(photo credit: Washington Free Beacon)

The Washington Free Beacon reports that founders Steve Forbes, Steve Moore, and Art Laffer joined former Virginia Governor Glenn Youngkin and Fox News’s David Asman to discuss a range of policies including lower taxes, a flat tax, tax simplification, cutting the capital gains tax, and eliminating the estate tax. Also, in Youngkin’s words, to “reinstill hope.”

The Beacon suggests three possible interpretations:

1. “This supply-side wing is a bunch of has-beens, aging relics of the Reagan past. Laffer is 86, Forbes and Kudlow are 79.” (Their words, not mine.)

2. “The Unleash Prosperity crowd has been actually far more influential in Trump economic policy than has been widely understood or appreciated,” helping shape tax cuts.

3. “A third way to look at it is that the pro-growth, free market approach has room to run in a post-Trump Republican Party. Of the key agenda items enumerated at the gala—school choice, a Steve Forbes flat tax, technology dominance, and Social Security reform with private accounts—there is plenty left to cover in the future.”

These observations are not mutually exclusive. Rather, they might be best read in a sequence of 2, then 3, then 1. The supply-siders have been influential in shaping Trump-era tax cuts. But their “key agenda items” of school choice, a flat tax, and privatizing Social Security are relics of the GOP past. (No, “technology dominance” is not an agenda item.) There is always “room to run” off the road’s side and into a dried-out ditch, but that prospect is usually reason enough to take away the keys.

GOOD READS FOR YOUR WEEKEND

The Wall Street Journal’s feature on the Savannah Bananas is self-recommending, but it has important lessons for The Real Economy too!

In the rise of Banana Ball, it’s not hard to see a rejection of the crass price-gouging that’s overtaken professional and even college sports. Cole has designed a Bananas outing to be rigorously affordable. Tickets for Banana Ball games at major league parks start at $30 and peak at $60—not enough to park your car at a lot of pro sports events. Tickets at Grayson come with all-you-can-eat food and sodas. Cole even launched a bespoke Bananas ticket exchange so fans could sell directly to fans and avoid the exorbitant reseller market that many teams and leagues partner with.

…

For all the current mania, Cole insists on playing the long road. He’s got plenty of ideas in the pipeline—a Bananas cruise; a game with two diamonds; a possible international tour—but he’s wary of saturation and strives to keep Banana Ball accessible. He insists that ESPN’s arrangement allows the games to also be shown for free on YouTube. Cole even broke ties with a handful of sponsors after deciding they didn’t feel very Banana Ball. He’s resisted multiple offers to sell; he and Emily still wholly own the franchise.

At Labor Innovation, David Rolf looks Beyond the Next Wave Election: Rebuilding Worker Power for the Long Haul. “We don’t require every family to organize its own school district or every neighborhood to negotiate separately for power lines or police protection. Why should workers have to organize employer by employer to secure a meaningful collective voice in the economic decisions that shape their lives?”

In the New York Times, Julia Stiles’s Dancing Is Healing Millennials. Cheers to the Times for giving us the in-depth coverage we needed of her poignant tribute to Heath Ledger on Dancing with the Stars. Jeers, though, for referring to 10 Things I Hate About You as a “cult classic.” Do we refer to The Godfather as a cult classic? The Shawshank Redemption? Zoolander? I didn’t think so.

And speaking of Elder Millennials, you must read Chris Griswold’s new policy essay for American Compass on Vocational Education for All. I predict this proposal for universal voc ed will soon become conventional wisdom, and his essay the seminal case. Chris also joins me on this week’s episode of the American Compass Podcast to discuss further.

OH WHEN WILL THEY EVER LEARN?

The economists and pundits who led the American economy off the globalization cliff will often hide behind the defense that they could not possibly have known how China was going to undermine the hypothetically wonderful rules-based international order. In fact, they should have known and, more importantly, they did not care. The market fundamentalism of the consumer-welfare-maximizing free-traders insists that it does not matter what other countries do, all that matters is getting cheaper stuff.

(And yes, I will once again quote Paul Krugman, until you have all memorized the line, “a country serves its own interests by pursuing free trade regardless of what other countries may do.” And yes, I will once again remind you that this is still the conventional wisdom at the American Enterprise Institute.)

Lest one have any doubts, even as a publication like The Economist sounds the retreat on the principle applied to industrial capacity (“Foreign companies, however big, stand little chance against a Leninist developmental state that has attained China’s size, wealth and modernity.”), it is charging straight into the same ambush on the next technological wave.

In Let China copy American AI, The Economist even recognizes the pattern and proposes that we repeat it:

Anthropic and OpenAI have lately taken up an old tradition in corporate America: bemoaning the Chinese copycat. For decades firms moved assembly lines to China only to find me-too merchants rising next door. Now America’s leading artificial-intelligence labs say the same thing is happening to their models, and want the federal government to stop it.

…

Yet the labs’ commercial interests do not align with those of consumers. Users win when there are more—and more capable—models on offer.

…

Policymakers in Washington should recognise what Chinese AI bosses already do: the technique makes China’s progress dependent on America.

Yes, China is running the exact same playbook. Yes, we should again thank them for undercutting our innovators with cheaper consumer products. And yes, we still believe that we are going to secure long-term leadership by hooking China on our technology. What could go wrong?

It’s not like China is actively compromising the leaders of our top tech firms to… Nvidia Chief Seen as Target of Chinese Spy Plot (New York Times):

A top executive at a Singapore-based data center company was under scrutiny for possibly steering advanced Nvidia A.I. chips to China. And now American officials had concluded that she was a Chinese intelligence asset, funneling information to Beijing.

But what came next was even more alarming. Surveillance of the executive, Alice Huang or Huang Le, a Chinese citizen, revealed that she had developed a close relationship with Jensen Huang, Nvidia’s chief executive.

One might hope this would lead Huang to update his view of the Chinese Communist Party, that “they want companies to come to China and compete in the marketplace and I believe that. … I do hope because they say it—their leaders say it. And I take it at face value.” Somehow I doubt it.

Share

THE FOUR STAGES OF TARIFF GRIEF

In The Art of the Tariff, Politico helpfully highlights the morass of arguments that tariff opponents now find themselves throwing mostly at each other.

Stage 1: We don’t need manufacturing.

“The economy has over time moved from being entirely agricultural to having a footprint in manufacturing, and now it’s got an enormous productive service sector,” Holtz-Eakin said. “I don’t see the need to focus on [manufacturing] the way both administrations have. It seems like more nostalgia than good economic policy.”

Stage 2: Manufacturing isn’t booming.

Berger said she still sees the merit in preserving a large manufacturing sector to maintain the U.S.’s innovation edge, supply chain resiliency and national security. But she argued that Trump’s trade policies, including frequent tariff shifts, aren’t going to herald a revival, despite what the president is telling voters. “I don’t see any sign of it,” she said.

Stage 3: We are seeing a manufacturing boom, but tariffs make it harder.

“When all is said and done, you can’t really point to the tariffs,” Douglas Holtz-Eakin, president of the American Action Forum, a center-right Washington-based think tank, told Morning Trade. “It’s a wash at best, but I would think that on the whole, they would be a hindrance” to manufacturing growth.

Stage 4: Yes, tariffs help. But at what cost?

This is the one we’re now arriving at, as evidence for any of the first three collapses. And it has the benefit of being correct. Yes, tariffs will drive reindustrialization. And yes, that has costs. Welcome to the wonderful world of trade-offs. The question, of course, is what those benefits and costs are in the long run, which is what sends opponents running back to the first stage, disclaiming that we should be willing to incur any costs in the first place. It’s a nice tight loop of internal coherence that works so long as it avoids contact with reality.

Meanwhile, in the real economy, new industrial expansions keep rolling in:

First Solar: “Today Governor Henry McMaster, Senator Darlene Graham, Commerce Secretary Howard Lutnick, and South Carolina officials joined us to inaugurate our newest facility in Gaffney, South Carolina. This is a working factory, not an empty shell, with 500 people employed and 700 jobs expected in 2027. It exists because the moment demanded it. The One Big Beautiful Bill Act and the Trump Administration’s trade policies drove real demand for American energy technology, and we moved to onshore final production as rapidly as we could.”

U.S. Steel: “U. S. Steel’s Board of Directors has approved full funding for a nearly $3 billion investment in a new hot strip mill at the company’s Mon Valley Works – Edgar Thomson Plant near Pittsburgh.”

Anduril and Qualcomm (via PirateWires): “Defense technology company Anduril and semiconductor firm Qualcomm launched an initiative to produce 100% made-in-America computers. Today, the companies announced BlueChip, a product line ‘dedicated to rebuilding American computer manufacturing’ and reducing dependency on foreign manufacturers, according to a press release, beginning with a laptop set for release next year.”

Volkswagen (via Wall Street Journal): “Audi and Porsche are the only German auto brands without a U.S. factory. Their corporate cousin Volkswagen, and direct rivals BMW and Mercedes-Benz, all produce cars in factories across the South, in some cases for global export. That situation has left Audi, which primarily builds its U.S.-market cars in Germany, Mexico and Central and Eastern Europe, particularly vulnerable to tariffs in Trump’s second term.”

Which brings us to…

YOUR GERMAN GOOSE(STEP) OF THE WEEK

From Politico Europe: “Disturbing and pathetic”: German politicians slam Audi CEO’s appearance at Trump rally. “German politicians have sharply criticized Audi CEO Gernot Döllner’s appearance alongside U.S. President Donald Trump at a campaign rally on Saturday. ‘Actively campaigning for an autocrat who is waging a trade war against Germany marks a new low for the VW Group,’ said Isabel Cademartori, a Social Democratic Party lawmaker and the party’s transport policy spokesperson.”

With due respect to Ms. Cademartori, probably best to avoid phrases like “new low” when discussing a corporation whose history page features lines like: “The US troops who arrived on April 11, 1945 stopped the plant’s armaments production and liberated its slave workforce. The longed-for end of the Nazi dictatorship marked the beginning of a new era for Volkswagen too.”

We do appreciate, though, her acknowledgment that Audi is “validating Trump’s strategy [of] using a trade war to shift jobs from Europe to the United States.”

WHAT COULD GO WRONG?

Our financial sector continues to find new ways to earn money while creating no value and indeed making life worse, which, when you think about it, is actually a pretty impressive feat. You’ll recall recent The Real Economy coverage of the “tax-aware long-short” strategies seeking to avoid capital gains taxes, but that’s a few hundred billion dollars.

Now, the Wall Street Journal delivers a helpful primer on The ‘Buy, Borrow and Die’ Wealth Strategy Has Become a $5 Trillion Market. Let’s say you’re asset rich, your stocks have gone up, but if you sell them you’d have to pay taxes. Instead, you go borrow money from a bank, posting your stock as collateral, and can consume whatever you want tax-free. When you die, you pass along your assets, which get “stepped-up basis,” and no one ever pays taxes on the gains. The Journal goes to great lengths to find legitimate reasons this might be useful, but in fact it is just tax avoidance bordering on tax fraud.

And it’s actually kind of risky. People are “levering up” their personal balance sheets, which works as long as the market keeps going up, but what happens if it goes down? And what happens if banks start trying to push this model on larger and larger segments of the population? You know, like Monument Bank in the UK, which wants to make sure investors with a few hundred thousand dollars can “adopt a billionaire mindset.”

Then flip on over to the New York Times to read that Baby Boomers Are Retiring in Droves. Private Equity Is Waiting. From the headline, I figured they meant PE is waiting to suck up their savings and charge high fees for sub-market returns. But here we’re talking about how retiring small business owners are selling. “Deal by deal, ownership is being extracted from the thousands of communities where businesses were built to the handful of cities where capital is already concentrated. For the new owners, the primary, and often exclusive, connection to the community is the profit they can derive from the acquired asset.”

But at least it’s efficient? The thing about coin-flip capitalism is that, about half the time, the coin lands tails. We’re seeing this now in private equity, where a gush of deals in the early 2020s, all backed by enormous amounts of debt at low interest rates, all premised on selling the companies in about seven years, now find themselves in a high interest rate environment where no one wants to buy the companies and refinancing the debt is expensive. Oops. If the goal were to actually buy companies, improve them, and then sell them, this might still work fine. But when success relies on macroeconomic conditions outside your control, you get to walk around looking like a genius while the times are good and then… well, thing is, when things go bad, you still get to walk away with all the profits from when times were good. Someone else gets left holding the bag. The Wall Street Journal provides a good illustration in A $300 Billion ‘Debt Wall’ Is Looming Over Private-Equity Backed Companies.

On a lighter note, just an amazing quote in this Bloomberg story, Anthropic’s Massive Revenue Surge Comes With Ballooning Computing Bill, which reports that “Anthropic’s revenue for first half of 2026 is nearly 400x that of its revenue for all of 2023.” Not bad. But Jim Lebenthal, chief market strategist at Cerity Partners, says “frankly, I’d like to see higher revenue growth than what I’m seeing in the filing.”

AND OF COURSE, YOUR CANADA GOOSE OF THE WEEK…

Last week, we took a look at Ezra Klein’s analysis that Canada’s rebuke of the United States has been “ruinous and revealing about the shambles of Donald Trump’s foreign policy — how what Trump is doing is not getting America what Trump wanted. I mean, Trump wanted Canada to be the 51st state. Instead, it might become an associate member of the European Union.”

But nope, EU scraps ‘associate member’ offer for Canada (Politico Europe). Rather, the EU is “opting instead for softer language promising ‘ever closer association’ ahead of a landmark EU-Canada summit.” One thinks of Dwight Schrute’s dream of being Assistant Regional Manager, and his actual title of Assistant to the Regional Manager.

Surprising no one, Prime Minister Mark Carney has proudly seized the Schrute mantle. “The good news is it doesn’t matter about specific names or nomenclature,” he said. “What matters is the difference that it will make to lives of Canadians.” Well no, actually, associate membership in the EU and warm-fuzzy association bear no relationship to one another. Carney still seems to think that Davos posturing is what makes a difference for the lives of Canadians, but he is going to discover that the actual structure of economic relationships matters a lot more.

Enjoy the weekend!

Leave a comment

The sector was losing 15,000 jobs per month in 2024. That rate slowed by almost half in 2025. Thus far in 2026, the sector has added more than 70,000 jobs, putting the total nearly 300,000 above the pre-Liberation Day trend. Time to move on to a new disingenuous talking point.

Axios and the Burning Glass Institute’s Gad Levanon have us covered, with U.S. manufacturing rebound not consistent across factories. Sure, “factory output rose 0.3% in September despite a 3% drop in auto production — the latest evidence that the long-struggling sector is gaining momentum,” and “the Institute for Supply Management’s manufacturing index showed a ninth straight month of expansion, with new orders growing at a faster pace and backlogs of unfinished work mounting.” But did you know, “U.S. manufacturers added a net 40,000 jobs over the 12 months ending in September. But the gains came entirely from advanced manufacturing — even though the subset accounts for just 38% of factory employment.”

Friends. What are we even doing here? Isn’t a shift toward more advanced manufacturing good? Who here thinks, if the trends were reversed, Axios and the Burning Glass Institute would be celebrating that it was other manufacturing rather than advanced manufacturing benefiting most?

Not for nothing, it’s also worth taking a look at the actual job trends on both sides of Mr. Lebanon’s divide. Both were losing jobs at a similar rate in 2024, both slowed their declines significantly in 2025, both turned positive in 2026. Advanced manufacturing employment shifted from 37.5% of the total at the end of 2024 to 37.7% today. Worrying. Very worrying.

GOOD READS FOR YOUR WEEKEND

How Evangelicals Turn Supporters into Leaders—and What the Left Can Learn (Eric Blanc, Labor Politics). If you enjoyed part one, on lessons for labor organizing from church organizing, give part two a read.

Mike Konczal writes, What distinguishes the 1% from the merely affluent? A third kid. Interesting data, and a particularly important insight: “Is this about a third kid becoming a new cultural symbol for the 1%? Some digging makes me think this isn’t the case and the story might be more fascinating. A third kid isn’t new for them; what’s new is that it has become rarer for everyone else.”

I Teach at a Business School. It’s Time to Shut Them Down. (Chris Marquis, New York Times) “The modern business school is designed to promote dealmaking, simplification and optimization. This mind-set has escaped containment and has spread to the wider world.”

What liberals get wrong about social media (Matt Feeney, UnHerd). Really wonderful essay on the convenient and shallow obsession with “disinformation” as the fatal flaw of social media, when in fact the problem is that “it is more extractive than extremist.”

• h/t Matthew Crawford, who expands further in the attention economy v. free-market thinking.

• Crawford wrote a related piece for American Compass several years ago, on how “attention-harvesting technologies jeopardize our capacity to govern concentrated power—and ourselves,” part of our underrated and increasingly prescient collection: Lost in the Super Market.

GOOD READS – AI DIVISION

Why the AI Pessimism? (American Compass) New polling data, conducted in two waves over the past six months. Key finding: “The strongest driver of AI pessimism is belief that AI labs do not see ‘improving everyday lives’ as a priority. Net optimism drops from +41 among the 25% of Americans who believe this is a top priority for companies to (-60) among the 22% who believe it is not a priority.”

Nobody Is Ready for the AI-Agent Flood (New York Magazine). Yet another way AI at scale seems likely to make the ordinary American’s life worse.

Coxon Day (The New Critic). Really long, but worth your time, from an extraordinarily talented young writer. “This messianic moment — complete with such biblical stakes as total annihilation, total enslavement, total absolution, or total power — has created a tribal frenzy in the Bay that will soon spill its bounds. There, you’re a good guy, or a bad guy, or you’re evil, or you’re crazy, or you’re retarded, or you’re cracked, or else you’re altogether worthless. Those uncourageous sheeple with no tribe will have to watch from the sidelines as the great battle over our civilization is waged without their knowledge or consent. If you’ve been AGI-pilled, it takes little effort to convince you that the labs, or fighting the labs, or covering the labs, are the only things that matter.’

