Here at American Compass, we’ve been pumping out everything you might need for the occasion, including:

• Chris Griswold on employment trends

• Daniel’s rundown last Friday of all the past year’s developments

• Oren’s essay on lessons learned for economists

• A Compass Atlas with all the relevant economic data

• Julius Krein on investment and Sander Tordoir on Europe

But all good things must come to an end. Time to get back to work. And we’re firing back up with some thoughts from Oren on the new White House budget proposal:

Presidential budgets are always unserious, but the one released by the White House this morning is unserious in an especially unfortunate way. We are all accustomed to the wish-list of program expansions or cuts that Congress will not pass and the optimistic economic assumptions that will not come to pass. It is a political document. But President Trump has done something different.

The Fiscal Year 2027 President’s Budget, released this morning, calls for reorienting the nation’s priorities around an unprecedented military expansion. The proposed $446 billion increase, which comes on top of a $164 billion increase for the current year, would represent a 44% increase in Pentagon spending, and the largest single-year increase in defense spending as a share of GDP since at least 1962. Larger than any year of the spiraling Vietnam War. Larger than the total increase over President Ronald Reagan’s Cold War build-up. This all appears to come on top of the additional $200 billion that the Pentagon wants to ask for during the current year to support the war in Iran.

This spending does not come at a time when the federal government is flush with cash, to say the least. Rather, the nation is expected to run record-breaking deficits indefinitely, with interest payments on the debt consuming an ever-rising share of GDP. Just last year, a new round of tax cuts expanded those deficits dramatically. (Yes, it was deeply concerning that interest on the debt exceeded defense spending. No, this is not a good fix.)

Nor does the spending come at a time when a military build-up should be the national priority. In its “Military Fact Sheet,” the White House asserts proudly that the amount approaches “the historic increases just prior to World War II, a level that recognizes the current global threat environment and restores the readiness and lethality of our forces.” In what way does the threat environment resemble the prelude to a world war, and what role are we expecting to play in such a conflict?

And more importantly, who is going to pay for it? If the uber-hawks so committed to war spending on this scale were prepared to accept that taxes would need to increase substantially, at least they would be putting their money where their enthusiasm for dropping bombs is. But that’s not going to happen. Instead, the plan is to fund all this through more borrowing and cuts to other programs and services, many of which lower-income households rely upon.

If there is a silver lining, it would be that some of the new spending will be targeted toward investment in rebuilding the industrial base, from critical minerals to shipyards. But while Pentagon investments are a vital component of a comprehensive strategy, subsuming reindustrialization within military expansion is unwise, substantively and politically. On substance, focusing support on the defense industrial base while ignoring the broader industrial ecosystem has been a horrible mistake and a total failure, as Mark DiPlacido and I explained in “Big Stick Economics” last year. We wrote:

Security at home, functional alliances, and deterrence all require industrial depth: a diversified resource base capable of meeting the demands of wartime production, flexible supply chains in competitive markets without single points of failure, a skilled workforce with a strong talent pipeline, and an industrial commons that fosters the interaction and investment necessary for constant innovation. The measure of the conservative commitment to a strong defense is not the size of the Pentagon’s budget or the number of invasions launched, but the willingness to adopt economic policy that ensures market forces strengthen rather than erode the foundations of national power.

Orienting the effort so narrowly on the military as the end customer will ensure the industrial base remains brittle and dependent on state support.

Politically, making defense spending and war-fighting the purpose of reindustrialization will reduce its popularity and raise a reasonable concern: if the main thing a rebuilt industrial base is going to do is reinforce an American commitment to empire and military involvement around the world, is that even something we want?

As I wrote a couple of weeks ago about “Trump’s Biggest Mistake on Iran,” by starting a war there “he has given priority to the ambitions of American empire over the interests of American citizens, in exactly the manner of the ‘globalist elites’ he had sought to replace.” This budget plunges his administration much further down that path. The increased spending should be a hard no from both parties in Congress, and from anyone who still hopes to see the United States return to a focus on the well-being of its own citizens. If Republicans allow cutting other spending to fuel an unprecedented military expansion to become their top priority for the year, they will deserve the rebuke that the midterms will deliver. — Oren

THAT SAID, IF THE AIR FORCE HAD TO HOLD A BAKE SALE FOR A NEW BOMBER…

…schools would have even more money to waste on dysfunctional Ed Tech. Thankfully, the backlash is building daily, and perhaps even fast enough to pull the AI wave back out to sea before it crashes down over our classrooms.

The New York Times reported Monday on “Chromebook Remorse: Tech Backlash at Schools Extends Beyond Phones,” which helpfully provides an answer to this mother, who asks in the Washington Post, “‘Why is my kindergartner watching ‘KPop Demon Hunters’ in school?”

Once a screen enters the classroom, it rarely stays limited to “educational” use. The introduction of classroom devices opens the door to the broader internet, including platforms such as YouTube that were never designed for young children or for classroom use.

What starts as just a little KPop Demon Hunters instead of storytime eventually becomes college kids who can’t read good. The latest on that front comes from AEI’s Daniel Buck, who highlights that Harvard faculty report they’ve “had to trim some readings and drop others entirely, switch from novels to short stories, and that it’s difficult to keep assigning reading in the face of increasing student complaints.” Suggested solution: Fail kids who don’t read. Although, that comes with a prerequisite step: Don’t give everyone an A just for showing up.

Good luck. In the meantime, Vanderbilt just announced it accepted 1,382 out of 48,720 regular decision applicants, a 3% acceptance rate. Better weather and a better football team, too.

SPEAKING OF VANDERBILT…

Shoutout to Friend of the ‘Stack Ganesh Sitaraman, director of the Vanderbilt Policy Accelerator, for a terrific New York Times op-ed, “This Is Why Flying Is So Awful.” Ganesh is the authority on the excessive industry deregulation begun in the Carter administration and accelerated under Reagan. As he explains:

Led largely by Democrats, including Senator Ted Kennedy and the future Supreme Court justice Stephen Breyer, policymakers argued that if airlines could fly wherever they wanted and charge whatever they wanted, there would be more competition, lower prices and the same geographical access. In 1978, Congress passed the Airline Deregulation Act, which eliminated route and price regulation and ultimately disbanded the Civil Aeronautics Board altogether…

Read the whole thing to learn about how “unbridled competition soon led to destruction and reconsolidation. Airlines declared bankruptcy and merged; union wages were rolled back; small communities lost service; the flying experience got worse; big airport hubs became the norm.”

MORE GOOD READS

Capitalism, Modified, in a Conservative Town | Tim Carney, Washington Examiner

“The Inn, the bars, the antique stores: They’re all for-profit businesses, but they’re also not entirely for-profit. The community leaders of Bluffton are the furthest things from socialists, but they see capitalism is a tool for creating economic value, which is not always the same thing as — and is less important than — fostering the good life. The government’s heavy hand often crushes when it tries to create, but the market’s invisible hand often smothers, they argue.”

Think Tanks Have Defeated Democracy | Sam Hammond, Palladium

“Advocacy organizations on both sides are trapped in something of a prisoner’s dilemma: even if progressive and conservative funders recognize that they’re burning hoards of money while making our politics less functional, the incentive to defect is too great, as unilateral disarmament would simply cede territory to the other side.”

No Learning Please, We’re Democrats! | Ruy Teixeira, The Liberal Patriot

“Democrats have convinced themselves that their problems have essentially been solved. Here at The Liberal Patriot, we know all about that. Funding for our modest enterprise, always precarious, has now completely dried up. Our view that the party has neither solved its problems nor is even very close to doing so has tanked our appeal among partisan Democratic donors, even reform-oriented ones, who now tend to regard us with suspicion. A little heterodoxy is fine but there’s a limit! Hence: no money.”

They’re Rich but Not Famous—and They’re Suddenly Everywhere | Rachel Ensign, Wall Street Journal

“Because there are so many more multimillionaires, products and services that cater to this group are also booming. Hermès, Brunello Cucinelli and Ferrari all recently reported strong sales from the richest customers, while some companies that target the merely well-off are facing flagging demand. Since the start of the pandemic, demand has picked up for the most expensive homes and the highest-end travel.”

Corporate Governance as Foreign Policy | Remarks by Assistant Secretary of State Caleb Orr

“Corporate governance tools are all about enabling coordination and aligning incentives: between directors and shareholders, active investors and passive asset managers, or management and other stakeholders. Used in foreign policy, these same tools apply to relations among states, governments, and the companies that are instrumental to achieving their political and economic objectives. Critics who label these efforts ‘state capitalism’ are being too facile. The Administration is using well-established legal tools and private sector expertise, including the global gold standard of U.S. corporate law to advance our national security interests.”

BAD READS

We would be remiss, having highlighted all of American Compass’s fine work on tariffs this past week, if we did not also direct you to “Liberation Day, One Year Later,” an appallingly inadequate attempt to marshal data in opposition to tariffs from the Wall Street Journal editorial page and frequent collaborators Phil Gramm and Donald Boudreaux. See how many of the errors you can spot, then surf over to Oren’s thread on the matter to check your score.

A LOT OF IMMIGRATION NEWS RECENTLY

Starting with this important analysis from the Dallas Fed that tells you exactly what Oren told you more than seven months ago in “Coming Down from the Open-Border Sugar High.” As Oren explained then:

How low would potential employment growth fall if immigrants are in fact departing at a rate four to five times higher? Probably to roughly zero, reflecting steady continued job growth for native-born Americans and legal immigrants, offset by rapid declines for departing illegal immigrants. From this perspective, the average of 35,000 jobs added over each of the past three months is substantially higher than could fairly have been expected, not the disastrous slowdown presented in the media. Yet commentators have not only ignored this reality but tried actively to obscure it. Break-even employment declines as unauthorized immigration outflows continue

As the fine economists at the Federal Reserve have finally calculated now:

Incorporating these updated estimates of net unauthorized immigration into our full model—allowing the labor force participation rate to vary over time—yields substantially lower break-even employment growth than previously estimated (Chart 2, yellow line). The break-even rate peaked at about 250,000 jobs per month in 2023, fell to roughly 10,000 by July 2025, and declined to near zero thereafter, averaging about –3,000 jobs per month from August to December 2025, indicating, if anything, a modest net jobs loss over this period.

