Why Can't We Build Anything Anymore?

0:00 Why don't we build things anymore?

0:02 It's a common and honestly not unfair

0:04 question asked by everyone from outofouch retirees who

0:07 got their job on a factory floor with a firm handshake all the way up

0:10 to our own military who are starting to realize that we may not be able

0:13 to support ourselves if we lose trade relationships

0:16 with all of the countries we have outsourced to.

0:18 The share of our economic output coming

0:20 from actual production has more than hald over the last 50 years with almost all

0:24 of that being replaced by broadly defined services.

0:27 Bringing back real jobs making real stuff in real factories

0:30 has become a popular political message to reverse this trend.

0:33 And it's easy to see why.

0:35 In the past, these jobs offered non-oleducated

0:38 people a skilled profession that often came

0:40 with good pay and benefits in areas that didn't have a high cost of living.

0:44 At the same time that we have lost those industries,

0:46 we have lost those kinds of jobs as well.

0:49 But if we really are going to go allin

0:51 in an effort to bring back those factory jobs,

0:54 we should probably take some time to understand

0:56 what made them so desirable in the first place.

0:58 Because without the rose tinted glasses of nostalgia,

1:01 it is worth recognizing that this was hard work with grueling hours.

1:05 This is to say nothing of the fact that even if

1:07 we do manage to reverse all of the outsourcing we have done,

1:10 a lot of this work might just be

1:12 incompatible with a world rapidly progressing towards widespread automation.

1:17 We'll return significant manufacturing jobs to our country.

1:22 Well, the news of a major Tyson Foods plant

1:24 shutting down tore the heart from one Nebraska community.

1:28 General Motors plant in Lordstown, Ohio is coming to an end later this week.

1:32 When I start working in the morning,

1:34 it's just like somebody putting the switch on myself.

1:38 It's monotonous.

1:41 Offshoring, automation, and a shift toward service jobs have

1:44 all played a part in killing manufacturing jobs.

1:48 The number of people actually making stuff for a living is down by over a third.

1:52 In the same time, the workforce as a whole has grown by 50%.

1:56 Not too long ago, this was actually seen as positive progress.

2:00 Blueco collar manufacturing jobs are dangerous, harder on your body,

2:04 and all around seen as inferior to working in a nice airond conditioned office,

2:08 contributing to the all-encompassing service sector.

2:11 But that's all started to change.

2:13 People have realized that manufacturing jobs

2:15 can earn more than white collar work.

2:17 And it's become a desirable career all over again.

2:20 Elections are being won or lost over the promise of creating manufacturing jobs,

2:24 and billions of dollars are being handed out to companies to make it happen.

2:28 But the trend is not our friend.

2:30 and fighting it might end up doing more harm than good.

2:33 These are still incredibly difficult jobs with a very uncertain future.

2:37 So why are we all of a sudden yearning for the lines?

2:40 So the reason that manufacturing jobs have become

2:43 so desirable all over again is actually pretty simple.

2:46 In the past, the most reliable opportunity for men without a college

2:49 degree to earn an income that could support a family was in manufacturing.

2:53 Fast forward to today and record numbers of people

2:56 with a college degree are still struggling to find work.

2:59 very few jobs can comfortably support a family by themselves and areas

3:02 that do have high-paying jobs are unrealistically expensive to live in.

3:06 It's made a lot of people realize that maybe the old factory job wasn't so bad.

3:11 Back in the good old days, the way it worked was that most people

3:14 in a manufacturing business would work on the factory floor.

3:17 Above them would be a smaller group of supervisors with practical

3:20 experience that can make sure everybody was doing their work correctly.

3:23 and above them sitting in a separate office with a college educated specialist

3:27 and executives responsible for designing new products

3:30 and setting the direction of the company.

3:32 But eventually we figured out that these jobs up

3:34 here were way better than these jobs down here.

3:37 So what if everybody could just do these ones?

3:40 Globalization, automation, outsourcing,

3:42 and tech services meant that instead of working on the factory floors ourselves,

3:46 we could give those jobs to low-paid workers on the other

3:48 side of the planet and move up into management positions.

3:51 We made the world our factory floor and the American

3:54 workplace became the office overseeing and managing it.

3:58 This was actually a pretty sweet deal because hot take alert,

4:01 but a lot of our factory jobs kind of suck.

4:04 If we could work all of the old jobs that the executives used to work,

4:07 this would have been an incredible opportunity.

4:10 But of course, it didn't work out like that for two simple reasons.

4:13 The first reason is that we found out there isn't

4:15 actually that much space at the top of the pile.

4:18 Go back 40 years and the average

4:19 office wouldn't know what a culture coordinator,

4:21 corporate wellness manager, diversity and inclusion officer,

4:24 social media manager, brand ambassador, or sustainability consultant even was.

4:29 There are lots of extremely common jobs

4:31 in modern offices that didn't exist 20 years ago.

4:34 Part of this is due to technology.

4:36 You can't coordinate social media if it doesn't exist,

4:39 but a lot of it has been in response to finding more jobs for people to fill.

4:43 Regulations, best practices,

4:45 and modern initiatives have given modern workplaces more boxes to tick,

4:48 which has meant more people in service jobs.

4:50 But it means that the average value created by those service jobs has gone down.

4:54 This white collar inflation means that today the people

4:56 working the jobs back down at the bottom

4:58 of the pyramid have kept up or exceeded most

5:00 of the people trying to squeeze in up here.

5:02 The second issue with making the entire economy

5:05 white collar is that eventually the countries that we

5:07 outsourced the bottom of the services pyramid

5:09 to wanted to make their own white collar jobs.

5:12 For the last 30 years, American companies have outsourced manufacturing

5:15 to China because it was so cheap.

5:17 But China has now taken those technical expertise and used

5:20 it to build their own companies that are just as good,

5:22 if not better than the American businesses that they

5:24 have used to do the grunt work for.

5:26 What this means is that 30 years ago,

5:28 it was factory workers fighting off global competition for their jobs.

5:32 Today, it's everybody.

5:34 The solution is to bring back manufacturing and build

5:37 the pyramid back up again with a solid foundation.

5:40 It honestly seems sensible except for the part

5:42 where it totally misses the point.

5:44 So, it's time to learn how money works to find out why we yearn for the lines.

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6:52 Now, sit down.

6:53 What I'm about to say might come as a shock to you, but America is not special.

6:59 We were not the only country to do the old service job switcheroo.

7:02 Other advanced economies like those in Europe, Canada,

7:05 and Australia also outsourced a lot of their manufacturing

7:08 and some of them went even harder than we did.

7:10 Australia, which used to have a large manufacturing

7:12 industry producing advanced products like automobiles and aircraft,

7:16 has lost all of its major companies.

7:18 And according to their own department of jobs and skills,

7:20 the largest manufacturing industry by employment today is baking.

7:25 Even the countries that we outsource to ended up outsourcing.

7:29 South Korea, Japan, and even China have started

7:32 to wake up to the problems that they have

7:33 caused for themselves by outsourcing the jobs that actually

7:36 make the stuff to the lowest global bidder.