How to Increase America’s AI Lead Over China (Institute for Progress). Good report with concrete and immediately doable proposals. “The two most important interventions are: (1) For BIS: Create a new end-use control to restrict China’s remote access to training clusters abroad — China’s largest and fastest-growing source of frontier-scale compute. (2) For DOJ/FTC: Create a narrow safe harbor to allow US companies to coordinate on countering Chinese adversarial distillation. Both interventions (and all the others we discuss in the report) are things the federal government could do today.”

BAD READS

As lame-duck battle over chips heats up, OpenAI pulls back (Politico). “OpenAI has changed its tune on China. Nvidia is a big winner.” Booo.

The Excruciating Delight That Is Modern Day Apple-Picking (Wall Street Journal). Pro-tip: You’re not going to find a real rural agricultural experience within a convenient drive of a massive modern metropolis. You can go to rural America if you want that. Or you can truck with everyone else from Park Slope out to some Potemkin orchard “experience.” But it seems odd to be surprised by, or complain about, the difference between the two.

WILL THERE BE ENOUGH JOBS FOR REPORTERS COVERING LABOR SHORTAGES?

Breathless reporting on how immigration enforcement reduces the pool of easily exploitable labor always seems to stop short of asking the desperate employers, “so, um, you’re saying that you were knowingly operating your business illegally this whole time?” But the Wall Street Journal delivers a modern classic of the genre here: The Immigration Crackdown Is Making It Much Harder to Build Houses.

The summer surge in federal immigration raids is hitting the housing market, pushing up labor costs and freezing projects.

Nearly two-thirds of builders said immigration enforcement is affecting their labor force, up from 23% in March and 13% a year ago, according to a September John Burns Research & Consulting survey.

“We’re almost dead in the water because our workforce is gone,” said Scott Brannock, president of Jacksonville-based Tidewater Homes and the Northeast Florida Builders Association. “We have national builders who are missing projections, losing hundreds of thousands of dollars because they have slabs sitting on the ground and no one to frame.

I have a follow-up for Mr. Brannock…

And even if contractors are able to find workers, the labor shortage means they have to pay them significantly more. Brannock, the Jacksonville builder, said local framers’ wages used to work out to around $20 an hour. Now, that is up to $40 to $45 an hour. For the average 2,500-square-foot house, framing labor, which used to cost $10,000, now runs builders $25,000 to $28,000, he said.

Too bad those framers aren’t white-collar professionals, then they could get a feature written about how their industry is booming, with high demand driving rapid increases in pay. Sorry guys, maybe stop building houses and start running social media campaigns or something.

Builders and subcontractors say it will be costly and time-consuming to replace workers like Velazquez with U.S. citizens. “There’s no one lining up to do a lot of these jobs,” said Josh Putnal, the owner of a siding-and-soffit subcontractor in Jacksonville.

There’s no one lining up in the parking lot at Home Depot, I think he means. See, thing is, in a healthy labor market, there’s no line of people waiting to take a job you might deign to offer. Maybe Mr. Brannock could organize a group of builders to line up in the parking lot at the Northeast Florida Builders Association and framers can swing by and pick up whoever is offering the best work.

Share

Meanwhile, while fewer illegal immigrants are available to frame houses for $20 per hour, entrepreneurs are, wait for it, finding more productive ways to build houses. Capitalism! I don’t usually promote corporate press releases, but I’ll gladly copy-paste one written with this kind of style: “D.R. Horton is not waiting for lower mortgage rates, stronger consumer demand or relief from persistent construction labor and cost pressures to make ongoing investments and commitments to operational improvement. Instead, the Arlington, Texas-based homebuilding giant is extending a decade-plus commitment to construction and operational innovation into a new frontier: artificial intelligence that performs physical work.”

• Read more about Promise Robotics, the company partnering with D.R. Horton, in this profile: Canada’s housing supply is in crisis. Can robots help? (BetaKit)

• And here’s a fun video: Promise Robotics

Progress also continues apace at the The American Housing Corporation (American Compass podcast with co-founder Bobby Fijan here). Take a tour through Demonstration House 2.

But who will pick the crops? A robot is now harvesting iceberg lettuce at speeds comparable to human crews. And, interesting perspective on the traditional tinkering of farming someday extending to custom robotics as well. “Today farm robots are priced for large operations. Within 10 years, farmers will build their own.”

SOMEHOW, THE CHINA OVERCAPACITY STORY JUST KEEPS GROWING

Jamie Dimon:

China is tough. I don’t think they have to be a natural enemy of ours. But if you don’t have some sort of common trade barriers that are fair, it’s going to be hard to stop them.

Look at Germany. They don’t have a proper defense industrial base, but their real industrial base was extraordinary—cars, machine tools, all this equipment. That’s being attacked today by the Chinese. And their stuff is good. They’re going to lose. You can see it right in front of you, but it’s going to take a while to play out.

Jim Cramer:

Right now I am shocked that the EU isn’t just totally shutting down China with what will be a $1.2 trillion surplus given that it has become an export behemoth on the backs of the workers in the EU.

After Welcoming China’s Electric Vehicles, This Country Is Paying the Price (New York Times):

Then the Chinese automakers arrived.

Today, they control about 85 percent of Thailand’s electric vehicle market, up from almost zero four years ago. Japanese automakers, slow to embrace the technology, have struggled. In 2024 and 2025, Subaru and Suzuki shut down their Thai plants, while Nissan and Honda have scaled back production.

Several Thai auto-parts suppliers that depended on Japanese manufacturers went bankrupt, threatening a supply chain that employs about 700,000 workers.

“It was much faster than anything we had expected,” said Supavud Saicheua, chairman of the National Economic and Social Development Council, the central economic planning agency in Thailand.

“We didn’t think of the full picture,” he added. “The impact on Thailand has been much more adverse than we had thought.”

Michael Dunne highlights staggering data in our own hemisphere: “Chinese cars are pouring into the Americas south of the United States. The numbers are staggering. Chinese share of new car sales in 2026 – Venezuela: 51%; Peru: 39%; Chile: 33%; Mexico: 21%; Brazil: 17%; Argentina: 12%.” And, he notes, “Thailand, Mexico, Brazil, Europe all taking a similar tack vis a vis Chinese car imports.”

MORE PROBLEMS WITH CHINA

Japan ‘months’ from running out of critical rare earth as China squeezes supply (Financial Times). “Tokyo asks US to help convince Beijing to ease chokehold on yttrium and avert manufacturing shutdown.”

Volkswagen bet on Xpeng to save its China business. It’s not going to plan (Reuters)

“China represents the challenge at the heart of Volkswagen’s global ‌crisis: A market that once contributed nearly 50% of group profits now accounts for about 10%. That stunning reversal has forced the company into the biggest restructuring in its 89-year history.”

Stunning! Who could have guessed. Not Jensen Huang, who says of the CCP, “They also publicly say, and rightfully I believe they believe this, that they want China to be an open market. They want to attract foreign investment. They want companies to come to China and compete in the marketplace, and I believe that. The Wall Street Journal should just pre-write the obit for Nvidia’s China business so it’s ready to go when the time comes.

Can’t really say it better than Nick Phillips does here: “At root, the libertarian error is to see free trade with China as capitalism and tariffs as socialism. It’s exactly the opposite. Importing Chinese goods means importing their subsidies, their currency manipulation, and their industrial policy, letting these distortions determine prices in our country. Tariffs preserve our capitalist system by ensuring that prices reflect free competition between firms rather than Beijing’s decision to subsidize a strategic industry. The real socialists are the ones who want a socialist state to determine who wins and who loses in the American economy.”

But, I can say it more succinctly: Free Trade, Free Markets, Choose One.

THANKFULLY, THE UNITED STATES IS CHOOSING FREE MARKETS…

…even if that means escalating economic conflict.

Peter Harrell: “Interesting US sanctions out this morning against a Chinese startup accelerator (sort of like a Chinese Y Combinator), over IP theft. Signal that despite Trump-Xi summitry and the trade truce, enforcement action against specific harmful Chinese activities continues.”

And the Treasury Department signals its intent to tighten outbound investment restrictions with a new notice of proposed rulemaking: Outbound Investment Security Program Regulations. Bill Bishop comments, “Likely lots of heartburn for some VCs and Pharma firms tonight. Surprised the lobbyists were not more successful.” Chris McGuire has the details.

For its part, China Slaps Export Curbs on More Drones and Industrial Machinery (Bloomberg). “China is imposing export controls on more drones and machinery, as the world’s second-biggest economy flexes its industrial muscles. The measures announced by the Ministry of Commerce Monday will take effect from Nov 18. They expand curbs to include new types of drones — plus parts and technologies — as well as components of dredgers including mud pumps and cutterheads. Also added to the list are some types of tunnel boring machines, which hadn’t previously been subject to export controls.”

As Eurasia Group’s Gerard DiPippo points out: “Those advocating for Chinese FDI into the US on the grounds that it will allow more tech transfer into the US should pay closer attention to China’s export controls. Beijing won’t let that happen for important technologies, even if Washington were interested.”

…AND SO WHILE THE REST OF THE WORLD COPES WITH CHINESE-INDUCED DEINDUSTRIALIZING, WE ARE DOING THE OPPOSITE

Check out IndustriousAF, an organization at the intersection of venture capital and workforce development. “The founders we work with say their tightest constraint is trained talent. There are not enough pathways (like apprenticeships) connecting people to these careers. We are building them, starting on the shop floor.” They’ve just released a valuable tool called Promised vs. Produced, designed to provide quarterly tracking of investment commitments coming in from the loading docks and new production rolling off the assembly line.

• Co-founders Ashwin Lalendran and Brent Parton join me on this week’s American Compass Podcast.

Welcome back, Defense Policy Board, now chaired by the great Bob Lighthizer. Politico:

The revived Defense Policy Board will meet today at the Pentagon for the first time under its new chair, former U.S. Trade Representative Robert Lighthizer. The agenda for the closed-door, two-day meeting has a strong trade flavor as participants explore the defense implications of U.S. trade and economic policy.

The Defense Policy Board has historically not focused on trade,” Jeannette Chu, vice president for national security policy at the National Foreign Trade Council, told Morning Trade, adding that the meeting’s agenda reflects the administration’s economic security priorities as laid out in the National Security Strategy. That “includes seeking balanced trade, secure access to critical supply chains and materials and reindustrialization.”

Economic security is important to national security, imagine that.

JPMorganChase has begun doing the actual investment part of investment banking.

• Robot factories and hypersonic missiles: JPMorgan Chase’s first $5 billion of defense investments (CNBC).

• Jamie Dimon’s National-Security Pledge Finances $230 Billion in First Year (Wall Street Journal).

More good stories.

• Major rare earths processing plant to be built in New York (Politico). “The Pentagon-backed facility in Rochester by Phoenix Tailings would be among the world’s largest rare earths processing facilities outside China.”

• Apple adds iPhone component, materials makers to its US supplier network (Manufacturing Dive). “Apple has partnered with a new U.S. supplier and expanded its alliance with another to provide critical materials and components for the iPhone Duo and iPhone 18 Pro, according to an Oct. 20 press release. Apple’s new supplier is Perryman Co., a Pennsylvania-based titanium producer. The metal is used to make the casings of many Apple products. Apple will commit up to $100 million over the next three years with Perryman, which melts, forges and rolls titanium with at least 80% recycled content for iPhone Duo, according to the release.”

And one more good weekend read, on The Family Firm That Has Never Had a Layoff in 75 Years, for those of you who have made it all the way to the end (Wall Street Journal):

Hundreds of executives have made the pilgrimage to St. Louis to try to replicate Steve Gund’s elusive feat: He’s the third-generation CEO of a family manufacturer that has averaged 18% annual growth for a decade—all without ever laying off an employee.

…

The model requires trade-offs, and a lot of discipline: Gund has never had a layoff but staffs sparingly so it can weather the leaner stretches. Employees are pushed to voice and document concerns on red cards displayed on the factory floor, putting leaders on notice to take care of problems quickly. Everyone from line workers to managers crafts a career-development plan. Yet those who don’t adapt to Gund’s high-performance culture are managed out.

OK, OK, we all know the real reason you read to the end… it’s time for:

THIS WEEK’S CANADA GOOSE!

We met former Canadian Finance Minister Chrystia Freeland a couple of weeks ago, interviewing Janet Yellen about how “it’s important for Canada and other countries not to accept this lying down and to retaliate.” But this week she joined The Ezra Klein Show for one of the more distant-from-reality conversations on record. The episode, “Trumpism Is Backfiring,” begins from Klein’s premise that:

In late August, Prime Minister Mark Carney, of Canada, walked away from trade talks with the Trump administration. He did so knowing that the retaliation could be ruinous for the Canadian economy.

But it’s also ruinous and revealing about the shambles of Donald Trump’s foreign policy — how what Trump is doing is not getting America what Trump wanted. I mean, Trump wanted Canada to be the 51st state. Instead, it might become an associate member of the European Union.

Trump wanted to weaken China in the global sphere. Now Carney and Canada are negotiating deals and agreements with all manner of other countries, including China, in an effort to diversify away from America.

Canada’s actions are “ruinous” for Trump’s foreign policy because he actually wanted it to become the 51st state and now it’s going to be an EU member? China has not been weakened because… Canada wants to negotiate with it? What a peculiar weighting of priorities, giving so little value to successful U.S. deals concluded with every other ally that a single tantrum from Canada earns a grade of “ruinous” failure overall. The actual conversation is about as helpful as you’d expect from one that starts there. No, you won’t learn from Ms. Freeland why Canada walked away or how joining the EU would better protect its “sovereignty.” But you will learn:

It even got to a point where Cecilia Malmström, a wonderful Swedish liberal, was the E.U. trade commissioner. She was dealing with the U.S. I was, too. We would text each other and talk to each other, and we developed this shorthand where, if you said: I am in Mordor — that meant: I’m in Washington. Cecilia once sent me a text saying: Gandalf is going to Mordor next week.

Obviously, to me, what that meant was that Angela Merkel was going to Washington. In the shorthand, the elves were Europeans. Hobbits were Canadian.

Truly, Andrea Merkel was the Gandalf of her time…

Hard to top that, but I did appreciate this from The Economist as well: “One big problem is that the middle powers are a disparate bunch, with differing degrees of nostalgia for the order that Mr Carney mourns.... Such regional heavyweights as Brazil, South Africa or India are not sure who appointed Canada—a blandly rich vanilla milkshake of a country—to lead a new post-American world order.” An editor should surely have caught “blandly rich” but, otherwise, well played.

Enjoy the weekend!

Leave a comment

US-owned steel plant with a plant in Middletown OH begins mass layoffs amid Trump tariffs: In a memo sent by Cleveland-Cliffs to workers, the company explicitly linked the move to Trump’s steel tariffs on Canada, which it said had “significantly shrunk the market” for its products.

The story it linked to was from Newsweek, and carried the headline, “US-owned Canadian steel plants begin mass layoffs amid Trump tariffs.”

As the careful readers you are, you may have noticed from the headline that it is the Canadian plants laying off workers. In fact, the very same company slowing work in Canada had recently announced a $1 billion investment to expand capacity at its Middletown, Ohio plant. The tweet gets this sufficiently mangled that an unsuspecting, ideologically driven pundit might read it and think the story was a chance to dunk on tariffs, when in fact it is a story about tariffs working the way they are supposed to. It almost seems like a clever ploy by someone who wanted to highlight a tariff success and expose the shallowness of the opposition…

Well, friends, The Dispatch’s Jonah Goldberg is not such a careful reader. He eagerly hammered his “retweet” button for the story, adding the incisive commentary: “Maybe the tariffs were stupid all along?” Oops. Marc Short, chairman of Mike Pence’s Advancing American Freedom, went with, “Battleground states throughout the heartland feeling the pain of irrational trade policy.”

As men of strong intellectual integrity, I presume both will maintain their commitment to this story as an important one worth highlighting, and using to draw conclusions about the effectiveness of tariffs. At the time of this writing, they have not yet corrected the record and acknowledged the positive result, but that will surely come soon.

Bonus Gosling of the Week: Radio host Erick Erickson showed impressive followership in retweeting both the original story and the Goldberg dunk off the back rim.

GOOD READS FOR YOUR WEEKEND

What a Year of Free Money Meant: Softer Diapers, Clean Laundry, a Visit to Six Flags (New York Times). Yes, basic income experiments consistently fail, public opinion is strongly against, and even past advocates are acknowledging it’s a bad idea. But hey, there’s always money for more basic income experiments. Here, the Times profiles three recipients of a one-year experiment in California. As I wrote long ago, a time-limited experiment says nothing about the long-term effects of a permanent entitlement. The experimenters and journalists continue to struggle with this concept, but it was good to see that one of the three profiled recipients understood intuitively: “One year of payments was ‘just enough time not to get comfortable,’ she said, and the urgency motivated her.”

Silicon Valley’s Dream City Has Crashed Into Small-Town Politics (Wall Street Journal). I’m not one to take the side of wealthy venture capitalists trying to buy their way out of the ordinary democratic process but, I have to be honest, this story makes a pretty strong case that the local political process deserves whatever it gets.

The Welfare State Is Crushing Britain (Wall Street Journal). The UK is in trouble.

What Evangelicals Can Teach Us About Organizing (Eric Blanc, Labor Politics). A really great look at what it takes to build community in modern America, and what institutions associated with opposite sides of the political spectrum have in common and can learn from one another.

