 From the very beginning of this series we've talked not only about economic concepts like price signals and spontaneous order but also about the underlying nature of political power and the way that incentives affect all people's behavior. To some extent this may seem like a broad focus but these themes are entirely related. Most people don't even notice the way their behavior is shaped by the rules and institutions of their society or how powerful those forces can be but in the somewhat ironic words of John Maynard Keynes, practical men who believe themselves to be quite exempt from any intellectual influence are usually the slaves of some defunct economists. Mad men in authority who hear voices in the air are distilling their frenzy from some academic scribbler of a few years back. Keynes was wrong about a lot of things but he was right about that. In fact I think that right now we're all living through a moment in time when those words have never been more true and yet one thing I have perhaps devoted an insignificant amount of time to on this show is the nature of the economy itself. So today as we stare down the metaphorical barrel of an economic catastrophe I want to take a deeper look at the structure of the film and entertainment industry, what the big short got right and wrong about the 2008 recession and the ripple effect that our current crisis is going to have for people around the world and hopefully in the process you'll see that the economy is not some machine with levers to pull and buttons to push but rather an incomprehensibly complex network of human relationships and productive activity. This may be our most challenging episode yet but I promise you it'll all come together. I hope you'll stick around and by the end give this video a like hit that bell icon and share it with all your friends. Welcome to Out of Frame. Like a lot of other non-essential businesses shut down across the United States the entertainment industry is in free fall. Actors, musicians, set designers, costumers, electricians, grips, camera operators, craft service people, thousands of freelancers and gig workers are out of work with no clear sign of when they might return. Major projects have been put on hold, blockbuster releases have been rescheduled, even huge companies like Disney have taken a massive hit. With their theme park shut down by law all over the world they've been forced to enter into a five billion dollar credit agreement just to survive. AT&T which owns Warner Media and Direct TV and which had already laid off hundreds of people is still looking at ways to cut tens of billions of dollars in expenses. They just took on 5.5 billion dollars in new loans. AMC has closed over a thousand movie theaters worldwide and furloughed their entire corporate staff along with 26,000 theater employees and even if their theaters are allowed to reopen soon with so much fear of the coronavirus permeating our culture who knows how many will actually be able to come back. The same story is playing out everywhere and we're barely scratching the surface. What's happening right now is going to ripple through supporting industries and the freelance community in a way that literally no one can fully understand and few people are even a little bit prepared for but we'll come back to that in a moment. First we need to fix a common misconception. I've talked to hundreds maybe even thousands of people about these ideas over a lot of years and I've come to a realization when most people think about the economy they think about big abstract concepts like gross domestic product bank account balances and obscure stock symbols on the tv politicians talk about economies like their cars that can be started stopped accelerated and steered wherever they want to go even the academic terminology is dense autarky and aggregate demand diminishing marginal utility and equilibrium perito efficiencies and price indexes for most people it's all super confusing and leads them to believe that they need to be a wizard at finance and advanced mathematics to get it but in reality the economy is just people I know that sounds like an oversimplification it really isn't economies are natural extensions of human behavior like language or culture that emerge spontaneously as individual people interact with each other exchanging the goods they make for stuff other people have that they want more the first caveman to offer a fish he caught for a stone tool someone else made was creating an economy over centuries people have formed bigger more complex societies in large part as a result of bigger more complex trading networks and now the economy is global it's a mesh of human interconnection and our lives are immensely better for it fortunately understanding all of this does not take a phd or a background in calculus we can see economies in operation every day as long as we know what to look for from small-scale interactions like two kids swapping sandwiches at lunch to global mass production that relies on millions of people cooperating through complex corporate partnerships it's actually easy to pierce the abstract veil of economic jargon and find the humanity beneath all it takes is curiosity logic and a little bit of empathy so with that in mind let's go back to the film industry it would be too complicated impossible even to know let alone show all of the individual human beings skills and jobs that actually have to come together just to make a movie but by working our way backward through a few pieces of the overall network i think you'll start to see what i mean all around the world politicians have instituted policies that prevent larger gatherings and shut down companies that they've called non-essential businesses nothing could be more obviously included in both categories than movie theaters not only are they inherently bringing together hundreds of people into one tightly packed area they're also the epitome of frivolous in the eyes of the government but what does it really mean to shut the entire industry down on the surface it means that people can't go see movies in theaters but since almost half of all people in the u.s. only go once a year or less as it is and just 14 percent go more than once a month nobody thinks that's a very big deal in the middle of a pandemic surely it's no harm for people to just stay home and watch netflix instead right but of course the shutdown also means that everybody who is employed in the movie theater business is currently out of work the top five theater chains in the u.s. amc regal cinamarch marcus and harkins employ over 100 000 people virtually all of whom are now laid off or furloughed i'm sure they think this is a pretty big deal but let's dig deeper with no screenings that also means no movie theater concessions it turns out that americans consume 15 billion quarts of popcorn every year