7:38 And now everybody is in a desperate race to reverse course.

7:41 Robert Lawrence, a trade and investment professor at Harvard University,

7:45 recently wrote about this, arguing that this whole reversal was futile at best.

7:49 Behind the curve, can manufacturing still provide inclusive growth?

7:53 looks at how these jobs used to be able

7:55 to provide a good quality of life to average American families

7:58 and how our nostalgia for that time has made us

8:00 all focus on our jobs instead of the conditions surrounding them.

8:03 It doesn't matter if you forge engine blocks

8:05 by hand or file TPS reports in a cubicle,

8:08 you were still exchanging your time and expertise for a paycheck.

8:11 The reason that manufacturing jobs look so good

8:13 by comparison now is down to two important factors.

8:17 The first big advantage they had was that they remained unionized.

8:20 In the past, union efforts fought for pay and benefits of workers here

8:23 at the bottom of the pyramid against the people up here at the top.

8:27 As the population moved into white collar jobs in the service sector,

8:30 we convinced ourselves that we were the management.

8:32 Which is why, with the exception of a few special industries,

8:35 if you sit behind a computer for a living,

8:37 you are much less likely to be a part of a union.

8:40 In just the past 5 years, unions representing auto workers, dock workers,

8:44 and UPS drivers had negotiated pay and benefits that split opinions

8:47 across the country because they were so generous it almost seemed greedy.

8:51 The thing is though, if your income had also kept up with productivity,

8:55 these would still be lower middle- inome jobs

8:57 and office jobs would pay even better still.

9:00 The other thing that has made factory jobs

9:02 seem really attractive all of a sudden is

9:03 that factories naturally exist in areas that are cheap

9:06 because of the land that's required to build them.

9:08 Offices for high-end companies that can afford

9:10 to pay high-end salaries are almost always in very

9:13 expensive cities where you need to earn even

9:15 more to live a comfortable life without six roommates.

9:18 People are naturally much more likely to remember what someone does

9:22 for a living than what

9:23 the macroeconomic factors surrounding their employment are.

9:26 So instead of focusing on making cities affordable,

9:28 pushing for worker representation, or just offering workplace protections,

9:32 it's become easier to just talk about bringing back factory jobs.

9:35 Now, both sides of the aisle are

9:37 absolutely guilty of pushing this oversimplistic solution.

9:40 And politicians are making the same promises outside of America, too.

9:43 Tariffs, build back better, the chips act, bailouts,

9:46 and massive incentives all have the intention of creating

9:48 or at the very least maintaining manufacturing jobs.

9:51 But in his book, Lawrence has argued

9:53 that this is probably just going to backfire,

9:55 and it could actually make a lot of problems worse.

9:58 These big government programs ultimately amount to giving a lot

10:00 of money to companies so they can create manufacturing jobs.

10:04 But not even America can fight the force of the global economy.

10:07 Instead of making money more inclusive and providing

10:10 opportunities for semi-skilled workers to keep up,

10:12 these programs have largely worked to funnel money

10:14 into the hands of investors and business owners.

10:16 They also ignore the small problem that people have already moved on.

10:20 After decades of being told to upskill and go to college,

10:23 people have upskilled and gone to college.

10:25 These new projects are struggling to find skilled manufacturing workers to fill

10:28 these roles with some businesses resorting

10:30 to hiring people through skilled worker visas,

10:32 creating a situation where we have onshored

10:34 the offshore jobs that were originally onshore.

10:37 Now, Lawrence's book is written by a Harvard economist for Harvard economists.

10:41 It's an interesting read that I will

10:43 definitely leave a link for in the description,

10:45 but you have been warned it's pretty heavy.

10:47 Now, the good news amongst all of this is that the solution is simple.

10:51 The carrot hasn't worked.

10:52 Businesses have taken these government incentives

10:55 and handed them to their investors, but there is always the stick.

10:59 The bad news is that it's incredibly unlikely to happen.

11:02 It sounds like a good idea to make more stuff at home.

11:05 And for select industries with geopolitical ramifications like steel production,

11:09 ship building, and electrical grid infrastructure, it would be foolish not to.

11:13 But most people would not be happy at the big jump

11:16 in an iPhone's price tag if all the parts were made in America.

11:20 If you have ever looked into this issue

11:22 or even actually tried to purchase a locally manufactured phone,

11:25 you have no doubt seen a dizzying array of numbers

11:27 that claim anything from an Americanmade iPhone would cost $10,000

11:32 all the way down to an Americanmade iPhone would only

11:34 be a tiny bit more expensive than a Chinese-made iPhone.

11:38 So, which prediction is right?

11:40 Well, weirdly both.

11:42 But with trade and political tensions at all-time highs,

11:45 we might find ourselves in a situation where we

11:47 need workable answers to this problem sooner rather than later.

11:51 Consumer electronics are just one of many industries which have

11:54 been lost in Western developed nations over the past 40 years.

11:58 Prior to the 1970s, most durable goods

12:00 consumed in America or Europe were produced right

12:03 there in that country because that was

12:05 the easiest and cheapest way to get things done.

12:07 Import taxes and quotas meant that foreign goods were real luxuries,

12:11 which commanded a steep premium over their domestically produced competitors.

12:15 That's not to say that locally made goods were cheap, though.

12:18 An average television set could easily

12:20 cost the average household's entire monthly income.

12:23 And the same was true of stereos, fridges, cameras,

12:26 and a variety of other household items that we almost treat as disposable today.

12:30 But this started to change when countries like Japan, South Korea,

12:34 and ultimately China built out industrial centers of their own which

12:37 could manufacture and deliver items to the western markets for cheap.

12:41 However, it is really important to understand that this would

12:44 not have been possible with just cheap labor alone.

12:47 It was actually the increase in trade deals that made

12:50 it possible for foreign factories to compete with domestic factories.

12:53 This had a few major benefits for the world economy.

12:56 The salaries in these electronic factories may have been low,

13:00 but they were still far better than what

13:01 these workers would have made working on a substance farm.

13:05 The other big thing that it did was make things a lot cheaper.

13:08 The average TV today sells for about 400 bucks.

13:12 And you would need to get a seriously impressive model

13:14 for it to come anywhere close to matching the average household income,

13:17 even despite stagnant wage growth.

13:19 Imports have become the cheaper alternative, or really the only alternative.

13:24 So, why are these goods so much cheaper?

13:27 It's because we can exploit the cheap

13:28 labor in these developing countries, right?

13:31 Wrong.

13:32 The cost breakdown of an iPhone looks something like this.

13:35 There are the fixed costs of researching and developing a new phone model

13:38 that need to be paid off before the first unit even hits the production line.

13:42 That gets broken down and shared amongst all

13:44 the phones that are produced with that design,

13:47 which goes on until a new model needs

13:48 to be designed to keep up with the competition.

13:51 On top of R&D, there is the actual components,

13:54 the camera, the battery, the processor, which are provided by other companies

13:58 that just specialize in making these small parts.

14:01 Then there is the labor cost.