In other words, even with no weakening in the economy, you should expect to see a negative figure in the monthly jobs report about half the time.

And hey, here’s a negative number: 4. As in, U.S. citizens who graduated from the University of Massachusetts’ master’s program in computer science in 2022 are 4 times as likely to be unemployed as their foreign classmates. Kevin Lynn of the Institute for Sound Public Policy explains here.

For a more positive number, read this story from the New York Times, “A Republican Farmer Relies on Immigrant Work. He Sees His Party Erasing It.” Doesn’t sound positive. Times reporter Peter Baker says, “undocumented immigrants perform roughly 70% of the labor on [Wisconsin]’s dairy farms. At the O’Harrow farm, the Republican family owners worry that the immigration crackdown will hurt their workers and their business.” But as Daniel noted on X, the positive number is three. As in, the Times had also recently told the story of a New York farm facing an immigration enforcement action, which responded with technology: “The farm now produces three times more milk per worker, while employees earn more, work shorter hours, and do less grueling work.”

Daniel covered that story earlier this year in “Self-Milking Cow Machines,” where he wrote: “The machines exist, or soon will. They are simply not standard on American farms, for the same reason milking robots are not: cheap labor makes them unnecessary. We should wonder what other such innovations American firms might have developed, had demand existed here all along—and what they might develop if demand emerges.”

Finally, on the enforcement front, Aaron Renn writes “Why America Needs to Pause Mass Immigration” while both the Mass Deportation Coalition and the Democratic-aligned Searchlight Institute have new reports calling for tougher enforcement against unauthorized employment, with a greater enforcement focus on employers that hire illegal immigrants. The MDC lists “Substantially Enhance Worksite Enforcement” as its number one recommendation. Searchlight says the government should “make it easy, and mandatory, for employers to verify work authorization online” while focusing more of its interior enforcement on “employers who knowingly hire illegal immigrants.”

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MORE LABOR MARKET NEWS

Immigration restriction is necessary for a healthy labor market, but a healthy labor market needs much more than immigration restriction. The Wall Street Journal has a really good dive into “How Five Americans Made It to the Middle Class,” by, who else, Te-Ping Chen (and co-author Lauren Weber), highlighting unconventional pathways and the institutions that support them.

Lest you forget, the workers at that Amazon warehouse who organized four years ago are still trying to negotiate a contract. The Republican-majority National Labor Relations Board has just ruled that Amazon illegally refused to bargain, which means… the parties head into federal court. It’s a classic illustration of how the legal rights granted to workers under the National Labor Relations Act can be nearly impossible to exercise in practice, in the face of employer intransigence and endless litigation. And it helps explain why Republicans Senators Josh Hawley and Bernie Moreno are helping lead the push for the Faster Labor Contracts Act.

AS FOR ARTIFICIAL INTELLIGENCE

Interesting new analyses of human interaction with large language models are highlighting the damage they may cause to human agency.

In Thinking—Fast, Slow, and Artificial: How AI is Reshaping Human Reasoning and the Rise of Cognitive Surrender, researchers introduce the concept of “cognitive surrender” as distinct from “cognitive offloading.” Use of LLMs doesn’t just free up human time, it weakens human judgment.

In Who’s in Charge? Disempowerment Patterns in Real-World LLM Usage, “analysis of historical trends reveals an increase in the prevalence of disempowerment potential over time. We also find that interactions with greater disempowerment potential receive higher user approval ratings, possibly suggesting a tension between short-term user preferences and long-term human empowerment.”

This brings to mind Oren’s commentary from November, “For Big AI, the Creepiness Is the Point,” where Sam Altman offered the half-baked approach that, “there are going to be a lot of edge cases, and generally we plan to follow the principle of ‘treat adult users like adults,’ which in some cases will include pushing back on users to ensure they are getting what they really want.” I think what they really want, Sam, is to spend less time with your chatbot.

Speaking of which, we were happy to read about “The Sudden Fall of OpenAI’s Most Hyped Product Since ChatGPT.” That’s right, Sora is gone. Who could have guessed, as the Wall Street Journal reports, that “AI chips are the most precious commodity at any leading research lab, and at OpenAI, Sora was eating up far too many of them”? Oren could. As he wrote in October, in “Let Them Eat Slop”:

Imagine my excitement this week when OpenAI announced its next major product release. Which was it doing first—curing cancer, or educating the world for free?

Oh.

Sora 2 lets you make videos of a figure skater dancing with a cat or a man doing a backflip on a paddleboard (yes, those are OpenAI’s first two examples) and share them in an addictive infinite-scroll app designed to compete with TikTok. “It’s the most powerful imagination engine ever built,” explains fake-AI-generated-Sam-Altman in the creepy intro. Well, no, Sam, whatever generates your talking points about curing cancer or educating the world for free next year surely holds claim to that title.

What a gift to humanity that the company is now pivoting away from the slop because it is… “weeks away from finishing work on a new AI model, code-named Spud, and needed to free up more computing resources to power the coding and enterprise products that would run on it.” But they’ll get to educating the world for free right after that.

IT COULD ALWAYS BE WORSE

Credit where due, the AI labs are at least innovating, and creating new and useful products. That’s more than we can say for private equity’s efforts in health care. This new report from NYU’s Stern School of Business provides “a series of case studies documenting how financial engineering plays out in the real world,” revealing “a consistent pattern: debt accumulation, sale-leaseback transactions, and cost-cutting that ultimately harms patients and communities.”

Wanna bet on it? The Trump administration, meanwhile, is pushing ahead with plans to put private equity, private credit, and cryptocurrency in 401(k)s. This American Compass policy brief explains the details, and why it’s such a bad idea. And given what’s happening in financial markets at the moment, Axios notes that the “Move to open 401(k)s to private credit and crypto comes at awkward time.”

WELCOME TO THE PARTY, MR. DIMON

We were pleased to see these remarks last week from JPMorgan CEO Jamie Dimon: “I think you have to use industrial policy now—I say that reluctantly.” Next time with enthusiasm!

One reason for enthusiasm is the continued push in critical minerals, where the news is coming fast and furious:

• US Gets Another Magnet Plant in Push to Tackle China’s Dominance (Bloomberg)

• In Win for Trump, U.S. Firm Acquires Huge Congolese Cobalt Miner (Wall Street Journal)

• US Secures Rare Earths Supply as Part of $565mn Loan to Brazil Mining Group (Financial Times)

One reason we have no choice is China’s own industrial policy, which has become especially disruptive in the global automotive market.

In some places, we see capitulation. Stellantis in Talks to Make Chinese EVs at Idle Canada Plant (Bloomberg).

In others, the will to push back. Republican Senator Proposes to Widen US Ban on Chinese Autos (Reuters); Chinese Cars Can’t Cross From Canada to US, Trump’s Envoy Says (Bloomberg).

And always, reminders of why it matters. They Came to Build China’s EV Future. Investigators Found Conditions Akin to ‘Slavery,’ reported the Washington Post last month. And now, according to The World, Chinese EV Giant BYD Faces ‘Forced Labor’ Investigation at Hungary Factory. Peter Harrell highlights how “a sudden, widespread shutdown of Baidu robotaxis in China drives home the security vulnerabilities of connected cars and why the US restricts Chinese connected vehicles.”

Finishing with some good news on pharmaceuticals, in the Financial Times, “Europe Must Pay More for Medicines, Says Bayer”:

Stefan Oelrich, head of Bayer’s pharmaceuticals division, told the FT that the longstanding model, under which US patients in effect subsidise pharmaceutical innovation through higher prices, was becoming untenable. ‘The American government has made it clear it does not see why the US should finance global R&D alone,’ he said, adding that Europe would ‘have to reorient’ towards higher price levels over time.

And the Wall Street Journal reports on the latest Section 232 action to induce domestic production and ensure reciprocity, “Trump Administration Unveils Up to 100% Tariff on Branded Drugs”:

The 100% tariff will apply to patented imported pharmaceuticals from companies that haven’t committed to invest in the U.S. and haven’t entered into “most favored nation” agreements to match their U.S. prices to the lowest they charge in other developed countries, a senior administration official said Thursday.

But the full 100% tariff might apply to only a few drugmakers or none at all. If a company pledges to invest in U.S. drug manufacturing in the coming years, its tariff rate will fall to 20%, the senior administration official said. The company would have to complete the factory by the end of President Trump’s term in the White House, the official said, or tariffs could be increased.

No wait, first more bad news on AI chips: The Institute for Progress has just published a thorough analysis finding “strong evidence that new H200 production would divert manufacturing capacity for US customers of comparable or more advanced AI chips. … In the current conditions of AI chip supply inelasticity, the United States loses more computing power than China gains from every H200 exported.” Read the report, or at least the tweet.

OK, we’ll go out on this: The Wall Street Journal notes that “Chinese share of American imports drops to lowest level since 2001,” the year China joined the World Trade Organization.

Enjoy the weekend!

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To mark the anniversary, we wanted to use this week’s newsletter installment to take stock—think of it as a Very Special Collector’s Edition. If you’ve been following along every week and have an instant recall of a year’s rapid developments across countries and sectors, well then we’ve got nothing new for you here. But that’s more than we can say for ourselves. We found assembly of the full picture to be extraordinarily valuable, noticing themes and connections that had escaped us, and we hope you will too.

What follows is a country-by-country and sector-by-sector account of Liberation Day, broadly defined. It covers not only tariff policy and bilateral trade agreements, but also the investment commitments extracted from trading partners and major companies, the government’s expanding role in industrial policy and financing, and the defense industrial base’s renewed commitment to capital investment under pressure from the administration. It is not comprehensive—much more has happened than can fit in one document—but it covers the major developments for the major trading partners and the sectors most directly implicated by the new international trading order.

President Trump made his administration’s theory of the case clear on Inauguration Day when he signed the America First Trade Policy memorandum, ordering a government-wide review of our trading partners’ unfair trade practices, the impact of large and persistent trade deficits, and other areas where he believed the United States had surrendered too much leverage over the terms of trade. The core argument was that, to be free and fair, trade must be balanced: persistent trade deficits in goods, combined with foreign tariffs and non-tariff barriers, had hollowed out U.S. manufacturing capacity, weakened domestic supply chains, and threatened our national security.

