You’ve not touched on this: there’s immense institutional inertia on the *private sector* side in favor of cheap labor and against capital investment. For the better part of the last 20 years overinvesting in capital has been very risky, because you can’t defer debt service or installment payments in a downturn, but you can sack people. Basically every industry has tried to become “nimble” in this regard, aided by the weak labor market making it possible to throw people at problems instead. Even capital-intensive ones have moved to lease capital and push risks off on large leasing firms, increasing short-term costs to access productivity-enhancing equipment and foregoing the benefits of accumulation.
That will take some time to change, even though the skilled blue-collar labor shortage in particular seems set to continue almost regardless of what we do on the policy side over the coming decade. The Fed might succeed in generating a brief blip that convinces C-suites that the 2010’s are coming back, but the second interest rates go down it’ll be right back to “not enough people”.
Looking at construction, pre-fabrication, and consulting engineering, where I am now, almost *no one* at the senior level believes this to be the case, but almost everyone at the operational level does. I have actual clients where VP’s are screaming upward that they need more and better capital across the board to reduce hiring spend and get prices under control, and CEO’s are basically just sticking their fingers in their ears and belting out “LALALALALA I CAN’T HEAR YOU NEXT YEAR WILL BE 2009!!”
Policy may be slow, but corporate culture shifts are slower. We’re going to be here a while. Invest and plan accordingly, as regards inflation.
I’m not saying you’re wrong, but working in tech, this comment reads like bizarro world to me. The last 15 years have been defined by cheap and over abundant capital being used to drive labor out of work. That’s essentially the entire premise of the tech industry, and has led to most of the big blockbuster growth in the last decade plus. Consider Uber or WeWork as classic cases, but there are literally hundreds (maybe thousands) of companies that have been built on the idea that capital is so cheap you can light it on fire if there’s a chance it will get you to some large-scale vision that’s viable.
Now we’ve seen layoffs across many companies of that type, as the message from investors has been “your business has to actually make sense now, the free money party is over.”
I'm not shy in saying elsewhere that "tech" was one of the beneficiaries of the physical economy not wanting to put investment capital into, well, physical capital. It wasn't that the money didn't exist, it was that demand was incredibly low.
I'll take construction as it was the single largest "offender," so to speak: No construction firm bought more than the bare minimum of equipment to function between 2009 and 2018. A number of large players died or nearly so in 2008-09 because they had capital and debt payments that couldn't be deferred, while their smaller peers, dependent on rental equipment fleets for their needs, just halted their rental contracts, laid a bunch of people off, and skated by ok albeit at vastly reduced size. They were then able to rehire some folks when the bottom finally slotted back in in the 2010-13 timeframe and scale a bit between 2014-18.
Because there was no demand for investment, no investor had anything better to do than to subsidize whatever vaguely plausible sounding stupidity Silicon Valley's scions cooked up this week.
I'm not sure Uber really makes sense as an example here. The premise of Uber as a business is that it is capital-light (Uber does not itself own and maintain the fleet of cars) and labor-intensive (you need a LOT of drivers who are willing to have a gig job that is much more precarious than a 'real' position). I guess the distinction here is between "capital" as physical productivity-enhancing goods vs. "capital" as just the pool of potential investor money you have access to, rather than what you spend that money on.
What you're describing is a consequence of low interest rates combining with a disinterest in accumulating durable capital goods.
I don't think what we've seen in tech is capital being used to lower labor costs. We did see a lot of capital being lit on fire, but I thought that was just inefficient. "Burn money on customer acquisition" is a way to exploit dumb pre-IPO valuations, but are there any real long term winners from this business model? I chalk this up to "capital is so cheap it's not being deployed efficiently."
I guess I would say looking at tech over a longer term, workers are historically expensive and therefore there isn't chronic underinvestment in capital where it will help. Rather no one has invented the machine that puts the workers out of business.
This just strikes me as factually wrong. Amazon is putting tons of capital investment in labor saving technologies (drone delivery, warehouse automation), Walmart (self-driving trucks), retail in general (self-checkout), software development (DevOps/CICD), customer service in general (self-help, self-provisioning of services).
We have to treat Amazon as different from Google/Facebook/etc as different from Uber/WeWork/etc.
Amazon has been around a long time and it looks to me like a logistics company and a tech company at the same time. They've invested tons of capital in their logistics system - which I would say is both really good, and also makes them an outlier for American businesses with physical stuff.
As a tech company, I think they're similar to e..g Google - they have an expensive tech work-force and haven't really changed the game on how many nerds they need, and they're willing (and have been willing) to build data centers because you need those to run the business. But they don't save labor by opening another data center - they need more nerds to run the place.
And neither Amazon nor Google are burning VC money on customer acquisition.
I think my meta-point fits well with Amazon: tech workers are expensive, so tech companies don't scrimp on infrastructure, but there's also no robot coder to replace the humans yet. So they don't have a path to spend even more on infrastructure to cut labor costs.
Tech isn't just VC & the VC startups you've heard of aren't the totality of all startups. Attempting to use narrow definitions to exclude companies like Walmart, Dell, Dominos, Kroger and on and on from "tech" is just ignoring how they either built in house tech capabilities or relying on partners (startups and more) to increase labor saving capabilities.
You are also, for some reason, treating software development labor as a different category than labor - which is just factually wrong.
Except it is the only place to look. If the company is not running a profit but there is an assumption of a future profit(the stock price says there is), then that profit is assumed to be a percent of sales. Where else can you look?
> "Burn money on customer acquisition" is a way to exploit dumb pre-IPO valuations, but are there any real long term winners from this business model?
There are a few big ones, yep. Facebook, Amazon, and YouTube all spring to mind as companies that blew lots of money on customer acquisition until the properties of scale (whether just economies of scale or network effects) made them juggernauts.
But that’s the key: you have to be in a business where scale gets you something. WeWork is selling office space, and office space doesn’t really have any network effects or economies of scale, so burning money on customer acquisition is dumb. Facebook has both network effects on the user side and economies of scale on the ad network side, so forgoing profit to gain scale worked great.
Maybe I'm just older and more cynical, but it seems like the "light the pre-IPO money on fire" aspect of venture funded growth was a lot more prevalent and dumber on the more recent "unicorns" - Youtube, Facebook, Amazon, they're from an older generation, and never came close to the "lose money on every customer and make it up in volume" model we've seen recently.
I see Amazon as fundamentally different from Uber - Amazon's proposition was: if we make any money from selling anything (or anyone gives us any money) we can find productive ways to grow this business" - and now they have huge data centers and a logistic network and gajillions of employees - they're a legitimately huge business. Ride sharing struck me more as "we're going to subsidize the product, but it can never be profitably delivered at this price point. We're just hoping you get too used to it and we can raise prices later."
There was an interesting comment from the boss of Taiwan Semiconductor related to this, along the lines that US companies focus too much on optimizing rates of return but that TSMC measures results in tons of cash - https://twitter.com/trengriffin/status/1538326004124377088?s=20&t=z9hQ_GTcBESphIv4WtT9og. By focusing on growing the business and total cash accumulation, TSMC has achieved market dominance. I'm sure there is more to it, but if you focus on the ratio, you will always end up with a smaller business and forego needed capital investments.
Chang is correct, but the reason ratios matter to US businesses is that ones with the best ratios get the capital. So you have the software giants, then everyone else. In practice, this is where the vulnerable supply chains come from.
I wonder if the end of depression economics will move the Democrats and corporations even closer, adding their mutual interest in increased immigration to the woke pressure hitting corporate leaders from their workforce. Who knows, there may come a day when these companies understand that greater economic growth (which is higher under Democrats than Republicans), along with an expanded workforce and a happier set of young employees, is even more important than shaving corporate (and personal) taxes a bit, or even getting rid of the odd regulation.
While as a liberal Democrat, I wouldn't be that happy about welcoming these new members to the club, defeating the around-the-bend Republican party is so important that we can't be too choosy.
I know Matt hates the idea but I continue to think the much more likely medium term result is Democrats becoming much closer to business. It seems like the party is much more in unison on the social elements of the party then the economic elements. I predict many more of the future moderates will be Sinemas than Manchins.
Of course, but the mid-level and more senior operations and engineering folks know it's not coming. There's no one left, every skilled blue collar guy or gal who isn't a complete invalid or senselessly, hopelessly lazy is already working and has likely hopped for better pay once or twice in the last year already.
The more forward looking among the operational cohort are now screaming for capex, momentary recession be damned. Only the MBA's at the top keep thinking we're going back to 2009 at the end of the year.
In real life, companies are terrified of having to lay anyone off and are much happier to make capital investments that come at a well-defined risk/reward ratio. Your perception of how companies behave is just wildly detached from reality.
If you need a citation for something this basic I don't know what to tell you, I'm not going to go find one for you. How about you ask the guy above for a citation instead?
It looks as if the ground is finally shifting, let's see how it plays out.
No doubt the AEI and Chamber of Commerce will be frantically bellowing to reallocate all immigration to low-skilled labor, the good news is neither party gives a damn what they want anymore.
Plenty of rent-seeking, still, but that's not going to get *worse* at least, and may well improve slightly in healthcare and housing.
All else equal, the near-future labor market will encourage investment in shit that actually increases physical productivity, whether that's physical or digital capital. Hopefully it will siphon off some financial backing from what we usually call "tech", aka fantasyland.
Capital investment is decided not by the absolute cost of capital but by the relative cost and risk of spending on capital and labor.
The exact reason that capital flocked to tech in the last decade was that the “real” economy was fed on cheap labor with no bargaining power. Demand for physical capital plant was very low prior to 2018 or so. Low interest rates were a sign of low demand as much as anything, so the government blew a bunch of cheap borrowed money and dozens of tech firms got a decade-long grace period of wild unprofitability while the physical economy made basically no productivity gains at all.
I’m already on the record saying “tax the shit out of social media profits especially and tech profits to a lesser extent in an effort to make the sector less attractive to investors”. I’ll add “keep the economy hot enough that physical capital accumulation is once again incentivized even if inflation stays at 3-4%” and “cut some of the bullshit red tape that pointlessly hinders productivity.”