14:03 An article by the New York Times reported that a Foxcon factory

14:06 in Jung could produce 500,000 iPhones

14:08 a day and employed an astronomical 350,000 workers.

14:13 This means that on average, it takes roughly 17 man-hour to manufacture

14:17 a completed iPhone from raw materials and components.

14:20 This report is from 2016, so things could have changed since then

14:25 with newer models and more automation on assembly lines,

14:28 but the companies involved are naturally pretty

14:30 tight- lipped about this kind of stuff.

14:32 So, for now, let's assume that this is the industry standard.

14:35 The next cost is the profit component of the manufacturer.

14:38 No major phone companies actually produce their own phones.

14:42 They instead outsource manufacturing to companies

14:44 like Foxcon, Celestica, and TDK.

14:47 These companies will mark up the phones beyond their raw

14:49 manufacturing costs in order to make a profit themselves.

14:53 After all, they aren't a charity.

14:54 They want to make money for their shareholders.

14:57 There is also shipping, taxes, and the profit that the companies themselves

15:00 will make for selling each individual phone.

15:03 Once all of these are added up,

15:04 we are left with the price that you pay as a consumer.

15:08 If we think of all these cost factors individually,

15:10 it makes it a lot easier to assess the impact of moving manufacturing onshore.

15:15 If we assume that all other variables stay the same,

15:18 we simply need to change this variable here.

15:21 It takes the average worker 17 hours to produce a phone.

15:24 So if we multiply 17 by the average wage

15:27 of a production line worker in a Foxcon factory in China,

15:30 we find that labor accounts for $42 of the price of an iPhone.

15:34 If we change this to reflect the average salary

15:36 of an unskilled production line worker in the United States,

15:39 this number would grow to $263.

15:42 So, if both Apple and their manufacturing

15:45 partners wanted to maintain their profit margins,

15:47 then an iPhone would cost the end consumer an extra $221.

15:52 This actually doesn't sound so bad.

15:55 The average smartphone is much more expensive today than

15:58 the early models that came out a decade ago.

16:00 Ironically, the prestige of having an American-made iPhone

16:04 might actually be enough to attract certain buyers,

16:07 which is almost the opposite of consumer behavior 40

16:09 years ago when foreign imports were the status symbol.

16:12 Foxcon actually did invest heavily into manufacturing in the US.

16:17 But these projects have since mostly been abandoned.

16:19 Whether that was because of the pandemic or whether

16:22 it was because of economics that just didn't make sense, it's quite hard to say.

16:26 But let me rephrase the question I asked at the beginning of the video.

16:30 How much extra would you be willing to pay to have an Americanmade phone?

16:34 I don't think many of you would actually

16:35 be willing to part with this extra money.

16:38 I am personally as pro- local industry as they come,

16:41 and I honestly don't think I would pay extra if given the choice.

16:45 But as you might have expected, it only gets worse from here.

16:49 So far, we have only changed one variable, the labor costs.

16:53 But moving manufacturing to the states does much more than just that.

16:57 Tim Cook has said that the biggest

16:58 hurdle to domestic manufacturing is not labor costs,

17:02 it's the skills and infrastructure.

17:04 The iPhone is made of dozens of components

17:06 which are made in countries like Taiwan, Vietnam, India or China itself.

17:11 Importing individual electronic components into America is

17:14 much less efficient than importing completed products.

17:17 So the shipping and handling costs would increase drastically.

17:20 These increased costs might be offset slightly by the reduced

17:24 cost of transport for the finished product within America,

17:27 but iPhones are sold all over the world.

17:30 One of the biggest markets for the iPhone is China,

17:33 a market with consumers who are poorer and therefore more price sensitive.

17:37 Due to higher sales taxes,

17:38 an iPhone actually costs more in China than it does here in the States.

17:42 Needing to ship components from Asia across the Pacific and then back again

17:46 would only expand this price imbalance against

17:49 the country that can least afford it.

17:51 So what if American iPhones were made in America and iPhones

17:54 for the rest of the world were made in their own local hubs?

17:57 This actually happens quite a lot in the automobile industry.

18:01 Some of BMW's largest plants are not actually in Germany,

18:04 but rather South Carolina.

18:06 This is primarily done to avoid the cost of shipping and import duties,

18:10 but it costs much more to ship a 4,000lb car

18:13 overseas than it does to ship a comparatively tiny iPhone.

18:16 This reduction in domestic shipping costs would be

18:19 dwarfed by the increased cost of needing to retool

18:21 and retrain a dozen factories rather than just

18:24 one factory every time a new phone is released.

18:27 Anyway, this doesn't really solve the main issue.

18:30 An iPhone assembled in America from parts made

18:33 in Asia doesn't mean we are less reliant

18:35 on fragile global supply chains or any more

18:37 immune to the actions of potentially hostile governments.

18:40 So, let's go from the feet up and assess what would happen

18:43 if we moved everything on shore just like the good old days.

18:46 Well, this is where prices get out of control very quickly.

18:50 Let's start off with the good news.

18:52 Shipping would cost less, but everything else would cost a lot more.

18:56 finding enough people in America to just work

18:58 in the assembly plants might be a major challenge right now.

19:02 When you throw in the need to manufacture all these components locally as well,

19:06 then it would be almost impossible,

19:07 especially considering that component manufacturing often involves skill

19:11 sets that just aren't trained anywhere in America.

19:14 Of course, money can solve everything.

19:16 So, with enough research and development and training,

19:18 it is possible, but it's going to be expensive.

19:22 A company would need to train an entirely new workforce

19:25 and pay them enough to tempt them to leave their current jobs.

19:28 These components are going to cost a lot more because they themselves

19:31 are influenced by the labor costs that go into putting them together.

19:35 In the very long term,

19:36 these costs may be brought down once the infrastructure is

19:39 established and training in micro

19:40 component manufacturing is something that people

19:43 do themselves to get a job rather than having training

19:46 given to them as a requirement to gain the necessary manpower.

19:49 But in the short term, an iPhone would be just the same as a TV 40 years ago.

19:54 Ridiculously expensive.

19:56 Unfortunately, most established businesses really can't make huge risky bets

20:00 that only have the potential to break even decades into the future.

20:04 They have stakeholders and shareholders to keep happy,

20:07 and the status quo is great at achieving that.

20:10 Besides, a lot of the huge companies that could

20:12 actually afford to make these investments are too busy

20:15 building low marginal cost leverage software applications that skirt

20:18 around regulations rather than creating an honest physical product business.

20:22 So, if you want to make few money by starting a disruptive tech company,

20:26 you really only need to come up with an idea that ticks three boxes.

20:29 The first step is finding an industry

20:31 or even an everyday activity that is highly inefficient.

20:34 People will gladly pay to make things easier for themselves.

20:37 And in an economy where people are working multiple jobs,

20:40 don't have stay-at-home partners for domestic chores,

20:42 and are spending hours commuting every week,

20:44 providing a product that saves a bit of time and energy is great,

20:47 and people will pay for it.

20:49 Now, finding a problem and then providing a marketable

20:52 product to solve it is just business 101.

20:55 But the problem for you is it's kind of hard.

20:58 Smart people are trying to figure this stuff out all the time.

