, such as tariffs and quotas on Chinese electric vehicles. He notes that while industrial policies can succeed under specific conditions—requiring a clear objective and the ability for failing companies to exit—the EU currently lacks both. Powerful incumbents in the traditional auto industry are likely to shape any policy to their advantage, and the EU faces conflicting goals across environmental, labor, industrial, and security domains. He observes that European companies are already being outcompeted in third-party markets by Chinese manufacturers like BYD. Instead of protectionism, Garicano believes Europe's core issues lie in labor laws hindering adaptation, a lack of radical innovation incentives, and a tendency towards incremental improvements rather than disruptive change.
The persistent shadow of the Spanish Civil War
The Spanish Civil War continues to be a central issue in Spain's literature and politics. Garicano attributes this to a poorly concluded chapter, lacking explicit reconciliation or a revolutionary overthrow of Franco. Franco died in power, and the transition to democracy was largely led by Franco-era elites, rather than a popular uprising. While figures like Santiago Carrillo advocated for reconciliation, the sense that the transition wasn't fully resolved persists. Garicano believes it's time to move beyond this unresolved past.
Catalonia's push for fiscal autonomy and its unsustainability
The economic dynamics of Catalonia's pursuit of greater autonomy are complex, stemming from a historical disparity with the Basque Country. The Basque Country secured a confederate financing system due to a past terrorist movement, allowing it to collect all taxes and negotiate bilaterally with the central government. This system, maintained by the Basque Country's political leverage, freezes their contribution to Spain's national expenses, even as pensions rise. Catalonia, a much larger region, desires similar treatment. However, Garicano argues that extending this model to two major regions would be fiscally unsustainable for Spain, inevitably leading to budget collapse. This inherent constitutional imbalance creates a precarious and difficult-to-resolve situation.
Chicago School insights and the reality of political incentives
Garicano learned from the University of Chicago that politicians are intelligent self-interested actors and that voters are largely inattentive, a concept explored by Bryan Caplan. However, his practical experience in politics revealed the critical role of party discipline in weak electoral-party linkages. Parties prioritize loyalty over competence, selecting candidates who owe their positions to the party to ensure obedience. This 'reverse selection' process, where individuals with zero external options are promoted, explains why parties maintain cohesion even amid scandals, as seen with the Spanish Socialist Party. Similarly, the EU's selection of leaders, like Commission presidents, prioritizes national leaders' desire to avoid challengers over appointing the most capable individuals. This is a rational outcome based on incentives, but one he didn't fully appreciate until entering politics.
The challenge of EU consensus and the case for majority voting
Garicano advocates for shifting from unanimous consent to majority voting in major EU decisions, particularly in areas like defense and foreign policy, which currently mirror core state functions. The unanimity rule leads to inefficient outcomes, such as multiple, incompatible defense procurement programs driven by national interests, despite massive spending. While he supports the idea of majority voting, he acknowledges that national sovereignty concerns around taxation, defense, and foreign affairs make it politically difficult. Even in areas like shell procurement, weeks are spent negotiating minute specifications, demonstrating the deep political entrenchment of national control. For progress to occur, only 'Pareto improvements'—where no one is worse off—are possible under the current system, which is rarely achieved in these sensitive policy domains.
The limitations of Eurobonds and strengthening EU capital markets
Eurobonds, as currently structured without a common revenue source, incentivize unchecked spending, much like four roommates sharing a credit card without shared financial responsibility. While Garicano supported the EU's Recovery and Reconstruction Fund, he emphasizes that true 'Hamiltonian' settlement requires centralized revenue collection. Regarding capital markets, the issue isn't a lack of liquidity but a failure to combine capital with knowledge and experience. Europe sends capital to the US for startups, and talent exists, but it lacks experienced professionals (like Spotify's marketing head) who can mentor and fund new ventures. Reforms like Sweden's tax-free capital gains reinvestment in startups can create a virtuous cycle. He criticizes EU harmonization efforts, which often add new regulations without repealing old ones, increasing complexity and hindering fundraising.