1. Housing, transport infrastructure, the power grid, climate mitigation work, rewilding initiatives, and a host of other things would beg to differ.
2. To the very limited extent that this is true in certain classes of consumer non-durables, it’s precisely because we’ve pushed production across the globe in pursuit of cheaper labor costs.
3. The corollary to that is that, to maintain the present atmosphere of mild abundance as labor costs globally rise and we drain the whole pond of cheap labor dry, we *must* invest in making physical processes more automated. Globalization was, at best, a pause button on that effort while manufacturing diffused more widely.
Funny that you, of all people, should accuse anyone else of reversing causality.
Capital was expensive as hell for most of history, but in the foundational moments of the Commercial, Agricultural, and Industrial Revolutions in Europe, labor was moreso.
Et Voila!
Does no one else find it odd that our main resident libertarian and techno-optimist is advocating just saying "fuck it" to the physical world and our, ya know, whole standard of living?
I mean, from what I've seen they generally think that *governments* should be getting out of the way and allowing the accumulation of capital to do its job.
This is the first time that I've seen someone say "yea, we don't need to invest in building things faster or making them more efficiently at all" as if things will just magically continue to work.
This is, of course, all basically right. But supply side reforms shouldn't mean forgetting the lessons of the past two years about the shortsightedness and risks of a fragile, excessively offshore supply chain. The covid disruptions in China and need to have flexibility to respond to Russian military aggression should have reminded us that a neoliberal trade policy based on the most rosy Pax Americana assumptions of the 90s was foolishly risky. The trick is to keep the good parts of those policies without repeating or perpetuating the mistakes. Some of the tariffs on basic products from overseas countries might make sense, even if it means a little short term pain, to ensure we aren't overly at risk if shipping was disrupted, etc. But tariffs on stuff from Mexico or Canada? That's dumb.
more cynically though, it made me think about whether our high defense spending might have some financial return after all. The Spice must flow - and American hard power might keep things moving. (Just not in a pandemic.)
Of course it does ! Just look at Turkey’s leverage in NATO. Soft power is nothing unless backed by hard power. Also us Defense spending is very low by historical standards, and probably inadequate for the challenges us faces, a fact the left oddly doesn’t like to acknowledge and the right oddly sort of does (except won’t do much about it).
We may be spending defense dollars inefficiently, but when you look at the comparative capabilities of the American and Russian military, you begin to understand that inefficiency is relative.
I suspect we'd see the same thing for the Chinese military, but fortunately, we haven't yet had an opportunity to see them in action.
I've been listening to a lot of defense analysts and a common refrain is that America's military is probably closer to Russia's performance than we would like to admit. Out initial engagement strength is much higher, but we've reduced our industrial defense capacity to an extent that our ability to sustain large scale conflict is likely similar to the Russians.
That’s true of all public spending (I dare say all spending period). The weird thing is that when it comes to the military and that alone, right and left switch sides, rhetorically at least. Never understood it. I’m a big government guy. I want strong well financed first class us public health sector, education social security, and yes military. Weird the NYT types advocate for all but the latter and WSJ only the latter.
The fact that the factory that did not invest in chip production becasue car companies did not place the orders was located Taiwan and not Paduca, is irrelevant. It does not make the supply chain more risky and uncertain. The supply chain stories are all about specific manufacturing or transportation firms not being able to respond to orders, not the location of those firms.
You're missing my point, and talking on the assumption that the conditions since the 90s will prevail and continue going forward. Russia, barring regime change, is becoming more aggressive and two years from now will be more immune to Western pressure than it is today. China is making moves on Taiwan. We don't know if this is passing turbulence or the early days of WW3 - and it's not really in our control. Now is not the time to become more rather than less dependent on faraway countries whose shipping can easily be disrupted -- and will be if there's more hostility, in which case the location of Taiwan vs Paducah will be relevant -- for items as basic as steel nails or tubing needed for domestic energy production. Or chips, for that matter.
I've been hearing this kind of rhetoric more and more, and it strikes me as a bit of a self-fulfilling prophecy. I agree that the behavior we're seeing China and Russia is extremely troubling, but one should not disregard that both these countries pay a significant cost for their negative behavior. Russia has certainly felt a significant cost from the West's reaction to their invasion of Ukraine. Similarly, an invasion of Taiwan would certainly not be costless for China--a war that involved America, would be tremendously costly for both countries (both economically and militarily). America's ability to impose this economic cost is well tied up with how entangled our economies are.
I worry that the recent push for "decoupling" from China would lower America's ability to impose these kinds of costs on China in the long term. It is true that we can't exactly control the actions of these countries' dictators, but our policy can determine how interdependent our economies are in the long term--that, in turn, can make aggressive actions (from either party) seem more or less unreasonable in the future. I'm starting to get concerned that our actions and policies today might make a confrontation with China much more likely in a decade or two--it certainly seems reasonable to believe that a confrontation between decoupled economies is more likely than between strongly coupled ones.
On the other hand si vis pacem para bellum - if you wish for peace prepare for war. As long as China is the one gaining in relative power the chances for conflict rise. If “decoupling” relatively weakens China it’s good.
I understand the argument for economic security but it bugs me that in effect we'd be telling democratic Taiwan, "We need to impoverish you because China may want to conquer and oppress you some day."
We do need allies in the world, and for them to have reasons to value their alliance with us, such as the ideals we stand for. So we may need to balance possibly competing goals, such as helping lift up the rest of the world versus building more of an economic fortress America.
Sorry, I was arguing against the common complaint against "supply chain" uncertainties whihc is orthogonal to your concerns.
Depending on how one see the future real supply disruptions would lead to different policies. In principle, I guess, we put a different tariff on each product depending on the strategic importance and the likelihood of supply from that source interrupted -- central planning. For me that is out, but I'll look at your intermediate proposals.
To the extent that suppliers are located far away from their customers, that does introduce additional layers of complication - there are more opportunities for things to go wrong. Multiply that by thousand or millions of transactions over time and, well...it's far from the only reason for the supply chain crisis, but it doesn't help.
China was always going to build up production capabilities, watch them wither in the US, then have us over a barrel. I don’t like Trump, but he didn’t cause this. He might’ve accelerated the inevitable pain a bit, but better now than later once even more our domestic production capability was gone.
Predatory pricing doesn't work for private enterprise because it requires the monopolizer to lose money as new entrants try to regain a foothold. Geopolitics doesn't work this way...China would be happy to "lose" money under this arrangement in exchange for a "destroy America's economy" button, and would exploit the 10+ years it would take for the US to regain capacity.
I also don't think the failure of predatory pricing strategies extends to extremely complex industries in which there are long-term educational needs, coordination, infrastructure, network effects, etc. The dynamics of building chips isn't the same as retail - if it was, low-income countries would be doing it by now.
Chip manufacturing is predominantly done by Taiwanese rather than mainland Chinese facilities -TSMC is generally acknowledged to be the industry leader (this March 2022 article https://www.fastcompany.com/90734580/why-intel-wants-congress-to-move-chip-production-back-to-the-u-s puts them at 56% of the global market), so I'm not sure what effects chip tariffs on China specifically had - although I heard plenty about supply constraints from Taiwan where the auto industry canceled all their orders due to incorrect demand forecasting at the beginning of the pandemic and TSMC basically shrugged because they were older, low-margin products they didn't particularly care about making in any event.
With respect to the predatory pricing argument, i think you're underselling the risks when it comes to semiconductors - it's very much a strategic industry. The barriers to entry, capital investment requirements, and lead times on chip manufacturing are really, truly, mind-boggling staggering. I'm not sure if anything else even comes close (maybe parts of aerospace?). If your enemy doesn't have a reliable chip supply, they're not going to be able to build one in the time it takes to lose a conventional great-power war (if it's a nuclear great power war I think this is largely moot in any event). This other article notes that TSMC plans on capex of $40-44 billion in a 2022 alone https://focustaiwan.tw/business/202201130014
The only industry with worse timeframes between "announce plant" and "production", that I'm aware of, is nuclear power.
And that's a function of the latter being dysfunctional as hell, not the immense complication that chip foundries suffer from.
An acquaintance in that space, over a lot of beer in Beijing years ago, described a chip foundry as the closest single thing humanity has ever created to a living organism. After you build it from principles identical to your last one with the benefit of tens of thousands of years of accumulated engineer experience, and stock it with proven equipment set up in well-understood ways... you then spend 2-3 years "raising" it like it's a child before it actually produces results that are up to industry standard.
It's like no other manufacturing application on earth, aerospace included. We're operating so close to the frontiers of what's technologically possible, and so damned small/far away from the realm of Newtonian physics, that doing the same damned thing most certainly does not produce the same damned result, at all.
Intel *needs* to stop being the half in "two and a half chipmakers" if the US is to have a secure future, and that'll take at least another decade and a shitpot of subsidized investment money.
Fab's are extremely expensive to run (fixed cost). Accordingly, they run at capacity 24hrs/day every day. Thus, even if 10% of the chip manufacturing market was supplied by China, eliminating this (and it was was big rules not just tarrifs) causes large pricing shifts as there is no spare capacity to soak up the difference.
Additionally, it takes a 9 months (more or less) to bring up a product in a new Fab assuming that the new Fab has a very similar process available. Otherwise, you may well need a complete redesign which could take well over a year.
Heaven forfend that I should defend Trump or his tariffs, but the chip shortage was that orders did not get placed, not that tariffs on "Red" China :) impeded supply.
Freer trade ensures that when orders do get placed, the supply come from the lowest cost source and this in the aggregate raises growth and real income. Freer trade is a growth strategy, not an inflation strategy.
This was certainly an issue but the restrictions imposed on U.S. manufacturers with regards to chip purchases from China really did have a major impact on design. It wasn't the 25% tariffs.
I actually think that these restrictions may have been the best action Trump took (and I am as anti-Trump as they come). It was unfortunate that they coincided with the start of the pandemic and failures to place orders by companies expecting the collapse of future orders.