21:01 And maybe you will get lucky and think of something nobody else has.

21:04 But there is an easier way.

21:06 Find an industry that is inefficient because of man-made

21:08 inefficiencies or as the lawyers would call them, regulations.

21:12 Step two is to figure out how to fix

21:14 this problem with some kind of marketable technology.

21:16 Now, this technology could be something revolutionary like the telephone,

21:20 which fixed the issue of slow

21:21 and inefficient communication through telegrams or postal mail,

21:25 or it could be something like Tinder, which solved the issue of slow,

21:28 inefficient boinking through actually having to go out and talk to people.

21:32 technology can really mean anything.

21:36 But if making money is all you're interested in, then it's a lot

21:39 easier for that technology to be software that works on existing devices.

21:43 Software is ideal because distribution and manufacturing are as simple

21:47 as an Amazon Web Services subscription and a good copy paste button.

21:50 Once a program is developed,

21:52 the variable cost for every additional user is basically negligible.

21:56 Investors love this.

21:57 So they will pay you and your business a lot

22:00 more than they would any other business making real products.

22:03 According to data collected by NYU Stern,

22:05 software companies had the highest enterprise value

22:07 to sales ratio of any business type.

22:09 The only investments that had higher ratios were real estate investment trusts,

22:13 but their value comes mostly from the real estate holdings and not their sales.

22:16 So this is not really a fair comparison.

22:18 The average company was valued by investors

22:20 at between 6 and 10 times their total sales,

22:23 which was especially impressive considering that some

22:25 of these companies had negative operating margins,

22:27 meaning that even though they were selling

22:28 a product with almost zero marginal cost, they were still losing money.

22:33 So, by combining the easiest technology

22:34 to develop with the easiest problems to solve,

22:37 you will find that the perfect business to scale rapidly

22:39 towards a life-changing exit is one that skirts regulation with software.

22:44 Sounds dumb, but some of the fastest growing

22:47 companies in history were founded on exactly this principle.

22:50 Uber skirted taxi licensing and regulation by creating

22:52 software that technically let people carpool together.

22:55 If people happen to just turn

22:57 their personal vehicles into full-time taxi services,

23:00 that was just users not engaging with the technology as intended.

23:04 Airbnb avoided the intense regulations that hotels have to adhere

23:07 by by just creating software that technically

23:11 let people find a temporary roommate.

23:13 If people purchased multiple specialty built homes to run Airbnb hotel chains,

23:17 that was just a user not engaging with the technology as intended.

23:20 Cash App was just a way to settle small payments between friends.

23:24 If it gets used as a shadow banking system for questionable activities,

23:28 well, you get the idea.

23:29 By the time these businesses get big

23:31 enough for regulators to take notice of what's

23:32 going on, they already have so many

23:34 users that restricting them becomes very politically unpopular.

23:37 Bill Gurley, a venture capitalist who invests

23:39 in businesses like these, gave an admittedly fantastic

23:42 presentation last year about how important these businesses

23:44 are to avoid a phenomenon where big,

23:46 inefficient incumbent businesses aren't challenged because

23:49 regulations make it too hard for smaller,

23:51 better businesses to enter their market.

23:53 Clever loopholes like this are a great way to disrupt industries that are

23:56 getting a little bit too comfortable and making a lot of money doing it.

24:00 But before you get too excited,

24:01 you should remember that sometimes regulations exist for a reason.

24:06 It's been half a year now since the collapse of Yata Bank,

24:09 a bank for people who were fed up with banks.

24:11 The disruptive new platform allowed depositors to participate in lotteryies

24:16 with their savings instead of receiving a typical and predictable interest rate.

24:19 Most months, people would receive no payment.

24:22 But there were winnings paid out to randomly selected people

24:24 with entries based on how much cash they held in their accounts.

24:28 People with more money got more entries

24:30 and therefore more chances to win a significant prize.

24:33 The average return on these winnings across all users was supposed

24:36 to be roughly the same as the yield on a highinterest savings account.

24:39 It was a novel idea that was arguably just

24:41 a bit of fun for people trying to save some money.

24:44 But banking and financial services are kind of hard.

24:46 It's much easier to make money by running a casino,

24:49 which is what Yatab Bank slowly turned into with other

24:52 games that people could play with their savings.

24:54 Now, you probably already know this, but this wasn't actually

24:57 the worst part of this sketchy new way to save your money.

25:00 The actual mechanics of running a bank

25:02 like processing transfers and you know keeping

25:04 track of how much money people had on their accounts was kind of hard.

25:08 So it used a middleman which provided

25:09 services to other fintech platforms on behalf

25:11 of a real bank that had to adhere to all these boring old regulations.

25:15 Synapse was a banking as a service provider which was supposed

25:18 to keep track of transactions for other platforms like crypto brokerages,

25:21 online sports books, and stock trading platforms.

25:24 So, if you wouldn't feel comfortable keeping your life savings in DraftKings,

25:27 you probably shouldn't keep your life savings

25:28 in a bank that's not directly FDIC compliant.

25:32 Somewhere in this chain,

25:33 these companies couldn't agree on how much people had in their accounts.

25:36 And so far, it has been average consumers

25:38 that haven't been able to access their money.

25:40 Simply losing track of how much people have

25:42 is also outside of the domain of the FDIC, which only handles bank failures.

25:47 So, there are thousands of customers who simply

25:49 had their money Thanos snapped into the banking ether.

25:52 My friend Patrick Bole did a great deep dive

25:54 into the real financial mechanics of this cluster And of course,

25:57 the suspenderwearing superhero Coffeezilla covered

26:00 the story as it was unfolding.

26:02 Now, the whole people losing their life

26:03 savings thing here isn't really the point.

26:06 The bigger issue here is that fintech has become one of the most

26:09 popular industries for new startups to carve out market share in.

26:12 Yata is just one example of where that has

26:14 the potential to do a lot of harm to regular people.

26:17 There is an old saying that every warning label on a piece of equipment

26:20 is a gravestone for an appendage that was lost somewhere down the line.

26:24 The amount of regulations that financial companies, let alone actual banks,

26:28 are subject to is beyond the capabilities

26:30 of any single human to fully understand.

26:33 Endless red tape in services that we all use every day,

26:36 can be immensely frustrating,

26:38 especially when it speeds up the consolidation of bigger and bigger banks.

26:42 But every law, every regulation,

26:44 and every guideline that financial firms need to adhere to was

26:47 written because something has gone horribly wrong in the past.

26:50 The rush of new fintech companies skirting

26:52 these regulations by falling just outside the bounds

26:55 of a typically regulated body will end up

26:58 with a lot more people losing a lot more money.

27:01 By now, pay later services like CLA, Affirm, Afterpay,

27:04 and PayPal's built-in split payment function

27:06 now handle billions of dollars in consumer

27:08 transactions every year and have become

27:10 a massively popular alternative to traditional credit cards.

27:13 When mixed with traditional consumer credit,

27:15 these new services have accelerated reckless spending

27:18 with a lot of people using Afterpay to pay off their credit card

27:21 and their credit card to make their Afterpay payments.