To move quickly, President Trump invoked the International Emergency Economic Powers Act—a novel use of an emergency statute that had never before provided the basis for tariffs. The resulting trade agenda unfolded in stages. The reciprocal tariffs announced on Liberation Day took effect in early April; however, shortly thereafter, the administration suspended the higher country-specific rates for most partners and replaced them with a 10% global tariff while opening space for bilateral negotiations. When that pause expired, country-specific reciprocal rates resumed in August at adjusted levels. At the same time, the administration pursued a parallel track with national-security trade actions under Section 232 of the Trade Expansion Act of 1962 in sectors such as steel, aluminum, autos, semiconductors, pharmaceuticals, and copper, while separately moving to eliminate duty-free de minimis treatment for low-value imports.

In practice, the reciprocal tariffs became less a static schedule than an instrument of negotiation. The leverage that they created provided the impetus for a series of bilateral Agreements on Reciprocal Trade, or ARTs. The administration has since signed ARTs with Malaysia, Cambodia, El Salvador, Guatemala, Argentina, Bangladesh, Taiwan, Indonesia, and Ecuador, and announced framework deals with the European Union, India, Japan, South Korea, Switzerland, Thailand, the United Kingdom, Vietnam, and others—covering the majority of U.S. trade. Review and renegotiation of the U.S.-Mexico-Canada Agreement (USMCA) is now underway.

In February, the Supreme Court held that the IEEPA authority to “regulate … importation” does not include tariffs, invalidating the reciprocal and fentanyl tariffs imposed under the statute. In response, President Trump terminated the IEEPA tariffs, imposed a temporary 10% surcharge under Section 122 of the Trade Act of 1974 (which expire in July), and moved to preserve the broader strategy through new investigations under Section 301 of the Trade Act of 1974, ongoing and new Section 232 cases, and the bilateral agreements already negotiated under the shadow of the reciprocal tariff regime. As we explained in “Keep Calm, the Tariffs Are On,” the Court’s decision had little substantive effect on the administration’s trade agenda. One consequence, however, is that countries that negotiated a higher reciprocal rate now pay only the 10% Section 122 surcharge on most goods, absent product-specific exclusions or higher Section 232 rates. That gap will persist until the administration deploys a new tariff authority.

And that is where the United States finds itself now: not a finished settlement but an active campaign on favorable terrain, with a range of obstacles but a strategic logic that remains intact.

COUNTRY ANALYSIS

CHINA

• China’s Trade Surplus Climbs Past $1 Trillion for First Times | New York Times

• Trump’s Tariffs Send US Trade Deficit With China to 21-Year Low | Bloomberg

• The American and Chinese Economies Are Hurtling Toward a Messy Divorce | Wall Street Journal

• Why China Is Doubling Down on Its Export-Led Growth Model | Financial Times

• China’s Growth Target Is a Global Problem | Financial Times

• On Trade, China Isn’t As Strong as It Looks | Commonplace

• On China, Our Trading Partners Have Only One Choice | Commonplace

Even before Liberation Day, the average U.S. tariff on Chinese goods had already reached almost 40% after IEEPA actions in February and March 2025 over China’s role in the fentanyl supply chain were layered by President Trump atop his first-term Section 301 tariffs. Liberation Day pushed the effective rate far higher, and the ensuing tit-for-tat escalation drove U.S. tariffs on China above 145% and Chinese tariffs on U.S. goods above 125% by mid-April. In May, the two sides agreed to a ceasefire, cutting net tariff additions in 2025 to 30% and 10%, respectively, for 90 days. The first-term Section 301 tariffs remained in effect.

The truce did not end the confrontation. In October, the United States moved to expand the list of Chinese companies targeted by export controls, China responded with broader and tighter export controls on rare earths and magnets, and Trump then threatened 100% tariffs and new software restrictions. Meeting in Busan, Korea, Presidents Trump and Xi reached a second detente that reduced tariffs again, withdrew the expansion of U.S. export controls, deferred China’s expanded export controls for a year, and paused several other non-tariff escalations on both sides. The power of China’s critical-minerals chokehold, perceived by some as the trump card in the economic conflict, brought the sector into focus alongside semiconductors as the highest-priority supply chains for rapid reshoring.

As the primary driver of global imbalances, the Chinese export machine has been a key focus of the administration’s policy. China suppresses domestic consumption, overproduces manufactured goods, and relies on foreign markets to absorb the surplus—an economic model that delivered a record $1 trillion trade surplus in 2025 even as Chinese exports to the United States fell by nearly one fifth. By late 2025, China’s share of U.S. imports had fallen to roughly 7.5%, erasing more than two decades of growth since China’s ascension to the WTO at the turn of the century. Rather than landing in the United States, China’s surplus has flowed into Europe, Southeast Asia, and other markets, threatening their industrial bases and forcing them to choose: capitulate to China’s industrial dominance or join the United States in raising barriers against it.

That basic logic has shaped the entire trade agenda. The administration’s reciprocal trade agreements, tighter rules of origin, anti-circumvention provisions, and pressure on partners not to serve as waystations for Chinese goods are all China policy by other means. At the same time, as the semiconductor and shipbuilding sections show, the administration has been softening its posture toward China in important respects, cutting against the broader strategy. The oscillation between maximal pressure and negotiated reprieve has been a defining feature of the second-term trade war.

In March, U.S. officials met their Chinese counterparts in Paris to discuss tariff arrangements, agricultural and critical minerals purchases, and proposals for formal mechanisms to manage the commercial relationship. A summit in Beijing between Presidents Trump and Xi, postponed from the end of March due to the war in Iran, is currently scheduled for mid-May.

UNITED KINGDOM

• The Art of the Possible: Britain Settles for Quick Win in US Trade Deal | Reuters

• US-UK Trade Deal Squeezes China Supply Chains | Financial Times

• Trump Tells U.K. and Canada That Boosting Trade With China Is ‘Dangerous’ | New York Times

• U.S., U.K. Strike Deal on Higher Drug Prices | Wall Street Journal

In May, the UK became the first major trading partner to negotiate a post–Liberation Day agreement, which left a baseline 10% tariff in place while providing relief in selected sectors. Most notably, the first 100,000 vehicles imported annually from the UK face the 10% rate; additional autos face the 25% rate. The June implementing order provided relief for certain aerospace products and set terms for a broader Economic Prosperity Deal rather than a full trade agreement.

The precedent this set is notable: even close allies must negotiate for market access, and any relief comes in narrow, negotiated carveouts. The UK avoided the eventual increase in steel and aluminum tariffs on other countries from 25% to 50%, but did not secure full metals relief; any future cuts will be tied to U.S. demands on supply-chain security (i.e. limiting China-related exposure). The UK is subject to the administration’s Section 301 investigation into forced labor, though not the overcapacity probe.

December brought an agreement in principle on pharmaceutical pricing, under which the UK would raise net prices paid for new medicines by 25%, while the United States agreed to exempt UK-origin pharmaceuticals, ingredients, and medical technology from future Section 232 tariffs and not to target UK pricing practices in future Section 301 investigations during the president’s term. A February MOU concerns building more secure non-Chinese supply chains for critical minerals.

EUROPEAN UNION

• Europe Got Tough With Trump, but It Needs the U.S. as Much as Ever | Wall Street Journal

• Europe’s China Shock Worsens as Trade Deficit Widens | Politico

• How Germany Fell Out of Love with China | The Economist

• French Advisers Urges EU Tariffs or Weaker Euro to Counter China | Reuters

The U.S.-EU framework, reached in July, set a 15% tariff on most EU goods—including autos, pharmaceuticals, and semiconductors—down from the 20% reciprocal rate announced on Liberation Day. Tariffs on steel, aluminum, and copper remained at 50%, with future relief tied to joint action on supply chains and overcapacity. In exchange, the EU agreed to eliminate tariffs on U.S. industrial goods, provide preferential access for U.S. agricultural exports, and address longstanding non-tariff barriers. An August joint statement included commitments on $750 billion in U.S. energy purchases through 2028, $600 billion in EU investment in the United States, defense procurement increases, strong rules of origin to ensure the agreement’s benefits accrue to the United States and the EU rather than third countries, and economic security cooperation. September’s implementing notice zeroed out duties on EU-origin aircraft, generic pharmaceuticals, and natural resources unavailable in the United States.

The EU deal may be the most structurally fragile of the recent investment agreements. The energy pledge depends on private buyers, while the $600 billion investment target carries no legally binding commitment and is difficult for Brussels to direct or enforce. After months of delay amid broader tensions with the United States—including Trump’s threats over Greenland and the uncertainty following the Supreme Court’s IEEPA decision—the European Parliament voted in March to advance the implementing legislation. The measure now moves to negotiations with member governments, with a final parliamentary vote expected no earlier than June. In the meantime, the EU is subject to the administration’s new Section 301 investigations, covering structural manufacturing overcapacity and failures to enforce forced-labor import bans.

In June 2025, NATO members committed to spending 5% of GDP in defense and defense-related spending by 2035. A trilateral critical-minerals partnership with the EU and Japan, announced in February 2026, aims at supply-chain resilience, including a possible plurilateral trade initiative with tools such as border-adjusted price floors.

JAPAN

• Inside Trump’s $550bn ‘Shakedown’ of Japan Inc | Financial Times

• Trump Hails Japan’s First Batch of U.S. Investments | New York Times

• Japan to Spend Nearly $63 billion In Second Phase of US Investment | Reuters

• The Global Industrial Development Toolkit: Unpacking Trump’s Investment Deals with Japan and South Korea | American Affairs

The July trade and investment agreement with Japan subjects nearly all imports from Japan to a baseline 15% tariff, down from the 24% reciprocal rate announced on Liberation Day. The 27.5% tariff rate on autos also fell to 15%—a significant change for an export economy heavily reliant on autos. In exchange, Japan agreed to provide greater market access for American producers, including large purchases of U.S. agricultural and energy products, 100 Boeing aircraft, and billions in defense equipment, while it also accepted U.S. automotive safety standards for vehicles sold in the Japanese market. Japan is subject to both of the administration’s new Section 301 investigations, covering structural overcapacity and failures to enforce forced-labor import bans.

But the real novelty was the creation of an allied-financing mechanism for American industrial policy. A September MOU commits Japan to a $550 billion capital infusion into U.S. strategic industries through January 2029. The structure is asymmetric: the United States selects the projects, Japanese capital funds them, and the overwhelming share of returns ultimately flows to the United States. Japan can decline specific investments, but doing so risks forfeiting preferred distributions and prompting renewed tariff pressure. By October, Japan had identified up to $390 billion in potential projects; in February, the first $36 billion tranche was announced.