I am sure some of it was, as you say, failing to place orders. But think about how many IC's are in a car (my guess=many thousands). If any one of those IC's is cut from production then the car manufacturer, at best, needs to qualify a new part (6-9months). More likely, with integration as it is today (I work in ASIC design), they will need to redesign PC boards to work with non pin-compatible devices. This means design time in addition to qualification time (a year).
Worse still, if any of the parts they cannot get are ASIC's then you need to convince a company to design a new part for you and qualify it (1.5+ years), except they have no reason to believe you will continue buying it once the semiconductor crunch ends.
There's never any logic in who gets credit/blame for economic events. Lots of professed free-market capitalists will say the President runs our planned economy if the commander in chief is from the other party...
the party that controls the presidency the summer before a presidential election gets the blame or credit for the economy. winning wars is also popular but the effect fades quickly. those are the only firm rules.
Particularly frustrating to see that CA’s solution is “Millions in California to Get up to $1,050 in ‘Inflation Relief’.” [1]
> “Millions of Californians will be receiving up to $1,050 as part of a NEW middle class tax rebate. That’s more money in your pocket to help you fill your gas tank and put food on the table,” he [California Governor Gavin Newsom] tweeted.
We did something similar in GA with “Kemp: $1.1 billion in Georgia tax refunds begins this week.” [2]
> House Bill 1302, which Kemp signed into law March 23, will give a refund of up to $250 to single filers, up to $375 to single adults who head a household with dependents and up to $500 to married couples filing jointly.
So this a general problem across states and it seems that the state and local support funds in ARP were too large and it’s giving rise to these counterproductive actions. It would’ve been great if we had already passed BBB with some provisions to claw back excess state and local support to prevent this.
It's an interesting corollary to the tax cuts some red states have put in with their excess funds...in both cases one might go "oh gawd this is going to increase demand and cause inflation". Weirdly, a regressive tax cut might be less inflationary. My take-away is that we gave the states too much money. We totally won last year's war.
As a Californian and a Newsom supporter, I throw my hands up. I mean, why? It's not as if Newsom fears defeat in November or that Republicans will take the legislature. If ever there was a case for don't just do something, stand there, this is it.
I believe California is required to return excess to taxpayers (Gann limit). The whole 'inflation' angle is just Newsom trying to take credit for doing something he was required to do.
Colorado is doing the same thing, but it’s a requirement of TABOR. The Democratic governor and legislature moved the refund date to before the election however.
Much of this is a consequence of the feds giving states a ton of money assuming that states would need it due to reduced tax revenue and covid spending. Turns out those assumptions were not correct.
Given the current macro-economics: save. If you're a state, save for a rainy day so you don't have to cut basic services when we get an intentionally induced recession to cool down demand. If you're the Federal Government, run smaller deficits so higher interest rates won't eat into the budget.
Same as MY's advice last week about how individuals can fight inflation...find a way to not put the money into circulation chasing goods and services.
Minor correction: The FAA did *not* change the number of hours to obtain a Commercial Pilot's License. I know, because I have one. They changed the qualifications to be a first officer on a scheduled airline passenger service. Previously, the captain had to have an Airline Transport Certificate (1,500 hours experience) but you could be an F.O. with a CPL (250 hours). Now you need an ATP to be an F.O.
To mitigate the damage, the FAA introduced a "Restricted ATP" that allows you to be an F.O. (but not a captain) with less experience than the full ATP, but still a lot more than CPL.
This doesn't change the gist of your argument, but the text should be clarified.
And also upgrade and modernize our seaports! But we legally cannot. Singapore has spent a lot of money and effort modernizing and upgrading their seaports recently. Now, I am not expecting Singapore-levels of efficiency here in the US (yet), but it is worth noting that some of the things Singapore is improving are actually illegal to do in the US, not just difficult. Singapore is using dredging and land reclamation to make more space but using foreign dredging companies in the US is actually illegal, so we only have like 5 dredging companies and 16 dredging ships (that do not perform well by international standards) for the entire country, and many projects get only 1 or 0 dredging bids. Union contracts also make it very difficult to add any automation to ports. Everything has to be done by a person, no matter how comparatively inefficient it is. And last year's infrastructure law made it illegal to use any of the money for automation at seaports. Not that improving seaports will be a panacea for inflation, but currently American seaports are some of the most inefficient in the world, so improving them should at least help.
'Allies' doesn't just mean 'friends'. To be an ally with a country is usually understood to be a pledge to come to its aid if attacked. India is a nuclear nation that has active border disputes with two other nuclear nations, and at the same time there are no vital American or western interests in who controls what bit of Tibet or Kashmir. Similarly, Vietnam is a country with a repressive communist government that has previously been invaded by China and has active disputes with China over maritime possessions.
It's good to have friendly and productive relationships with other countries. But that can be done - in the case of Vietnam, *is* being done - without becoming 'allies'.
I just disagree with the entire premise. To the extent that 'countering China' is a worthwhile or moral goal, it can be done without creating formal new alliances. Smith is starting from the conclusion that it would be good to encircle China with countries armed with Western weapons and an understanding that the American military will ride to their aid if they get in trouble, and then working back from that to decide who those countries should be. I am starting from the premise that America should reduce its international defence obligations and reject new ones that don't serve vital national interests, and neither India nor Vietnam do so.
India in particular would be a great ally to have along with all the other southeast Asian countries. But they haven't been acting like they would make a good partner. We made a lot of icky partnerships during the cold war because communism looked like an enormous global threat. China is a problem but doesn't seem like it's such a big problem that we should be ignoring human rights to maintain alliances. Plus India will already oppose Chinese influence without any intervention by us.
I don't think the human rights objection makes sense given that we have an alliance with Saudi Arabia. China to me seems like a much bigger threat than Iran.
(To be fair I think we should sort of cut ties with them because I want us get out of the Middle East anyways, and MBS won't even pump more oil because he has beef with Biden or something.)
Agreed. Our alliance with the Saudis gets worse all the time and now that our interests in the region are waning, the only reason to keep up the alliance is to prevent the Chinese from worming their way in. And I would argue that we should make it clear to MBS that if they don't shape up we will start warming up to Iran.
We can't afford to only have saints for allies, but the reason to see China isn't that they have a huge economy. It's that they are totalitarians who have no respect for human rights and the rule of law (at least as we know it). We need to make alliances with nations that have similar values and use those relationships to reinforce those values, or else opposing China won't make a whole lot of sense.
If our goal is to somehow contain China and we're willing to take economic pain (in not free-trading with them when we need supply-side help) to do it, then having good trading relationships with lots of other countries in the area is probably a good idea.
I recall one idea you had was that in a fiscally constrained environment, politics would normalise as both parties tried to advance their own economic ideas instead of culture war ranting. Instead, I suspect that we are going to get even more culture war ranting as both parties try to protect their friends. The Democrats want to protect typically minority workers protected in not-too-efficient public sector jobs (like subway conductors). The Republicans want to protect their new friends in the white working class, who may have jobs in basically corrupt private sector industry (like construction). There is, of course, a strong crossover between the two groups.
My suspicion is that both parties will fight like rats in a sack to defend useless or grossly inefficient occupations. The idea that parties should try to manage the economy efficiently will become eroded, in favour of pointless make work.
I could use a bit more clarity on what some of the holdups are. Take the jones act for example, my understanding is the WH can issue a temporary waiver. So even if there is coalition politics or strategic disagreement as to if getting rid of it permanently is a good idea, it could still be eliminated temporarily to ease temporary pain.
Matt has been calling out ‘the main choice groups’ for dictating bad legislative strategy on abortion. But even in that case he’s not telling me it’s NAARAL to blame—So I’m not really even sure what the main choice groups are right now. Who is behind the jones act? Would they settle for temp waivers at this moment but others are holding out for permanent repeal? What’s actually happening?
It seems like temporary waivers happen from time to time. I don’t think anyone has ever paid a serious political price for them. Maybe folks think it’s different following a natural disaster.
Or maybe our current China / Russia tensions have made people in the WH feel like protectionism toward Us flagged merchant fleets is very good! Idk. I sort of assume what’s really going on is that the WH is actually just having trouble making new policy on al the different things at once. But I’d love to hear some informed gossip about it!
Trump used Jones Act waivers for Puerto Rico after Hurricane Maria. Because Biden is so high on using the Defense Production Act, you would think he would act the same with Jones Act waivers, but that doesn't seem to be the case.
I think the point of Matt's column is that the government can't do much about short-term supply problems but should pursue actions to improve supply over time.
The problem with a Jones Act waiver is that it would make Biden look feckless. Even if it did lower the price of gas by fifteen cents ceteris paribus, the noise in prices would be so great that no one would notice and people would see him as playacting at trying to solve a problem. Biden began releasing oil from the SPR three months ago; the price of gas only continued to go up (though it's slightly decreasing now). What good did that action do him?
"In a tight labor market, allowing more imported construction materials doesn’t mean fewer jobs; it means a transition of jobs out of nail-making factories into making houses with nails. And that means an overall more prosperous economy."
I agree. But, it's often hard to do politically, when the nail factory jobs are located in swing states and have well-organized unions, while the making-houses-with-nails jobs are scattered throughout the country, and much less well-organized.
Yeah, You’ve been pushing these ideas for a while now. I’m still skeptical. I feel like the combination of Trump, the pandemic, and now the invasion of Ukraine have all really really emphasized the strategic dangers of de-industrialization. Long term America should figure out how to make a whole lot more things in America, by Americans. Preferably well paid unionized ones. Rather than ranting about inefficiencies and how it doesn’t square with their ‘90s models, economists would do better to use their brainpower to figure out what needs to be done to make it work.
I think we can probably work to distinguish between consumer trinkets and strategic concerns. Reliance on China for cheap furniture and toys? Meh.
Reliance on China for a disproportionate share of refined rare earth metals and batteries? Worth addressing.
The flip side of not relying on “cheap-by-American-standards” labor and embracing a larger role for capital goods to enhance productivity is that many processes can be done competitively at home or nearby once again.
I expect the trend of automating anything which can be automated in manufacturing to pick up again after a few years of CEOs getting sick of handing their blue collar workers 5-8% raises without commensurate productivity upticks.