TAXES & TARIFFS

Kim Clausing and I disagree on tariffs and have enjoyed debating each other a number of times, but we agree on this: There is a smarter way to tax the rich (Financial Times). Tax capital, folks. This statistic, especially, fascinated me: “Despite having the world’s most successful public companies, the US raises much less from corporate tax (about 2 per cent of GDP less) than other rich countries.”

Arnold Ventures chairman John Arnold makes a strong case that, as a matter of fiscal policy, tariffs are here to stay and businesses should plan accordingly: “Status quo is the strongest force in politics. My expectation is that, despite all the handwringing, the eventual tariff regime will look similar to today’s. That is a 10-15% baseline tariff on most imports, higher rates on countries with blatantly unfair trade practices and/or geopolitical rivals, and industry specific adders on those deemed strategic to national security or economic interests.Most businesses prioritize certainty so they can make investment decisions, forecast expenses, and have confidence in supply chains. That certainty is probably more important than the rates.”

Also on X, Michael Lucci makes a similar point: “Trump’s Transatlantic and trade policies are here to stay.”

I’d suggest this is right for three reasons: First, we need the revenue. Second, tariffs create pro-tariff constituencies that will fight to keep them. Third, the tariff deals that Trump has struck are, by all accounts, advantageous to the United States. Ripping them up out of spite, or on principle, will be difficult to defend.

WOMP WOMP

Marshall Cohen (CNN): “New Reuters poll is brutal for prediction markets.” Score another one for the common sense of the American people, who by a 75% to 8% margin say prediction sites are gambling.

The White House may be staying away, but The FTC Is Beginning to Probe the Sports Gambling Industry (The Washington Sun).

And it turns out common-law liability can work. Buried under lawsuits, Character.ai Files For Bankruptcy—Disney Bids $20 Million After Copyright Dispute (Forbes).

A SURPRISING PRO-FINANCIALIZATION MOMENT

Bloomberg reports: KKR Bans Non-Competes for Lower-Paid US Portfolio Company Staff. Good for them!

Ok, enough of that. Back to our ridiculous story from the world of finance: To Get This Job at McKinsey, You’ll Need to Survive a Debate With AI First (Wall Street Journal):

Though it is all a simulation, the approximately 10-minute conversation with the AI will take place in McKinsey’s very real offices, with partners or interview assessors in the room observing how the candidates do.

…

“The things I’m paying attention to are: Hey, did you hear what they said that was important? Did you act on that? Did you blow through it? Did you come with your agenda and you’re, like, ‘I’m gonna steamroll this answer,’” Zafar said. “What we’re looking for is how do you respond to changing stimuli?”

McKinsey is testing the avatar with undergraduates applying for business-analyst jobs in some North American offices this fall, and hundreds of candidates are likely to participate. If successful, the firm expects to use it for other roles next year.

To clarify, McKinsey is not “testing the avatar with undergraduates,” it is testing the avatar on undergraduates. There’s a difference. This also seems to be one of the most painfully unnecessary overuses of AI out there. One can picture the meeting where the recruiting team assigned to incorporate AI had to come up with it. Just going out on a limb, but maybe the human interviewer could assess “how do you respond to changing stimuli?” through actual human interaction with the human candidate?

Share

THE OVERCAPACITY STORY EXPLODES

China’s trade surplus this past month went entirely out of control. China’s Exports Soar, Putting Its Trade Surplus on Track for a Record, reports the New York Times, noting that “China’s exports grew last month at the fastest pace in almost any month since the end of the global financial crisis.”

What did this mean for Europe? The South China Morning Post’s Finbarr Bermingham had the numbers: “China’s trade surplus with Germany grew 201.7% in Sept alone (vs Sept 2025); with EU up 52.3%; with France up 251.8%.”

And the Europeans are finally getting serious! More from Bermingham:

EU leaders to ‘urgently’ call for new trade weapons to tackle China shock.

After hybrid car deal, EU needs to rebalance China trade in other sectors, Dombrovskis says.

“A deal halving Chinese hybrid car imports into Europe will have to be followed by the rebalancing of trade in other sectors and better access to the Chinese market for the EU, European Economic Commissioner Valdis Dombrovskis said ‌on Wednesday.”

And then looking back on the week: “Unanimity in the room that the EU needs to cap Chinese exports across sectors and president of the European Commission presenting a kill switch to instantly cut China from the market that capitals love. Through the looking glass moment for those who have followed this stuff for years. Actions speak louder than words, but I am pretty amazed by how quickly the mood has changed. Largely driven by a shift in Berlin. Many thought for years that nothing would change unless Germany changed. Well, here we are…”

The Brookings Institution’s Robin Brooks shows how this looks on the Chinese side in How China Is Reinventing Its Export Machine, with great charts on how China’s imbalances with other countries are exploding.

Not all other countries, though. There’s this one country that decided enormous imbalances were unhealthy and unsustainable and took action. In that country, the imbalance with China has declined. Hey, that’s us (good chart)! And it’s a reminder that the counterfactual without Trump’s trade policy is not business as usual but the same kind of sharper pain being felt elsewhere. That we have not only held the line but actually made progress is remarkable.

MORE CHIPS, PLEASE

Semiconductor fabs lead the reindustrialization story this week.

• Japan to fund $21B deal to expand chip production in New York (The Hill)

• TSMC Weighs Texas Expansion, Holds Talks on Musk’s Terafab (Wall Street Journal)

Which brings us to your regular reminder that none of this would be happening without the aggressive industrial policy adopted to drive domestic investment in chip production, which is now compounding on itself.

But this isn’t good: ASML’s chip equipment sales to China soar 109% despite US export curb push (SCMP). “The Dutch firm expects China to account for 20 per cent of its total sales this year, even as the U.S. pushes for tighter export restrictions.” The U.S. is right to push for tighter export restrictions, but it’s hard to make that sale to allies when our own government is trying to sell our best chip technology to China at the same time. Which is why the export controls in the NDAA are so important. American Compass’s Chris Griswold published a very good policy brief on that yesterday: Strengthening America’s AI Chip Export Controls.

OK, OK, YOUR WEEKLY CANADA GOOSE

Congratulations to Canada on “Geely Auto Group Mainstream Brand Officially Announces Entry into the Canadian Market.” Probably puts their associate EU membership at risk, but worth it for a closer strategic partnership with China.

Speaking of which, this is fascinating: China’s Unloading of US Bonds Gets Fresh Look as Skeptics Grow (Bloomberg). It seems China may not have been reducing its holdings of U.S. Treasuries, instead just parking them at Canadian banks where they get recorded as Canadian holdings:

Puzzled, Liberman — a mortgage-debt specialist — started asking around. The answer, to his surprise, was always the same. “The smartest people on the Street said, ‘It’s not Canada. It’s the other Canada,’” he said. And by “the other Canada,” he explained, “they meant China.”

“China, the Other Canada.” This seems unwise. I do hope the Canadians reconsider.

Enjoy the weekend!

Leave a comment

That’s a remarkable statement for at least a couple of reasons. One problem, of course, is that Yellen appears more concerned with the well-being of other countries and their citizens, and with the long-deceased abstraction of the rules-based international economy, than with America’s own interests.

The other, not unrelated problem is that she has her story backward. What “other countries” is she thinking of? Everyone else was able to reach agreement with the United States. Canada’s insistence on having the option to build closer trade ties with China prompted it to walk away from negotiations, sparking the current trade conflict. So is Yellen saying other countries should not have reached agreements with her country? That Canada is right to insist on getting closer to China?

Or is the real audience for all this in Davos? In her last year as Treasury Secretary, Yellen testified before Congress that, “we gain and China gains from trade and investment that is as open as possible.” She traveled to China and delivered a speech in Guangzhou, which she celebrated as “the top destination for foreign investment in China” and called “a fitting place for me to emphasize the strong economic ties between the United States and China, and the benefits these ties can bring for both the U.S. and Chinese economies.” Fine sentiments for Carneyland, but not the modern USA.

WORTH YOUR ATTENTION THIS WEEKEND

Secretary of State Marco Rubio gave a phenomenal speech in Athens on the Western intellectual and political tradition, which you should read in full. And somebody deserves a raise… A++ work from the advance team on this staging:

Meanwhile, back in Washington, Vice President JD Vance and Secretary of Labor Keith Sonderling were lowering the boom on H-1B abuse by Indian outsourcing firms and, more notably, Microsoft and Adobe. “The Department of Labor is taking historic action by shutting down the pipeline of systemic fraud, the fraud that has flooded our country with foreign labor at the expense of American workers,” said Sonderling.

• Bonus link: Commonplace was all over this a week ago, with an in-depth look at the case against the first DOL target, Cognizant.

How Everything Became Gambling (New York Times). “We are living through a kind of postpandemic gamified speculative-trading apocalypse of which traditional gambling is only one horseman. There’s also crypto, now an enormous industry still searching for a nonspeculative use; stock trading apps like Robinhood, which popularized high-risk, leveraged options trading among retail investors; and, most recently, prediction markets, which saw $60 billion in trading volume last year. Soon, it won’t make much sense to distinguish among these categories, as the apps converge on a multi-offering model featuring some combination of sportsbook, prediction market, options trading and crypto, if not all of the above.”

• Bonus contrast: San Antonio Spurs star Victor Wembanyama says of becoming a spokesman for gambling and prediction markets, “I will never do that. Honestly, I think it’s very sad to see some players promote it.” Meanwhile, LeBron James, who has earned more than $500 million playing basketball, just signed an endorsement deal with Polymarket for about four times what he’ll earn on the court this year.

Trump Accounts’ Extraordinary Expansion Puts Individual Stocks Into Kids’ Holdings (Wall Street Journal). A recurring theme here, addressed most recently in Thanks, Sam, But We Already Have a Stake in OpenAI, is that distributing capital to labor is a poor substitute for ensuring a fair distribution of income between capital and labor. When the “ownership society” is a pretext for focusing everyone’s attention on the stock market, while their fate remains tied to their paycheck, it ceases to advance the ordinary citizen’s interests.

WORTH A CHUCKLE

This week’s award for worst effort by a Wall Street Journal columnist goes to Allysia Finley for

Hurray for Higher Mortgage Rates. Finley offers two arguments for high interest rates benefiting homebuyers. First:

The silver lining for home buyers is that higher mortgage rates suppress demand, especially by investors. Higher interest rates combined with elevated home prices, plus slow growth in rents, make housing a less attractive investment.

In other words, high interest rates make buying a home so unattractive that investors will stop trying, at which point home prices will fall and you can get one cheap! But don’t I face the same price as the investors and likewise find a purchase unattractive? And if prices start falling, won’t investors notice at the same time I do? Shhh, too many questions. Second:

The Trump team deserves credit, however, for curbing government mortgage-relief programs that repeatedly waived payments for delinquent borrowers. Foreclosures rose as a result, by 47% over the past year for mortgages backed by the Federal Housing Administration. This isn’t a cause for panic. Foreclosures, suppressed by the Biden team, have merely returned to pre-pandemic levels. This has freed up more homes for buyers and returned demand and supply to a healthier equilibrium. “The ample supply of homes for sale on the market is giving homebuyers better opportunities to negotiate,” the NAR reports.

It’s hard to even know what this argument is. On one hand, did the rise in foreclosures have anything to do with interest rates? If not, hard to say it’s a benefit from higher interest rates. On the other hand, if the argument is that higher interest rates did make adjustable-rate mortgages much more expensive and drive foreclosure rates much higher, that’s… not good. “Higher rates are pricing people out of their homes, giving you the opportunity to buy them” might not quite fly as an affordability message.

BUT PROGRESS ON FINANCIALIZATION IS HAPPENING

This week, the U.S. Treasury Department issued the first penalty for violation of restrictions on outbound investment to China. Also this week, Trump Throws His Weight Behind Credit-Card Legislation Most Feared by Banks (Wall Street Journal). Careful readers will recall last week’s headline item in this newsletter, Treasury (Man) Bites Hedge Fund (Dog), on aggressive action by the administration against tax-avoidance shenanigans at hedge funds. And then there’s the bipartisan housing bill’s inclusion at President Trump’s insistence of a prohibition on institutional-investor-owned housing atop an executive order on the same issue, and another executive order restricting stock buybacks by defense contractors.

The war on financialization is still at its early stages. But the theory of the case, that financial profits unmoored from productive purpose are not a good thing, is at this point well accepted and the real wins against powerful interests are starting to pile up.

COMPULSORY ARTIFICIAL INTELLIGENCE SEGMENT

This was a lovely essay from Walter Isaacson, framing the debate over AI’s likely effect on labor in especially accessible terms: Ada Lovelace Already Answered the Big Questions About A.I. (New York Times). He writes:

On the other side is the Lovelace camp, which holds that there will always be a role for human creativity, intention, agency and empathy. Human creativity involves values, aesthetic judgments, emotions, personal consciousness and a moral sense. … The greatest gains, according to this camp, will not come from machines working alone, but from a symbiosis that tightly connects machine processing power with human creativity in a mutually beneficial way.

BACK IN THE WORLD OF DOLLARS AND CENTS, Spending on AI Is Becoming Almost Impossible for Businesses to Budget (Wall Street Journal). The economics of the technology, and the business models of the labs, remain something of a mystery. Perhaps the next $200 billion of capex will begin to clarify matters.

THE UBI DUMPSTERFIRE CONTINUES TO BURN. Jacob Coxon, the former Anthropic employee who helped trigger the current wave of AI fear with his viral announcement that he was quitting, went on The Daily Show with Jon Stewart to discuss the technology. It did not go well. “I heard you talking about jobs and I think there will be no jobs. There won’t be jobs in this world. This is the world that’s being envisioned by the people building the technology.”

Stewart pushes him on whether a world without jobs would really be such a good thing, and the interview goes quickly off the rails. People best at programming, we are reminded again, tend not to be best at grasping and reasoning about the human condition. As Coxon acknowledged afterward, “I’m far less able to opine on this than the short-term dangers of superintelligence.” An evergreen caveat for efforts from the AI labs to discuss things other than AI models.

• Bonus link: Chris Griswold wrote for Commonplace yesterday on the consistent polling result that people do not like proposals to just give everyone money. That applies to UBI, and it applies to the president’s latest campaign gambits.

GIVING PEOPLE MONEY TO REINDUSTRIALIZE, THOUGH…

Lots of good investment news to report:

TSMC Mulls Multibillion-Dollar Texas Campus for More AI Chips (Bloomberg). The tax credit for new fabs “was a cornerstone of former president Joe Biden’s 2022 Chips Act, and it was increased to 35% last year. While an extension has yet to find a viable path to passage this year, Senator Mike Crapo, an Idaho Republican, and Senator Ron Wyden, an Oregon Democrat, have said they are committed to it.”

Anduril Plans a $3.7 Billion Baltimore Shipyard for Virginia-Class Submarines (The Washington Sun). Note the timeline: “Anduril expects the shipyard, dubbed Arsenal-2, to begin hiring in 2029 and launch operations in 2030.” Two to three years from investment commitment to job creation, another year to output. Keep that in mind when assessing, oh, say, the success of tariffs imposed 18 months ago.

Speaking of tariffs imposed 18 months ago, the high reading for the August trade deficit had the usual suspects gleefully declaring tariffs a failure. But something looked odd in the data; the rate of increase was hard to square with actual economic trends and reporting. Unless, that is, you consider the AI buildout. As everyone now knows, AI requires a lot of data centers, and data centers require a lot of chips, computers, and telecom equipment. Those industries are ones that the U.S. offshored entirely, and that take a long time to bring back even as we try to do so quickly (see, e.g., CHIPS Act item above).

So the AI buildout represents an exogenous shock to the trade deficit, unrelated to the effect tariffs might be having. How does the picture look if we separate out the imports and exports of those particular AI hardware categories? I made just such a picture:

The result is pretty stunning. Even with the AI hardware (the red line), the trade deficit has closed in recent months to a 12-month average as low as any time since the year 2000. But look at the blue line, which excludes AI hardware. The deficit in trade across all other categories of goods has fallen continuously since Liberation Day, by half overall, to its lowest level on record (going back to 1994). That’s kind of incredible.

To be clear, the point is not to suggest that AI hardware somehow “doesn’t count.” For purposes of in fact closing the trade deficit, we need to deal with AI hardware too, and this data underscores just how costly it has been to abandon technological leadership in these areas. But if we want to know whether tariffs are working, a sudden explosion in demand for goods that can only be imported while we race to rebuild our own production capacity only obscures the answer. Focusing on those areas that were not so disrupted gives us a better picture of what policy is doing, and that picture is an encouraging one.

Back to the encouraging specifics, like Bayer to invest $2.2B in Ohio pharmaceutical facility (Manufacturing Dive). And the Office of Strategic Capital, whose announcements are coming fast and furious:

• Will Cooper: “Today, the @DeptofWar’s Office of Strategic Capital announced a $1.5 billion conditional loan commitment to Wolfspeed to help strengthen the U.S. supply chain for silicon carbide (SiC), gallium nitride (GaN), and other wide bandgap semiconductor materials.”

• Will Cooper: “The @DeptofWar’s Office of Strategic Capital (OSC) announced today a $150 million conditional loan commitment to @PsiQuantum to enhance the company’s advanced manufacturing and prototyping capabilities in the United States.”

Syringes provide a good case study. MedTech Dive reports that BD strikes supply chain pact with Trump administration. This will be a good test of the administration’s approach to encourage reshoring of medical supply chains, which establishes a stiff Section 232 tariff but offers short-term relief to firms that can demonstrate they are actively working to reshore production. From the report: “BD said Tuesday it has struck a partnership with the Trump administration to expand domestic manufacturing and strengthen the supply chain for medical consumables. BD, a maker of syringes, needles, infusion pumps and other medical products, said it will invest a total of $19 billion in the U.S. over several years. The pact includes investments in U.S. manufacturing, innovation and end-to-end production capabilities, the company said. The agreement provides relief from any future tariffs on BD products under Section 232, subject to BD achieving undisclosed milestones.”