27:24 This practice might sound silly to you or I, but for a lot of people,

27:27 it's just an option of last resort when there

27:29 is too much month at the end of their money.

27:31 It's so common, in fact,

27:32 that the Consumer Financial Protection Bureau has a term for it, loan stacking.

27:37 And it's something that is much more difficult with traditional debt products.

27:40 Another problem with these new financial tools is how they make their money,

27:44 if they bother to do that at all.

27:46 These companies don't charge interest like

27:48 typical personal loans or credit cards,

27:49 and most of them don't have fees to open or maintain.

27:52 So, if you use them to make the scheduled

27:54 payments without using it to justify any additional purchases,

27:57 you might fool yourself into thinking that it's just a practical financial tool.

28:01 But the business case for these companies is that you don't

28:04 need to pay for the product because you are the product.

28:07 They make their money by charging retailers a commission on purchases.

28:10 These fees have so far been similar

28:12 to the merchant fees charged by credit card companies,

28:14 but some analysts argue that they have only been able to maintain

28:17 these low fees because they are burning investor money to maintain market share.

28:20 And when that money runs out, these hidden fees will all need to increase.

28:24 Either way, the retailers are willing to pay these additional fees

28:27 to buy now pay later companies because they can offer them additional customers.

28:31 When these companies were first growing,

28:32 they promoted their own platforms that would

28:34 push consumers to retailers that accepted their payment,

28:37 which was a good way for these businesses to get some free advertising.

28:40 As they have become more popular with consumers,

28:42 it has become hard for retailers not to accept buy now pay later

28:45 services because a lot of people simply can't afford to pay with anything else.

28:49 In either case, you are the product.

28:51 BNPL services are packaging you up and selling you as a ready

28:55 to purchase customer for the low low price of some merchant fees.

28:58 Consumer credit card laws are starting to catch up with these companies,

29:01 but for a long time they were able to hide

29:03 just how much debt struggling Americans were taking on.

29:06 Oh, and they were also really lax about money laundering.

29:10 Coming from a banking background,

29:11 finance is the industry that I am most familiar with.

29:14 But it's also simultaneously something that most

29:16 people don't properly understand and something

29:18 that can absolutely up your life if you just make a few silly mistakes.

29:23 But this is not just affecting your finances.

29:25 This is happening in plenty of other highly regulated industries as well,

29:29 including healthcare, which has already had some disastrous consequences.

29:34 Here is the biggest challenge, though.

29:36 Nobody likes red tape, bureaucracy, and big incumbent businesses.

29:40 I mean, big banks and credit cards clearly suck.

29:43 And so do hotels, taxis, medical tests,

29:45 traditional therapy, traditional investments in housing.

29:49 And yeah, about that.

29:51 The solution to the housing crisis seems so simple.

29:54 Building houses.

29:55 Home construction.

29:56 Housing construction.

29:57 Build more housing.

29:58 Build new housing that people will welcome.

30:00 We aren't building enough homes.

30:02 All want to build more homes.

30:03 Building more goddamn houses.

30:07 Uh yeah, that's right.

30:08 just build more houses.

30:10 Well, we've been trying.

30:12 The number of houses in America has never been higher.

30:15 And even on a per capita basis, we are doing well by historical standards.

30:19 What's more is that if you looked around most big cities in the country,

30:22 you would be forgiven for thinking that we are

30:24 in the middle of a development boom because we kind of are.

30:27 The problem is that these new homes are

30:29 almost entirely made up of high-end luxury apartments

30:32 or McMansions that are out of the price

30:34 range of people who don't already own real estate.

30:36 Even those who have benefited from increased home

30:39 prices can't keep up with these new developments,

30:41 which is why hundreds of thousands of these properties

30:43 are now sitting empty across the country.

30:46 So then, why don't we just build what everybody says they want,

30:49 affordable, medium-sized, medium density housing?

30:52 Well, the good news is that there are dozens of companies that are

30:55 raising hundreds of millions of dollars

30:56 to fill this potential gap in the market.

30:58 The bad news is that they are almost certainly going to fail.

31:01 And that's if running an honest business

31:03 was their actual priority in the first place.

31:05 getting harder and harder to sell a home with persistent high prices,

31:08 high mortgage rates,

31:09 some of which remains hidden until years later when most home warranties expire.

31:15 This is really a great community to live in.

31:17 It's just not an investment right now.

31:20 The biggest issue is housing affordability.

31:22 They're building thousands of homes within this factory.

31:26 Homes built on a production line have been lorded as a cheap

31:29 and fast solution to Australia's need for housing for decades.

31:33 Home construction supplies across the country increased by 47% since 2016.

31:41 Okay, so the price to construct a home has increased a lot and there

31:45 are a lot of reasons why this is happening but most of those have been

31:49 focused on recent changes that have occurred since co and we will get

31:53 to those but a longerterm issue is that we just kind of suck at building houses.

31:58 According to the Bureau of Labor Statistics,

32:00 construction and in particular residential construction is

32:03 the only major industry in the country that has not become more productive since

32:06 1987 when they started collecting this data.

32:09 Productivity measures how much output we get for every hour of work that we do.

32:13 For example, in the motor vehicle industry,

32:15 new technology and better manufacturing processes means

32:18 we are making three times as much

32:20 value in automobiles for every manh hour of work as we were back in 1987.

32:25 Admittedly, this can sometimes be a little

32:27 confusing because cars have become more expensive.

32:30 So, this doesn't directly mean we are making three times as many cars directly,

32:34 but we are making more cars that are more complex and more valued in the market.

32:38 In the commercial equipment industry,

32:40 we are now almost 30 times as productive as we were back in 1987.

32:44 This shouldn't be that surprising.

32:46 It's the basis of our GDP,

32:47 which is almost six times higher than it was back in the mid1 1980s.

32:51 But over that same time, construction has actually become less productive.

32:55 To oversimplify, we are only getting 80%

32:58 as much house for every manhour spent on construction.

33:00 Even though in almost every other sector of the economy,

33:03 we are much more productive.

33:05 This drop was almost so unbelievable that the Fed commissioned an investigation

33:09 into the sector to find out if they were messing up the data somehow.

33:12 The report tried to make the argument that maybe

33:14 new home construction was just of a significantly higher quality,

33:18 which is why it was taking longer.

33:20 And well, this probably isn't surprising to anybody

33:22 who has toured a newly built home recently,

33:24 but there was no evidence that building standards have measurably improved.

33:29 A 30-year mortgage at Michael's age essentially means that he's buying a coffin.

33:33 If I were buying my coffin, I would get one with thicker walls,

33:37 so you couldn't hear the other dead people.

33:40 After looking into almost every possible issue with their data,

33:43 their conclusion was that nope,

33:45 the construction industry really had gone backwards,

33:48 which begs the question, why?

33:50 Well, there are a few reasons.

33:52 The first might come as a shock to you

33:54 if you have watched this channel for a while.

33:56 Yeah, no, I'm kidding.

33:58 It's private equity.