As to raises etc. ceo pay rose meteorically in the past 50 years far beyond anything justifiable by performance whereas workers pay lagged productivity. It’s not about efficiency but power. If unions are strong again worker pay will rise, if need be at CEO’s expense. If not then not. By comparison to us or uk, Germany didn’t de-industrialize and didn’t push their blue collar workers out of the middle class and that didn’t make them uncompetitive.
CEOS don't get paid with corporate revenues. They get paid with stock. CEO pay ha risen so much compared to worker pat because stock prices have risen so much, not because companies are giving them more money out of payroll.
Interesting theory. Doesn’t make it less foolish strategically though. Also worth asking how much overlap there actually is between those who lost middle class jobs in factories and middle to upper middle class managerial types ?
It's famously difficult as an English speaker to go to Germany to learn or practice German, because all the Germans immediately switch to English as soon as they hear your voice.
Ok. What about nails? MY basically suggests we import them from half way across the world and let local industry die. Are nails strategic or not? I would guess yes.
If you can scratch-build a production line for something in 3 months in any port city in the world, it’s not strategic, except maybe blown-mesh masks, where the use case is “need this yesterday”.
I think a lot of this low-level manufactured goods (not consumerist trash that we can do without, but actual foundational building materials) should be considered pretty strategic.
Wire-cut nails are so simple that I could maybe see an exemption...but we are at the point where a lot of our basic manufacturing know-how is atrophying, so maybe not.
FWIW, I've spent about half of my career as a mechanical engineer in various manufacturing or manufacturing-adjacent firms
I agree, but there has to be a cut-off somewhere. Wire-cut nails, cement or gypsum board, and plywood almost definitionally fall on the non-strategic side of that cut-off.
I think it more important by far to maintain manufacturing capacity in the capital goods and machinery used to make end products, TBH.
It’s just incredibly simple to set up reasonably productive manufacturing lines for a lot of consumer goods, especially raw materials, if you have access to the capital and precursors. High-precision planers, autoclaves, petrochemical plants, UV photolithography machines, and glass fiber extrusion equipment, on the other hand…
I understand, but again, I can’t fathom thinking it worth the cost to tariff screws by a factor of 6 to maintain production here for “strategic reasons”.
I also think you’re overstating the complexity here. It’s not 1815, when the screw manufacturing capacity of Great Britain was the main bottleneck in the production of firearms for her armies. The definition of “high value added” is a moving target.
Aside from select aerospace applications, this doesn’t make sense, and to my limited understanding those have mostly moved on to rivets and complicated-ass composite layup joints anyway.
I mostly agree, but I'm not quite as comfortable saying that a reasonable efficient production line can be set up that quickly, even for stuff like sheetrock and concrete.
Even a lot of simple things require people to know how to do it. Not just the line workers, but supervisors and management and SMEs...and with the Boomers retiring rapidly, a lot of that human capital/knowledge from our pre-post-industrial days is disappearing.
I don’t entirely disagree, but there needs to be a balance.
Its not at all reasonable to ask folks to spend 3X as much to build a house because some bureaucrat decided that cheap ceramic tile, drywall, and copper wire are strategic goods.
That will make things worse, not better.
One dimension we’ve left to the side is that when we consider whether something is strategic or not, we need to consider how long we can go without it on a war footing. Drywall, unimportant. Cement, middling. Inertial guidance systems for cruise missiles, crucial.
We can afford to make many or most things cheap to consumers so long as, again, we maintain control over high value added processes and industries crucial to quickly restoring the global trading order after a disruption, i.e. warmaking.
Are we bad at manufacturing? Some quick googling says our manufacturing value was $2.35 trillion in 2019. That's not nothing, though granted China's was higher at $3.8T (though I wonder how much of that was assembling more complicated imports).
Our manufacturing-by-value is decent, because we focus on higher-value goods.
The argument is over the value of maintaining a certain amount of critical low-value-but-fundamental manufacturing for when there are (inevitably) trade disruptions and other international supply shocks.
It's true we felt this with the lack of PPE early in the pandemic, with limited stocks of masks, pipettes, test tubes, smocks and what have you. But how important is it to have a continuing manufacturing capability for those types of things rather than just having stockpiles to cover reasonable disruptions? Is it vital for the US to have a pipette manufacturing capability in case of a 100-year pandemic crisis?
Who said maximum efficiency should be the no. 1 priority ? Also I’m sure clever enough economists would realize perceptions of security (by individuals and in terms of a country’s projections of resilience and power) need to be taken into account in the economic calculus one way or the other. A risk factor in other words.
Baby formula and gasoline are purely domestic - Buy America is bad economics and is more likely to make things worse than better all while making everything more expensive.
Idea for a public policy that could ease supply constraints in tax advisory jobs: let the IRS build its own online tax prep software. So much of the goat rodeo of last tax season was taxpayers getting mixed up on the amount they received in EIPs and CTCs, and almost none of that would have happened if these taxpayers could have used online tax prep software that already had that information in its database.
Another idea: pass the "direct pay" tax credits in Build Back Better. If Manchin is so concerned about inflation, why is he endorsing make-work for people working in tax equity?
Third idea: replace the 179D deduction revamp in Build Back Better with something that doesn't require a small army of tax consultants to navigate. Energy efficiency as a service contracts and pay for performance programs at utilities have become more common—asking the tax code to measure performance on energy efficiency is unnecessary in those situations. Repeal section 179D and instead add a paragraph to section 168 that says a taxpayer can get 100% "bonus depreciation" on a deep energy retrofit if they make an energy efficiency improvement in the course of the trade or business of selling avoided electricity demand ("negawatts"). Achieves the same thing as old 179D with far less work for places like Alliant Group.
The IRS is currently prohibited from operating any online tax prep software, largely due to the lobbyists from the commercial tax prep companies. It is extremely unlikely that bills to change that will ever see the light of day.
Republicans seek to defund the IRS so, even if it were allowed to create its own tax software, it wouldn't have the money to do so. However, even when Democrats are in control, the law prohibiting the IRS from competing with TurboTax never changes. That's not Republicans (this is the type of thing that could be easily thrown into a larger budget reconciliation bill). That's lobbyists. And the Intuit lobbyists own both Republicans and Democrats.
"But when the economy is a bit overstimulated and also hit by negative demand shocks, it’s the perfect time to talk about boring neoliberal stuff like free trade." --> Typo? Shouldn't this say "negative supply shocks"?
"You can have really prolonged labor market slumps, creating periods where protectionism really does create jobs."
I think it's important to note that traditional free trade theories don't dispute that protectionism can create jobs in specific industries or potentially net create jobs in the overall economy in the short run. The argument for free trade is that this is (1) bad for consumers (who should always be the top priority in economic thinking -- everyone is at all times a consumer) and (2) bad for producers in the long run due to malinvestment and lack of incentive to invest, innovate, etc.
Speaking of cracking, America has insufficient cracking capacity to produce adequate supplies of gasoline. This is going to be somewhat alleviated by recent events where refiners are able to restore capacity lost due to Covid but since every refiner in North America is currently competing for the industrial services companies workers and equipment required to do this it is taking time. There are shortages of personnel and equipment required to do this. Nevertheless refinery throughput is climbing rapidly towards the 95% at which it has been hovering for decades.
The usual methodology of pundits is to attribute the drop in refinery throughput capacity to the malign oil companies and their evil executives. So, naturally, this is completely false. The thing that happened was that Covid hit. Annual shutdowns or outages as some call them, were scaled back. Not because anyone anticipated reduced demand but simply because these shutdowns require many hundreds and sometimes thousands of specialist workers to come onsite, They work out of mobile trailers used as offices, lunchrooms and some pretty impressive portapotties. And this could not be safely accomplished. So the scope of work was severely scaled back to the minimum, in some cases, that permitted continued operations at reduced capacity. This happened everywhere.
That throughput capacity begins to inexorably degrade the minute these plants are brought back online. Deferred maintenance made the problem now of restoring capacity even larger. But we are catching up.
You’ve not touched on this: there’s immense institutional inertia on the *private sector* side in favor of cheap labor and against capital investment. For the better part of the last 20 years overinvesting in capital has been very risky, because you can’t defer debt service or installment payments in a downturn, but you can sack people. Basically every industry has tried to become “nimble” in this regard, aided by the weak labor market making it possible to throw people at problems instead. Even capital-intensive ones have moved to lease capital and push risks off on large leasing firms, increasing short-term costs to access productivity-enhancing equipment and foregoing the benefits of accumulation.
That will take some time to change, even though the skilled blue-collar labor shortage in particular seems set to continue almost regardless of what we do on the policy side over the coming decade. The Fed might succeed in generating a brief blip that convinces C-suites that the 2010’s are coming back, but the second interest rates go down it’ll be right back to “not enough people”.
Looking at construction, pre-fabrication, and consulting engineering, where I am now, almost *no one* at the senior level believes this to be the case, but almost everyone at the operational level does. I have actual clients where VP’s are screaming upward that they need more and better capital across the board to reduce hiring spend and get prices under control, and CEO’s are basically just sticking their fingers in their ears and belting out “LALALALALA I CAN’T HEAR YOU NEXT YEAR WILL BE 2009!!”
Policy may be slow, but corporate culture shifts are slower. We’re going to be here a while. Invest and plan accordingly, as regards inflation.
I’m not saying you’re wrong, but working in tech, this comment reads like bizarro world to me. The last 15 years have been defined by cheap and over abundant capital being used to drive labor out of work. That’s essentially the entire premise of the tech industry, and has led to most of the big blockbuster growth in the last decade plus. Consider Uber or WeWork as classic cases, but there are literally hundreds (maybe thousands) of companies that have been built on the idea that capital is so cheap you can light it on fire if there’s a chance it will get you to some large-scale vision that’s viable.
Now we’ve seen layoffs across many companies of that type, as the message from investors has been “your business has to actually make sense now, the free money party is over.”
I'm not shy in saying elsewhere that "tech" was one of the beneficiaries of the physical economy not wanting to put investment capital into, well, physical capital. It wasn't that the money didn't exist, it was that demand was incredibly low.