This reminds me of HBS professor Willy Shih’s analysis in the Financial Times of exactly the same product from exactly the same supplier. He concludes:

But, for a matter of just pennies per syringe, the US seems to be going down a path towards losing its last large-scale domestic syringe manufacturing capacity. I recently received my Covid booster and flu shots, and I would have happily paid a nickel or a dime more for domestically produced syringes to make sure I could get them in the next pandemic.

But Professor Shih’s willingness to pay a nickel will accomplish nothing. Secretary Yellen’s efforts to ask the Chinese nicely will accomplish nothing. Tariffs accomplish a lot.

Share

WHAT ELSE IS HAPPENING WITH CHINA?

Former CEA chair Jason Furman highlights a chart showing: “China goods imports as a share of total U.S. imports. Note the share is now below what it was prior to PNTR.” Another remarkable data point. People often note that a significant share of those imports from China are still coming from China but pass through some other country en route to the U.S., affecting the data. But Furman considers that too, and concludes that, “a bit more than half of the decline since 2016 appears to be genuine.”

Chip-making equipment remains an issue. Nicholas Brown has the definitive paper on the way China is continuing to access and make use of advanced chip-making equipment, which threatens to erode one of the few U.S. advantages in manufacturing.

The FCC strikes again, this time blocking the use of Chinese test labs to certify electronics for sale in the United States. Chris McGuire has the definitive chart, showing that the U.S. held a market-leading 30% share of testing 20 years ago while China had less than 10%. Today, China stands at 82% and the U.S. below 4%. Raise your hand if you think this is because China has a comparative advantage in testing electronics. Anyone? No? Well, good news. Thanks to the FCC, that share will fall toward zero in the next couple of years as testing must be done elsewhere for products that enter the U.S. market.

And sorry again, Secretary Yellen: Thailand at ‘last paragraph’ of US trade agreement, PM says (Reuters). “The United States ​is ⁠Thailand’s largest export market, accounting for 24% of the southeast Asian country’s ⁠total ​exports so far this ​year.” Look at where Thailand is on a map, and then consider that it sells more to the U.S. than to China. Maybe we’re not such a bad trading partner after all!

YOUR BAD TWEET OF THE WEEK IS THIS POORLY TIMED SHOT…

CHASER!

The chasing continues, with Brad Setser: “We will see if it works, but kudos to Europe (and especially France and Germany) for trying to learn from the US example in 2025.” And Peter Harrell: “...would mark the most significant change to EU-China policy in decades.” And Nick: “Our global tariffs prevented Europe from offloading the pressure from diverted Chinese exports by simply increasing exports to the US. Without global tariffs, we remain consumer of last resort and balance Europe’s imbalance.”

It seems like maybe the Liberation Day regime has in fact been supremely successful in turning the tide against Chinese overcapacity. No, the problem is not yet solved, but the trajectory seems about as promising as one could hope. Will Canada be able to absorb the entire Chinese surplus itself? Time will tell…

Even the UK has gone this week from How Britain Learned to Love Chinese Cars—Especially a Look-Alike Range Rover: The Jaecoo 7, made by China’s Chery, was the U.K.’s bestselling vehicle in September (Wall Street Journal) to Britain set to levy tariffs on Chinese electric cars (Reuters).

In fairness to Secretary Yellen, she too spoke about this issue, on her visit to Guangzhou:

I’m especially concerned about overcapacity, which members of the Chamber identified as a concern in the Chamber’s recent survey as well. Overcapacity isn’t a new problem, but it has intensified, and we’re seeing emerging risks in new sectors. Specifically, direct and indirect government support is currently leading to production capacity that significantly exceeds China’s domestic demand, as well as what the global market can bear.

And she too had a plan: “This will be a key topic in discussions with counterparts in the coming days.” Did those discussions work as well as the tariffs she wants countries to retaliate against? That hardly seems the point, I suppose, when there are norms to uphold and views to exchange.

AND YOUR CANADA GOOSE OF THE WEEK IS…

Julie Dabrusin, Minister of the Environment, Climate Change and Nature, who filmed a video of herself in China, where she went “to deepen our cooperation to lower global emissions.”

Good luck to you, Ms. Dabrusin.

And to everyone else, enjoy the weekend!

Leave a comment

Yesterday’s PMIs for September were likewise strong:

• S&P Global: “Production and new orders both increase as domestic demand strengthens; workforce numbers expanded to greatest degree in over five years.”

• Institute for Supply Management: “New Orders Growing; Production Growing; Employment Growing.”

ICYMI: Last week’s newsletter, Baghdad Bobs of American Industry, discussed these PMI trends and the folks who continue to proclaim the demise of American manufacturing regardless of the data. Unfortunately, the examples offered such a dense set of links that spam filters were triggered. So if you didn’t see it then, read it now, and remind your inbox that this fine weekly product is not spam!

LEADING THE WEEK: TREASURY (MAN) BITES HEDGE FUND (DOG)

On Monday, the U.S. Treasury Department announced it would begin aggressive scrutiny of various tax-avoidance maneuvers that Wall Street has cooked up in recent years. Secretary Scott Bessent: “Treasury is serious about cracking down on transactions designed to dodge taxes or exploit our federal tax code.” Suffice to say, a Republican administration placing Wall Street in the crosshairs is an uncommon and very encouraging sign.

It also underscores how far over the line the money managers have gone. The issue was thrust into the spotlight over the summer when Treasury first began making noise on the issue and Bloomberg published a feature story on the nearly $200 billion pouring into “tax-aware long-short” funds that in some cases help the rich avoid taxes even on their wage income.

The leading practitioner, AQR, declares proudly on its website that “taxes can create a gap between how your investments perform and how your wealth grows. Our tax-aware capabilities are designed to help close this gap.” Quite the euphemism!

See, taxes create a gap between your earnings and your growing wealth because some share of your earnings has to go toward supporting your nation and providing public goods to you and your fellow citizens. If everyone tries to “close this gap,” the country falls apart. I wrote more about this in my Financial Times column this week: Do US lawmakers finally have capital in the crosshairs?

A BAD ANALYSIS ROUND-UP

Hard to keep up with it all, but some favorites from the past week or two:

When is a work requirement not a work requirement? From the Cato Institute, The New Right Discovers Welfare Without Work Requirements. Cato characterizes the Trump administration’s draft proposal to open child care subsidies to families with a stay-at-home parent as “welfare without work requirements” even though the benefit would only be available to families with earned income from a working parent. This framing makes sense only if one thinks of a work requirement’s premise as “every able-bodied person must be in the formal labor market” as opposed to “public support to a family should be premised on, and create incentives for, that family working to support itself.”

The fundamental libertarian error here is to treat the individual rather than the family as the benefit recipient. But if we are going to treat the individual as the recipient, why is it the working parent in one case and the stay-at-home parent in the other? Why not make it the working parent in both cases? Or the child, for that matter? The sterile libertarian mindset is simply incompatible with the way human beings live and societies function.

One might go so far as to suggest that the Cato Institute’s lament that making families with a stay-at-home-parent eligible means “taking childcare subsidies away from working parents” is pretextual, seeing as their preferred policy is “to shrink welfare programs, including childcare subsidies.”

The data is beside the point. From the Wall Street Journal editorial board:

• The Tepid Trump Economy (June 30). Growth comes in low, “last year’s tax bill and deregulation would be driving faster growth if not for Mr. Trump’s border taxes that raise costs and uncertainty for business.”

• The U.S. Economy Is Accelerating (September 30). Growth estimates revised upward! Tariffs bad anyway.

Justin Wolfers, Conservative. It’s been too long since we’ve heard from Justin Wolfers, who had a lovely post this week on why My Libertarian Friends Were Right. Whereas he never noticed this during, say, the Obama or Biden administrations, he has now discovered that “concentration of power can be abused” and that’s led him “to become more small-c conservative. The old conservative idea was that we have rules of the game that have served us well for generations. We should be slow to change them.” Welcome, Justin! We trust he will be a vocal proponent for this perspective during the next Democratic administration.

Goalposts, moved. From the American Action Forum: “It is time to stop treating the outcome of tariff policy as a hypothetical. The experiment was run in 2001 and failed.” Employment in the steel industry has declined, argues Douglas Holtz-Eakin, thus proving steel tariffs do not work. But as Nick explains:

Tariffs are the only reason why the United States still has a steel industry of any size. China’s excess capacity alone is sufficient to satisfy 100% of U.S. steel demand. If we let them, they would. Free traders frequently set the bar for tariff effectiveness at whether they triggered a “boom” in the year or two after implementation. This is ridiculous, because the point of tariffs is to trigger a structural readjustment in demand that requires investment, construction, etc. over longer time horizons. The whole point is that you’re building capacity that didn’t previously exist. If it did, you wouldn’t need tariffs.

…

For a test of whether the current round of steel tariffs can drive new investment, see e.g. Mesabi Metallic’s announcement yesterday of the largest investment in the history of American steel, which followed two other massive capital commitments (Hyundai and Nippon). Output is up across the sector, and new capacity coming online brings the price down. That’s how it’s always worked since the days of my favorite tariff “experiment,” which is the creation of the American industrial base behind a 25-40% tariff wall during the Industrial Revolution.

That’s a good segue to…

THE REINDUSTRIALIZATION MARCHES ON

Trump to Unveil Planned $15 Billion Iowa Steel Project (Wall Street Journal). “Mesabi’s proposed mill would be one of the largest in the U.S. with an initial annual production capacity of 7.5 million tons. Later additions could increase the plant’s capacity to about 10 million tons a year.”

The Journal also has a good overview of the deep hole the U.S. dug itself on critical minerals (if you’ll pardon the pun), the Trump administration’s aggressive dealmaking to begin climbing out, and why it will still take a long time to recover. See How the U.S. Is Attacking China’s Control of Critical Minerals. Meanwhile, with the U.S.-China summit in the rearview mirror, President Trump seems fed up with China continuing to squeeze the critical minerals supply chain: US slows aircraft-part exports to China as Trump seeks leverage in trade negotiations, sources say (Reuters).

And on the Journal’s op-ed page, a remarkable commentary from JPMorganChase CEO Jamie Dimon: A Plan for the Western World’s Revival:

I will focus my attention on strategic foreign economic policy. Since World War II, America has fostered economic and military relations, trading with more than 100 nations and forming more than 50 military alliances. The levers to accomplish our foreign-policy goals include trade policy, through tariffs, quotas, investment policies, regulatory barriers and other instruments. Another lever is industrial policy, which encompasses subsidized loans, tax rules, export credits, immigration policies, government investment and development finance.

Perhaps some day the Journal’s editorial board will start reading the rest of its paper.

JPMorganChase putting some money where its mouth is. “Ford Motor Co., JPMorgan Chase and the state of Michigan are establishing a $3 billion program that addresses manufacturing and supply chain challenges by providing companies with financing, workforce support and other resources to scale production” (Manufacturing Dive).

Congress, moving. IFP’s Aidan Mackenzie says, “WE HAVE A PERMITTING DEAL” and it’s a good one, making progress on transmission infrastructure, NEPA litigation, and various types of energy projects. If this gets across the finish line, following on the housing legislation from mid-year, that would be not-insignificant progress on a couple of long-stalled priorities.

NOT BOOMING: HIGHER EDUCATION

Per Gallup, Record-Low 31% Say College Education Is ‘Very Important’. That’s “four percentage points below last year’s reading, the previous low among the seven times Gallup has asked this question since 1978. As recently as 2013, more than twice as many U.S. adults (70%) said college was very important.”

Not helping matters, Cornell. The university is making headlines for other reasons this week, but its Report of the Committee on the Future of the American University is worth a look. In particular, the assessment of shortcomings in its undergraduate program focuses heavily on a failure to equip graduates with the soft skills necessary to succeed in the world. As NYU’s Jay Van Bavel summarizes the findings, “companies have a ‘jarring’ skepticism of higher ed thanks to a new generation of degree holders who lack key skills like handling uncertainty, compromising, and absorbing feedback. Faculty also report that incoming students, despite four years of undergraduate education, are ‘underdeveloped’ in these relational or interpersonal skills.”

That failure is rapidly becoming common knowledge. What’s notable about the Cornell report, though, is its conclusion that the solution is for universities to lean heavily into actively teaching those skills. On one hand, it would be a very good thing for universities to rediscover their roles as formative institutions rather than amusement park entitlements. On the other hand, the kinds of challenges the report describes are ones that are upstream of the university, in the way our public schools and communities are failing to prepare young people for adulthood at all. Making universities the site of remedial math and reading is bad enough, making them the site of remedial citizenship is unlikely to work. They should only be admitting students who can handle “the basics,” and we should keep in mind that most young people do not attend or succeed at college, which means that we have no choice but to ensure the basics are learned elsewhere.

Some better, or at least not-bad, news: A new paper from UCLA’s Robert Fairlie and Jane Wu, The Early Impacts of AI on Employment among Recent College Graduates, looks at the summer 2026 labor market and finds that, if anything, the most recent college graduates seem to have found employment especially quickly.

WHAT ELSE IS NEW IN THE WORLD OF ARTIFICIAL INTELLIGENCE?

Paying attention and paying interest. Apollo Global Management chief economist Torsten Slok warns that ordinary people using AI agents to help manage their finances may begin sweeping their savings en masse from low-interest checking accounts into higher-interest options, causing bank runs (via Andrew Curran). I’m not sure about that one. Seems like a long-winded way of saying that today’s enormous bank profits rely in part on high switching costs keeping customers in bad products. One solution to a possible run might be for banks to offer competitive interest rates on liquid deposits.

But Curran makes a larger, more important point: Widespread reliance on just one or a few AI models will lead to all sorts of weird, herd-like behaviors that are mitigated in normal life by the varying preferences and priorities of billions of human beings. I would make the point even more broadly, which is that life’s vitality and a civilization’s progress depend on interaction and conflict between different sets of values and ways of looking at the world.

The approach manifested by Anthropic, in its training of Claude on a “constitution” and a single definition of what it means to be “good,” runs the risk of overhomogenizing the approach to decision making that might govern various parts of our economy or society. Would we be better served by some sort of modified alignment training that sends numerous different versions of advanced models into the world, all with slightly different ways of thinking?

Share

Speaking of thinking about things the same way… Did Anthropic’s A.I. Really Make a Scientific Discovery on Its Own? asks the New York Times. “An expert at the University of Copenhagen said his team had been sharing its research with the company’s A.I. model, Claude, and that its new finding matched their work.” There doesn’t seem to be much evidence that the Copenhagen team’s work was directly misappropriated by the model, but the case does underscore the importance of distinguishing between AI-driven scientific breakthroughs that are very much along the lines of what scientists were already discovering and ones that portend an entirely new trajectory for our frontiers.

One group still thinking differently? Chipmakers. Lawmakers plan to cut off China from AI chips. Nvidia, AMD want Trump to intervene. Every time these companies step up their efforts to undermine the democratic process and the interests of the nation that has made their success possible, they make the case for aggressive regulation a little bit stronger. As I testified before the House Foreign Affairs Committee in January, “under our Constitution, citizens have the right to petition their government, no matter how unwise their ideas. But also under our Constitution, it is the people’s representatives, not multinational corporations, that set national policy, to ensure that it advances the national interest.”

We just have to remember that if business leaders make it exceptionally clear that market incentives are misaligned with the public interest, then the case for a light touch on the free market simply does not apply.

Somehow even worse: China’s Tencent leases 100,000 chips from Oracle to accelerate AI push (Financial Times). It’s genuinely unclear how we could possibly still be allowing Chinese firms to access U.S.-controlled data centers. My only explanation is that the idea of blocking sales of our most advanced chips but then leasing them instead is just so absurd that people assume it’s not really happening.

AS FOR OTHER TRADE WITH CHINA

Tough beat for Ford CEO Jim Farley in the “Key Points” summary on this CNBC article: Ford CEO says it’s ‘too late’ for Europe to fend off Chinese automakers, but not for U.S.

Key Points:

• Ford CEO Jim Farley said it’s “too late” for Europe to fend off an influx of Chinese automakers in the region, but the U.S. still has time to “be considerate” about its decision.

• Farley’s comments come as Ford tries to compete against Chinese automakers in Europe, while also partnering with some Chinese companies on technology and to fill plants.

We just have to remember that if business leaders make it exceptionally clear that market incentives are misaligned with the public interest, then the case for a light touch on the free market simply does not apply. (I repeat myself.)

Decision Time for Europe. EU steel exports hit by high energy costs, tariffs and China oversupply (Financial Times). “European steel exports have fallen by a fifth with production at historic lows as the industry contends with soaring energy costs, US tariffs and the knock-on impacts of vast oversupply from China.”

South China Morning Post’s Finbar Bermingham has a good primer: EU weighs sweeping new trade powers against China before make-or-break October. “The mood in Brussels is hardening and Europe’s actions in coming weeks could set the course of EU-China relations for years to come.” He also highlights a new paper from the Federation of German Industries (BDI), which argues that “even if de-risking entails costs, including in the form of counter-reactions, passivity would in the long term be economically considerably more costly and irresponsible from a security-policy perspective.”

The French are talking tough! Macron: “China today is attacking our domestic market for machine tools and motor vehicles. She already did it in chemistry. And so it is destroying our industrial base. We Europeans were naive.”

But, at the Hudson Institute, Ulrich Speck lays out his scenarios, and is not optimistic:

Scenario 1: China pretends to make concessions or makes minor concessions — the EU, led by Germany, plays along and doesn’t use its trade defense instruments. Likelihood 50%.