with 30 percent of that happening at the movies in 2018 the popcorn industry did over 1.1 billion dollars in sales but now with no orders coming from theaters for several months those sales are going to tank that means more people could lose their jobs it also means that a lot of surplus popcorn will need to be sold before companies like act two and orville red and bacher place new orders with the farmers who grow the corn but farmers plan their crops a year or more in advance in Nebraska where i grew up corn gets planted in may or june but fields are being prepared right now and the things you need to do to plant one crop on one timeline can't just be switched over to some other crop that grows in different weather and soil conditions on a different schedule so corn farmers across the united states and everywhere else in the world are going to take a loss as well but we're not done the reduction in orders rippling across the network means less revenue to farm co-ops and processing facilities less revenue to companies that dehydrate the corn it means that trucking and rail companies that transport the corn to processing plants have fewer customers and that means that all of those businesses may also have to lay off employees and reduce expenses which inevitably means more ripple effects throughout more areas of the economy business owners plans for expansion will be cancelled new factories won't be built better machinery won't be purchased improvements to worker safety and comfort won't materialize pay and benefits will be cut people just now graduating college will find a job market with a fraction of the opportunities that were available when they started as someone who finished grad school in may of 2007 i know what that's like in the end it will be millions of people affected by shutting down just this one part of one industry there are thousands of parts of hundreds of industries that are not allowed to do their work right now every one of them will be affected as i said the economy is a mesh a web a network of interconnected people the effects don't just flow in one direction tons of my entertainment business friends are struggling right now but i'm actually one of the lucky ones while i've done a lot of jobs that would not have survived this like the year i spent working as a music manager on cruise ships most of my career has been spent at a computer from when i started out as a music supervisor to my time as a music editor for a software company and then all the years i produced and edited video content created motion graphics and recorded voiceovers like this one i might as well have been in training for extended quarantine but even still to do my job i need content most of that content has to be created in the real world and it often requires hundreds of people coming together all those people i mentioned at the beginning actors and costume designers set decorators gaffers camera operators if their productions are shut down editors have nothing to edit composers have nothing to score that creates ripple effects too if people like me have fewer clients and less work we also have to make tough choices about how we deal with that we might put off upgrading our computer hardware and software or maybe we'll forego hiring anyone to help organize footage and if we have no work at all well like anyone else we're in real trouble in the words of one of my favorite living economists donald boudreau most of what constitutes our prosperity is a flow of finely coordinated activities each performed by highly specialized workers in normal times this flow of activities is largely out of sight my point in all of this is to encourage you to look around your world and try to think about what you're not seeing look for what's out of sight as you do that consider what it really means to shut down the economy what's happening right now is catastrophic in march we saw the largest stock market crash since 2008 the spike in unemployment is literally off the charts and worse than we've ever seen more importantly with so many people out of work a ton of goods and services are simply not being created it's bad and while i know a lot of people will blame our current situation on the pandemic itself the truth is that there were a lot of other policy options that weren't discussed or even considered viruses have been a part of the human experience since the beginning of time but what we've done in response to this one is completely unprecedented i think that like most recessions and depressions throughout history what's happening today is overwhelmingly man-made adam aka is 2015 film the big short is a flashy smart and even mostly accurate portrayal of the financial industry in the two years leading up to the housing crisis of 2007 it follows the actions of a few central characters scion capital hedge fund manager michael burry mark bomb manager of front point partners working with jared vennett and a pair of young guys just starting their own firm charlie galler and jamie shippley with the help of the reclusive former investment banker ben rickard they're all based on real people who were among the first on wall street to figure out that the mortgage industry was on the verge of total collapse the movie does a pretty good job of trying to make complex concepts like mortgage-backed securities collateralized debt obligations and credit default swaps easier to understand but by painting the causes as purely issues of corporate malfeasance and ignorance at every level the film misses a massive opportunity to talk about the role the government itself played in creating the housing crisis starting with the inflation of the very bubble that caused it jared vennett played by a very smooth ryan gosseling explains the mortgage-backed securities market using a game of jenga he shows how the bonds themselves were built on large groups of individual mortgages with varying degrees of risk called tranches traditionally mortgages and mortgage-backed securities had always been a boring safe investment because the mortgages themselves were very safe home buyers were well vetted put up significant down payments and the homes themselves served as collateral for the banks but when michael burry started digging into the details he realized that that wasn't true anymore in the early 2000s banks started making huge loans to low-income high-risk individuals with no money down and variable interest rates that would go up over time these new mortgages and the investment products built around them were no longer safe when they failed everything failed but what the movie doesn't really get into is how this happened in the first place why did banks just start making incredibly high-risk loans to people who are unlikely to be able to pay them back well because the government created the incentives and gave them the money to do so in the 