Critical mineral coordination shows the broader strategic logic of the partnership. An October framework focused on financing, stockpiling, mining, and processing to secure an alternative supply of critical minerals outside China. In February, that effort widened into a trilateral track with the European Union and Japan, with action plans to develop new coordinated trade tools and to broaden plurilateral cooperation. Further steps were announced in March 2026.

SOUTH KOREA

• Samsung and Other South Korean Firms Pledge Larger Domestic Investments after U.S. Tariff Deal | CNBC

• Understanding the $350 Billion MOU Putting Seoul Under Pressure | Korea Economic Institute of America

• The Global Industrial Development Toolkit: Unpacking Trump’s Investment Deals with Japan and South Korea | American Affairs

A July 2025 preliminary deal with South Korea, later expanded to include a $350 billion investment framework, placed a 15% tariff on Korean goods, down from a 25% reciprocal rate announced on Liberation Day. Sector-specific caps ensure Korean automakers, pharmaceutical producers, and chipmakers receive rates no less favorable than those offered to competing exporters. In exchange, Korea agreed to ease market access for American producers by removing a 50,000-unit cap on qualifying U.S.-made cars, reducing emissions paperwork, streamlining approvals for agricultural biotechnology products, and pledging non-discrimination against U.S. digital firms. Also included: a 103-aircraft Boeing order and an additional $150 billion in private foreign direct investment from Korean companies during President Trump’s second term. As with Japan, South Korea is subject to both of the administration’s new Section 301 investigations.

As with Japan, the real novelty was the extension of the allied-financing model. The package totals $350 billion, with $150 billion earmarked for U.S.-approved shipbuilding investment—turning one of Korea’s industrial advantages into a pillar of the administration’s maritime revitalization. The other $200 billion is tied to an investment MOU for strategic sectors. Like Japan’s, the structure is asymmetric: the United States selects projects, Korea funds them, and after investments break even 90% of distributions flow to the United States. Korea secured protections Japan did not: a $20 billion annual funding cap, greater reliance on loans and guarantees, and a consultative role in project review. But the leverage remained clear. After delays in Korea’s implementing legislation, January tariff threats were followed by March legislation authorizing a public corporation to manage the promised investments.

TAIWAN

• Taiwan and TSMC Rush to Head off Donald Trump’s Tariff Threat | Financial Times

• US and Taiwan Reach Trade Deal, with Semiconductor Chips and China in Focus | Reuters

• Taiwan Reaches Trade Deal With Trump and Pledges More U.S. Chip Factories | New York Times

Taiwan’s Liberation Day rate was 32%, reset to 20% when country-specific tariffs resumed in August. A January investment MOU and February trade agreement then capped the reciprocal tariff on most Taiwanese goods at 15%, set future Section 232 treatment on Taiwanese auto parts, timber, and lumber at no more than 15%, and zeroed out reciprocal duties on generic pharmaceuticals, aircraft components, and natural resources unavailable in the United States. Taiwan zeroed out tariffs on over 6,300 U.S. products, and agreed to accept U.S.-standard vehicles and FDA-approved medical devices and facilitate roughly $85 billion in purchases of U.S. liquified natural gas and crude oil, power equipment, and civil aircraft and engines through 2030. Taiwan is also among the economies targeted by the administration’s new Section 301 probes into overcapacity and forced-labor enforcement.

The deal was principally structured around semiconductor reshoring. Taiwanese firms committed at least $250 billion in direct investment and at least $250 billion in credit guarantees to support additional investment in the United States in semiconductors, energy, and AI. The agreement tied future semiconductor Section 232 relief directly to domestic buildout: Taiwanese firms constructing new U.S. capacity may import up to 2.5 times that planned capacity without paying Section 232 duties during construction; firms that complete new U.S. projects may import up to 1.5 times their new U.S. capacity duty-free. The agreement links trade treatment to economic-security alignment. The United States reserves the right to consider Taiwan’s cooperation on export controls, investment reviews, and shared national-security concerns when granting future preferential treatment—and can terminate it if Taiwan enters a new preferential agreement with a covered nation, such as China.

INDIA

• Trump’s Surprise Trade Deal With India Resets Fractured Ties | Bloomberg

• Trump and India Call Off Their Trade War, but the Terms of Peace Are Murky | New York Times

India’s Liberation Day rate was 26%. By August, it faced a 25% reciprocal tariff under IEEPA plus a 25% tariff because of continued purchases of Russian oil, pushing the headline rate on many products to 50%. Here, the administration was using tariffs to pursue foreign policy objectives beyond balanced trade. Consequently, India faced among the heaviest tariff pressure of any trading partner.

A February 2026 interim, nonbinding deal released the pressure. The United States removed the Russia-related tariff and lowered India’s reciprocal tariff to 18%; India committed to stop buying Russian oil and expand market access for U.S. exports. India agreed to eliminate or reduce tariffs on industrial goods and a range of agricultural products, address non-tariff barriers in priority areas, establish rules of origin to prevent third-country circumvention, and develop bilateral digital-trade disciplines. The package also included U.S. commitments on specific sectors, including tariff relief for aerospace goods, autos and parts, and pharmaceuticals. Tariff relief for India was paired with monitoring and a possible snapback if Russian oil purchases resumed, though the administration will need to use a different authority to retain the pressure absent IEEPA authority. India is subject to both of the new Section 301 investigations, covering structural overcapacity and failures to enforce forced-labor import bans.

The administration says India intends to purchase more than $500 billion in U.S. energy, information and communications technology, coal, and other products over five years (though such figures may be aspirational; India bought around $40 billion in U.S. goods in 2024). Unlike Japan and South Korea, India didn’t offer an investment package, and domestic politics—especially regarding the agricultural sector—limited the concessions it could make.

NORTH AMERICA

• Bessent Urges Canada, Mexico to Match US tariffs on China as Deadline Looms | CNBC

• Trump’s Tariff Threats Freeze Out BYD and Other Chinese Firms in Mexico | Bloomberg

• Mexico to Raise Tariffs on Imports From China After US Push | Bloomberg

• Lighthizer Has Bad News for Mexico | Bloomberg

• No Pain, No Gain on Canada and Mexico Tariffs | Commonplace

• Canada Doesn’t Have the Cards | Understanding America

For North America, President Trump’s second-term trade war began before Liberation Day. In February 2025, citing concerns relating to fentanyl and immigration, his administration imposed IEEPA tariffs of 25% on goods that did not claim and qualify for USMCA preference. That same structure persisted after Liberation Day and the later pivot to Section 122, with USMCA-compliant goods remaining exempted from the broader tariff action. The practical effect was to make USMCA more valuable, not less: more trade was pushed under its terms, turning it into the operating platform for regional trade even as tariff pressure intensified around it. Estimates indicate that 85% of imports from Mexico and Canada claimed USMCA preference in January, up considerably from a year before. Both countries face separate Section 232 actions on steel and aluminum, autos, and medium- and heavy-duty trucks (with USMCA-compliant trucks and parts receiving narrower treatment based on their U.S. content).

The administration has made a common regional demand: neither Mexico nor Canada can serve as an export hub for China and other non-market economies into the U.S. market. Likewise, it has signaled interest in building a “fortress North America” by tightening rules of origin, limiting third-country content, and reducing imports from non-market economies. That strategic logic will inform this summer’s USMCA sunset review. The stakes are high; Trump has mused about replacing USMCA and pursuing separate bilateral deals with Mexico and Canada

Mexico

Mexico is further along in adapting to the new U.S. economic framework. In December, it authorized tariffs of up to 50% on goods from countries with which it has no trade agreement, including China, signaling willingness to align more closely with the U.S. push to keep non-market-economy content out of North American supply chains. Bilateral talks began in March ahead of July’s Joint Review, putting Mexico ahead of Canada as the administration moves to tighten rules of origin and harden the region’s trade perimeter. Washington is pressing Mexico on discriminatory energy policies, biotech corn, and unresolved digital and customs barriers. In February, the two governments launched a first-of-its-kind Action Plan for critical minerals focused on coordinated trade tools, stockpiling, project development, and possible border-adjusted price floors. Mexico is nonetheless named in both Section 301 investigations.

Canada

Canada enters the review from a weaker and less settled position than Mexico. The administration is demanding movement on dairy access, digital rules, discriminatory procurement, customs frictions, and tighter regional rules of origin, alongside stronger alignment against non-market economies. Bilateral relations have been rocky; pressure deepened after Prime Minister Mark Carney’s Davos speech in January—which urged middle powers to resist American dominance—and after Carney’s subsequent move to open Canada’s market to Chinese autos as part of a “new strategic partnership.” Both actions drew strong criticism from the administration. U.S. and Canadian officials are only expected to begin formal USMCA review meetings in the coming weeks. Canada is subject to the administration’s Section 301 investigation into forced labor, but not the overcapacity probe.

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SECTORAL ANALYSIS

CRITICAL MINERALS

• America Gave Away Rare Earths | Commonplace

• Pentagon to Take Stake in Rare-Earth Company, Challenging China’s Control | Wall Street Journal

• New ‘Project Vault’ Critical Minerals Stockpile Is ‘First Step of Many’ Needed for U.S. to Break China’s Supply-Chain Chokehold | Fortune

China’s chokehold on critical minerals and rare earths has been in constant focus since Liberation Day. The real bottleneck is not the rocks themselves, but the refining, separation, and magnet-making capacity that transforms them into industrial inputs. China spent decades building dominance through state-directed industrial strategy and acquiring foreign competitors.

As the tit-for-tat trade war between the United States and China escalated in April 2025, China imposed export controls on rare earth elements and magnets; in October, it tightened those controls further to cover products tied to mining, processing, and magnet-making. Together, the measures created a licensing regime broad enough to disrupt global manufacturing. Shortly thereafter, Presidents Trump and Xi struck a detente that prevented a de facto trade embargo; however, the underlying vulnerability had been exposed for all to see.