Scenario 2: China pretends to make concessions or makes minor concessions—the EU uses its trade defense instruments, we move towards a trade conflict. Likelihood 30%.

Scenario 3: China understands that the EU is united and serious, and makes serious concessions. Likelihood 20%.

My take is based on two assumptions: (1) Germany (Merz) is still very nervous about Chinese retaliation against German companies in China, and (2) China does not believe that the EU is a strong and united player, and it believes it has the upper hand.

As I’ve argued for a while, we cannot make this decision for the Europeans, but we do both them and ourselves a favor by putting them to the choice, and we can hope they choose well.

Already choosing well, Japan. Japanese companies exit China in record numbers (Financial Times):

A record number of Japanese companies have closed their China businesses under the triple pressure of slowing momentum in the Chinese economy, US tariffs and a diplomatic freeze between Tokyo and Beijing. As of June 2026, a total of 10,118 Japanese companies had an established presence in mainland China, according to Teikoku Databank, Japan’s largest corporate credit research firm. That figure, published on Wednesday, was the lowest number since the group began compiling the statistic in 2010. It represented a 22 per cent fall from 2024 and a 30 per cent drop from a 2012 peak for Japanese corporate presence in China.

One recalls the laments that the U.S. was pushing allies into China’s arms. But then, one recalls many things the Blob told us in recent years that proved less than prescient.

Axios gets the last word: “The bottom line: Trump-era tariffs are divisive, but the president’s case for rethinking the global trading system is proving less so.”

WHICH BRINGS US TO YOUR WEEKLY CANADA GOOSE…

…and it’s still Prime Minister Mark Carney. While Carney postures about turning away from the United States toward a closer partnership with the EU, in an effort to protect Canada’s “sovereignty,” EU urges UK to raise tariffs on Chinese cars to avoid ‘made in Europe’ barriers (Financial Times). According to the FT: “Brussels has warned Andy Burnham that Britain would need to raise tariffs on Chinese cars and align more closely with EU trade policy if it wants to avoid ‘made in Europe’ barriers that would hit key exports.” Wait a minute, that’s… that’s Donald Trump’s music.

Enjoy the weekend!

Leave a comment

Of course, one year ago in September, free traders were harping on data for the first few months after Liberation Day, confident that the initial data proved them right. I had just debated blogger Noah Smith, who insisted that PMI readings were the way to keep tabs on the sector’s health:

The purchasing managers index, the PMI is also below 50, which signals contraction in the industry, and this is Bloomberg reports on this Wall Street Journal reports on this, everyone reports on this as a reliable first indicator of how manufacturing is doing. It’s not perfect, but over the long term it’s pretty correlated with government statistics on how manufacturing is doing.

A few days later, the Cato Institute’s Scott Lincicome tweeted out the month’s ISM PMI and Noah mocked, “But Oren Cass told me that economics isn’t a science and that tariffs would revitalize American manufacturing! How could the economists be right after all? HOW???”

Scott and Noah don’t tweet about PMIs anymore, though, somewhat amusingly, Noah continues with his narrative arc regardless of what the data says. Last September, “U.S. manufacturing is getting f[*]d.” November, “Trump said he’d revive manufacturing, but his tariffs are strangling it.” December, “Manufacturing is dying.” January, “Trump is really f[*]g over American manufacturing.” April, “No, America is not in a ‘stealth manufacturing boom.’ All the numbers still look bad.” May, “Trump was not hired by China to destroy American manufacturing. But if he had been, what would he be doing differently right now?” August, “Trump’s tariffs are clobbering most of U.S. manufacturing (except data center related stuff).”

For what it’s worth, that August tweet does cite the July ISM PMI. But not the data. Only a few isolated comments from respondents. The data was a 55.6 reading with “New Orders Growing; Production Growing; Employment Growing.”

One cannot help remembering Iraq’s Military Spokesman:

“There are no American infidels in Baghdad. Never!”

Of course, another lesson from the triumphant capture of Baghdad is that early success is no guarantee of achieving ultimate objectives. We’ve got plenty of headwinds, the broader economy could turn down, and, as we always emphasize at American Compass, reindustrialization requires not only stable and credible tariffs, but also industrial policy and workforce policy and so on. But the past year should put to bed for good the idea once peddled so confidently that aggressive tariffs weaken the manufacturing sector. And we should remember going forward that people who stick with their narrative regardless of trends in their own preferred data may more be concerned with their narrative than with the data.

AND NOW FOR SOME ARTIFICIAL INTELLIGENCE

I had an argument recently with a prominent (and, notably, left-of-center) economist who thought it would be great if robots proved better than doctors and thus replaced humans entirely. I suggested that actually, something important would likely be lost, and we needed to guard against that. He replied that if human doctors still contributed something valuable, people would be free to choose that in the market. I questioned whether individual choices in the market really dictated available options in fields like health care.

This was on my mind as I read: U.S. Health Officials Move Quickly to Deploy Medical A.I. Despite Concerns (New York Times). The story has a lot of good examples about the kinds of choices we are going to have to make as a nation, through the political process, about when to trade human values for AI efficiency. Pay attention to the actual use cases described, which are never that the individual of means will be better served, but rather that the tools will offer ways to provide care to those who otherwise cannot afford it.

Venture capitalist Vinod Khosla says his son’s company “could offer an AI primary care provider that could give underserved people rapid access to care.” Ross Harper, CEO of Limbic, says deploying his AI therapist “is a moral issue to get this out into the hands of people who can’t access care. … We have to remind ourselves: What are we comparing this against? We’re comparing it against no treatment, a long wait list.”

On one hand, as a static analysis, it is correct that AI-only treatment might be an improvement over an alternative in which patients have no access to any care. On the other hand, it’s not hard to follow the mindset to its logical conclusion, which is that we don’t have to provide access to other care because we can offer AI-only treatments, and then to start searching for where else access to care can be cut because an AI-only treatment will suffice. This will start in government programs, and then move on to insurers. The “bronze” plan will be AI-only.

This dynamic will be pervasive across society. If we speak only in the language of efficiency and cost reduction, AI may often win out. It will be crucial to think instead in terms of where we want to see our human labor concentrated and where we don’t care if it has a role.

Speaking of bad health care incentives, the Times also has a good story on how the Battle of Hospital A.I. vs. Insurer A.I. Is Pushing Medical Costs Higher. This is another flavor of the problem I highlighted in my recent essay, where “ever more A.I.-generated job applications are being processed ever faster by A.I. screeners.” As in so many areas of the economy, we have to remember that incentives to deploy AI for rent-seeking can be higher than incentives to deploy AI productively, and will then trigger demand for counter-deployment, all of which can increase economic activity while reducing our well-being.

Jensen Huang Goes on a Podcast. Jensen went on Ezra Klein’s podcast and, as usual when Jensen goes on a podcast, made quite a hash of things. In his view, if the labs say “there is no way to contain our experiments, there’s just no way; when we test our A.I. models, it will get out, and it will damage the world — then I think the answer is that we have to shut the labs down.” This, of course, is what the labs are saying. So, um…

What he says next is funnier, though. The reason “we have to shut the labs down” is “because the cost to humanity, the damage is too great. The shareholder, the liabilities — it could be civil liabilities, it could be criminal liabilities. I mean, the liability’s incredible.” This gets the liability argument precisely backward. As noted last week, David Sacks has been advancing the argument that legal liability provides the appropriate check on the labs; because there is liability, labs have the right incentives not to do dangerous things. He quoted this guy named Jensen Huang saying, “The market forces are already there. We don’t need any new laws. We don’t need new regulations.” Now Jensen argues that the extraordinary liability for shareholders is exactly the reason we have to shut things down.

Demonstrating a fundamental misunderstanding of how people learn math and use it in their lives, he said, “the multiplication table is starting to be forgotten. ... Basic math is being forgotten. Does it matter?” And then answered his own question. “I don’t think it does. I don’t think it does.”

And of course, he talked up China. He called it “terrific” that we are using a lot of Chinese open models in the United States. His framing on chips was interesting: “The question is, ultimately, who are we depriving? Are we depriving China of a chip for their industry, or are we depriving the United States of a market to compete in?” Why the “or”? Obviously, the chip restrictions would do both. The difference is that, while we decide whether China gets the chip for its industry, China decides whether the United States will have its market to compete in. And we already know what they will decide.

Huang says the United States should have “a greater ambition for the world to be built on the American tech stack. Just as we have a greater ambition that the world is built on the U.S. dollar and that more people speak English — that they use the American version of the internet.” Insofar as we’ve had success with China welcoming the dollar, English, and the American version of the internet, I guess he does have a point.

Share

SPEAKING OF CHINA, THERE WAS A SUMMIT THIS WEEK

The Wall Street Journal has a good rundown of Five Takeaways From Trump’s Washington Summit With Xi. (Is that a photo of Jensen Huang at the head table?) It looks like nothing much was agreed, which, as I wrote for the Financial Times about the last summit in May, is about the best we can hope for.

In the meantime, we continue to build up our own industrial capacity and decouple supply chains. Politico has a good story on Brendan Carr’s FCC, The Unlikely Agency Serving as Trump’s China Bad Cop.

Coming up next, a Chinese vehicles showdown with Rand Paul. Senator Bernie Moreno, sponsor of the Connected Vehicle Security Act, which would effectively ban Chinese cars and parts from the American market, says he will seek unanimous consent for the legislation on the Senate floor. The bill passed unanimously out of the Senate Commerce Committee and has more than 50 co-sponsors in the Senate and more than 100 in the House.

Moreno paused his plan on Thursday, likely because Senator Rand Paul (the likely objector) may be open to talking things over. Senator Paul’s home state of Kentucky produces more vehicles per capita than any other state in the country, so we shall see how far his passion for the “free market” extends to letting the Chinese Communist Party bankrupt his constituents’ employers with subsidized products.

And a Good Luck with That Award goes to EnerVenue, an “American” battery startup that chose to abandon its plan for manufacturing in Kentucky and set up shop in China instead. (Reuters: US battery startup that chose China over Kentucky opens first factory as Trump, Xi meet.) They’ve also accepted a major equity investment from a fund controlled by Hong Kong’s (i.e., China’s) government. In what way is this company American?

CEO Henning Rath says that with HQ in the U.S. and manufacturing in China, he is “combining the best of both worlds and building bridges even in a geopolitical difficult environment.” That may be the best of both worlds for Rath, but it is not the best of both worlds for the United States, which is precisely why U.S. policy must make it a bad one for his company.

Bonus deep cut: The South China Morning Post’s story on EnerVenue leads with a photo of a Kuka robotic arm, presumably in the new factory. Kuka, Kuka, why does that name ring a bell? Ah yes, because per the New York Times yesterday, In a Race With China, German Robots Are Outnumbered 14 to 1:

Once a symbol of German industrial innovation, the robot maker Kuka is now a source of regret. A decade ago, European regulators gave a Chinese appliance manufacturer, Midea, the green light to acquire Kuka, one of Germany’s leading robotics companies. Today Germany is failing to keep pace in the global race to deploy factory robots, which have been crucial to China’s transformation into the world’s manufacturing powerhouse.

It’s not hard to understand how the game is played, only to understand how we allow it to continue.

BY “WE,” I MOSTLY MEAN EUROPE

Of course, the United States isn’t allowing it to continue, though our response continues to be hesitant and halting, even though the status quo’s risks far exceed the risks of overcorrecting. In Europe, meanwhile, “Volkswagen ejected from European blue-chip index in blow to crisis-hit carmaker. VW’s market capitalisation of €38bn is just a fraction of its annual sales of €322bn.” Investors seem not to believe the continent is going to figure this out at all.

Someone who is figuring it out? The former head of the WTO. I recently highlighted Paul Krugman’s confession of error on free trade, and his remark that, “I’ve been shocked not only by my own change of mind, but by some of my colleagues.” One of those colleagues, it would appear, is former WTO head Pascal Lamy. Speaking to the South China Morning Post, Lamy still can’t help getting in his dig at the United States for irrationally pursuing protectionism, but this comes just moments before he admits Europe should go the same way:

The US has embarked on a protectionist crusade, which stems from the deep belief by US President Donald Trump that tariffs are the Swiss army knife of the 21st century economy, which is not so. The ones who pay the price for that at the end of the day are US consumers. … You are absolutely right, we Europeans are reaching a moment of truth with trade and China. Either we can convince China to rebalance the system and decrease its exports or we will have to go protectionist.

Only if you’ve been working in this world a long time can you appreciate the completeness of the transformation in thinking when the words “we will have to go protectionist” come out of Mr. Lamy’s mouth.

THIS IS REINDUSTRIALIZATION

Two very encouraging developments on the reindustrialization front, giving some dimension to the promising topline data. First: Lockheed Martin gets first batch of Patriot interceptor parts from General Motors (Defense News). “GM Defense delivered the initial batch of housing components for the Patriot interceptors called the PAC-3 MSE — on Aug. 28, just 22 days after the Aug. 6 contract signing, Lockheed said, for parts that traditionally take months or years to produce.” Three weeks from contract to delivery, from a commercial manufacturer. Reintegration of the defense-industrial base back into the full industrial base is crucial for both national security and a resurgent manufacturing ecosystem. Hopefully a sign of much more to come.

YCombinator partner Vivian Midha Shen reports that “atoms are in”: Hard-tech startups went from about 15% to almost 50% of the incubator’s Spring 2026 portfolio. That’s a very encouraging sign, and also a reminder that the path to rebuilding the American industrial base is not “tariffs on liberation day, taa daa millions of manufacturing jobs three months later,” but rather a shift in both economic incentives and social commitments that channel talent and capital for the long run. Suffice to say, the typical general equilibrium model used by economists does not have a variable for “excitement about building again.”

IN WHAT IS BECOMING AN ALARMINGLY REGULAR FINAL ITEM…

More bizarre developments from north of the border. Who knew: Even as Canada pursues fuller integration into the European community, ten EU member nations still have not ratified the decade-old free trade agreement that took provisional effect in 2017. How illiberal!

But nothing gets by Prime Minister Mark Carney. He’s even spending time gaming out a military invasion by the United States, saying “it would be irresponsible not to” (Politico). I’m pleased to report that I have also gamed out possible scenarios for Mark Carney invading my own house, and think I’ll likely be OK.

Seriously, though, Nick Phillips has a terrific piece at Commonplace on Canada Dreaming, which I’ll quote at length:

Carney’s popularity has surged as he single-handedly turns this perplexing trade dispute into a crisis and manufactures a grand trial for Canadian nationhood.

It seems that the real driver of these events is the psychic need for such a trial. Canada hasn’t had one in a long time, and prosperous liberal societies aren’t very good at generating them even as we crave thymos, the Greek term for the spiritedness that comes from struggle and purpose. Listening to a recent Francis Fukuyama interview about how liberal societies might generate thymos, one can’t help think of Carney: “Well, there are some possible futures where [liberal societies] actually do face real threats, where the society really does have to mobilize. I think we felt something like that in the 1930s with the Depression and then fighting World War II, and that was very inspiring to many people. It was also very devastating. And the question is, can you recreate that sense of national purpose without having a war or pandemic or revolution? I think you can. I think that there are a lot of projects out there in the world that could be the source of a greater sense of common purpose.”

In his 2021 book Values, Carney identified such a project: fighting climate change. Now, Carney appears to have found a new, more politically potent project: reorienting Canada away from the United States and realigning toward the EU…

Read the whole thing, and enjoy the weekend!

Leave a comment

In his speech to the European Parliament yesterday, the Canadian prime minister acknowledged that “sovereignty and openness are now difficult to reconcile,” but also argued that “deepening and widening our relationship will strengthen our sovereignty.” This seems… undertheorized. The Wall Street Journal’s overview of the bizarre gambit captures its incoherence well:

“Wouldn’t it be lovely if Canada was the 28th state of the European Union rather than the 51st state of the United States?” asked Finnish President Alexander Stubb, who speaks regularly with Carney.

I have been sympathetic to Canadian complaints that President Trump’s constant efforts to insult their country are inappropriate and unhelpful. At the same time, Carney’s determination to elevate himself to some anti-Trump hero of the globalist pearl-clutchers is at this point obviously causing far more harm to our northern friends.

• As the Financial Times, which rather better understands the EU, reports on consecutive days: EU capitals rebuff Mark Carney’s ‘unique alliance’ with Canada and Why Mark Carney’s romance with Europe can only go so far.

• Canada also faces the awkward problem that 70% of its exports go to the United States and only 6% go to the EU, notes Peter Harrell. And it’s unclear what Canada could hope to gain anyway, notes Nicholas Phillips. For instance, “there’s nothing to gain on competitiveness: regulatory alignment can only go in one direction, toward the EU, which is a proven formula for economic stagnation.”

• And then there’s the question of who would ever look to the EU as a functional example of strengthened sovereignty through deeper and wider relationships. Its inability to address the China wave now crushing its own industrial base is a glaring weakness (and contrasts helpfully with the sort of robust confrontation the Trump administration is insisting on for USMCA).

Speaking of which: Imports of Chinese autos into Europe continue to skyrocket. The latest plan? EU asks China to voluntarily limit car exports (Financial Times). “Brussels is seeking a commitment from Beijing to restrict sales of China-made hybrid vehicles to about 15 per cent of the EU market compared with more than a third today.” Good luck. Meanwhile, in the real world, “President Xi has called for China to make its advanced manufacturing sector ‘bigger and stronger’ and strengthen control over ‌key industrial supply chains, official news agency Xinhua said Thursday” (Reuters). Oh, and Michael Pettis points out that “China has unveiled a sweeping five-year plan for its electronic information manufacturing sector, aiming to boost the industry’s annual revenue beyond 30 trillion yuan ($4.5 trillion) by 2030.” (For reference, the combined value of the entire global consumer electronics and semiconductor markets is today around $3 trillion.)