I'll take construction as it was the single largest "offender," so to speak: No construction firm bought more than the bare minimum of equipment to function between 2009 and 2018. A number of large players died or nearly so in 2008-09 because they had capital and debt payments that couldn't be deferred, while their smaller peers, dependent on rental equipment fleets for their needs, just halted their rental contracts, laid a bunch of people off, and skated by ok albeit at vastly reduced size. They were then able to rehire some folks when the bottom finally slotted back in in the 2010-13 timeframe and scale a bit between 2014-18.
Because there was no demand for investment, no investor had anything better to do than to subsidize whatever vaguely plausible sounding stupidity Silicon Valley's scions cooked up this week.
I'm not sure Uber really makes sense as an example here. The premise of Uber as a business is that it is capital-light (Uber does not itself own and maintain the fleet of cars) and labor-intensive (you need a LOT of drivers who are willing to have a gig job that is much more precarious than a 'real' position). I guess the distinction here is between "capital" as physical productivity-enhancing goods vs. "capital" as just the pool of potential investor money you have access to, rather than what you spend that money on.
What you're describing is a consequence of low interest rates combining with a disinterest in accumulating durable capital goods.
I don't think what we've seen in tech is capital being used to lower labor costs. We did see a lot of capital being lit on fire, but I thought that was just inefficient. "Burn money on customer acquisition" is a way to exploit dumb pre-IPO valuations, but are there any real long term winners from this business model? I chalk this up to "capital is so cheap it's not being deployed efficiently."
I guess I would say looking at tech over a longer term, workers are historically expensive and therefore there isn't chronic underinvestment in capital where it will help. Rather no one has invented the machine that puts the workers out of business.
This just strikes me as factually wrong. Amazon is putting tons of capital investment in labor saving technologies (drone delivery, warehouse automation), Walmart (self-driving trucks), retail in general (self-checkout), software development (DevOps/CICD), customer service in general (self-help, self-provisioning of services).
We have to treat Amazon as different from Google/Facebook/etc as different from Uber/WeWork/etc.
Amazon has been around a long time and it looks to me like a logistics company and a tech company at the same time. They've invested tons of capital in their logistics system - which I would say is both really good, and also makes them an outlier for American businesses with physical stuff.
As a tech company, I think they're similar to e..g Google - they have an expensive tech work-force and haven't really changed the game on how many nerds they need, and they're willing (and have been willing) to build data centers because you need those to run the business. But they don't save labor by opening another data center - they need more nerds to run the place.
And neither Amazon nor Google are burning VC money on customer acquisition.
I think my meta-point fits well with Amazon: tech workers are expensive, so tech companies don't scrimp on infrastructure, but there's also no robot coder to replace the humans yet. So they don't have a path to spend even more on infrastructure to cut labor costs.
Tech isn't just VC & the VC startups you've heard of aren't the totality of all startups. Attempting to use narrow definitions to exclude companies like Walmart, Dell, Dominos, Kroger and on and on from "tech" is just ignoring how they either built in house tech capabilities or relying on partners (startups and more) to increase labor saving capabilities.
You are also, for some reason, treating software development labor as a different category than labor - which is just factually wrong.
Amazon is spending a ton of money until you look at their actual sales and then you say, "Amazon spends 0.1% of sales on labor saving technology."
Until your actually look at their gross margins and realize that revenue is a terrible way to look at R&D investments.
Except it is the only place to look. If the company is not running a profit but there is an assumption of a future profit(the stock price says there is), then that profit is assumed to be a percent of sales. Where else can you look?
> "Burn money on customer acquisition" is a way to exploit dumb pre-IPO valuations, but are there any real long term winners from this business model?
There are a few big ones, yep. Facebook, Amazon, and YouTube all spring to mind as companies that blew lots of money on customer acquisition until the properties of scale (whether just economies of scale or network effects) made them juggernauts.
But that’s the key: you have to be in a business where scale gets you something. WeWork is selling office space, and office space doesn’t really have any network effects or economies of scale, so burning money on customer acquisition is dumb. Facebook has both network effects on the user side and economies of scale on the ad network side, so forgoing profit to gain scale worked great.
Maybe I'm just older and more cynical, but it seems like the "light the pre-IPO money on fire" aspect of venture funded growth was a lot more prevalent and dumber on the more recent "unicorns" - Youtube, Facebook, Amazon, they're from an older generation, and never came close to the "lose money on every customer and make it up in volume" model we've seen recently.
I see Amazon as fundamentally different from Uber - Amazon's proposition was: if we make any money from selling anything (or anyone gives us any money) we can find productive ways to grow this business" - and now they have huge data centers and a logistic network and gajillions of employees - they're a legitimately huge business. Ride sharing struck me more as "we're going to subsidize the product, but it can never be profitably delivered at this price point. We're just hoping you get too used to it and we can raise prices later."
There was an interesting comment from the boss of Taiwan Semiconductor related to this, along the lines that US companies focus too much on optimizing rates of return but that TSMC measures results in tons of cash - https://twitter.com/trengriffin/status/1538326004124377088?s=20&t=z9hQ_GTcBESphIv4WtT9og. By focusing on growing the business and total cash accumulation, TSMC has achieved market dominance. I'm sure there is more to it, but if you focus on the ratio, you will always end up with a smaller business and forego needed capital investments.
Chang is correct, but the reason ratios matter to US businesses is that ones with the best ratios get the capital. So you have the software giants, then everyone else. In practice, this is where the vulnerable supply chains come from.
I wonder if the end of depression economics will move the Democrats and corporations even closer, adding their mutual interest in increased immigration to the woke pressure hitting corporate leaders from their workforce. Who knows, there may come a day when these companies understand that greater economic growth (which is higher under Democrats than Republicans), along with an expanded workforce and a happier set of young employees, is even more important than shaving corporate (and personal) taxes a bit, or even getting rid of the odd regulation.
While as a liberal Democrat, I wouldn't be that happy about welcoming these new members to the club, defeating the around-the-bend Republican party is so important that we can't be too choosy.
I know Matt hates the idea but I continue to think the much more likely medium term result is Democrats becoming much closer to business. It seems like the party is much more in unison on the social elements of the party then the economic elements. I predict many more of the future moderates will be Sinemas than Manchins.
I am seeing the opposite. I am watching those same management people screaming for more qualified labor.
Of course, but the mid-level and more senior operations and engineering folks know it's not coming. There's no one left, every skilled blue collar guy or gal who isn't a complete invalid or senselessly, hopelessly lazy is already working and has likely hopped for better pay once or twice in the last year already.
The more forward looking among the operational cohort are now screaming for capex, momentary recession be damned. Only the MBA's at the top keep thinking we're going back to 2009 at the end of the year.
Sometimes I think business history is just one long example of overlearning the lessons of the last crisis.
In real life, companies are terrified of having to lay anyone off and are much happier to make capital investments that come at a well-defined risk/reward ratio. Your perception of how companies behave is just wildly detached from reality.
"In real life, companies are terrified of having to lay anyone off"
Citation?
If you need a citation for something this basic I don't know what to tell you, I'm not going to go find one for you. How about you ask the guy above for a citation instead?
Okay then!
Ya, I posted a reply, remembered this guy from my last interaction with him, and just deleted it. No point.
It's really not my fault that you're ignorant
One retirement at a time
It only takes one company to innovate and start gobbling market share, then everyone must follow.
It looks as if the ground is finally shifting, let's see how it plays out.
No doubt the AEI and Chamber of Commerce will be frantically bellowing to reallocate all immigration to low-skilled labor, the good news is neither party gives a damn what they want anymore.
Plenty of rent-seeking, still, but that's not going to get *worse* at least, and may well improve slightly in healthcare and housing.
All else equal, the near-future labor market will encourage investment in shit that actually increases physical productivity, whether that's physical or digital capital. Hopefully it will siphon off some financial backing from what we usually call "tech", aka fantasyland.
Capital investment is decided not by the absolute cost of capital but by the relative cost and risk of spending on capital and labor.
The exact reason that capital flocked to tech in the last decade was that the “real” economy was fed on cheap labor with no bargaining power. Demand for physical capital plant was very low prior to 2018 or so. Low interest rates were a sign of low demand as much as anything, so the government blew a bunch of cheap borrowed money and dozens of tech firms got a decade-long grace period of wild unprofitability while the physical economy made basically no productivity gains at all.
I’m already on the record saying “tax the shit out of social media profits especially and tech profits to a lesser extent in an effort to make the sector less attractive to investors”. I’ll add “keep the economy hot enough that physical capital accumulation is once again incentivized even if inflation stays at 3-4%” and “cut some of the bullshit red tape that pointlessly hinders productivity.”
“ We have enough physical stuff in America”
1. Housing, transport infrastructure, the power grid, climate mitigation work, rewilding initiatives, and a host of other things would beg to differ.
2. To the very limited extent that this is true in certain classes of consumer non-durables, it’s precisely because we’ve pushed production across the globe in pursuit of cheaper labor costs.
3. The corollary to that is that, to maintain the present atmosphere of mild abundance as labor costs globally rise and we drain the whole pond of cheap labor dry, we *must* invest in making physical processes more automated. Globalization was, at best, a pause button on that effort while manufacturing diffused more widely.
Funny that you, of all people, should accuse anyone else of reversing causality.
Capital was expensive as hell for most of history, but in the foundational moments of the Commercial, Agricultural, and Industrial Revolutions in Europe, labor was moreso.
Et Voila!
Does no one else find it odd that our main resident libertarian and techno-optimist is advocating just saying "fuck it" to the physical world and our, ya know, whole standard of living?
I thought that’s what libertarian techno-optimists always did?
I mean, from what I've seen they generally think that *governments* should be getting out of the way and allowing the accumulation of capital to do its job.
This is the first time that I've seen someone say "yea, we don't need to invest in building things faster or making them more efficiently at all" as if things will just magically continue to work.