In response, the administration took action across nearly every lever of federal power. In February, Trump unveiled Project Vault, a public-private critical minerals reserve designed to give manufacturers a buffer against supply shocks. That same week, Secretary of State Rubio convened a Critical Minerals Ministerial with 54 countries, during which Vice President Vance proposed a preferential trade zone protected by enforceable price floors. The same day, USTR announced a U.S.-Mexico Action Plan and a separate track with the European Union and Japan, while the State Department signed an MOU with the United Kingdom and announced the United States has mobilized more than $30 billion to build critical mineral capacity through loans, exploration deals, stockpile purchases, and direct equity stakes, including a $400 million equity deal with MP Materials backed by a 10-year price floor and magnet offtake agreement.

DEFENSE INDUSTRIAL BASE

• You Can’t Spell ‘Defense Industrial Base’ Without ‘Industrial Base’ | Understanding America

• ‘There’ll Be Consequences’: Trump WH Warns Defense Contractors | RealClearPolitics

• US Defense Firms Boost Spending After Trump Calls for Expedited Arms Deliveries | Reuters

• Pentagon Headhunting Goldman, JPMorgan Bankers for ‘Economic Defense Unit’ | Semafor

For years, major defense contractors returned far more capital to shareholders through buybacks and dividends than they reinvested in production capacity. In January, President Trump directed the Department of War to identify contractors that underperform on delivery, underinvest in capacity, or prioritize shareholder payouts over government production needs. Such contractors face a prohibition on buybacks until they deliver “a superior product, on time and on budget,” while future contracts must tie executive compensation more closely to production performance. Capital expenditures are now expected to rise by more than a third this year; allied demand is also expanding. In June, NATO members committed to spending 5% of GDP on defense by 2035, and bilateral frameworks with the EU, Japan, and South Korea each include commitments to increase procurement of U.S. military equipment.

In November, the Pentagon unveiled a new acquisition architecture that concentrated authority in new Portfolio Acquisition Executives, replaced analyses of alternatives with competitive prototyping, expanded other transaction authorities, cut documentation to statutory minimums, and aims to provide “investable demand signals” such as multi-year procurements, guaranteed purchase orders, and long-duration contracts to catalyze private investment. The Department of War has also begun recruiting for a new Economic Defense Unit to help deploy expanded financing authorities across six key portfolios. Together with the Office of Strategic Capital’s expanded lending authority—reportedly up to $200 billion over several years—the administration is turning the Department into a more active investor in the industrial base on which it depends.

SHIPBUILDING

• Trump Wants the U.S. Shipbuilding Industry to Be Great Again. Here’s What It Will Take | CNBC

• White House Outlines Trump Plan for Shipping Industry | New York Times

• Trump’s Shipbuilding Imperative | Commonplace

• Rebuilding America’s Sea Power | American Affairs

In April 2025, President Trump signed an executive order on “restoring America’s maritime dominance,” noting that decades of neglect had left the United States building less than 1% of the world’s commercial ships while China produced roughly half. China’s shipbuilding capacity is higher by more than 20,000%.

The administration imposed Section 301 port-entry fees on China-operated and Chinese-owned vessels, as well as on operators using Chinese-built vessels, which were finalized in April, modified in October, and then suspended for a year in November after the U.S.-China detente. The effort provides a good illustration of how aggressive the administration was willing to be, and the difficulty of sustaining escalation in sectors that China dominates.

A February 2026 Maritime Action Plan fulfilled the 2025 EO, calling for a Maritime Security Trust Fund to provide durable funding, Maritime Prosperity Zones (modeled on Opportunity Zones) to channel domestic and allied capital into shipyards, and stronger enforcement against transshipping cargo through Mexico or Canada to evade U.S. fees. It also proposed a “Bridge Strategy” under which the first ships in a multi-ship contract could be built in allied foreign yards while direct investment simultaneously expands U.S. production capacity. The objective is to use trade leverage and allied cooperation to rebuild an industry the United States cannot revive on its own. Bipartisan legislation introduced in April 2025 proposed many of the same tools.

The Action Plan called for international agreements linking market access to joint industrial development, and singled out South Korea and Japan as central to revitalizing U.S. shipbuilding. The South Korea deal included $150 billion in U.S.-approved shipbuilding investment, alongside a working group on shipyard modernization, workforce development, maintenance and repair, and supply-chain resilience.

SEMICONDUCTORS

• Trump, Intel Agree to 10% U.S. Stake as President Promises More Deals | Wall Street Journal

• TSMC is Set to Expand Its $165 Billion U.S. Investment | CNBC

• TSMC to Delay Japan Chip Plant and Prioritize U.S. to Avoid Trump Tariffs | Wall Street Journal

• Trump Sets Up ‘Pax Silica’ Fund to Reduce Global Dependencies | New York Times

• Trump Administration Delays Tariffs on Chinese Semiconductors | New York Times

The United States had already embraced industrial financing of semiconductors before Liberation Day. The CHIPS Act has remained operative and the administration layered trade leverage over that existing subsidy pipeline. In April 2025, President Trump initiated a Section 232 investigation into semiconductors, semiconductor manufacturing equipment (SME), and derivative products. A January 2026 proclamation implements an immediate 25% tariff on a narrow category of advanced chips and derivatives that do not contribute to domestic semiconductor manufacturing capacity while deferring broader action.

As with autos and pharmaceuticals, the Section 232 action became leverage in bilateral talks. Taiwan’s agreement capped most reciprocal tariffs at 15%, and tied future semiconductor tariff relief directly to expanding U.S. capacity. South Korea secured a guarantee that future semiconductor tariffs would be no less favorable than those offered to a later major chip partner, while Japan’s $550 billion investment vehicle explicitly targeted semiconductor manufacturing and research.

In August, the administration converted remaining CHIPS support for Intel into an $8.9 billion equity investment that granted the government a 9.9% passive stake. In December, it launched Pax Silica, a State Department initiative to build trusted semiconductor and silicon supply chains with allies. In March, the Department said it would work with Congress to launch a $250 million Pax Silica Fund to support that effort.

As with shipbuilding, however, sustaining pressure on China on semiconductors has proved difficult: in December, the administration delayed new Section 301 semiconductor tariffs on China for 18 months as part of the broader detente, illustrating the tension between industrial strategy and managing an unstable relationship.

PHARMACEUTICALS

• Global Drugmakers Rush to Boost US Presence as Tariff Threat Looms | Reuters

• Eli Lilly Plans at Least $27 Billion in New U.S. Manufacturing Investments | CNBC

• AstraZeneca Unveils $50 Billion US Investment as Pharma Tariff Threat Looms | Reuters

In April, President Trump initiated a Section 232 investigation into imports of finished drugs, active pharmaceutical ingredients (APIs), and related products. In September, he threatened 100% tariffs on branded drug imports from companies without U.S. factories under construction, turning a live Section 232 investigation into a tool for inducing domestic investment commitments. The administration then delayed the tariffs to negotiate lower drug prices with manufacturers that also invest in U.S. production.

The strategy for supply-chain resilience and domestic production extended beyond tariffs. In May, Trump signed an executive order on regulatory relief to promote domestic production of critical medicines, aimed at accelerating approvals and removing barriers to reshoring. In August, he ordered the filling of the Strategic Active Pharmaceutical Ingredients Reserve, arguing that stockpiling APIs and their inputs could protect the United States from foreign disruption and strengthen domestic pharmaceutical manufacturing.

The domestic manufacturing push was paired with a broader campaign to reduce prices. In May, Trump issued an executive order to develop a most-favored-nation (MFN) policy for prescription drugs, arguing that Americans pay far more than patients in other rich countries, effectively subsidizing global innovation. In July, the administration sent letters to manufacturers urging negotiations; in September, it announced the first series of MFN agreements; and by February, it said it had announced 16 agreements, alongside the launch of TrumpRx.gov.

AUTOS

• Volvo to Build New Hybrid Car to Meet U.S. Demand and Avoid Tariffs | New York Times

• Stellantis Unveils $13 Billion U.S. Investment Plan | New York Times

• South Korea’s Hyundai Motor Increases U.S. Investment to $26 Billion | Wall Street Journal

• GM Wants Parts Makers to Pull Supply Chains from China | Reuters

• Tesla Wants Its American Cars to Be Built Without Any Chinese Parts | Wall Street Journal

On autos, a first-term Section 232 threat became a second-term tariff reality. An investigation initiated in 2018 concluded the following year that imported autos and parts impaired national security; however, President Trump never imposed tariffs, instead using tariff threats as leverage in USMCA negotiations. That changed in March 2025 when the administration imposed a 25% tariff on imported passenger vehicles and auto parts.

North American trade, including USMCA-compliant goods, was not fully spared. For USMCA-qualifying autos and parts, the 25% duty applies only to non-U.S. content (for parts, the process for calculating that share remains pending). As with other sectoral actions, these tariffs became bargaining chips in reciprocal trade talks. The UK secured a 10% total rate on the first 100,000 vehicles, while the EU, Japan, and South Korea each reduced their rate to 15%. In October, the administration imposed Section 232 tariffs on medium- and heavy-duty trucks, parts, and buses, again at 25%, again applied only to non-U.S. content.

This tariff action has prompted investment commitments. Toyota agreed to export U.S.-made vehicles to Japan, Korean automakers accelerated U.S. production plans, and the EU committed to mutual recognition of US automotive standards. Separately, the One Big Beautiful Bill Act repealed the Inflation Reduction Act’s clean vehicle tax credits, removing the subsidy architecture that had been steering capital toward domestic electric vehicle production and reshaping the investment landscape for automakers planning expansions. The legislation also provided a new deduction for interest on auto loans for U.S.-assembled vehicles.

STEEL, ALUMINUM, AND COPPER

• Trump’s Steel Tariffs Are Triggering Counterstrikes From US Neighbors Against China | Bloomberg

• E.U. Proposes 50% Steel Tariffs as Trump Effect Ripples Around World | New York Times

• Trump Invokes ‘Golden Share’ to Block U.S. Steel Plans for Illinois Plant | Wall Street Journal

• U.S. Steel to Restart Blast Furnace at Plant Trump Pushed to Preserve | Wall Street Journal

• U.S. Getting Its First New Aluminum Production Plant in Nearly 50 Years | Design & Development Today

With steel and aluminum, President Trump converted a Section 232 action from his first term into a broader industrial weapon. The tariffs began in 2018 but, by the end of the Biden administration, they had been reduced via country-specific quotas and product exemptions. In February 2025, the Trump administration restored them to full force—resetting steel at 25% and raising aluminum to 25%, ending country exemptions, tightening origin rules, and expanding coverage to more downstream products. In June, the administration doubled both tariffs to 50%, arguing that the earlier rates had not restored the capacity utilization needed for national defense. It also widened the tariffs to cover additional downstream and derivative goods, including household appliances and certain auto parts. Meanwhile, in July, Trump imposed a 50% tariff on semi-finished copper products and intensive copper derivative products under Section 232.