There is no economic future for Canada in a free-trade zone unable to protect itself from China, which will in turn mean its own goods will face increasingly robust exclusion from the American market. The longer it pretends otherwise, the less leverage it will have when it comes back to the USMCA table, and the funnier President Trump’s jokes will become.

In other USMCA news, U.S. Pressures Mexico to Box Out China’s AI Hardware Exports (Wall Street Journal). “Mexico and the U.S. are discussing the so-called rules of origin proposal as part of negotiations around revising the U.S.-Mexico-Canada Agreement… In addition to AI equipment, the U.S. could also propose rules to lower Chinese content and increase North American components for a litany of consumer products, such as medical equipment. While cars, auto parts and high-end computer chips are subject to tariffs from the Trump administration, more commonplace semiconductors used in the AI buildout can enter the U.S. largely tariff-free.”

Keeping Chinese supply chains out of North America is the core of the USMCA renegotiation and, further underscoring Canada’s strangely unreasonable position, Mexico seems perfectly comfortable going along with it. Peter Harrell has more on the importance of reworking rules of origin. I also wrote about this in the Financial Times last year: “A USMCA premised on balanced trade and the exclusion of non-market economies would represent a revolution in trade law and international relations”

GOOD, BAD, and UGLY READS FOR YOUR WEEKEND

Good: The Federal Government Subsidizes Professional Daycare. It’s Time To Fund The Family. (Leah Sargeant in The Daily Wire.)

Following nicely on last week’s discussion in TRE about the Day Care Dustup, Sargeant writes: “In 2022, Governor Spencer Cox of Utah petitioned the Biden administration for exactly this kind of flexibility. Cox cited surveys of Utah residents that found 81% of them preferred to have a child too young for school watched by a parent or guardian. Cox was frustrated that a program intended to help poor families rise made that help contingent on overriding their better judgment about their children’s needs.”

Bad: Republicans’ Familiar Fight Over Big Government (Matthew Continetti in the Wall Street Journal.)

Continetti’s framing of the day care debate is another reminder of why the Wall Street Journal’s editorial page has ceased to be a serious source of policy commentary: “Limited-government conservatives point out the potential cost of the program, its perverse incentives (that $9,000 vanishes as soon as dad gets a raise) and its reliance on social engineering.”

The potential cost of the program is… $0. There is no proposal to appropriate any additional funding.

The perverse incentives… already exist in the program, which, again, is not being expanded. The description of the perverse incentives is also incorrect. The $9,000 does not vanish as soon as dad gets a raise.

The social engineering is… reduced if the program becomes more neutral in its treatment of different family arrangements. Just imagine the counterfactual. If existing law made both family structures eligible and someone came along and said “we should provide subsidies only to people who put their children in paid day care,” would that be less social engineering?

Continetti quotes Doug Holtz-Eakin making the same mistake: “Who works or does not work; who takes care of a child; or who takes a child to childcare is the family’s business. It is certainly not the place of the federal government to put its thumb on the scale using taxpayer dollars.” Which policy puts a thumb on the scale—the one that makes eligibility dependent on who works or does not work and who takes care of a child, or the one that does not?

(And of course, note that these same conservatives are fine with “social engineering” and “who works or does not work” when the subject is work requirements. It’s hard to make sense of these objections, except as opposition to the idea of providing support to families raising kids. That’s an objection they’re entitled to have… but perhaps not an effective one. They seem awfully determined not to focus on it.)

Ugly: Worried About Your College Kid? Now You Can Hire a Local Mom. (New York Times). Submitted without comment:

“Sometimes people think that we’re coddling students,” Horwitz said, “and I just don’t think that anything could be further from the truth. … Horwitz, for her part, brings students balloons on their birthdays and chicken soup when they’re sick, sits with them in the emergency room and picks up their prescriptions if they’re busy. She bakes homemade challah, coordinates with the bedbug exterminator, texts photos and updates to faraway parents and doles out recommendations on the best local doctors and landlords.

HERE COMES XI

President Xi Jinping arrives in Washington next week for yet another summit with President Trump. On the agenda? Who knows. Will anything be accomplished? Probably not. And here’s hoping not. To quote the conclusion of my Financial Times column on the May summit: “The best plausible result is simply no deal, beyond efforts to smooth any decoupling that might proceed, giving the US time to come to its own terms with the irreconcilable differences of its great-power competitor. Only then can we hope to succeed in one of the decoupled spheres towards which the world now hurtles, whether we like it or not.”

Perhaps the biggest question on the table is how long the two sides will extend their “truth,” with the U.S. postponing its blacklisting of Chinese firms and China promising to keep supplying critical minerals (a promise it’s already not keeping). The shorter the truce the better, lest U.S. firms relax on getting alternative sources of critical minerals online as quickly as possible.

Discouragingly, President Trump continues to insist on floating the idea of having Chinese automakers set up plants in the United States. This week he told Fox News, “if China wanted to come in, and open a plant to build their cars here, I’d be okay with it — Japan does it — but they hire our people. The big thing is they hire our people, they use our people.” Encouragingly, his cabinet sees things differently.

• As noted last week, Transportation Secretary Sean Duffy has just sent an angry letter to Ford, warning it against “intertwining its future with Chinese state-backed enterprises” and choosing “to deepen operational dependencies on strategic competitors.” Those warnings would apply to welcoming Chinese manufacturers into the U.S. market.

• Earlier this year, Treasury Secretary Scott Bessent discussed the issue at a Semafor event:

Ben Smith: “There are people in China who would like to have one of the outcomes of these talks be some form of joint-venture, BYD factory setting up in the United States. Is that on the table?”

Scott Bessent: “I think we’re going to maybe end up with two boards, a board of trade and maybe a board of investment. I’m not sure — we have a 100% tariff on Chinese EVs, and there is a rule to do with autonomous-driving cars that they cannot have foreign components or Chinese components.”

Ben Smith: “Just to be clear, you don’t like the idea of a BYD factory in the US: American workers, Chinese investment?”

Scott Bessent: “There are things; I would think maybe the auto-industry isn’t one of them…”

While Ford pursues its China partnership, General Motors is working on developing its own batteries and supply chains:

“We’re developing a supply chain such that, two years from now, three years from now, it will be domestic,” Kurt Kelty, GM vice president of battery and sustainability, told CNBC during an exclusive interview. “That’s what we’re aiming for — when we get into market, we’ve got a domestic source for that.”

And blueberry grower Driscoll’s is getting its own lesson in what happens when you go to China. The Wall Street Journal tells the all-too-familiar tale:

About 15 years ago, executives from U.S. fruit grower Driscoll’s went to China with a goal of turning blueberries into that country’s next big food trend. The California company dispatched one of its experts to scout farmland in southwestern China’s Yunnan province, contracted with global blueberry-genetics firms to lock up the best varieties and brought in high-tech growing technologies to mass produce a fruit few Chinese people then ate. By 2020, it was cranking out thousands of tons of blueberries for Chinese supermarkets. Then it became the latest U.S. company to encounter the buzzsaw of Chinese competition.

As tales of blueberry fortunes spread, Chinese entrepreneurs rapidly built farms of their own. They adopted high-tech growing techniques similar to Driscoll’s, even allegedly copying greenhouse designs used by farmers growing for Driscoll’s. They also swiped the company’s patent-protected varieties, a Chinese court has ruled. State banks fed the rush, offering a special category of loans for blueberry growers.

Production in China has shot up 25-fold since 2010. In 2021, China overtook the U.S. as the world’s top blueberry grower, and by 2025 its annual production was double what it was in the U.S. For Chinese consumers, it was a blueberry bonanza. Prices dropped so low—often $3 or less for a 9-ounce container—that state media trumpeted an era of “blueberry freedom,” in which even ordinary people can gorge on a once-exotic fruit. For just about everyone in the blueberry business, though, it has been a knife fight, plagued by intellectual-property theft and tanking profits.

It’s OK, though. China may do that on a truly critical product like blueberries, but I’m sure they want Jensen Huang to succeed with advanced AI chips in their market for as long as possible.

But making Jensen look serious by comparison, China’s trade diplomats are complaining at the WTO that departing from its most-favored nation principles would lead to “power-based trade relations” and protectionism.

And a final item: Congress just passed the first new tariff authority since the 1970s, giving the president authority to level tariffs on importers of Russian oil and gas (Wall Street Journal). Guess who, per PunchBowl’s Andrew Desiderio, is the number one target? China.

Share

REPLACING CHINA

New data from the JPMorganChase Institute shows that small- and mid-sized firms have shifted their mix of spend from international to domestic payments since imposition of tariffs last year. One interesting question: to what extent does declining international spend reflect a tariff-induced shift toward domestic sources of supply, and to what extent does it reflect declining prices on imports as foreign sellers absorb part of the tariff cost? Presumably, the answer to some extent is “both.”

The industrial policy drumbeat proceeds apace.

Former Australian Prime Minister Scott Morrison writes in the Wall Street Journal that China Overplayed Its Hand on Critical Minerals:

The virtue of the Trump administration’s measures is that they can’t be easily reversed by China’s market manipulation. Floor price and durable offtake agreements boost resilience and provide guardrails for Western participants and tie in end users. These measures change the economics, enabling Western competitors to challenge China’s dominance. Counterintuitively, we have China to thank for it.

• Progress: Elmet Group wins $2 billion US tungsten stockpile contract (Reuters). The U.S. takes a particularly large equity stake of nearly 20%.

• Progress: US aims to issue deep-sea mining permits within months, Interior Secretary Burgum says (Reuters).

Though not progress everywhere. On the defense front, Pentagon Sees Strategic Inventory Munitions Shortfalls, IG Says (Bloomberg). And, the Iran war is raising doubts over Trump’s “America First” foreign investment goal (Peterson Institute). Pledges from Gulf states represented the majority of the investment commitments secured by the Trump administration in its first year. Enthusiasm and capacity for following through is, er, waning.

AI AND THE LABOR MARKET

Who wants to see a robot pick cherry tomatoes? That would replace “jobs Americans won’t do,” of course. Nonetheless, More U.S. Workers Fear Losing Their Jobs to Technology according to Gallup. The share has has risen substantially, to more than 25%, in the past year.

This is presumably about AI, and there the Center for State Labor Innovation had a very good piece by MIT’s Thomas Kochan on potential avenues for worker influence on AI deployment. This is a theme I emphasized in my recent New York Times essay, arguing:

As for the threat these models pose to the job market, greater worker power is the strongest defense. So long as management alone gets to choose the tools it deploys, it will always prefer those that decrease or eliminate the need for actual human employees, with all their tiresome expectations of living wages and basic respect and so on, or that at least minimize their autonomy and keep them closely monitored. But if workers must also approve the use of these models, that equation would flip on its head. Management would have to find approaches that make workers’ jobs better; A.I. companies would have to develop tools that they could expect workers to approve.

That essay also discussed legal liability for A.I. labs, which is now squarely on the front burner. I wrote:

Lawmakers at both the state and federal levels should make the developers and deployers of A.I. strictly liable for harms that they cause. Where so-called agentic A.I. is acting autonomously, it should be treated as an agent of whoever provides and whoever controls it, leaving them liable just as employers are for their employees, including criminally liable if the agents commit crimes. The concept of an “attractive nuisance” should also apply.

Andrew Ross Sorkin headlines today’s DealBook, The A.I. Industry’s New Worry: ‘Liability Exposure’. Yeah, no kidding. Sorkin focuses on tort liability if models run amok. That’s an obvious worry.

But the labs may already be on the hook for potentially trillions of dollars of liability, it seems to me, given the harm they are already causing. One good example is the damage to public education, where effects of the rampant cheating and cognitive offloading are undermining schools in ways that may make COVID look like child’s play. Look at what’s happening even at an elite and tech-capable university like MIT, which just published an in-depth report that Alex Veremeyenko summarizes:

Study groups are disappearing. Office hours are emptying out. Problem sets and take-home exams no longer prove anything, because AI can produce credible solutions to almost any written assignment in the undergraduate curriculum. Students who lean on chatbots lose mastery and confidence, and some slip into what the report calls cognitive surrender, reaching for AI at the first hint of struggle.

Meanwhile, the hacking capabilities of the models now being released are imposing enormous costs on all of the institutions across society that must upgrade their own tools and revise their own processes in response. Who should pay for that? So far, the labs are imposing far more cost on society than they are providing benefit. Future uses of the technology will hopefully provide benefits far in excess of costs, but that is no defense against the costs in the meantime. The labs need to proceed in a way that avoids those costs, or else expect that the first claim on that future wealth will go to those who are bearing them.

YOUR BAD TWEET OF THE WEEK

It would be too easy to just pick a David Sacks tweet every week, or a Jensen Huang quote every week, but seeing as we’re already talking about AI liability, and we have David Sacks quoting Jensen Huang, let’s take a moment to appreciate:

It’s not clear if Jensen and David are saying that robust tort liability solves for the market failure, or that there is no market failure and the profit-maximizing strategy is always to prioritize safety. The latter would be… untrue. The former might be true in theory, but it’s safe to assume that if anyone ever tries to hold these companies liable, the same tech leaders will be arguing that’s unfair. Tech leaders like David Sacks. Who rejects tort liability for Meta: “I think in the case of social networking, it’s much more unclear what the harms are and what the benefits are. And I think it’s much more subjective and it’s much more of a personal choice for adults and also for parents. … You said, the harms of this are immense and well known and understood. If that’s the case, then let’s just ban it for under 13 or under 16 or whatever it is.” So no tort liability, or if there would be tort liability then we need new laws and regulations.

It’s quite the shell game: oppose regulation because the market will fix it, or count on liability to fix the market; then when that doesn’t work, oppose the liability and say we should have regulated.

Enjoy the weekend!

Leave a comment

Davenport characterizes the policy change as one that “would effectively create a government incentive for parents to stay home with their children,” which is “effectively” true only in the sense that it would negate the overwhelming incentive that current policy creates to use paid child care. The policy would offer a family nothing for having a stay-at-home parent that it could not also receive without one, so it creates no “incentive” in that respect. Rather, it would end the policy of telling parents they can receive the subsidy only if they make the latter choice.

Critics were also quick to complain that the policy change would take funding away from one set of parents and give it to another, but that dynamic is also misstated. Davenport warns at one point, “the move could end up redirecting money away from working parents and their child care providers, causing some to raise their rates or even close, critics said, potentially worsening what many experts say is a child care crisis in the country.” But then she provides this example:

Krystal Gastineau, the owner of Cribs 2 Crayons, a child-care center in Aurora, Colo., said that about half the children she cares for receive the subsidies, which are paid directly to Ms. Gastineau’s business via direct deposit. “If they could, I think parents would choose to take the money and stay home,” she said. “That would take away a major source of income.”

That quote speaks volumes. “I think parents would choose to take the money and stay home.” In other words, the day care center operates on federal funds provided to serve parents who would prefer a different arrangement. Altering the policy would allow parents (married, with one working) to make the choice they prefer. So who is incentivizing what on whose behalf here?

The Japanese soldiers of the Old Right, unaware they are still fighting a war that ended 30 years ago, came charging out of their caves with some genuinely bizarre arguments.

Jonah Goldberg: “Any evidence it works? Got some studies? Data? Examples of any kind? Or are you just going along because it sounds good or polls well or keeps you in good graces with Vance and Heritage Foundation and (wink wink) Heritage Americans and small donors? Maybe you just like expanding entitlements so long as you think it’ll benefit your coalition? Prove you have anything like republican virtue or intellectual seriousness.”

It’s not clear what Goldberg means when he asks if this “works.” Like, does making families with a stay-at-home parent eligible to receive support “work” in making those families eligible for that support? Unclear what data is needed. Is reallocating funds without increasing spending really a form of “expanding entitlements”? Is Jonah Goldberg someone who comes to mind when you think about “republican virtue” and “intellectual seriousness”?

Dana Loesch: “No. Incentivizing government dependency isn’t ‘great’ for families. Dependency is one of the tools the left has used for the past 100 years to destroy the family. This proposal will also include illegal aliens, as currently law determines status by the child not the adults so anchor babies are eligible for this fund, which isn’t ‘great’ for American families…”

Does providing support only to households that earn income “incentivize government dependency”? Does offering the expansion only to married couples “destroy the family”? Should conservatives leave untouched any program that serves illegal aliens, lest improving the program incidentally improve services for illegal aliens as well? (And does this argument apply to public education, highways, and the police?)

EPPC’s Patrick Brown offered the far more thoughtful critique that “the broadening of eligibility comes with real trade-offs … a conservative estimate is that the population of eligible children might double after the new rules. As a result, the odds of being a CCDBG-eligible child who actually received the assistance would go from 1 in 7 to 1 in 14.”

But the problem with this objection is two-fold. First, as noted by Ms. Gastineau above, in many cases we could be talking about the same households still benefiting from a subsidy but now having more options in how to arrange their lives. Second, even insofar as there is a direct tradeoff, that tradeoff already exists. Those families with a stay-at-home parent are there, and the policy choice is to give 0% of the subsidy to them. Is 0% for households with a stay-at-home parent and 100% for households where all parents work the correct split? You could make that argument, but it would be difficult, and Patrick doesn’t try.

Especially seeing as the Trump administration proposal would merely give states the option to open eligibility (where, presumably, those states believe that doing so would benefit their populations), the starting assumption should be that greater flexibility and the option of a refined allocation would produce a net benefit. “No reallocating existing funds, you can only add new ones” is the standard left-of-center approach to the safety net, neither conservative nor wise. (Patrick responds to the response here, in his always-excellent Family Matters newsletter.)