Flexible labor markets and the high cost of errors
Garicano argues for more flexible labor markets, citing Denmark's model of high unemployment insurance coupled with easy hiring and firing as an ideal. This 'flexicurity' approach requires significant investment in social safety nets to encourage job mobility. Rigid labor markets, he contends, not only increase costs for companies but drastically raise the 'cost of making mistakes.' Unlike agile tech giants like Facebook that can pivot quickly, traditional European companies struggle to adapt, potentially leading to bankruptcy. This inflexibility hinders their ability to respond to rapid technological shifts, such as the rise of AI.
The future of jobs: complexity, AI, and human connection
Contrary to fears of mass unemployment, Garicano's book 'Messy Jobs' argues that AI will make jobs more complex and relational, not simpler. Tasks that are highly predictable, routine, and easily definable are most at risk of automation or outsourcing. Jobs involving significant relational complexity, political dynamics, and human interaction are likely to persist. While AI can simplify certain complexities, deeper 'knowledge problems' and tacit human knowledge remain difficult to replicate. This shift may alienate those who prefer simpler, more structured work. The challenge lies in adapting the workforce to these evolving, 'messier' roles and managing the significant retraining required, as current retraining programs often prove ineffective.
The slow diffusion of AI benefits and the nature of progress
Garicano observes that while AI promises productivity gains, these benefits are not always immediately apparent in aggregate statistics. He cites an example of an IT department where individual productivity increased, but overall departmental productivity remained flat, suggesting gains might be 'consumed in the corridors.' Similarly, the adoption of AI tools by doctors is leading to more meetings and tasks, but one physician reported having more time for yoga due to AI handling bureaucratic work. This suggests that AI's impact may manifest as increased leisure time and reduced stress, rather than solely higher output. However, he acknowledges that personal productivity gains, like his own increased work hours tracked by WHOOP, can lead individuals to work more, not less, driven by the pace of AI development and the need to stay competitive. This phenomenon, akin to the Jevons paradox, means that increased efficiency may not automatically translate to reduced working hours.
Spain's strategic position in the AI landscape
Garicano believes achieving 'AI sovereignty' is not a realistic goal for Spain or Europe. The continent lacks a significant presence in hardware, foundational models (open or closed-source), and data centers, with the exception of ASML (a Dutch company). Europe's strategy should focus on being a 'second mover,' leveraging US investments in AI research and becoming a major customer. By acting as a large customer, Europe gains negotiation power. The strategy involves focusing on rapid adoption, ensuring interoperability between models, and maintaining market competitiveness. He argues that for many applications in law, professional services, medicine, and private company research, cutting-edge 'frontier models' are not essential; a lag of three to four months is acceptable if the country possesses internal technology and data. Open-weight models are key to retaining data and knowledge sovereignty.
Mentioned in This Episode
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Common Questions
Spain's housing crisis is driven by a combination of factors including restrictive zoning laws, historical overbuilding leading to a burst bubble and subsequent distrust of development, and complex biodiversity regulations. These issues collectively create a 'NIMBY' (Not in My Backyard) environment, making new construction difficult and exacerbating the shortage.
Topics
Mentioned in this video
Luis Garicano previously served as a Member of the European Parliament.
European Securities and Markets Authority, mentioned in the context of the EU's capital markets package, where increased power is given without removing national authority, hindering true unification.
The executive branch of the European Union, whose President selection process is discussed in terms of political maneuvering and avoiding strong candidates.
Luis Garicano's current academic affiliation.
Luis Garicano taught at this business school. It's mentioned in the context of his academic background and the influence of Chicago economics on his political understanding.
Colombian novelist whose work, part of the Latin American Boom, was enjoyed by Luis Garicano.
Peruvian writer and Nobel laureate, known for his market-friendly views and non-fiction work on liberal thinkers, enjoyed by Garicano.
Spanish poet and playwright of the Generation of '27, mentioned as a significant figure in Spanish literature.
A Spanish writer, considered 'underrated' by Luis Garicano, who is a big fan of his work.
Luis Garicano's son, with whom he has a differing view on the importance of frontier models in AI.
Co-author of the book 'Messy Jobs'.
Economist whose work on industrial policy is cited, suggesting it succeeds under specific conditions.