Action on metals widened beyond tariffs into direct state participation. In June 2025, the administration approved Nippon Steel’s controversial acquisition of U.S. Steel, but only after receiving a “golden share” through a national security agreement. The golden share gives the U.S. government extraordinary rights over a wide range of corporate decisions, including plant closures, offshoring, major capital investments, and changes to production commitments—an atypical level of control in a private-sector transaction. In September, Trump used that authority to block U.S. Steel from halting production at its Granite City, Illinois plant.

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Editor’s note: We interrupt your regularly scheduled Understanding America for this comment from Oren on Iran.

The decision of whether to start a war is the most consequential a president can make, and President Trump has chosen wrong. If the operation in Iran tips the economy into recession and devolves into a military quagmire, his decision will more obviously be wrong. If the Iranian regime falls tomorrow, he will still have been wrong. He has given priority to the ambitions of American empire over the interests of American citizens, in exactly the manner of the “globalist elites” he had sought to replace.

In the decades after the Cold War’s end, the United States adopted a framework in which American dominance of the global system was the ultimate imperative. As I observed last year in Foreign Affairs, President George H. W. Bush’s seminal Defense Planning Guidance in 1992 called for the United States to “promote increasing respect for international law, limit international violence, and encourage the spread of democratic forms of government and open economic systems,” and to “retain the pre-eminent responsibility for addressing selectively those wrongs which threaten not only our interests, but those of our allies or friends, or which could seriously unsettle international relations.”

The following year, President Bill Clinton ratified this bipartisan consensus in a speech at the United Nations. “We cannot solve every problem,” he said, “but we must and will serve as a fulcrum for change and a pivot point for peace.” Four years later, in his second inaugural address, Clinton went further, anointing the United States the world’s “indispensable nation.” At around the same time, neoconservatives Bill Kristol and Robert Kagan assigned the American people “fundamental interests in a liberal international order, the spread of freedom and democratic governance, an international economic system of free-market capitalism and free trade,” and a “responsibility to lead the world.”

Prioritizing the American empire over American citizens and then claiming this would somehow redound to their benefit, hollowing out the Heartland to stitch global markets together, giving more attention to upholding abstract principles on the other side of the world than to helping families make ends meet—these are the kinds of tradeoffs that the American elite embraced. The strategy worked so poorly, and became so despised by so many Americans, that they elected Donald Trump president instead of continuing to go along with it.

In January, debating the Hudson Institute’s Michael Doran on the future of U.S. policy toward Israel, I argued against action in Iran, because “there is not a lot of good reason to believe that the United States attempting to intervene in Iran would be successful or push it in a better direction in any reasonable timeframe.” Instead, it seemed to me, “the United States should take its limited resources, both literally and figuratively, and focus on those things that are most relevant to the interests of the American people,” including “strengthening the architecture of our existing alliances, which is not especially strong right now, and focusing on the very many problems that we have here on this side of the ocean.”

Of course, the first-order cost of this war, like any war, is the death, destruction, and instability that it causes. That’s why the United States should only ever go to war as a last resort, only after careful deliberation, only with a just cause and a clear rationale, and only after leaders have built support from the citizenry they are sworn to represent, and from whom the soldiers and resources must be drawn. The Trump administration did none of this, which makes the costs unjustifiable and also weakens the U.S. position, lacking the deep political support necessary to make a “fight until we win” posture credible. Deploying ground troops, as is reportedly under discussion, would compound all these problems.

The quick, limited strikes on Iran in June and Venezuela in January seem to have given the White House a false confidence that “We Can Just Do Things.” But this conflict is two-sided, and the other side currently holds a veto over how and when it ends. The regime could fall, but it appears more likely to survive, solidify control, and radicalize further—with less to lose and no fear of an American threat already carried out. (Already, this has become an argument for regime change as the only option.)

When it comes to the Middle East, a second-order concern must always be energy. One reason past presidents have not attacked Iran is that it was expected to respond by shutting the Strait of Hormuz, as has been diligently war-gamed for decades, sharply reducing global supplies of oil and natural gas. Destruction of energy infrastructure by both sides would deepen the crisis and impose continuing costs for years after a shooting war ended. Sharp price increases are already hitting the American family directly in its pocket book and will likely get worse before they get better.

Those increases also pose a rather serious political challenge ahead of the midterm elections for a White House that had insisted it was advancing an “affordability agenda.” The Trump trade agenda has come at a remarkably low cost to consumers and offers a tangible and vital domestic payoff; igniting a contest to destroy Persian Gulf infrastructure is a different story. As the New York Times headlined ominously last week, “U.S. Inflation Stayed Subdued Before Onset of Iran War.”

The energy shocks pose a direct threat as well to the objectives of rebalancing the global trading system and reindustrializing the American economy. Rising energy prices are not conducive to major industrial investments, or flourishing manufacturing and agricultural sectors. If they tip the economy into recession, the president’s vision for a new “golden age” will recede over the horizon. The positions of trading partners more reliant on the Gulf, whose investments in the American economy and demand for American exports are vital to American growth, are quickly weakening as well. For instance, Politico reported on Wednesday:

The meeting between President Donald Trump and Japanese Prime Minister Sanae Takaichi in Washington on Thursday was meant to be a celebration involving cherry blossoms, big investment checks and an affirmation of close ties between the two allies. The U.S.-Israeli war on Iran has scrambled that agenda. Japan depends heavily on oil shipped through the Strait of Hormuz…

President Trump also announced this week that he would postpone the long-anticipated summit with China’s Xi Jinping because of the war.

And then there is the cost in resources. The war has already meant moving vital strategic assets out of other regions and expending limited munitions, reminding the world that the United States can barely fight one limited war for a few weeks, let alone fulfill its purported commitments to deter more powerful adversaries around the world. The Pentagon has reportedly asked the White House for $200 billion in supplemental spending to support the war effort, an outrageous request that underscores the folly of the entire mission.

Recall, the White House position (backed by much commentary) is that the war is going well, perhaps as well as could have been hoped or anticipated. And yet, after less than three weeks, the price tag could be $200 billion? Will anyone in the administration promise that even that amount will prove sufficient? This is why our Constitution rightly requires the president to secure authorization from Congress before initiating a conflict. No member of Congress should vote for that spending unless they are prepared to identify the people whose taxes they will raise to fund it. Even then, the list of other priorities that such outlays could instead have funded is too depressingly long to include here.

Finally, there is the simple matter of distraction. The attention of the White House is among the most valuable resources available to policymakers. Politically, the American people rightly take the president’s focus to signal what their government considers to be the nation’s most pressing problems. When a war is on, not much else happens. And so much else needs to happen—not only on trade and reindustrialization, but also on immigration, on technology, on health care, on education, on housing, on family. All must take a back seat to, well, whatever it is we are accomplishing 6,000 miles away.

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Against all these considerations, the argument for the war (depending on which you pick and attempt to decipher) usually requires a circular worldview in which American hegemony is vital to the goal of preserving American hegemony. We are dropping bombs on Islamic Revolutionary Guard Corps bases from which attacks might otherwise be launched at the American bases we must have in the region for situations where we want to drop bombs. We have taken steps that led predictably to the closing of the Strait, because it was dangerous for Iran to have the power to close the Strait. To prevent nuclear proliferation, we must demonstrate our willingness to flatten countries that do not yet have nuclear weapons. How this helps the American people is unclear, once you turn your eyes away from the hand-waving assumption that global empire benefits the typical citizen.

Critics of the war have been quick to call Trump’s decision impulsive, egotistical, and indefensible. But he is proceeding in precisely the proud tradition that policymakers, commentators, and scholars promoted for decades, in which addressing the cost of health insurance for American families takes a backseat to addressing the cost of shipping insurance for boats carrying oil to China.

Trump has not so much gone out on a limb as climbed up the wrong tree—one already filled with neoconservatives who spent years condemning him as reckless, vulgar, uninterested in constitutional imperatives, and dangerous to global stability… until he became their kind of reckless, vulgar, uninterested in constitutional imperatives, and dangerous to global stability.

In 2020, Bill Kristol warned against Trump’s “recklessness, his irresponsibility” and the prospect of him “unleashed, unbridled with a bunch of sycophants working for him,” without military advisors like Jim Mattis and John Kelly to guide him. John Bolton said that Trump was “dangerous” because “I don’t think he understands enough about international affairs to be able to recognize threats to America unless and until they have a direct impact on his personal political circumstances.”

But last June, Kristol told the New York Times, “you’ve got to go to war with the president you have. … If you really think that Iran can’t have nuclear weapons, we have a chance to try to finish the job.” In January he said the administration “should be helping the brave people of Iran overthrow a cruel and terror-sponsoring dictatorship.” As the first missiles landed last month, Bolton told the Free Press, “I tried to convince Trump to do this in the first term. I’m sad that I didn’t succeed then, but if there were ever a moment to do this, this is it.”

In 2016, John Podhoretz called Trump “an unspeakable human being” and “an emetic” who was “about to be vomited up.” Now he waxes rhapsodic: “The six weeks of diplomatic dithering following the Iranian slaughter were, in fact, simply temporizing. We got our ducks in a row… Today, February 28, 2026, may be the most important day of the 21st Century so far.”

This tree in which Trump and his war chorus now find themselves together is dead, its core long since rotted. Americans tried its bitter fruit and turned away in disgust. If the weight of this foreign adventure finally causes it to keel over, the president will have quite a distance to fall.

There is another tree, far from the online swamp of identity politics and ethnic hatreds, where most Americans sit, uninterested in empire and yearning to live in a republic with representatives focused on the interests of their fellow citizens. President Trump should climb down and head on over. Regardless, it represents the nation’s well-rooted future, and we all share responsibility for ensuring it grows.