1990s congress decided that home ownership was critical to reducing poverty and modified a number of laws such as the community reinvestment act to explicitly encourage banks to make more housing loans to low-income people at the same time the government mandated that over 50 of the loans made by government sponsored enterprises like the federal national mortgage association and the federal home loan mortgage corporation had to go to low-income buyers but since these kinds of loans are very risky banks want to guarantees from the government that any loans that didn't get paid back would be insured by taxpayers this created what economists call a moral hazard of course that's not all around the same time in response to the bursting the dot-com bubble and again after 9-11 the federal government employed some of John Maynard Keynes ideas told you it was ironic and pushed through huge stimulus packages meanwhile the federal reserve reduced interest rates in order to increase the money supply so not only were banks required and given strong incentives to make risky loans was so much new money flooding the system they also had the means to set up a house of cards built on wildly over leveraged investment schemes most dangerously of all they knew that if things didn't work out they wouldn't be the ones on the hook there's going to be a bailout they knew cash was coming in atm they had to backstop this they knew the taxpayers would bail them out they weren't being stupid they just didn't care there's more to the story of course but some economists were already warning of a housing bubble even before michael burry caught on in 2004 auburn university economist mark thorton wrote given the government's encouragement of lax lending practices home prices could crash bankruptcies would increase and financial companies including the government-sponsored mortgage companies might require another taxpayer bailout it's a shame that the big short leaves all this out especially because understanding this stuff could have helped us prevent it from happening again instead in response to the housing collapse the federal government under george w bush and barack obama pushed even bigger stimulus packages and used the fed to flood the market with even more money in a 2016 interview with new york magazine the real life michael burry criticized these policies saying we are right back at it trying to stimulate growth through easy money it hasn't worked but it's the only tool the feds got meanwhile the fed's policies widen the wealth gap which feeds political extremism forcing gridlock in washington this is toxic as burry went on to explain interest rates are used to price risk and so in the current environment the risk pricing mechanism is broken that is not healthy for an economy no no it's not and yet that's what we were already stuck with before fear of covet 19 led governments around the world to forcibly stop hundreds of millions of people from operating their businesses and earning a living this is why it's so important to see the economy as human beings instead of statistics if we're right people lose homes people lose jobs people lose retirement savings people lose pensions you know what i hate about banking it reduces people to numbers here's a number every one percent unemployment goes up 40 000 people died did you know that while a specific number like 40 000 is extremely hard to assess and may or may not be true increases in unemployment are correlated to a number of major social problems depression and drug use goes up domestic violence goes up suicides go up people lose years of their life to stress and delayed medical treatments children die i thought we were better than this i really did and the fact that we're not doesn't make me feel all right and superior it makes me feel sad i just know that at the end of the day average people are going to be the ones that are going to have to pay for all of this regardless of the risks of coronavirus or how effective lockdowns have been at saving lives the cost of these policies are both very real and far greater than most people have even begun to consider the trade-off is not human lives versus the economy it's all human lives a few weeks ago michael burry resurfaced to criticize the lockdowns calling them criminally unjust and told bloomberg news that universal stay at home is the most devastating economic force in modern history i agree we need to think about the economy less like a car that can be driven or controlled by a politician or a group of technocrats and more like an organic living brain if you start removing synapses eliminating nodes and connections the brain starts to become unstable and the more that get removed the more likely the brain is to die economies work the same way for a lot of the same reasons the more companies you shut down and the more economic connections and relationships you eliminate the harder it is for all businesses to function even some of the ones that haven't been told to close their doors won't survive because they rely on all the ones politicians decided weren't essential and with all of those productive creative people sitting idly at home waiting to be allowed to go back outside a lot of the stuff that actually improves our standards of living will become scarce and cease to exist to quote don budrow one more time ultimately our wealth consists chiefly in the ongoing willingness and ability of millions of strangers to work for us daily any obstacle to large numbers of people performing their daily jobs means hardship for us all trillions of dollars in stimulus bills and enhanced unemployment payments cannot make up for the loss in real human productivity instead that's a one-time Band-Aid that will have to be repaid in the form of future taxes and inflation we are all interconnected and essential and when we allow governments no matter how well intended to decide which businesses can operate and which can't we are allowing them the power to create compounding problems that have earth shattering consequences for billions of people we'll get through this and we'll do it together connections will reform new businesses will emerge but i hope that once this is all over people finally learn how important free economies are and that we never do this again hey everybody thanks for watching this episode of out of frame i'm sure there will be a lot to talk about in the comments but mostly i just want to know how everybody's holding up let me know how you're being affected by all this i also have an announcement we finally set up a patreon account for the show so if you're a fan and want to help us make more content please check out the link in the description and consider donating a few dollars each month and don't forget to like and subscribe to all our social channels on youtube facebook twitter and instagram see you next time