Most worthy of critique, on the other hand, is President Trump’s promise to give everyone $5,000 if Republicans win the midterms. Without spending too much time on it: (1) terrible way to run a campaign, (2) we cannot afford it, (3) it’s inflationary, (4) only mail universal checks as stimulus in a crisis.

The better idea would be a deficit reduction plan that both raises taxes and cuts spending. Encouragingly, that continues to gain traction with Republicans. As Social Security fund runs dry, some Republicans say it’s time to raise taxes (Washington Post). Congressman Tom Cole (R-OK), chairman of the House Appropriations Committee, says: “We’ve got too many people who say, ‘Well, we have to stay within the current income level or stay at the current tax rate.’ I’m willing to look at the tax rate. I am willing to raise the amount of income through tax.”

YOUR ONE WEEKEND READ on this 25th anniversary of 9/11 is The Man Who Refused to Sit on the Sidelines, from The Atlantic. “The FDNY lost 343 men on September 11; 65 of their sons and daughters now serve in the department.”

If you’ve never read Esquire’s story on The Falling Man, that would be very much worth your time as well.

BLUE-COLLAR BOOM

The Wall Street Journal reports, Americans Without College Degrees Are Having One of the Best Job Markets in Years. “Unemployment among younger workers who didn’t go to college has rarely been lower in recent decades. It is the opposite story for college grads.” Important to note, though, that this is still relative to these cohorts’ own experience in the past. In absolute terms, college grads still have a lower unemployment rate.

But something is clearly happening to the college degree. The Financial Times: The University Degree Is Losing Its Lustre. Both the Journal and FT point the finger at technology and economic trends, and surely those play a role, but it’s also worth bearing in mind the extent to which universities are doing this to themselves, both with lousy programs that produce graduates lacking both hard and soft skills, and with overproduction of graduates in the first place that floods the market with low-value diplomas. In a recent Commonplace piece, Perverse Incentives Handed Higher Ed to AI, Dalton Haydel explores this further.

ARTIFICIAL INTELLIGENCE

What is the economic effect of A.I. going to be? Anthropic has released a really nice modeling tool that lets you put in your own assumptions about likely labor-market effects. It’s simplistic in all sorts of ways, but does well what a model is supposed to do, which is test your intuitions about reasonable assumptions, how they relate to each other, and how they would affect outcomes.

Here’s my own run through it:

By 2030, AI will be capable of doing 85 out of 100 knowledge-work tasks. (We did it! “AGI”!)

Out of every 100 instances of a task AI can do by 2030, AI will be doing 50.

For those 50 tasks, some of them will be fully automated, meaning a human is not involved at all.

Tasks where AI is involved will get done twice as fast as today.

When someone is displaced entirely from their occupation, it will take them six months on average to find a new job.

Results! GDP up 14%. Unemployment rate just below 5%. Wages up for all types of workers, by 11% on average. Labor share of income at 58% (similar to today).

Frankly, those are some pretty aggressive assumptions and some pretty pleasant outcomes, at least economically speaking. Try it for yourself.

When is AGI not AGI? When it’s OpenAI talking about AGI! Pitchman Sam Altman has always played a shell game with his definition, but I especially enjoyed this comment from OpenAI president Greg Brockman promoting the new Astra model. “Everyone has a different definition of AGI . . . it’s a grey, fuzzy thing. But I think when we look back people will think it’s about this time and about this model.” We don’t know what AGI is, but this is it. OK, then.

Anyway, per Brockman, it’s now more of a “spiritual concept.”

And in Dallas, at the Republican Convention: AI Loses Debate (Semafor). Ben Smith has a great writeup of the faceoff between Joe Lonsdale and Joe Allen, which he reports the latter Joe won convincingly. Apparently Lonsdale was surprised that arguments like “we have Kitty Hawk, we have 747s, we built the railroads” didn’t land, nor did comparing AI complaints to “Black Lives Matter hysteria” or saying they’re “psyops from China.” As Allen put it, data centers are “a constant humming reminder of a future they don’t believe in.”

Speaking of which, read my New York Times essay on why Americans don’t believe in the AI future! Big Tech Fooled America Once. The Second Time’s Not Going So Well.

IN MORE PROMISING CORNERS OF AMERICAN INDUSTRY

Japan, U.S. advance $550 billion investment pact with AI, chips in focus (Investing.com): “Japan is making progress on a $550 billion investment initiative with the United States, with artificial intelligence and semiconductor projects expected to play a central role in the next phase of the agreement, Bloomberg reported on Friday.” And, South Korea Nears Agreement on Billions in U.S. Investments, a Win for Trump (Wall Street Journal): “The deal, potentially worth more than $100 billion, envisions South Korea financing the construction of up to eight nuclear power plants and a natural-gas project, according to people familiar with the matter.”

The Department of Energy announces a new critical minerals investment. Ex-Im Bank announces a new manufacturing investment for advanced satellite communications systems. And, USA Rare Earth breaks ground on its South Carolina facility—the first new rare earth magnet factory in America in 40 years.

While Ron Paul himself would probably not be excited by such aggressive industrial policy, allow us to say: It’s Happening.

But wait, don’t be fooled so easily by all of the great data coming out of the industry, the increases in output and now employment, the investments coming online. Richard Stern, working always at Advancing American Freedom, has some bad news: “the tariffs have limited what could have been a far larger manufacturing surge” and “threats of more government involvement in industry are holding back growth and delaying investments.”

What’s worse, “this bounce in manufacturing output is largely explained by a rise in industrial capacity utilization rather than by an expansion in manufacturing capacity.” Instead of instantly making new factories appear, the economy appears to be boosting production in existing factories while working to bring new ones online. Suspicious.

Fortunately, while fundamentalists confused by a world not aligning with their dogma might attempt to reverse engineer an incoherent story that validates their one truth, we have analysts like Richard and organizations like AAF doing the hard work of explaining how the novel set of policies designed to boost manufacturing have nothing to do with the boost in manufacturing, while the set of policies pursued for decades as manufacturing collapsed are responsible for the progress.

Share

MEANWHILE, IN CHINA NEWS

A broad-based coalition of unions and industry groups have just written to Senate leaders John Thune and Chuck Schumer in support of the Connected Vehicle Security Act that would exclude Chinese vehicles from the U.S. market. This is important legislation with growing bipartisan support that the Trump administration should get behind as well. Transportation Secretary Sean Duffy has just written to Ford, blasting its continued pursuit of partnerships with Chinese companies, but, like, you don’t have to use the Article II angry-letter power. The Constitution afford our nation stronger tools.

Polestar, seen last week complaining about its poor treatment by U.S. regulators, “cut its full-year delivery forecast, hurt by Washington’s crackdown on Chinese-linked vehicles that forced it out of the United States.” One correction, though. Reuters describes Polestar as a “Swedish company, which is majority-owned by China’s Geely Holding.” If you’re majority owned by a Chinese company, sorry, you’re not Swedish any more.

Good story in the New York Times on dynamics in Latin America, where Peru Shows the Limits of Washington’s Anti-China Push. It does seem a bit incongruous, though, to report “Senior administration officials have warned, while offering no evidence, that Chinese-financed projects threaten Peru’s sovereignty and, in the case of the port, could give Beijing a military foothold” and then “today, Chinese companies control Lima’s electricity distribution system and play a role in transportation, banking and telecommunications.” What evidence are we looking for here?

Georgetown’s Peter Harrell highlights a potential decision by Malaysia to use Huawei chips in a major “sovereign data initiative,” an early test of provisions in bilateral trade agreements secured by the Trump administration that would seem to preclude such moves. Decisions like these, and the U.S. choice to respond or not, will determine whether we can successfully establish a “China or the U.S., pick one” framework for potential trading partners.

And per the Brookings Institution’s Kyle Chan, looking at the upcoming Trump-Xi summit, “sounds like Board of Trade / Investment talks are stalled—by Washington.” That’s something we’ve been pushing on since the spring, and would be good news indeed.

(For an appallingly weak counterpoint, see the new Foreign Affairs essay by former Biden adviser Brian Deese: The Case for Letting China In. The case, apparently, is that China has things we need, and if we structure our investment deals right we can get it to hand leadership back to us. Good plan.)

Maybe Mr. Deese would prefer to be in…

EUROPE

Oh, Europe. Still can’t decide what to do. Now, EU faces 300,000 factory job cuts as China ‘colonises’ supply chains, industry warns (The Guardian). In a Brookings symposium on the issue, Ryan Hass, director of the Institution’s China Center, hits the nail on the head:

The current EU-China trade trajectory serves China’s interests. Beijing will use carrots and sticks to sustain its open access to the EU common market, which is the only major market in the world with high purchasing power that remains open to China’s surging exports. China may pay lip service to European concerns, but it will not offer any concessions or meaningful voluntary restraints on its exports. If there is going to be any rebalancing of EU-China trade relations, Europe will need to instigate it.

Whether justified or not, China’s confidence in its capacity to sustain the current trade trajectory is borne of three factors. First, Beijing judges Europe’s leaders as politically weak, divided on China, and lacking a mandate to launch a trade war against China amidst an actual war in Ukraine and a widening transatlantic rift with U.S. President Donald Trump. Second, Beijing is confident it can build an image of its market as a key driver of future demand for European products, and thus a key opportunity that European industrial giants cannot afford to squander. And third, China is confident it has punitive tools at its disposal to prevail in any trade war with Europe, should it become necessary to use them.

On its current trajectory, China’s surging export wave will decimate key European sectors, including autos, chemicals, green energy, machinery, and industrial tools. This, in turn, will alter Europe’s political center of gravity. The only question is whether Europe will be compelled to push back now or later on China’s unfair trade practices, including China’s suppressed domestic demand, its subsidies, and its undervalued currency.

AND FINALLY, IN H-1B NEWS

The Department of Labor is investigating Cognizant. This has received extraordinarily little coverage, but Newsweek has a good rundown. Republicans on the Senate Judiciary Committee are pleased. One wonders what a large-scale investigation into the visa practices of a major Indian outsourcer might turn up, and how that might be applicable to the sector more broadly. Stay tuned.

In less helpful reform, IFP’s Connor O’Brien highlights a move by DHS that’s likely to backfire. The proposed policy change would force temporary visa holders to leave the United States immediately if they lose the job attached to the visa (whereas currently they have 60 days to find a new job). At first glance, this seems like a “tough on immigration” approach. But the reality is that employers already have far too much control over workers using these kinds of visas… that’s partly why employers love them! Essentially giving employers the power to deport a worker they’re unhappy with will only invite further abuse in the program. The answer is fewer temporary visas, not more exploitative relationships.

YOUR BAD TWEET OF THE WEEK

This week we salute the Tax Foundation’s Erica York for pushing back against the subversive narrative that the labor share of income is falling with better data showing that… the labor share of income is falling. Good catch.

There were indeed a couple of years in the late-1940s when labor share was lower than today, so… well, I guess that’s the question. So what? If the Old Right put half the effort into thinking about and addressing economic problems that it puts into trying to argue they just don’t exist, maybe it would be in better shape.

Enjoy the weekend!

Leave a comment

The Federal Reserve’s latest Beige Book reports: “Healthy labor demand was seen most frequently in manufacturing, construction, and some service sectors... Significant wage increases were most often connected to demand for skilled workers in construction and manufacturing.” Also encouraging.

And the Purchasing Managers’ Indices continue to report strong growth this month.

• From S&P: “The headline seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI®) was unchanged at 53.9 in August, signaling a solid expansion in the manufacturing economy. Output volumes rose for the fifteenth consecutive month…”

• From ISM: “New Orders Growing; Production Growing; Employment Growing… Economic activity in the manufacturing sector expanded in August for the eighth consecutive month…”

And from the Dallas Federal Reserve, Texas Manufacturing Activity Accelerates as Outlooks Improve Further.

Caveat: There may be something wrong with these numbers. The true experts in the free trade gang were so reliable about posting data from these sources in the months after Liberation Day, when it didn’t immediately turn positive. But now they’ve gone quiet. They may know something we don’t. We are monitoring the situation.

YOUR ONE WEEKEND READ is Why the World Needs to Force China’s Yuan to Revalue: A currency accord, enforced with tariffs, might be the only way to get China to act, from Greg Ip in the Wall Street Journal:

China’s massive and growing trade surplus threatens to hollow out its trading partners’ industrial bases. For years, the rest of the world has pleaded with China to change its economic model to rely more on domestic demand, and less on exports, to no avail.

A currency accord, enforced with tariffs, might be the only way to get China to act. The time may be ripe. Frustration with China is boiling over, especially in Europe. “This Chinese surge now threatens…the very core of Europe’s productive system,” a French government report said in February. In June, German Chancellor Friedrich Merz called for a new Plaza Accord aimed at China.

A meeting by central bank governors and finance ministers from the top 20 economies starting this weekend in Asheville, N.C., would be a good place to start the conversation.

Read the whole thing and, while you do, imagine former Trump CEA Chair Steven Miran bursting through the wall like the Kool-Aid Man. Did someone say a currency accord backed by tariffs?

Seriously, though, it’s good to see the international economic framework that has guided the Trump administration get the credit it deserves in the Journal…

…and with our trading partners! On Sunday, reported Reuters, G20 countries should consider more trade barriers on China to cut imbalances, Bessent says. “U.S. Treasury Secretary Scott Bessent said on Sunday he will encourage G20 members to re-examine terms of trade with China to shrink global imbalances and press Beijing to rebalance its economy away from exports and toward domestic consumption.”

On Tuesday, the U.S. released a “chair statement” from the summit with support from 19 of 20 countries. Any guess on who the one is? (The Financial Times provides a hint: China derails consensus after US-hosted G20.) As Bloomberg’s chief U.S. economist Anna Wong notes, “The 19-1 vote is really telling. Now that Europe is experiencing what the U.S. had experienced in the 2000s, there is finally something approaching moving toward a global consensus on global imbalances.”

Strange, that. We were warned by the very best experts that aggressive U.S. action on trade was going to alienate allies and drive them toward China. But it seems to have had the opposite effect, and now everyone is coming together to confront and isolate China.

From the Wall Street Journal: U.S. Says It’s Fed Up With China’s Overcapacity—and More Countries Agree. For instance, “When it comes to China, ‘everyone’s feelings have crossed a threshold,” said Japanese Finance Minister Satsuki Katayama.’” And, “a February report by the French government titled ‘The Chinese Steamroller’ said China’s export surge threatened the ‘very core of Europe’s productive system.’ In Indonesia, one of the poorest G-20 members, government officials have said that a flood of Chinese imports is hurting domestic industry.”

Indeed, it appears that by refusing to continue absorbing the brunt of the global imbalances itself, the U.S. has forced its partners to acknowledge and address the problem alongside it.

In his latest at Foreign Affairs, A Great Rebalancing Is Coming: Who Will Bear the Costs of a Global Trade Adjustment?, Michael Pettis looks at how all this might play out:

Beijing seems set on trying to preserve its surpluses for as long as possible. Washington is just as intent on reducing its deficits. If Europe can develop the political capacity to do the same, the burden of adjustment will increasingly fall onto the surplus economies, which would have to rely more on domestic demand and less on exports. If it cannot, Europe will absorb more and more of the global surpluses, and what appears today to be a trade conflict mainly between China and the United States may become a conflict between China and Europe—and a struggle between the two of them to avoid bearing steeper costs down the road.

If I were Canada, I’d work on teaming up with the United States against China on this one, rather than cozying up to China or thinking about joining the EU. I would not recommend the current strategy. As Secretary Bessent suggests, “I don’t think you can be in a tit-for-tat with someone who’s 13 times larger than you are.”

MORE GOOD READS FROM THE WEEK

I still don’t have the greenlight to emulate Matt Walsh’s “What Is a Woman?” documentary, sporting a man-bun wig while wandering around conferences to ask pretentious and underachieving economists “what is an economist?” So you’ll have to make do with this not-a-parody column from Soumaya Keynes in the Financial Times: When Is an Economist Not an Economist?

Think of economists as a guild whose members police who is allowed to join and what counts as true economics. By guarding the definition of economic expertise, they preserve their influence over the public and public policy.

This seems mostly right, with the caveat that their definition of “true economics” has fallen so flat on its face that defining their profession by its terms is at this point reducing their influence rather than preserving it. (Also, fun fact: Yes, Ms. Keynes is related to that Keynes! She is his great-great-niece.)

Forthcoming in the American Economic Review, from Daron Acemoglu et al: Eclipse of Rent-Sharing: The Effects of Managers’ Business Education on Wages and the Labor Share in the US and Denmark. Apparently, CEOs with business degrees don’t just wear snazzier quarter-zip fleeces, they also reduce wages by placing higher priority on shareholder value. They do not, on the other hand, increase output, investment, or employment growth.

And, from the New York Times, Wispr Flow is supposed to make writing effortless and magical. So I “wrote” this column with it. Amy X. Wang observes:

To tell you the truth, I hate this. I hate Wispr Flow so much. I hate that so many people in the world are lauding this like it’s the greatest invention, when actually I think it’s making everyone sound a little like an idiot, and now everybody has to read everyone else’s idiot words. I wish I could describe elegantly how much I hate it with some kind of handy, clever metaphor, but that kind of creativity comes to me through writing with my hands.

Speaking of things AI is ruining…

EDUCATION

NYC school system to ban AI for elementary, middle school students (Politico). Good for them. EPPC’s Patrick Brown makes the salient political point: “One political side has its leaders pushing robots as tutors and ‘A1 in every classroom.’ The other side has a major city administration keeping generative AI out of elementary and middle school classrooms. One of those paths is more family- and human-friendly than the other.”