33:59 Trade businesses like roofers, plumbers, carpenters,

34:02 and general builders have been some of the most popular

34:04 acquisition targets for private equity investors over the last two decades.

34:08 The way this typically works is that a large PE firm will target a regional

34:11 market and slowly buy up all of the electrician businesses in a given area.

34:15 Once they have an array of these companies,

34:17 they will centralize sales, bookings, administration,

34:20 and other overhead to theoretically save on costs

34:22 and make these businesses more competitive in the marketplace.

34:26 Now, if that's where the business strategy stopped,

34:28 it honestly wouldn't be that bad.

34:30 Business owners have a way to sell their business to fund a retirement,

34:33 and lower operating costs could in theory be passed along to consumers.

34:37 But of course, in reality, it rarely works like this.

34:40 To acquire these businesses, PE firms borrow a lot of money so they don't

34:44 have to put in too much of their own money.

34:46 That debt needs to be repaid.

34:48 So, realistically, what they actually end up

34:50 doing is replacing the cost of hiring

34:51 lots of independent local staff with the cost of paying back lots of debt,

34:55 leaving little room for actual cost savings.

34:57 And that's assuming they wanted to give you a good deal in the first place.

35:00 It can be really hard to tell when

35:02 a business has been acquired because on the surface,

35:04 they usually keep their old branding.

35:06 This means it's possible that if you do the responsible thing and get

35:09 three quotes from three different plumbing companies

35:11 to work on building your new home,

35:12 you might actually be talking to the same business three times over

35:16 and they don't exactly have much

35:17 incentive to compete on price against themselves.

35:20 To put this into perspective,

35:22 Goldman Sachs is technically now the largest HVAC company in America.

35:25 The impact of local micro monopolies was something

35:28 that the FTC was starting to pay attention to.

35:31 However, officially they are no longer looking into this problem.

35:34 This explains part of the reason why housing has become more expensive.

35:37 But theoretically, the free market should

35:39 slowly undermine these profitering businesses, right?

35:42 Well, even with all of these tactics,

35:44 the industry is struggling financially because of the productivity problem.

35:48 And according to the data,

35:49 billions of dollars worth of outside investment has only made it worse.

35:53 But don't worry, the tech bros have a solution.

35:56 Okay, so there are two main reasons why American

35:58 productivity has grown so much in most other industries.

36:02 The first reason, as you could probably guess, is technological improvements.

36:06 The example from earlier,

36:07 car manufacturing looks very different today than it did

36:10 40 years ago thanks to a lot of automation.

36:12 Other industries like tech have developed even further.

36:15 According to company financials,

36:16 Apple makes $2.4 million in revenue per employee.

36:20 That's because in new rules like tech development,

36:22 a few man hours of work on a new feature

36:24 can be leveraged over billions of devices within their ecosystem,

36:28 potentially making hundreds of millions, if not billions of dollars.

36:31 Going all in on technology has had its problems,

36:35 but it has made our economy look really good, at least on paper.

36:39 The second reason American productivity has improved in most industries is

36:42 not really because we have become more productive at our jobs,

36:45 but because we have taken the least

36:46 productive jobs and outsourced them overseas.

36:49 Business majors and economists call this the service pyramid.

36:52 The people at the bottom in the primary

36:54 sector harvest the resources in mines and on farms.

36:57 The people in the middle, the secondary sector,

36:59 turn those resources into products and the people

37:02 at the top and the tertiary sector coordinate everybody else.

37:05 Over the last 50 years or so,

37:07 we've been moving the bottom of the pyramid to wherever has the most resources

37:10 to harvest and the middle of the pyramid

37:12 to whoever has the largest and cheapest workforce.

37:14 That left just the creamy jobs up here at the top for us Americans,

37:18 which are theoretically the most valuable.

37:20 Someone working on a production line making laboos can

37:23 only really generate so much revenue in an hour,

37:25 no matter how good they are at their job

37:27 or what kind of machinery they are using.

37:29 Someone running a marketing campaign for all

37:31 that glorious consumer slob can make a lot more.

37:34 It's a cool trick that definitely didn't have any unintended consequences like

37:38 gutting entire industrial regions that used to be the middle of the pyramid.

37:42 But we couldn't really do the same thing with construction.

37:45 A residential construction site today looks roughly the same

37:47 as a residential construction site from the 1980s.

37:50 Builders use slightly more modern tools and materials,

37:53 but the change hasn't been nearly as drastic

37:55 as it has been in factories and offices.

37:57 And because a house is built where it stands,

37:59 we haven't been able to outsource these jobs either.

38:02 Although to be honest, we kind of have.

38:04 We will need to talk about that later.

38:06 But before that, we need to look at how

38:07 the venture capitalists are planning to change this broken system.

38:11 If you've been paying any attention to the construction

38:13 industry or you follow any real estate influencers,

38:16 you've probably seen a lot of new companies

38:18 raising billions of dollars to build homes in factories.

38:21 The idea actually makes a lot of sense.

38:23 If homes are mass-produced in a controlled environment, like a factory floor,

38:26 then we could use the same kind of automation techniques that made

38:29 things like the car industry more

38:30 productive while residential construction remain stagnant.

38:34 Mass-produced homes could be designed once and then

38:36 copied like any other mass-produced product to reduce

38:38 unit cost instead of the current standard practice

38:40 where almost every home is a one-off custom design.

38:44 Building within a controlled environment like a covered

38:46 factory floor also means that quality control could

38:48 be more carefully monitored and delays due to inclement

38:51 weather wouldn't be a factor in construction times.

38:53 For the companies themselves,

38:55 the business opportunity is even bigger than that though.

38:58 If homes become mass-produced from broadly recognized companies,

39:00 there is an opportunity to make a lot of money from branding correctly.

39:04 Your home probably doesn't have the builder's badge on it like your car does,

39:07 but factory-p produced home models that are recognizable could charge

39:10 a premium over regular homes if they are branded correctly.

39:13 So, it's a promising business opportunity for all parties if it works.

39:17 The problem is it it hasn't worked.

39:21 Several different companies have collectively raised billions

39:23 of dollars to bring these homes to market.

39:25 And they have done it using a variety of questionable financial strategies.

39:29 Catera, which promised to be an endto-end factory homebuilder,

39:32 raised $2 billion from SoftBank.

39:33 And it was once dubbed the Weiwork of Construction.

39:36 And I guess they were right because it

39:38 collapsed and filed for Chapter 11 in 2021.

39:41 Viv raised hundreds of millions of dollars at a billion dollar

39:44 valuation from Silicon Valley investors before it was wound down in 2023.

39:48 Connect Homes, Mighty Buildings, Blue Homes, Rad Urban,

39:51 Factory OS, Gwen, and Integra all followed the same playbook.

39:55 Lots of investor hype with big fundraising rounds before realizing that building

39:59 a house in a factory is really hard and then go bankrupt.

40:02 The investors know that home construction is an industry ripe for uh disruption.

40:07 But they underestimate just how expensive

40:09 these facilities will be to build and operate

40:11 and overestimate how much people want to spend

40:14 on what amounts to a fancy mobile home.