Spanish poet, mentioned as a significant figure in Spanish literature.
Mexican writer, author of 'Pedro Páramo'.
A Spanish actress, mentioned in the 'Overrated vs. Underrated' segment and described as 'fairly rated' and a great actress.
A Spanish painter, considered 'fairly rated' by Luis Garicano, who notes his significant recognition within Spain.
Co-author of the book 'Messy Jobs'.
The communist leader mentioned in the context of the Spanish transition to democracy, who advocated for moving forward peacefully.
Spanish economist, former Member of the European Parliament, and professor at the London School of Economics. He is the co-author of the book 'Messy Jobs'.
Spanish politician and writer, mentioned in relation to the 1981 coup attempt.
Spanish writer admired by both Garicano and the host, known for his novels and non-fiction, including 'Anatomy of a Moment'.
Author of 'The Myth of the Rational Voter,' mentioned in the context of explaining voter inattentiveness in political science.
A Beatles album preferred by Luis Garicano over 'Sgt. Pepper'.
A Beatles album preferred by Luis Garicano over 'Sgt. Pepper'.
A Beatles album that Luis Garicano considers underrated and personally enjoys, despite its perceived unpopularity among fans.
A Beatles album considered 'overrated' by Luis Garicano, who prefers other albums like 'Abbey Road' or 'Revolver'.
A non-fiction novel by Javier Cercas about the 1981 coup attempt in Spain, highly recommended by Luis Garicano.
A new book co-authored by Luis Garicano, focusing on the impact of AI on the labor market and the emergence of 'messy jobs'.
A novel by Juan Rulfo, which Luis Garicano enjoyed from the Latin American Boom literature.
Another book by Javier Cercas, mentioned by the host.
A book by Bryan Caplan that discusses voter inattentiveness as a rational behavior in politics.
A city in Extremadura, Spain, known for its historical architecture and one of the best restaurants in Spain.
A region in Northern Spain known for its distinct culture, history, food, and natural beauty, considered by Garicano to be an underrated gem.
A region in Northern Spain, part of the area Garicano highlights for its food, nature, and historical significance.
A region in Spain that seeks the same financial autonomy as the Basque Country, posing a challenge to Spain's fiscal stability due to its larger size.
A region in Spain considered 'underrated,' possessing rich history and beautiful medieval towns like Cáceres, but having stagnated economically for centuries.
A region in Spain with a unique confederal financing system within the constitution, partly due to historical terrorist movements. It collects all its taxes and negotiates bilaterally with the central government.
The country being discussed in relation to its housing crisis, economic productivity, culture, and political landscape.
Luis Garicano's dream travel destination, chosen for its cuisine, landscape, people, economic transformation, and technology.
A technology giant that, along with Nvidia, signed a letter encouraging the use of open-weight models, aligning with Europe's strategy.
A Chinese electric vehicle manufacturer whose cars are increasingly seen in Latin America, impacting the European automotive market.
A wearable device for tracking physiological data, mentioned by Luis Garicano in the context of his own health metrics and the impact of his work schedule.
A French AI company, mentioned as an example of European efforts in language models, though not yet at the level of Chinese models.
A tire manufacturer with a plant in Valladolid, Spain, contributing to the city's industrial base.
A leading semiconductor company, mentioned as an example of how large customer bases (like China) can influence government policy on sales.
A major car manufacturer with a significant presence in Valladolid, Spain, impacting the local economy.
A Dutch company that manufactures photolithography machines for the semiconductor industry, mentioned as a rare European player in critical capital equipment for AI.
Knowledge problems discussed in the context of AI's limitations, suggesting that certain aspects of human knowledge remain difficult to replicate by machines.
An acronym for 'Not in My Backyard,' referring to local opposition to development projects, discussed in the context of Spain's housing policies.
The economic union of the Eurozone, discussed in the context of the need for fiscal union and shared revenue streams to support common projects like Euro bonds.
Mentioned in the context of Spain's historical lack of Nobel laureates in science, highlighting a weaker tradition in research and innovation compared to arts and humanities.
A reference to Alexander Hamilton's proposal for federal assumption of state debts, applied to the European context for centralized funding of common European public goods.
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