This is, of course, all basically right. But supply side reforms shouldn't mean forgetting the lessons of the past two years about the shortsightedness and risks of a fragile, excessively offshore supply chain. The covid disruptions in China and need to have flexibility to respond to Russian military aggression should have reminded us that a neoliberal trade policy based on the most rosy Pax Americana assumptions of the 90s was foolishly risky. The trick is to keep the good parts of those policies without repeating or perpetuating the mistakes. Some of the tariffs on basic products from overseas countries might make sense, even if it means a little short term pain, to ensure we aren't overly at risk if shipping was disrupted, etc. But tariffs on stuff from Mexico or Canada? That's dumb.
more cynically though, it made me think about whether our high defense spending might have some financial return after all. The Spice must flow - and American hard power might keep things moving. (Just not in a pandemic.)
Of course it does ! Just look at Turkey’s leverage in NATO. Soft power is nothing unless backed by hard power. Also us Defense spending is very low by historical standards, and probably inadequate for the challenges us faces, a fact the left oddly doesn’t like to acknowledge and the right oddly sort of does (except won’t do much about it).
I think we need to address the "bang for the buck" problem before we contemplate raising spending.
We may be spending defense dollars inefficiently, but when you look at the comparative capabilities of the American and Russian military, you begin to understand that inefficiency is relative.
I suspect we'd see the same thing for the Chinese military, but fortunately, we haven't yet had an opportunity to see them in action.
I've been listening to a lot of defense analysts and a common refrain is that America's military is probably closer to Russia's performance than we would like to admit. Out initial engagement strength is much higher, but we've reduced our industrial defense capacity to an extent that our ability to sustain large scale conflict is likely similar to the Russians.
That’s true of all public spending (I dare say all spending period). The weird thing is that when it comes to the military and that alone, right and left switch sides, rhetorically at least. Never understood it. I’m a big government guy. I want strong well financed first class us public health sector, education social security, and yes military. Weird the NYT types advocate for all but the latter and WSJ only the latter.
The fact that the factory that did not invest in chip production becasue car companies did not place the orders was located Taiwan and not Paduca, is irrelevant. It does not make the supply chain more risky and uncertain. The supply chain stories are all about specific manufacturing or transportation firms not being able to respond to orders, not the location of those firms.
You're missing my point, and talking on the assumption that the conditions since the 90s will prevail and continue going forward. Russia, barring regime change, is becoming more aggressive and two years from now will be more immune to Western pressure than it is today. China is making moves on Taiwan. We don't know if this is passing turbulence or the early days of WW3 - and it's not really in our control. Now is not the time to become more rather than less dependent on faraway countries whose shipping can easily be disrupted -- and will be if there's more hostility, in which case the location of Taiwan vs Paducah will be relevant -- for items as basic as steel nails or tubing needed for domestic energy production. Or chips, for that matter.
I've been hearing this kind of rhetoric more and more, and it strikes me as a bit of a self-fulfilling prophecy. I agree that the behavior we're seeing China and Russia is extremely troubling, but one should not disregard that both these countries pay a significant cost for their negative behavior. Russia has certainly felt a significant cost from the West's reaction to their invasion of Ukraine. Similarly, an invasion of Taiwan would certainly not be costless for China--a war that involved America, would be tremendously costly for both countries (both economically and militarily). America's ability to impose this economic cost is well tied up with how entangled our economies are.
I worry that the recent push for "decoupling" from China would lower America's ability to impose these kinds of costs on China in the long term. It is true that we can't exactly control the actions of these countries' dictators, but our policy can determine how interdependent our economies are in the long term--that, in turn, can make aggressive actions (from either party) seem more or less unreasonable in the future. I'm starting to get concerned that our actions and policies today might make a confrontation with China much more likely in a decade or two--it certainly seems reasonable to believe that a confrontation between decoupled economies is more likely than between strongly coupled ones.
On the other hand si vis pacem para bellum - if you wish for peace prepare for war. As long as China is the one gaining in relative power the chances for conflict rise. If “decoupling” relatively weakens China it’s good.
I understand the argument for economic security but it bugs me that in effect we'd be telling democratic Taiwan, "We need to impoverish you because China may want to conquer and oppress you some day."
We do need allies in the world, and for them to have reasons to value their alliance with us, such as the ideals we stand for. So we may need to balance possibly competing goals, such as helping lift up the rest of the world versus building more of an economic fortress America.
Sorry, I was arguing against the common complaint against "supply chain" uncertainties whihc is orthogonal to your concerns.
Depending on how one see the future real supply disruptions would lead to different policies. In principle, I guess, we put a different tariff on each product depending on the strategic importance and the likelihood of supply from that source interrupted -- central planning. For me that is out, but I'll look at your intermediate proposals.
To the extent that suppliers are located far away from their customers, that does introduce additional layers of complication - there are more opportunities for things to go wrong. Multiply that by thousand or millions of transactions over time and, well...it's far from the only reason for the supply chain crisis, but it doesn't help.
China was always going to build up production capabilities, watch them wither in the US, then have us over a barrel. I don’t like Trump, but he didn’t cause this. He might’ve accelerated the inevitable pain a bit, but better now than later once even more our domestic production capability was gone.
Predatory pricing doesn't work for private enterprise because it requires the monopolizer to lose money as new entrants try to regain a foothold. Geopolitics doesn't work this way...China would be happy to "lose" money under this arrangement in exchange for a "destroy America's economy" button, and would exploit the 10+ years it would take for the US to regain capacity.
I also don't think the failure of predatory pricing strategies extends to extremely complex industries in which there are long-term educational needs, coordination, infrastructure, network effects, etc. The dynamics of building chips isn't the same as retail - if it was, low-income countries would be doing it by now.
Chip manufacturing is predominantly done by Taiwanese rather than mainland Chinese facilities -TSMC is generally acknowledged to be the industry leader (this March 2022 article https://www.fastcompany.com/90734580/why-intel-wants-congress-to-move-chip-production-back-to-the-u-s puts them at 56% of the global market), so I'm not sure what effects chip tariffs on China specifically had - although I heard plenty about supply constraints from Taiwan where the auto industry canceled all their orders due to incorrect demand forecasting at the beginning of the pandemic and TSMC basically shrugged because they were older, low-margin products they didn't particularly care about making in any event.
With respect to the predatory pricing argument, i think you're underselling the risks when it comes to semiconductors - it's very much a strategic industry. The barriers to entry, capital investment requirements, and lead times on chip manufacturing are really, truly, mind-boggling staggering. I'm not sure if anything else even comes close (maybe parts of aerospace?). If your enemy doesn't have a reliable chip supply, they're not going to be able to build one in the time it takes to lose a conventional great-power war (if it's a nuclear great power war I think this is largely moot in any event). This other article notes that TSMC plans on capex of $40-44 billion in a 2022 alone https://focustaiwan.tw/business/202201130014
The only industry with worse timeframes between "announce plant" and "production", that I'm aware of, is nuclear power.
And that's a function of the latter being dysfunctional as hell, not the immense complication that chip foundries suffer from.
An acquaintance in that space, over a lot of beer in Beijing years ago, described a chip foundry as the closest single thing humanity has ever created to a living organism. After you build it from principles identical to your last one with the benefit of tens of thousands of years of accumulated engineer experience, and stock it with proven equipment set up in well-understood ways... you then spend 2-3 years "raising" it like it's a child before it actually produces results that are up to industry standard.
It's like no other manufacturing application on earth, aerospace included. We're operating so close to the frontiers of what's technologically possible, and so damned small/far away from the realm of Newtonian physics, that doing the same damned thing most certainly does not produce the same damned result, at all.
Intel *needs* to stop being the half in "two and a half chipmakers" if the US is to have a secure future, and that'll take at least another decade and a shitpot of subsidized investment money.
Fab's are extremely expensive to run (fixed cost). Accordingly, they run at capacity 24hrs/day every day. Thus, even if 10% of the chip manufacturing market was supplied by China, eliminating this (and it was was big rules not just tarrifs) causes large pricing shifts as there is no spare capacity to soak up the difference.
Additionally, it takes a 9 months (more or less) to bring up a product in a new Fab assuming that the new Fab has a very similar process available. Otherwise, you may well need a complete redesign which could take well over a year.
Heaven forfend that I should defend Trump or his tariffs, but the chip shortage was that orders did not get placed, not that tariffs on "Red" China :) impeded supply.
Freer trade ensures that when orders do get placed, the supply come from the lowest cost source and this in the aggregate raises growth and real income. Freer trade is a growth strategy, not an inflation strategy.
This was certainly an issue but the restrictions imposed on U.S. manufacturers with regards to chip purchases from China really did have a major impact on design. It wasn't the 25% tariffs.
I actually think that these restrictions may have been the best action Trump took (and I am as anti-Trump as they come). It was unfortunate that they coincided with the start of the pandemic and failures to place orders by companies expecting the collapse of future orders.
(edit: https://www.nytimes.com/2020/09/26/technology/trump-china-smic-blacklist.html)
But how did this work? How did restriction on exports to SMIC lead to not being able to import chips for automobiles?
I am sure some of it was, as you say, failing to place orders. But think about how many IC's are in a car (my guess=many thousands). If any one of those IC's is cut from production then the car manufacturer, at best, needs to qualify a new part (6-9months). More likely, with integration as it is today (I work in ASIC design), they will need to redesign PC boards to work with non pin-compatible devices. This means design time in addition to qualification time (a year).
Worse still, if any of the parts they cannot get are ASIC's then you need to convince a company to design a new part for you and qualify it (1.5+ years), except they have no reason to believe you will continue buying it once the semiconductor crunch ends.
But I'm still not understanding how the factory being located outside the US had anything to do with the chip shortage. What am I missing?
The biggest problem with supply side reform is, by the time it works, the next administration and the other party might get the credit.
Yeah, life's tough. Do it anyway.
There's never any logic in who gets credit/blame for economic events. Lots of professed free-market capitalists will say the President runs our planned economy if the commander in chief is from the other party...
the party that controls the presidency the summer before a presidential election gets the blame or credit for the economy. winning wars is also popular but the effect fades quickly. those are the only firm rules.