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At the think tank’s “New World” gala last June, Cass interviewed Vance on stage, and the vice president took a trip down memory lane. “Maybe the first time I ever met Marco was in a conference room in his Senate office with Mike Needham and Oren Cass talking about some of the very things we’re talking about here tonight,” Vance said. “It’s kind of amazing to see it come full circle to where we are today.”

Another place where we are today: the midst of a battle over bipartisan housing legislation, the 21st Century ROAD to Housing Act, which passed the Senate yesterday by an overwhelming margin of 89-10 and has strong support from President Trump. In the House, Republican French Hill, chair of the financial services committee, is threatening to block passage over his opposition to proposed restrictions on large institutional investors controlling the housing supply. Daniel dives in:

The housing legislation before Congress is a consequential package of supply-side reforms, years in the making, designed to encourage building new housing and clear away some of the obstacles that Washington has helped erect. And yet the legislation now risks being derailed in the House because of one provision.

That provision is Section 901, added after President Trump argued that “people live in homes, not corporations,” issued an executive order acting on the point, and urged Congress to turn it into law. The section advances the principle by prohibiting large institutional investors from buying up single-family homes and building new ones to hold in perpetuity and offer only for rent.

The backlash from industry groups, allied analysts, and some members of Congress has been intense. Critics call it “protectionism” and warn that it will make the build-to-rent model harder to finance, thereby reducing the single-family housing available as long-term rental stock. They have captured the provision’s purpose well; the question is whether these effects are features or bugs.

Section 901 is, in fact, protectionism for families over funds. The rest of the bill advances reforms to increase housing supply. But housing policy does not only shape supply. It shapes demand too, including who gets first claim on single-family homes. Section 901 answers the question too few housing bills are willing to ask: who is all this housing for?

A single-family home occupies a special place in American life. The problem in this part of the market is not an abstract shortage of “units.” It is that working- and middle-class Americans increasingly cannot buy single-family homes in or near the communities where they want to build lives. For most American families, a single-family home is the primary vehicle for building wealth. It is how a household stores savings, accumulates equity, and benefits from appreciation. When a family buys the home, those gains flow to the family. When an institutional investor buys the home, those gains flow to the fund and its shareholders. A family that owns a home has a stake in its community that a family renting a home controlled by Wall Street simply does not. The family may occupy the home either way, but the economic and social consequences are fundamentally different. That is the distinction Section 901 is meant to protect.

Critics cast that protection as an assault on the market itself, wildly overstating the scope and effect of the section’s prohibitions. The law would not abolish rental housing or force a mass liquidation of existing portfolios. It applies only to large institutional investors—firms with control over at least 350 single-family homes—because the target is not ordinary landlord activity but Wall Street-scale acquisition-and-hold strategies. It covers only single-family homes and duplexes, not apartment buildings or manufactured housing, and leaves room for rental housing and new construction through a series of exceptions. The large-scale build-to-rent model it does obstruct is a relatively new phenomenon, not a necessary component of a healthy housing market.

At its core, then, Section 901 says: as we work to expand housing supply, we should not be doing so in a way that makes single-family homes a permanent institutional asset class. That is a useful guardrail to install, and indeed the right one. And this is the time to install it, at a moment when we are taking action to make building easier, and before a worrying trend hardens into a permanent feature of the market.

The claim that Section 901’s ban on large institutional investors acquiring existing single-family homes reduces supply is wrong on its face. If a large institutional investor is prohibited from buying an existing single-family house, the house does not disappear. The number of homes does not change. The only thing that changes is who gets to compete for it. What Section 901 does is give families trying to buy a home a better shot against institutional buyers with access to cheaper capital, more favorable tax treatment, and the ability to submit all-cash offers. Calling that a reduction in supply is simply false.

The more serious objection concerns build-to-rent. Here, the critics have a real point: the provision requires a large institutional investor to sell a new house within seven years, which changes the economics of building. Some long-duration capital will be less interested, some projects that work under a perpetual-hold structure will no longer pencil out, and the exit itself becomes harder to underwrite and execute. At the margin, some single-family rental supply that could have come online may be lost.

So be it. Section 901 is meant to make one particular business model—permanent institutional control of single-family homes—harder to finance, harder to justify, and harder to scale. The provision does not ban build-to-rent. It preserves it, but on terms meant to prevent single-family homes from becoming a permanent stock of institutional rentals. Some projects will not go forward. Others may shift toward for-sale development, or some mix of ownership and rental. The land, labor, and materials not used for one form of construction will be available for another. Advocates for housing reform have spent years insisting that regulatory barriers to construction were the immediate constraint on housing supply. Only now, with the opportunity here to remove barriers, have they decided that new homes still won’t get built, unless it is with the relatively novel build-to-rent model. That’s less an argument from economics than a principled objection to public policy having any say in how the American housing market should function. They are of course entitled to their preference for a market optimized solely for efficiency, in which considerations of tax arbitrage and cash flow optimization on Wall Street override any preferences that the American people might have about how they will live their lives and build their communities. But they should not be surprised when that is not the majority view.

In their final objection to Section 901, critics directly rebut this framing of the tradeoff, and argue instead that they are the ones vindicating the preferences of families. Some, of course, prefer renting a single-family home. They want the yard, the good school district, the extra bedroom, but not the down payment, the burden of maintaining a property, or the immobility that comes with owning. Why, critics ask, should Congress override that preference?

The first answer is simple: Section 901 does not eliminate single-family rentals. There will still be rental homes. There will still be small landlords. There will still be families for whom renting is the best arrangement. What Section 901 targets is Wall Street-scale ownership of single-family homes as a permanent business model.

The second answer is that “preference” is doing too much work here. The rise of build-to-rent does not reflect some newly discovered preference among American families for institutionalized single-family renting. It reflects a shift in the preferences of builders and capital providers, who found it less risky and often more lucrative to hold the homes themselves rather than sell them. In many cases, the family renting a single-family home is not expressing some deep lifestyle commitment to tenancy over ownership. The family is constrained. It may not have enough savings for a down payment. It may not have access to financing on acceptable terms. It may be shut out of ownership precisely because the structure of the market increasingly favors investors over households. The institutional model does not solve that problem. It monetizes it.

Thus, Section 901 is vital to the broader bill’s moral and economic coherence. It is not mainly an affordability provision. It is a provision about the kind of housing market that will best promote the nation’s liberty and prosperity. The rest of the 21st Century ROAD to Housing Act is about making it easier to build homes, as it should be. But a housing bill that says nothing about who ends up owning those homes is incomplete. Section 901 fills the gap: single-family homes should be places where households build equity, not where large investors harvest it. — Daniel

TRADEOFFS, TRADEOFFS, EVERYWHERE

Almost two weeks into the war with Iran, the public’s response remains unsettled. A recent Washington Post poll finds that opposition to the U.S. campaign has softened since the opening strikes. But more Americans still want the strikes to stop than continue, a majority say the Trump administration has not clearly explained the war’s objectives, and most say the current level of U.S. casualties is unacceptable. As the New York Times notes, wars are rarely more popular than at the outset—and this one is off to an unprecedentedly unpopular start.

Whatever one thinks of the war on its merits, there is a strategic reality in the background: our resources are not infinite, and even an expansion of the defense industrial base’s capacity does not eliminate the tradeoffs imposed by fighting in multiple theaters at once. As A. Wess Mitchell—who served as assistant secretary of state for Europe and Eurasia in the first Trump administration—argues in a Wall Street Journal letter, “Elbridge Colby’s Warnings Are Coming True,” munitions used in the Middle East are munitions unavailable elsewhere, including in East Asia, where a conflict with China over Taiwan would place enormous demands on the same finite stockpiles. The “simultaneity problem,” Mitchell writes, is not longer just a theory; it is the basic arithmetic of fighting in one theater while trying to deter a larger war in another.

TRADE WARS, TRADE WARS, EVERYWHERE

China published a new tranche of trade data, confirming that China Shock 2.0 continues to barrel forward. Exports surged 22% in January and February compared to the prior year—three times faster than the median analyst expected. China’s trade surplus for the first two months of 2026 hit a record $213.6 billion, up 25% from the same period last year. Exports to the United States fell 11%, while exports to Southeast Asia rose 29% and exports to the EU rose 28%, with individual country figures that are even more striking: Germany up 31%, France up 32%, Italy up 36%.

Numbers like these continue to confirm the logic of Daniel’s piece from earlier this year: when the United States refuses to absorb China’s excess capacity, the surplus does not vanish; it gets diverted. Much of that pressure is now landing on European shores, where leaders face the same choice we did—defend the home market and industrial base, or submit to another round of deindustrializing import penetration, and the economic, social, political, and security problems that result. As the Centre for European Reform’s Sander Tordoir put it, “Second China Shock to Europe in full motion. Europe’s policy response is weak, fragmented and haphazard. Buckle up.” Quite so. Europe is beginning to confront reality, but has yet to act with the urgency it demands.

• Also read: In the Financial Times, Ruchir Sharma writes that China’s Growth Target Is a Global Problem: “Beijing has been overinvesting for years, but lately it has been dumping the excess output it can’t sell at home. In the past, China’s export volumes rose with prices; this decade, Beijing has dropped export prices by nearly 20 per cent, producing a 40 per cent surge in volume. … China’s dumping offensive is deindustrialising rival exporters the world over.”

• And worth a listen: At the Official Monetary and Financial Institutions Forum, Michael Pettis and Mark Sobel, chief economist and vice chair at OMFIF, discuss China’s Flailing Growth Model and Challenges, and the economic and political consequences that will result if the Chinese government takes the necessary step of boosting household consumption.

On the home front, the Trump administration’s effort to restore the Liberation Day package of tariffs in the aggregate through different, more clearly established trade authorities continues apace, with the launch of two new Section 301 investigations into dozens of countries’ policies related to “structural excess capacity” and forced labor. In the Wall Street Journal, “Trump Targets Industrial Subsidies and Forced Labor in Tariff Probes.” The Office of the United States Trade Representative’s press releases provide more information here and here. Both investigations implicate China and could serve as the basis for higher tariffs, something to bear in mind as Treasury Secretary Scott Bessent and Ambassador Jamieson Greer travel to France this weekend to meet with Chinese officials ahead of President Donald Trump’s summit with Xi Jinping later in the month (Reuters).