40:16 Today, companies like Boxible are again raising hundreds

40:20 of millions of dollars for their factory-made tiny homes.

40:23 The company sold just 51 tiny homes at below cost in 2024,

40:27 but is still claimed a valuation of $3.5 billion.

40:31 Now, the good news is that the venture

40:32 capitalists aren't really falling for this anymore.

40:35 Even SoftBank has learned their lesson.

40:37 The bad news is that this means these companies are

40:39 now raising money from regular

40:40 people using regulatory loopholes around crowdfunding.

40:44 Boxible, for example, has raised more than $200 million

40:46 from more than 50,000 unsophisticated investors, according to their website.

40:50 As with a lot of these businesses raising money from the public,

40:53 they have capitalized on a tenuous connection to Elon Musk.

40:56 The business gained a lot of attention based on the false reporting that Musk

41:00 was living in one of their homes outside the SpaceX Starbase in Texas.

41:04 The channel Wall Street Millennial did a great deep dive on the other

41:07 aspects of the business in a video that I can only describe as damning.

41:11 One other channel called About Here also did a great

41:14 report on the technical limitations of all prefabricated housing.

41:18 It was focused on the Canadian market, but would apply to pretty much anywhere.

41:21 So, I will leave a link to both of those videos down below.

41:24 The point is that the process of building homes is really

41:27 hard to improve upon like we have with other manufactured goods.

41:30 And that reality is now coming to head

41:32 with more immediate problems in our economy.

41:34 So, remember when I said that we couldn't outsource home

41:36 building jobs like we could with those old factory jobs?

41:39 Well, in a way, we sort of do.

41:42 According to the Harvard Joint Center for Housing Studies and Pew Research,

41:45 around 14% of the construction workforce

41:47 in America is composed of undocumented workers.

41:50 According to the reports, that share is even higher in trades like drywalling,

41:54 roofing, painting, and flooring.

41:56 Any system that relies on a vulnerable or desperate source of labor to skirt

41:59 unions and minimum wage laws wasn't really

42:02 working as intended in the first place.

42:04 But no matter your politics on the recent crackdowns of undocumented workers,

42:07 the simple fact of the matter is

42:09 that this will put upwards pressure on construction costs,

42:12 especially in a handful of particularly overleveraged cities.

42:15 In fact, this has already happened before.

42:18 A study tracked construction costs between 2005 and 2013

42:21 after the roll out of the Secure Communities Program,

42:24 which was, according to the administration at the time,

42:26 a program for the arrest and removal

42:28 of public safety and national security threats,

42:30 those who have violated our nation's immigration laws.

42:33 The study found that an arguably much less severe crackdown led

42:37 to a 19% increase in construction costs over the measured period.

42:41 Today, on top of that, there are the tariffs.

42:43 Basic materials like copper wire could soon

42:45 attract import duties as high as 50%.

42:48 And higher interest rates,

42:49 which could also impact building more than you might expect.

42:53 Now, upward pressure on construction costs is just one visible example.

42:57 But when you start adding tariffs to just about everything,

43:00 these rising costs start to affect the average consumer directly as well.

43:04 No matter what side of the aisle you fall on, and even

43:06 if these tariffs were explicitly meant to protect American jobs,

43:09 it has started discussions about who really wins from fighting a trade war.

43:13 If you have been paying any attention to this whole circus,

43:16 you probably have been told a dozen times that tariffs

43:18 are just a tax paid by local businesses on imported goods,

43:22 which will normally just get passed directly along to the consumer.

43:25 That means they are really just another invisible tax on average

43:28 American consumers and therefore this whole thing is just a bit dumb.

43:33 Now that's not wrong.

43:34 It's true that if these tariffs or some other

43:37 version of them do eventually go into full effect,

43:40 you are going to pay more for most products and therefore this whole thing

43:43 can just be dismissed as the orange man being reckless with the global economy.

43:47 But hot take alert, there actually is more to this discussion.

43:51 Even if they don't realize it,

43:53 anything that both Bernie Sanders and Donald Trump can agree

43:56 on is probably worth looking into a bit more deeply.

43:59 And if they can resolve three big problems,

44:01 it could be a step in the right direction for most working Americans,

44:05 even if it's not done for the right reasons.

44:08 The first big problem is putting the genie back in the bottle.

44:11 America's biggest source of imports is now Mexico.

44:14 A combination of tariffs on China

44:16 and the investments into production facilities down

44:18 south has just given them the lead and they are highly dependent on it.

44:23 According to the global data firm CPPI

44:26 and visuals from the organization of economic complexity,

44:29 we make up 76% of Mexico's exports,

44:32 which are now mostly cars, car parts, and basic electronics.

44:36 According to glass door, Ford Motor Company employees in Mexico City

44:40 are earning between the equivalent of $10,000

44:43 for basic line work and $25,000 a year for highly technical production roles.

44:48 Combined with less strict environmental, safety, and business regulations,

44:52 it's hard for a unionized plant in America to compete with that.

44:55 Now, labor costs are only a small part of the total cost of assembling a car.

44:59 You also have to add the cost of materials and components, the shipping costs,

45:03 and the amortized expenses of researching,

45:05 designing, and tooling for a particular model.

45:07 So, this means even small tariffs could make it

45:10 cheaper to make big items like cars here in America,

45:12 which would give American workers more negotiating power over pay and benefits.

45:16 But, it needs more time, or else it's just going to hurt everybody.

45:20 A lot of our imports from Mexico are

45:22 components that our workers need to do their jobs.

45:25 A wiring harness is a bunch of cables

45:26 that connect all the electronic features in your car together.

45:29 They are an integral part of assembling modern automobiles,

45:32 and American factories import almost all of them from Mexico.

45:35 Without this component, local manufacturers can't make cars.

45:39 So, they are just going to accept the tariff and pass

45:41 the additional cost along to consumers

45:43 without actually making any additional jobs.

45:46 This can also let other cars which are not made in America raise

45:49 their own prices because their competitors will be forced to do the same thing.

45:53 The thing is, America can make these wiring harnesses here at home,

45:56 and doing so will create good union jobs for lots of people,

45:59 but companies can't build a new factory in 30 days.

46:02 It takes time.

46:04 Now, this is just one example of one product,

46:07 but similar problems are playing out in every

46:09 important dependent business across the country right now.

46:12 Big immediate changes like this don't really help anybody.

46:16 Now, that's just the first reason,

46:18 and it's only a small part in the bigger problem that workers,

46:21 businesses, investors,

46:22 and trade partners just don't know what the is coming next.

46:26 The idea of winning a trade war really

46:28 comes down to who is actually going to win.

46:31 Globalization is an unbelievably complicated issue with thousands of different

46:34 variables that have all made the world what it is today.

46:38 The dominance of the US dollar, cultural exchange,

46:41 digital connectivity, and the end of the cold war,

46:43 crossber intellectual property rights, foreign aid, debt markets,

46:47 and big international organizations have all shaped our lives.

46:50 But it's a lot easier to focus on the much more tangible action of global trade

46:54 because we can physically see junk get loaded

46:56 into shipping containers and sailed into our ports.