Particularly frustrating to see that CA’s solution is “Millions in California to Get up to $1,050 in ‘Inflation Relief’.” [1]
> “Millions of Californians will be receiving up to $1,050 as part of a NEW middle class tax rebate. That’s more money in your pocket to help you fill your gas tank and put food on the table,” he [California Governor Gavin Newsom] tweeted.
We did something similar in GA with “Kemp: $1.1 billion in Georgia tax refunds begins this week.” [2]
> House Bill 1302, which Kemp signed into law March 23, will give a refund of up to $250 to single filers, up to $375 to single adults who head a household with dependents and up to $500 to married couples filing jointly.
So this a general problem across states and it seems that the state and local support funds in ARP were too large and it’s giving rise to these counterproductive actions. It would’ve been great if we had already passed BBB with some provisions to claw back excess state and local support to prevent this.
[1] https://www.bloomberg.com/news/articles/2022-06-27/millions-of-californians-to-receive-up-to-1-050-in-inflation-relief
[2] https://www.gpb.org/news/2022/05/12/kemp-11-billion-in-georgia-tax-refunds-begins-week
It's an interesting corollary to the tax cuts some red states have put in with their excess funds...in both cases one might go "oh gawd this is going to increase demand and cause inflation". Weirdly, a regressive tax cut might be less inflationary. My take-away is that we gave the states too much money. We totally won last year's war.
As a Californian and a Newsom supporter, I throw my hands up. I mean, why? It's not as if Newsom fears defeat in November or that Republicans will take the legislature. If ever there was a case for don't just do something, stand there, this is it.
I believe California is required to return excess to taxpayers (Gann limit). The whole 'inflation' angle is just Newsom trying to take credit for doing something he was required to do.
California's direct democracy _never_ ceases to amaze me. It's the gift that keeps on giving...
Colorado is doing the same thing, but it’s a requirement of TABOR. The Democratic governor and legislature moved the refund date to before the election however.
Much of this is a consequence of the feds giving states a ton of money assuming that states would need it due to reduced tax revenue and covid spending. Turns out those assumptions were not correct.
I agree in principle, but what should they do with the money instead?
Given the current macro-economics: save. If you're a state, save for a rainy day so you don't have to cut basic services when we get an intentionally induced recession to cool down demand. If you're the Federal Government, run smaller deficits so higher interest rates won't eat into the budget.
Same as MY's advice last week about how individuals can fight inflation...find a way to not put the money into circulation chasing goods and services.
Minor correction: The FAA did *not* change the number of hours to obtain a Commercial Pilot's License. I know, because I have one. They changed the qualifications to be a first officer on a scheduled airline passenger service. Previously, the captain had to have an Airline Transport Certificate (1,500 hours experience) but you could be an F.O. with a CPL (250 hours). Now you need an ATP to be an F.O.
To mitigate the damage, the FAA introduced a "Restricted ATP" that allows you to be an F.O. (but not a captain) with less experience than the full ATP, but still a lot more than CPL.
This doesn't change the gist of your argument, but the text should be clarified.
And also upgrade and modernize our seaports! But we legally cannot. Singapore has spent a lot of money and effort modernizing and upgrading their seaports recently. Now, I am not expecting Singapore-levels of efficiency here in the US (yet), but it is worth noting that some of the things Singapore is improving are actually illegal to do in the US, not just difficult. Singapore is using dredging and land reclamation to make more space but using foreign dredging companies in the US is actually illegal, so we only have like 5 dredging companies and 16 dredging ships (that do not perform well by international standards) for the entire country, and many projects get only 1 or 0 dredging bids. Union contracts also make it very difficult to add any automation to ports. Everything has to be done by a person, no matter how comparatively inefficient it is. And last year's infrastructure law made it illegal to use any of the money for automation at seaports. Not that improving seaports will be a panacea for inflation, but currently American seaports are some of the most inefficient in the world, so improving them should at least help.
The west coast dockworker's union contract is up, I'm hoping that next one requires a decent level of automation.
I have serious doubts that substantial automation will happen. The port authorities historically have not had a lot of leverage against the unions.
India and Vietnam are not our allies just yet. Matt and Noah Smith have several more substacks to write before that happens.
We should be though!
Should we?
'Allies' doesn't just mean 'friends'. To be an ally with a country is usually understood to be a pledge to come to its aid if attacked. India is a nuclear nation that has active border disputes with two other nuclear nations, and at the same time there are no vital American or western interests in who controls what bit of Tibet or Kashmir. Similarly, Vietnam is a country with a repressive communist government that has previously been invaded by China and has active disputes with China over maritime possessions.
It's good to have friendly and productive relationships with other countries. But that can be done - in the case of Vietnam, *is* being done - without becoming 'allies'.
Right, I think having a formal alliance with India [1] and Vietnam [2] would be helpful to our effort to counter China.
[1] https://noahpinion.substack.com/p/time-for-a-diplomatic-revolution
[2] https://noahpinion.substack.com/p/ally-with-vietnam
I just disagree with the entire premise. To the extent that 'countering China' is a worthwhile or moral goal, it can be done without creating formal new alliances. Smith is starting from the conclusion that it would be good to encircle China with countries armed with Western weapons and an understanding that the American military will ride to their aid if they get in trouble, and then working back from that to decide who those countries should be. I am starting from the premise that America should reduce its international defence obligations and reject new ones that don't serve vital national interests, and neither India nor Vietnam do so.
India in particular would be a great ally to have along with all the other southeast Asian countries. But they haven't been acting like they would make a good partner. We made a lot of icky partnerships during the cold war because communism looked like an enormous global threat. China is a problem but doesn't seem like it's such a big problem that we should be ignoring human rights to maintain alliances. Plus India will already oppose Chinese influence without any intervention by us.
I don't think the human rights objection makes sense given that we have an alliance with Saudi Arabia. China to me seems like a much bigger threat than Iran.
(To be fair I think we should sort of cut ties with them because I want us get out of the Middle East anyways, and MBS won't even pump more oil because he has beef with Biden or something.)
Agreed. Our alliance with the Saudis gets worse all the time and now that our interests in the region are waning, the only reason to keep up the alliance is to prevent the Chinese from worming their way in. And I would argue that we should make it clear to MBS that if they don't shape up we will start warming up to Iran.
We can't afford to only have saints for allies, but the reason to see China isn't that they have a huge economy. It's that they are totalitarians who have no respect for human rights and the rule of law (at least as we know it). We need to make alliances with nations that have similar values and use those relationships to reinforce those values, or else opposing China won't make a whole lot of sense.
We and they should have an entente.
If our goal is to somehow contain China and we're willing to take economic pain (in not free-trading with them when we need supply-side help) to do it, then having good trading relationships with lots of other countries in the area is probably a good idea.
Agreed. If only we had some kind of "partnership" that went across the entire "trans Pacific" region. Just need a name though.
Nobody knew global trade in the pacific could be so important.
I didn't know that was the causal mechanism but damn those guys better get cracking.
I recall one idea you had was that in a fiscally constrained environment, politics would normalise as both parties tried to advance their own economic ideas instead of culture war ranting. Instead, I suspect that we are going to get even more culture war ranting as both parties try to protect their friends. The Democrats want to protect typically minority workers protected in not-too-efficient public sector jobs (like subway conductors). The Republicans want to protect their new friends in the white working class, who may have jobs in basically corrupt private sector industry (like construction). There is, of course, a strong crossover between the two groups.
My suspicion is that both parties will fight like rats in a sack to defend useless or grossly inefficient occupations. The idea that parties should try to manage the economy efficiently will become eroded, in favour of pointless make work.
Construction companies are basically corrupt? Would love to hear more.
I could use a bit more clarity on what some of the holdups are. Take the jones act for example, my understanding is the WH can issue a temporary waiver. So even if there is coalition politics or strategic disagreement as to if getting rid of it permanently is a good idea, it could still be eliminated temporarily to ease temporary pain.
Matt has been calling out ‘the main choice groups’ for dictating bad legislative strategy on abortion. But even in that case he’s not telling me it’s NAARAL to blame—So I’m not really even sure what the main choice groups are right now. Who is behind the jones act? Would they settle for temp waivers at this moment but others are holding out for permanent repeal? What’s actually happening?
I wonder how much of the Jones act is Biden being spooked by how much NAFTA backfired politically in 2016?
It seems like temporary waivers happen from time to time. I don’t think anyone has ever paid a serious political price for them. Maybe folks think it’s different following a natural disaster.
Or maybe our current China / Russia tensions have made people in the WH feel like protectionism toward Us flagged merchant fleets is very good! Idk. I sort of assume what’s really going on is that the WH is actually just having trouble making new policy on al the different things at once. But I’d love to hear some informed gossip about it!
Trump used Jones Act waivers for Puerto Rico after Hurricane Maria. Because Biden is so high on using the Defense Production Act, you would think he would act the same with Jones Act waivers, but that doesn't seem to be the case.
I think the point of Matt's column is that the government can't do much about short-term supply problems but should pursue actions to improve supply over time.
The problem with a Jones Act waiver is that it would make Biden look feckless. Even if it did lower the price of gas by fifteen cents ceteris paribus, the noise in prices would be so great that no one would notice and people would see him as playacting at trying to solve a problem. Biden began releasing oil from the SPR three months ago; the price of gas only continued to go up (though it's slightly decreasing now). What good did that action do him?
"In a tight labor market, allowing more imported construction materials doesn’t mean fewer jobs; it means a transition of jobs out of nail-making factories into making houses with nails. And that means an overall more prosperous economy."
I agree. But, it's often hard to do politically, when the nail factory jobs are located in swing states and have well-organized unions, while the making-houses-with-nails jobs are scattered throughout the country, and much less well-organized.
Yeah, You’ve been pushing these ideas for a while now. I’m still skeptical. I feel like the combination of Trump, the pandemic, and now the invasion of Ukraine have all really really emphasized the strategic dangers of de-industrialization. Long term America should figure out how to make a whole lot more things in America, by Americans. Preferably well paid unionized ones. Rather than ranting about inefficiencies and how it doesn’t square with their ‘90s models, economists would do better to use their brainpower to figure out what needs to be done to make it work.