• This misstep by at least one faction of the right-of-center parallels the one I wrote about in Vice President Donald Trump: “If Trump brands Republicans as the party of liberty-means-license and ‘kids want to spend their time gambling with borrowed money because that’s their welfare-maximizing revealed preference,’ while Democrats become the party that speaks in moral terms and works to ensure young men build decent lives, the electoral consequences will be steep.”

In better news, from the State Department, “Vice President J.D. Vance and Secretary Marco Rubio announced today the launch of Foundry School, a training program for entrepreneurs, engineers, technicians, and industrial leaders to rebuild American manufacturing.” Cutting the enormous and counterproductive subsidies to traditional higher education is important, having new models like this toward which funding can be directed is equally important.

And back to worse news, from the Department of Justice, Ohio State University Agrees to $2.1M Settlement to Resolve Allegations that it Failed to Disclose Employees’ Ties to the People’s Republic of China in Applications for Federal Research Funding. Well the fine is good news, but as FDD’s Craig Singleton goes deeper on the problem in Higher Ed’s Secret Foreign Funding:

Washington has a list of names. What’s delaying disclosure? (Wall Street Journal).

China, China, China. It’s enough to make you think entangling our economy and society with a communist, authoritarian one might not be a good idea! Which brings us too…

Share

CHINA

A few decoupling items to keep an eye on, all from Bloomberg:

Top Automakers Urge Congress to Permanently Ban Chinese Cars: “The call by the US auto industry’s biggest trade association — echoing a similar plea made by the alliance and other auto groups in March — underscores mounting concerns in the domestic industry about the threat posed by China’s automobile makers. The alliance represents domestic carmakers including General Motors Co. as well as overseas giants Toyota Motor Corp. and Volkswagen AG.”

• A wild, related statistic from BYD’s latest financial report: “First-half sales from overseas rose 34% to 181.3 billion yuan ($27 billion), accounting for 53% of the total, while they shrank 31% in Greater China.” That’s, um, not normal. “The results show how the vast Chinese market, where annual vehicle sales outnumber those of the US by nearly two-to-one, has become so brutal that not even its national champion can count on making money there. That’s why Chinese carmakers have increasingly turned abroad…”

Why the FCC Is Becoming America’s China Uber-Hawk: “Perhaps less-well recognized is that the regulator is emerging as a key instrument in Washington’s efforts to ‘de-risk,’ or in some cases outright decouple, US supply chains from China. This shouldn’t come as a surprise: Since before the FCC’s creation, the US national security apparatus (and especially the Navy) was paying close attention to devices that transmit and receive signals over the air.”

LABOR x IMMIGRATION

Don’t look now, but: Record-High 47% Want Unions to Have More Influence (Gallup). Of particular note, “partisans differ on whether unions should gain influence, but majorities in all three groups approve of unions overall: 89% of Democrats, 70% of independents and 52% of Republicans. Broad Democratic approval is typical, but this is only the second time in the past quarter century — the first being in 2022 — that a majority of Republicans have approved of unions.”

Perhaps not unrelatedly, the quiet withdrawal of the case for mass immigration continues apace, even on the Wall Street Journal opinion page. In Immigration Becomes a Global Powder Keg, Walter Russell Mead makes the obvious yet not so frequently made point: “In recent years, American immigration advocates have argued that falling birthrates create a need for more immigrant labor. Those arguments are less convincing in the face of the accelerated automation that artificial intelligence appears ready to unleash.”

Example? Watch this “AgTech moon landing moment.” The first robotically harvested head of lettuce!

Perhaps not unrelatedly, the Center for Immigration Studies has released its latest analysis on the foreign-born population in the United States, finding that since January 2025, “The total foreign-born population declined 2.9m; Illegal immigrant population may have declined 2.3m.”

Either “root causes” like climate change suddenly reversed their effect, or enforcing the law works. You be the judge.

One place that enforcing the law seems to work is trucking. The U.S. Department of Transportation announced that it has shut down more than 100 commercial driver’s license (CDL) schools that were granting licenses to drivers who failed English proficiency tests, among a variety of actions. Vice President JD Vance on the problem: “We know that trucking is one of the best sources of employment for non-college-educated men. It was bad for people’s jobs, but it also made our streets and our highways a lot less safe.”

OPT, Yeah You Know Me (you’re welcome, Gen X). Here’s a problem that deserves more attention and seems easy enough to solve: alongside the H-1B mess, people are catching on to the absurdities of Optional Practical Training program (OPT), which was intended to allow foreign college students to work temporarily, but has been expanded by corporations and allied regulators into yet another boondoggle. Bloomberg actually had one of the best rundowns on this a number of years ago in The STEM Graduate System Is Broken. Here’s How to Fix It:

OPT has also opened a side door into the U.S. job market with minimal labor protections and oversight. It is increasingly funneling cheaper and more pliable, visa-dependent foreign candidates into fields such as software engineering and development, depressing wages and making a once-attractive career path less desirable. Moreover, even as OPT benefits U.S. schools eager to attract foreign students, it can undercut American students looking for work. And there have been too many instances of exploitation and outright fraud.

Fair warning, though, from the Cato Institute, which is proudly promoting testimony from its director of immigration studies, David Bier: “If you make legal immigration impossible, don’t complain about illegal immigration. You created it. You made it illegal.” That’s one way of looking at it! Fortunately, not one that conservatives have to put up with any longer.

And finally, speaking of things conservatives don’t have to put up with any longer…

YOUR BAD TWEET OF THE WEEK

Likely a regular feature, given the volume of foolishness out there (nominations welcome). Our inaugural edition comes to us from Grover Norquist’s former tax policy director, Ryan Ellis:

Enjoy the weekend!

Leave a comment

So now we have a split. Understanding America will be returning to your inbox in early September as a bi-weekly digest from the whole American Compass team focused on the challenges of reclaiming American citizenship. Weekly on Fridays, you’ll receive this fine product, The Real Economy, covering the stories that matter in, well, the real economy.

YOUR ONE WEEKEND READ is Reforging American Industrial Deterrence and Reclaiming the Common Good, a fantastic new essay from Congressman Riley Moore in the latest issue of American Affairs. He dives deep into the steel industry as a case study in America’s willful abandonment of its own industrial base and the necessity of reindustrialization:

We must implement policies that align commercial incentives with our strategic interests, so that it once again becomes profitable for private firms to build and sustain the capacity our deterrence depends on. And, ultimately, we must reintegrate our national security infrastructure with a strong and independent commercial industrial base.

It won’t be easy. Wall Street’s profit-maximizing logic is opposed to even modest tariffs to protect American industry, and it will fight even harder against the much higher tariffs and direct federal investment required to rebuild once great mills like Weirton. But doing so is necessary, not only for our national security but for our identity as a country that is independent, self-sufficient, and capable of standing on its own two feet.

Moore’s concept of “industrial deterrence” mirrors closely the “industrial depth” that Assistant USTR Mark DiPlacido and I described a couple of years ago in Big Stick Economics:

The big stick of President Theodore Roosevelt’s dictum is not an exorbitantly expensive fighter jet that takes 40 years to develop, is impossibly difficult to maintain, and depletes the munitions stockpile after a few sorties. Security at home, functional alliances, and deterrence all require industrial depth: a diversified resource base capable of meeting the demands of wartime production, flexible supply chains in competitive markets without single points of failure, a skilled workforce with a strong talent pipeline, and an industrial commons that fosters the interaction and investment necessary for constant innovation. The measure of the conservative commitment to a strong defense is not the size of the Pentagon’s budget or the number of invasions launched, but the willingness to adopt economic policy that ensures market forces strengthen rather than erode the foundations of national power.

Read that one too!

MORE GOOD READS FROM THE WEEK

Wall Street Journal: Europe Chastised Trump’s Climate Rollback. Now It’s Delaying Its Own Green Goals. Developed nations are increasingly balking at the cost of measures to cut down on fossil fuels. In a surprise to no one capable of doing math, the grandiose climate commitments that began a decade ago with the Paris Climate Accord now lie in shambles as the “ambition” of statement-issuing diplomats gives way to the reality of the energy needs of an industrial economy.

New York Times: Private Equity Is Stuck With 33,575 Unsold Businesses. Even amid a booming deal-making environment, private equity firms are unable to exit a growing number of investments at values their investors require. In the past four years, private equity returned 6% annually, trailing the S&P 500 by almost 10 percentage points. This is impossibly bad. The unluckiest monkey throwing darts at a list of stocks would perform far better. At least they’ve ruined companies and degraded services in the process… Great story in today’s Times about the degradation of a once great residential community when the local ownership sold to a private equity firm on the other coast.

One industry they’ve worked hard to ruin is youth sports. You can read more about that in New York Magazine: The Pay-to-Play Childhood. Private leagues have made youth sports expensive, hypercompetitive, and all-consuming. Investors are making a killing. For more on the theme, check out these two Commonplace classics:

• Michael Brendan Dougherty, In Defense of Travel Teams. Travel baseball and the dance mom circuit drain the wallets and time of suburban families. But I’m not going to stop taking part.

• Yours truly, The Moral Arbitrage Driving Wall Street Profits. Squeezing ‘inefficient’ businesses run for greater purpose will generate cash, but not value.

IMMIGRATION x LABOR

Fresno Bee: Federal judge finds Department of Labor’s effort to cut farmworker wages is unlawful. Sorry farmers, but if so few Americans are willing to work for you at a reasonable wage, leaving you desperately reliant on temporary foreign workers, you can at least pay those workers the going rate.

Politico: Unions sound alarm on last-minute push for robot farm equipment. A draft trailer bill would let unpiloted machines work alongside farmworkers, angering labor groups worried about job loss and safety. Bizarre move by organized labor, but no more bizarre than its general opposition to immigration enforcement or restriction. A union representing the interests of legal American workers would be falling over itself to support investment in farm automation, which would address “labor shortages” not by bringing in temporary foreign labor at low wages but instead by mechanizing processes and rapidly boosting productivity, which would improve job quality and wages. Another term for “job loss” of “jobs Americans won’t do” is “progress for workers.” Help us help you, labor organizers.

OH, CANADA!

Shortly after Liberation Day, the commentariat made copious amounts of hay about how the United States was no longer a trustworthy trade partner, its demands were unreasonable, allies would retaliate… and then the opposite happened. Virtually every American ally came to the table and reached a reasonable agreement.

This left Canada in a rather awkward position. Hard to complain the United States is being unreasonable when everyone else managed to get along just fine. And sure enough, the sticking point in the latest Mountie Meltdown appears to be the entirely reasonable and necessary American demand that Canada hold hands with the U.S. and Mexico in keeping Chinese distortions out of the North American market.

As Michael Froman, president of the Council on Foreign Relations and U.S. Trade Representative in during the Obama administration, explained on CNN:

I think the new issue is that the Trump administration is pressing Canada, as well as other countries, to adopt a common approach vis a vis China, whether it’s a common external tariff or export controls, or ensuring that Chinese products, inputs don’t get inserted into products in Canada, that will then be imported into the United States. And that’s a new set of trade issues and Prime Minister Carney has noted that that goes against their sovereign right to establish relationships with other countries. So that’s going to be an issue of contention that the administration is going to continue to have to have dialogue with Canada and with other countries over time.

Prime Minister Mark Carney has acknowledged the same, saying, “the U.S. introduced in the last hours, efforts to restrict our ability to have other trade deals. We’re the partner of choice in many respects for countries around the world, and the Americans wanted to restrict that. Unacceptable.”

But with due respect to Carney, this is not something the U.S. introduced in the last hours. It has been the core issue for more than a year. I wrote this in March 2025: “The third requirement of participation in a U.S.-led economic and security alliance should be the maintenance of a collective perimeter that excludes China. Partners should agree on common tariff barriers, investment restrictions, export controls, and immigration policies.” You should try reading Understanding America, Mr. Prime Minister, if you need help understanding America.

With somewhat less respect, Canada is “the partner of choice”? No, you’re not. The U.S. is the partner of choice. And that’s why Canada has none of the cards, and will inevitably have to make the sorts of commitments on China that the U.S. is reasonably seeking and most other trading partners have already made. While the roughly $900 billion in bilateral trade between the U.S. and Canada represents less than 3% of U.S. GDP, it represents about 40% of Canadian GDP. How much pain Canadians wish to suffer to prove their toughness, before reaching a trade deal on the access they need to our market, is their decision to make.

Last but not least, watch U.S. Trade Representative Jamieson Greer’s interview on the CBC.

Share

THAT’S FINE IN PRACTICE, BUT WHAT DOES THE THEORY SAY?

A couple of interesting papers from highly credentialed academic economists are worth a look:

Caroline Freund, former global director of Trade, Investment and Competitiveness at the World Bank, finds that Foreign Exporters Absorbed Nearly Half of the 2025 US Tariff Shock. Huh. Say more. “Most economic forecasters predicted a sharp rise in consumer prices and significant import disruption.” Yes, that’s true. “Instead, retail prices rose modestly and import-dependent sectors held up. This column uses data for the 50 largest US trading partners to show that foreign exporters absorbed roughly 40–50% of the 2025 US tariff increases through lower export prices–much more than earlier studies suggested.” Interesting.

This is my favorite part: “The aggregate result vindicates optimal tariff theory. It does not mean the tariffs made America better off.” If an economist could cross her arms and stomp her foot in prose, that’s how it would sound. For more on the vindication of optimal tariff theory, be sure to check out today’s American Compass Podcast discussion with Stephen Miran, who chaired the White House Council of Economic Advisers last year.

And at the Federal Reserve Bank of Boston, How Much Did Labor Productivity Gains Offset the Inflationary Impact of the 2025 Tariffs? “We provide evidence that industries in which tariffs induced higher costs in 2025 also experienced greater labor productivity growth, which helped them mitigate those higher costs.” That wasn’t in the models. Strange.

WE CAN JUST BUILD THINGS

Speaking of manufacturing data, The Kobeissi Letter highlights:

US manufacturing activity is rapidly expanding: The Philadelphia Fed Manufacturing Index of current business conditions rose +6.0 points in August, to 47.4, its highest since April 2021.

At the same time, the index of future business conditions jumped +39.2 points, to 73.6, its highest level since the 1980s and its largest monthly increase on record.

Meanwhile, the index of future new orders soared +30.9 points, to 66.0, its highest since June 2021.

All while the 6-month forecast for capital expenditures surged +18.1 points, to 48.2, its highest since the 1970s.

The US manufacturing sector is gaining momentum.

One place momentum is growing? The Hyundai plant in Georgia that faced a massive immigration enforcement raid last year. Now, “the South Korean automaker could increase the planned production capacity of its Hyundai Motor Group Metaplant America from 500,000 units to between 700,000 and 800,000 units by 2028. … The potential capacity increase would be part of Hyundai’s plan to invest $26 billion in the U.S. through 2028, he said. The company aims to launch dozens of new products and has a goal to produce at least 80% of the vehicles it sells in the U.S. domestically by the end of this decade, up from roughly 40% in 2024.”

“For us, the USA is the most important market in the world besides Korea, which is our headquarters,” Hyundai’s CEO told CNBC. Maybe Canada just slipped his mind?

WOMP WOMP

Sad trumpet for Chinese firms, though, whose momentum isn’t growing so well.

Financial Times: How Shein’s IPO lost its shine. Once high-flying fast-fashion retailer is listing in Hong Kong at quarter of peak value after years of false starts.

Wall Street Journal: EV-Maker Polestar Says Trump Administration Strung It Along Before U.S. Ban. The Chinese-owned automaker told dealers it is still trying to understand why it is being barred from the U.S. market. Looks like they, too, could benefit from an Understanding America subscription. Maybe they can commiserate with the Canadians at their next strategic summit.

TURNING TO TECH

New York Times: Meta to Pay Up to $17.1 Billion in Landmark Settlement Over Social Media Addiction Claims. The social media giant settled with 47 states, the District of Columbia and U.S. territories, and agreed to make major changes to its products over claims its platforms endangered children. Stay tuned for more on this at Commonplace shortly.

New York Times: How Big Tech Captured American Schools. Companies like Google and Microsoft have used their money, their might and their massive reach to influence nearly every step of the education supply chain. The atrocious conduct by purveyors of social media has become common knowledge. The parallel playbook run by many of these same companies to cash in on public education and corrupt it in the process is only beginning to come into public view. The fallout is going to be similarly severe.

AND ARTIFICIAL INTELLIGENCE IN PARTICULAR

Quite the comment from Sam Altman:

I thought when we got to GPT-4, which was back in 2023, that very quickly after that there was going to be much more disruption, software businesses up for grabs right away, than it turned out to be. I think I was wrong about a few things, but one in terms of the speed: the economy just has so much inertia. People keep doing the same things, buying from the same company, wanting to use their tools the same way. I think this is actually a positive in many ways, and it’s going to make this big transition go smoother and slower. I’m grateful for it. But it means we’ve all been too ambitious on timelines. Even with this incredible technology, society and the economy will adapt more slowly.

Sounds like maybe his choice between curing cancer and educating the world for free is getting pushed out a few years? Of course, we haven’t all been too ambitious on timelines. Some people with experience in the real world and a preference for analysis over carnival-barking have been making these points for years. But we welcome Sam aboard.

Wall Street Journal: What Problems Should AI Be Solving? Some of the biggest fortunes may be hiding in markets and solutions that Silicon Valley is ignoring.

New York Times: Sick of A.I. Slop? So Are Tech Giants. Spotify, LinkedIn and others are trying to dig out of a digital sewage heap full of low-quality content made with artificial intelligence.

FINALLY, ON THE LIGHTER SIDE

Wall Street Journal: The New Cure for Career Burnout: Clown School. For actors and others worn down by rejection and the pressure to get everything right, clowning offers an unusual prescription: embrace failure.

Enjoy the weekend!

Leave a comment