46:59 Without accounting for these other variables, though,

47:01 even the most well-th thoughtout tariffs in history aren't going

47:04 to do very much to reverse the winners and losers of globalization.

47:07 So, who are they exactly?

47:09 Several major economies have been able to develop extremely

47:12 quickly by focusing on producing exports for the global market.

47:15 The biggest consumer in that market by far being America.

47:19 Large multinational companies have also benefited from being able to produce

47:23 their products more cheaply and sell them in multiple markets across the world.

47:27 And wealthy asset owners have also won

47:29 because they got to finance this industrial boom,

47:32 move their capital freely around the world and benefit

47:34 from foreign investors pumping up their existing asset markets.

47:38 The losers have largely been the groups that weren't as globally mobile.

47:42 So instead of capitalizing on new global markets, they had to compete with them.

47:46 Smaller local businesses and of course above all else,

47:49 unskilled or semi-skilled workers.

47:52 You probably already have an idea of the people

47:53 that have been left behind by globalization.

47:56 small town communities in the rust belt that don't have as many

47:59 job opportunities as major employers went

48:01 out of business or move jobs elsewhere.

48:04 Now, I am going to implement a zero tolerance to Zoomer Commons policy.

48:08 But as someone who grew up in and went to college in Ohio,

48:11 the expectation was that anybody that completed their degree

48:15 could immediately move out of the state to one

48:17 of the big cities that had become part

48:18 of the global economy rather than just the American economy.

48:22 Now, obviously, I am now just a worthless influencer, so no major loss there.

48:28 But by losing other educated young workers,

48:30 these local areas are falling even further behind.

48:33 And the big global cities that people need

48:35 to move to aren't exactly winning out of this either.

48:38 And if they remain the only places where young workers

48:40 from across America and the rest of the world can get ahead,

48:43 then it's going to be incredibly hard to fix it.

48:46 The reason why a finance bro in New York

48:48 or a tech worker in California can be paid enough

48:50 to compensate for these spiraling costs is that they are

48:52 providing a service that can be leveraged across the global market.

48:56 Whereas a factory worker is producing goods

48:58 that are competing with the global market.

49:01 So if we reverse course on this whole free trade business,

49:04 it should reverse course on the winners and losers, right?

49:07 Well, no.

49:08 The strangest group of winners and losers has been the American consumer.

49:12 One of the reasons why we can get away with being

49:14 so reckless on trade is that everybody wants what America has.

49:18 And what America has is consumers.

49:21 There are a lot of us.

49:23 Even our basic jobs pay well compared to other countries.

49:26 And we love to buy It might not feel like it,

49:30 but a lot of the products you buy are a lot cheaper than they used to be.

49:34 Easy to transport appliances like fridges, TVs, personal electronics,

49:38 and computers have all become significantly cheaper over time.

49:42 Part of this can be explained by advances in technology,

49:45 but a lot of this is down to big global supply chains that have been

49:47 hyper optimized to get consumer junk

49:49 to your doorstep as cheaply and conveniently as possible.

49:52 The most extreme incarnation of this process

49:55 has been online retailers like Wish, Sheen,

49:57 and Teimu that directly ship consumer junk that almost seems too

50:00 cheap to be possible because a lot of the time it is.

50:04 The way that these companies have been able to effectively get these goods

50:06 into the American market is by taking advantage

50:08 of a small loophole in our trade policy.

50:11 The dimminimous value exemption lets shipments into the US avoid duties,

50:15 taxes, and tariffs as long as they are worth less than $800.

50:19 The intention of the law was to let people mail stuff to friends and family

50:22 without having to deal with the paperwork

50:23 and expenses of tariffs typically paid by international businesses.

50:27 But good intentions didn't stop these companies from building

50:30 their businesses around taking advantage of this simple carvout.

50:33 Normally imports from big manufacturing nations like

50:36 China are all shipped together as one big order that is then moved

50:39 to a warehouse and distributed here by American retailers.

50:43 But by shipping everything one by one,

50:45 these companies can get their orders under the $800

50:47 limit and avoid paying the taxes they really should be.

50:50 It's much much less cost effective to ship things like this.

50:53 But the savings on import duties more than make up for it.

50:56 According to US Customs,

50:58 they process over 4 million of these packages every single

51:01 day with more than half of them originating from China.

51:04 So, it's safe to say this exemption has not really been used as intended.

51:08 If you don't value your time at all,

51:10 go to Teemo and try to find a product worth more than $800.

51:13 You probably won't be able to do it because their business model

51:16 falls apart if they have to properly compete with retailers like Amazon.

51:19 Now, this whole game could be considered a win for consumers.

51:22 If you consider a two pack of Bluetooth speakers

51:25 in the shape of an astronaut for $20 a win,

51:27 but most consumers can only consume because they are also workers.

51:32 And for most people,

51:33 little consumer wins like this are not worth the worker losses they come with.

51:37 You probably didn't hear as much about it.

51:39 But in between everything else that was going on, this exemption

51:42 was also stopped and a lot of small businesses lost their mind.

51:47 This was a blow to the Chinese

51:48 retailers whose whole business model doesn't really work

51:50 without this loophole and drop shippers who

51:52 couldn't get their products in the same way.

51:54 But for the average American worker, this is a good thing.

51:58 If slowing down a million packages of consumer junk every day

52:01 is the price we need to pay for more jobs in America,

52:03 then it's absolutely worth it.

52:05 The only question is, will it?

52:08 American companies like Walmart and Amazon will benefit if this rule is upheld.

52:11 And yeah, obviously they are far from perfect,

52:14 but they do at least employ more local workers than Teimu.

52:18 Long-term, moving in the direction of fair trade rather than

52:20 totally free trade means we can regain local jobs and capabilities.

52:24 But it will be a long-term process.

52:27 One of the most important details

52:28 that people overlook when arguing for or against

52:31 trade protections is that most people these days

52:33 don't actually work in jobs making stuff.

52:35 Most of our economy is in the service

52:37 sector and thanks to communication technologies,

52:40 things like entry- level administration, customer service,

52:42 and IT have been outsourced just as fast as the people

52:45 who make stuff that can be physically shipped across the world.

52:48 If our definition of winning is getting American jobs back,

52:51 there are more effective strategies.

52:53 As I was writing this, the US

52:55 Postal Service started processing deminimous packages again.

52:58 And by the time you are watching this, that could

53:00 have changed or there could be totally new policies.

53:03 And that's the final and most serious problem.

53:06 To win any war, there needs to be a coherent strategy.

53:09 Businesses right now don't know what is going to happen next,

53:13 which is making it really hard to react accordingly.

53:16 If it's made clear which industries are going to be targeted for onoring,

53:19 and those industries can provide good jobs,

53:21 then businesses will either supply them or someone else will.

53:24 Blanket rules that change daybyday means everybody

53:27 is just going to sit back and wait,

53:29 which means hiring and investment freezes, which doesn't really help anybody.

53:34 But go and watch this extended cut video next to see

53:36 why we've kind of already created an unemployable class of young people.

53:40 And don't forget to like and subscribe to keep on learning how money works.