I think we can probably work to distinguish between consumer trinkets and strategic concerns. Reliance on China for cheap furniture and toys? Meh.
Reliance on China for a disproportionate share of refined rare earth metals and batteries? Worth addressing.
The flip side of not relying on “cheap-by-American-standards” labor and embracing a larger role for capital goods to enhance productivity is that many processes can be done competitively at home or nearby once again.
I expect the trend of automating anything which can be automated in manufacturing to pick up again after a few years of CEOs getting sick of handing their blue collar workers 5-8% raises without commensurate productivity upticks.
As to raises etc. ceo pay rose meteorically in the past 50 years far beyond anything justifiable by performance whereas workers pay lagged productivity. It’s not about efficiency but power. If unions are strong again worker pay will rise, if need be at CEO’s expense. If not then not. By comparison to us or uk, Germany didn’t de-industrialize and didn’t push their blue collar workers out of the middle class and that didn’t make them uncompetitive.
CEOS don't get paid with corporate revenues. They get paid with stock. CEO pay ha risen so much compared to worker pat because stock prices have risen so much, not because companies are giving them more money out of payroll.
Interesting theory. Doesn’t make it less foolish strategically though. Also worth asking how much overlap there actually is between those who lost middle class jobs in factories and middle to upper middle class managerial types ?
It's famously difficult as an English speaker to go to Germany to learn or practice German, because all the Germans immediately switch to English as soon as they hear your voice.
Ok. What about nails? MY basically suggests we import them from half way across the world and let local industry die. Are nails strategic or not? I would guess yes.
If you can scratch-build a production line for something in 3 months in any port city in the world, it’s not strategic, except maybe blown-mesh masks, where the use case is “need this yesterday”.
I'm an originalist so I'd say, yes, absolutely, nails are strategic: https://www.limra.com/siteassets/solutions-and-services/onboarding-and-development/trustworthy-selling/content-marketing-infographics/6-0-ts-module6-for-want-of-a-nail.pdf
I think a lot of this low-level manufactured goods (not consumerist trash that we can do without, but actual foundational building materials) should be considered pretty strategic.
Wire-cut nails are so simple that I could maybe see an exemption...but we are at the point where a lot of our basic manufacturing know-how is atrophying, so maybe not.
FWIW, I've spent about half of my career as a mechanical engineer in various manufacturing or manufacturing-adjacent firms
I agree, but there has to be a cut-off somewhere. Wire-cut nails, cement or gypsum board, and plywood almost definitionally fall on the non-strategic side of that cut-off.
I think it more important by far to maintain manufacturing capacity in the capital goods and machinery used to make end products, TBH.
It’s just incredibly simple to set up reasonably productive manufacturing lines for a lot of consumer goods, especially raw materials, if you have access to the capital and precursors. High-precision planers, autoclaves, petrochemical plants, UV photolithography machines, and glass fiber extrusion equipment, on the other hand…
Take screws, for instance.
Yeah, if you have a good screw cutting machine, you can mostly just have some feed steel rod stock into it and out come screws at the end.
But you have to set up the machine properly in the first place, and maintain it.
That's not trivial.
And we have -very- few people in the US that have experience with screw machines, because it's almost all been outsourced for so long.
I understand, but again, I can’t fathom thinking it worth the cost to tariff screws by a factor of 6 to maintain production here for “strategic reasons”.
I also think you’re overstating the complexity here. It’s not 1815, when the screw manufacturing capacity of Great Britain was the main bottleneck in the production of firearms for her armies. The definition of “high value added” is a moving target.
Aside from select aerospace applications, this doesn’t make sense, and to my limited understanding those have mostly moved on to rivets and complicated-ass composite layup joints anyway.
I mostly agree, but I'm not quite as comfortable saying that a reasonable efficient production line can be set up that quickly, even for stuff like sheetrock and concrete.
Even a lot of simple things require people to know how to do it. Not just the line workers, but supervisors and management and SMEs...and with the Boomers retiring rapidly, a lot of that human capital/knowledge from our pre-post-industrial days is disappearing.
I don’t entirely disagree, but there needs to be a balance.
Its not at all reasonable to ask folks to spend 3X as much to build a house because some bureaucrat decided that cheap ceramic tile, drywall, and copper wire are strategic goods.
That will make things worse, not better.
One dimension we’ve left to the side is that when we consider whether something is strategic or not, we need to consider how long we can go without it on a war footing. Drywall, unimportant. Cement, middling. Inertial guidance systems for cruise missiles, crucial.
We can afford to make many or most things cheap to consumers so long as, again, we maintain control over high value added processes and industries crucial to quickly restoring the global trading order after a disruption, i.e. warmaking.
Are we bad at manufacturing? Some quick googling says our manufacturing value was $2.35 trillion in 2019. That's not nothing, though granted China's was higher at $3.8T (though I wonder how much of that was assembling more complicated imports).
Our manufacturing value increased 70% 1997-2019, and in 2019 was three times greater than Germany's and almost six times greater than South Korea's (https://www.macrotrends.net/countries/USA/united-states/manufacturing-output)
Maybe our screw-making knowledge has atrophied (why God invented immigration) but we seem to be pretty good at making things.
Our manufacturing-by-value is decent, because we focus on higher-value goods.
The argument is over the value of maintaining a certain amount of critical low-value-but-fundamental manufacturing for when there are (inevitably) trade disruptions and other international supply shocks.
It's true we felt this with the lack of PPE early in the pandemic, with limited stocks of masks, pipettes, test tubes, smocks and what have you. But how important is it to have a continuing manufacturing capability for those types of things rather than just having stockpiles to cover reasonable disruptions? Is it vital for the US to have a pipette manufacturing capability in case of a 100-year pandemic crisis?
Thank you! That’s my thinking but unlike you I have zero professional knowledge in these matters so it’s very good to get this validation !
I'm sure there are lots of smart economists that could make good arguments against it, and make me feel stupid in the process.
But I fundamentally don't think I would feel secure (long-term living in a country that is so reliant on free trade for such fundamental things.
IOW, it's about perception of security rather than efficiency.
Who said maximum efficiency should be the no. 1 priority ? Also I’m sure clever enough economists would realize perceptions of security (by individuals and in terms of a country’s projections of resilience and power) need to be taken into account in the economic calculus one way or the other. A risk factor in other words.
Baby formula and gasoline are purely domestic - Buy America is bad economics and is more likely to make things worse than better all while making everything more expensive.
Idea for a public policy that could ease supply constraints in tax advisory jobs: let the IRS build its own online tax prep software. So much of the goat rodeo of last tax season was taxpayers getting mixed up on the amount they received in EIPs and CTCs, and almost none of that would have happened if these taxpayers could have used online tax prep software that already had that information in its database.
Another idea: pass the "direct pay" tax credits in Build Back Better. If Manchin is so concerned about inflation, why is he endorsing make-work for people working in tax equity?
Third idea: replace the 179D deduction revamp in Build Back Better with something that doesn't require a small army of tax consultants to navigate. Energy efficiency as a service contracts and pay for performance programs at utilities have become more common—asking the tax code to measure performance on energy efficiency is unnecessary in those situations. Repeal section 179D and instead add a paragraph to section 168 that says a taxpayer can get 100% "bonus depreciation" on a deep energy retrofit if they make an energy efficiency improvement in the course of the trade or business of selling avoided electricity demand ("negawatts"). Achieves the same thing as old 179D with far less work for places like Alliant Group.
The IRS is currently prohibited from operating any online tax prep software, largely due to the lobbyists from the commercial tax prep companies. It is extremely unlikely that bills to change that will ever see the light of day.
I think you put blame on the tax prep companies, and not enough on "Republicans wanting people to hate taxes".
Republicans seek to defund the IRS so, even if it were allowed to create its own tax software, it wouldn't have the money to do so. However, even when Democrats are in control, the law prohibiting the IRS from competing with TurboTax never changes. That's not Republicans (this is the type of thing that could be easily thrown into a larger budget reconciliation bill). That's lobbyists. And the Intuit lobbyists own both Republicans and Democrats.
I completely agree; mostly I just want to draw attention to the fact that were Congress to change that law, it would help.
To be honest all of these ideas are probably not easy politics—that's why they're still problems.
"But when the economy is a bit overstimulated and also hit by negative demand shocks, it’s the perfect time to talk about boring neoliberal stuff like free trade." --> Typo? Shouldn't this say "negative supply shocks"?
"You can have really prolonged labor market slumps, creating periods where protectionism really does create jobs."
I think it's important to note that traditional free trade theories don't dispute that protectionism can create jobs in specific industries or potentially net create jobs in the overall economy in the short run. The argument for free trade is that this is (1) bad for consumers (who should always be the top priority in economic thinking -- everyone is at all times a consumer) and (2) bad for producers in the long run due to malinvestment and lack of incentive to invest, innovate, etc.
Get busy supply side reforming or get busy dyin’ - Red
Speaking of cracking, America has insufficient cracking capacity to produce adequate supplies of gasoline. This is going to be somewhat alleviated by recent events where refiners are able to restore capacity lost due to Covid but since every refiner in North America is currently competing for the industrial services companies workers and equipment required to do this it is taking time. There are shortages of personnel and equipment required to do this. Nevertheless refinery throughput is climbing rapidly towards the 95% at which it has been hovering for decades.
The usual methodology of pundits is to attribute the drop in refinery throughput capacity to the malign oil companies and their evil executives. So, naturally, this is completely false. The thing that happened was that Covid hit. Annual shutdowns or outages as some call them, were scaled back. Not because anyone anticipated reduced demand but simply because these shutdowns require many hundreds and sometimes thousands of specialist workers to come onsite, They work out of mobile trailers used as offices, lunchrooms and some pretty impressive portapotties. And this could not be safely accomplished. So the scope of work was severely scaled back to the minimum, in some cases, that permitted continued operations at reduced capacity. This happened everywhere.
That throughput capacity begins to inexorably degrade the minute these plants are brought back online. Deferred maintenance made the problem now of restoring capacity even larger. But we are catching up.