The trade war, of course, is only one component of the competition with China. Another concerns efforts to deploy new technology most effectively across the real economy. That is the point of Kyle Chan’s new Brookings essay, “China Is Running Multiple AI Races.” While the United States remains fixated on the development of frontier models, the construction of giant data centers, and the race to AGI—with the viability and broader economic payoff still uncertain—China is competing on several other margins at once, embedding AI in factories, robotics, and logistics, and diffusing it more deeply through physical production processes. That is an alternative theory of technological power, and one the United States cannot afford to ignore.

Toward that end, this looks a promising opportunity to leverage America’s deep and liquid capital markets toward objectives that actually serve the national interest: Pentagon Headhunting Goldman, JPMorgan Bankers for ‘Economic Defense Unit’ (Semafor): “The Pentagon is building a new team of investment bankers steeped in private equity to invest $200 billion over three years in defense deals, aiming to counter China’s rise.” The pitch deck for prospective hires has been circulating on X and showcases the project’s ambition and scale.

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GOOD WEEKEND READS

• Josh Hawley: We Must ‘Bend’ AI to Serve the Good | Compact published the transcript of the conversation between its editor, Matthew Schmitz, and Senator Hawley, at the Summit on AI and Labor, which American Compass co-hosted a couple of weeks ago.

  • Bonus Link: Our co-host for that event, Palantir Technologies, has put together a handsome website and published the videos for all four panels—two of which were moderated by Oren and Daniel—with wide-ranging discussion on AI’s implications for labor, faith, and industrial policy. Check it out.

• Lincoln, the Great Economist | In the New Outlook, Scott Howard argues that America’s 16th president was more than an emancipator.

• This Law Enforcer Is Rewriting the Playbook for Policing Companies in Trump 2.0 | The Wall Street Journal profiles Federal Trade Commission chair Andrew Ferguson and assesses his efforts to harmonize competing strains of thinking about competition policy and enforcement..

• A Double Dose of Dystopia: First, in the Atlantic, McKay Coppins wrote about his year as a Sucker and “degenerate gambler”: “It made us all care much more about the games, but it had also atomized us—taking the last and purest expression of American monoculture and turning it into a hyper-individualized, every-man-for-himself portfolio of micro-bets.” And for the implications for America’s young men read “I’m a College Student. Gen Z Sports Betting Is Wrecking My Friends’ Lives” (Wall Street Journal).

• Bonus Dose, lest anyone think this problem is not painfully, absurdly obvious, or attempt an if-only-we-had-realized lament at some point in the future: “Gen Z’s ‘Financial Nihilism’ Finds Outlet in Prediction Bets, Crypto” (Bloomberg).

SPEAKING OF DYSTOPIA

OpenAI’s Sam Altman continues his one-man campaign to confirm everything his critics say about him, and the dangerously warped worldview of technologists generally, telling an interviewer this week: “We see a future where intelligence is a utility, like electricity or water, and people buy it from us on a meter.”

Two observations. First, intelligence is not like electricity or water. People do not “buy” and consume it. They develop, cultivate, and refine it through study, experience, and judgment. To treat the accumulated knowledge of human civilization as something dispensed through a meter is the Sam Altman project in miniature.

Second, has anyone told his investors? If AI really becomes a metered service, that would make it… a utility. His analogy points toward a business model defined by heavy capital requirements, growing commoditization, and inevitable and necessary regulation. That’s hardly the sort of business that usually commands the miraculous multiples OpenAI has.

That said, not every OpenAI development this week was quite so absurd. North America’s Building Trades Unions (NABTU) announced a partnership with the company to “train the next generation of skilled construction workers.” If AI really is going to become a utility, as Altman now claims, then the infrastructure for that utility will still have to be built the old-fashioned way: with workers, materials, and physical capital. NABTU says the collaboration will ensure that AI-related buildout—from computing facilities to transmission to new energy generation—supports union careers and registered apprenticeships, while OpenAI has also committed support for the building trades’ pre-apprenticeship network.

This is precisely the kind of business-labor collaboration American Compass’s recent report on workforce development, Learning by Doing, argues is necessary: if the country is serious about rebuilding productive capacity, it needs employers, unions, and training institutions working together to create actual career pathways into skilled work.

Bonus Link: Read Oren’s related column in the Financial Times: America Rethinks How to Train Its Workforce.

LABOR-DYSTOPIA CROSSOVER EPISODE

In “Punching, Slamming, Screaming: A Chef’s Past Abuse Haunts Noma, the World’s Top-Rated Restaurant,” the New York Times tells a fascinating and outrageous story that illustrates the importance of worker power across workplace contexts. It also has this gem of a line, on the politics of the culinary scene: “Some local chefs have posted that they find it offensive that Noma is swooping in and drawing deep-pocketed diners, when Los Angeles restaurants are facing existential threats from climate change, inflation and immigration enforcement.”

And finally, not quite a labor-dystopia synergy event, but in some senses it is, and also an incredible story from the past week… so, um, it turns out that the NBA’s Atlanta Hawks were planning to host a special promotional night for a recent game, “Magic City Monday.” Thing is, Magic City is, um, a strip club. This ranks high in the what-were-they-thinking pantheon, but it was actually going to happen until Luke Kornet, backup center for the San Antonio Spurs and part-time blogger on all manner of subjects, wrote a thoughtful condemnation of the plan and the NBA told the Hawks to cut it out. The Athletic has the full story, “Luke Kornet on spurring ‘Magic City Monday’ cancellation: ‘Needed to be done.’” Score one for the limitations of management’s judgment and the importance of employee voice.

And unless you are in Atlanta and had been looking forward to Monday night’s game a little too much, enjoy the weekend!

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As Michael Brendan Dougherty notes at National Review, “without the administration fully articulating the ends, it becomes almost impossible to judge whether the means are sufficient to get us there.” And while one can find much excitement on X for American excellence in ordinance, Oren points out, “no one doubts that the U.S. can drop large numbers of bombs on Middle Eastern countries and blow up boats in international waters. The skepticism has more to do with seeing what that has and has not accomplished, and where it tends to lead.”

In the meantime, speaking of Oren and excitement on X, he has a story to recount:

I found myself in a Twitter fight last week with the University of Chicago’s Richard Thaler, a Nobel laureate in economics and the best-selling author of Nudge. Twitter fights are tedious. I try not to subject readers to them too often, but we are here to understand America, and realizing that even the most accomplished economists are so frequently undeserving of our respect is important to that understanding. So humor me for a moment.

The catalyst for this particular discussion was my recent American Compass podcast episode with Thaler’s colleague, Luigi Zingales, who had sent out a tweet promoting the conversation. Out of nowhere, Thaler piped in: “do you agree with Oren Cass that share repurchases are evil? What about dividends?”

This is what the kids call “catching a stray.”

So I observed, in response, “economics as religion... If you construe a case for banning share buybacks as an argument that they are ‘evil,’ you may be afflicted by a case of market fundamentalism.” And off we went…

Richard Thaler: Why do you want to ban them if they are not evil?

Oren Cass: I think we should prohibit via regulation a firm’s management trading in its own stock because the incentives to do so are badly misaligned with the firm’s and economy’s long-term health.

But I’m much more interested in your idea that regulatory prohibitions should be applied only to things that are “evil.” Is that really your view? I mean, in securities regulation alone, it seems like that is pretty far off the mark, unless you’re saying we shouldn’t have securities regulation?

RT: You are reading too much into “evil”. Harmful? What about dividends? Share issuance à la GameStop is pretty bad but buybacks on average signal that the price was too low. Insider trading is bad. So is trading by members of Congress. Only ban bad stuff. Am I then religious?

OC: You made an assertion that Oren believes “share repurchases are evil.” I thought it was possible you really do think people only support bans for “evil” things, but clearly not. So it was just a baseless and inappropriate attempt to malign me. Fine.

What is your evidence that “buybacks on average signal that the price was too low”? The empirical evidence that I’m aware of suggests the opposite, with the exception of small-cap companies with large information asymmetries (which would then bring us to the insider trading inquiry...).

RT: Ok done here. Send me an email if you want to have a civil discussion. Firms buy back shares for lots of reasons including using them to give employees stock options. Yes they can be mis-used by top execs to meet targets, but go after that!

[Editor’s Note: He was not done here. He returned the next day…]

RT: Some useful background from my friend and co-author Owen Lamont. Failing to read his blog posts is an own-goal.

RT: Nice quote from Ken French: “Buybacks are divisive. They divide people who understand finance from those who don’t.”

So what can we learn from this dialogue?

1. The dysfunctional culture in economics runs deep. Thaler is a behavioral economist. “He investigates the implications of relaxing the standard economic assumption that everyone in the economy is rational and selfish, instead entertaining the possibility that some of the agents in the economy are sometimes human.” These are the people who are supposed to save us from the market fundamentalists, injecting more realistic assumptions about real-world decisionmaking into foolishly abstract economic models.

But Thaler cannot help himself. For some reason, he feels drawn to jump publicly into a discussion with Zingales, not to make some learned point, but to try to make fun of somebody whose views are insufficiently Economics(tm). We can infer, using tools from behavioral economics, that he anticipates such behavior will elicit a positive reception.

2. Unfortunately for Thaler, the joke is on him. It turns out he doesn’t know as much as he thinks he does about stock buybacks; rather, he’s operating on precisely the unsophisticated assumption of market efficiency that has gotten his discipline into so much trouble.

He seems to believe that we would never ban something unless it is evil. (Much better to “nudge,” using the superior wisdom of the technocrat to manipulate the common man into making the decision preferred at the University of Chicago.)

He makes an empirical claim, “buybacks on average signal that the price was too low,” but declares the conversation over rather than providing support for the claim. Probably a wise move, because he’s simply wrong, having gone with the generic theoretical assertion of efficiency without any concern for how buybacks actually function.

In fact, as the Harvard Law School’s Forum on Corporate Governance explained in 2020, “management teams often say they like to buy their stock when it is undervalued, but companies do a poor job of timing the market, often buying at market peaks rather than troughs.” For instance, “a 2019 study by Fortuna Advisors shows that 64 percent of companies in the S&P 500 had negative buyback effectiveness, implying that a company’s buyback return on investment (ROI), though positive, was lower than its total shareholder return (TSR), usually due to poor buyback timing and suboptimal capital allocation decisions.” Yes, “some studies suggest that companies are good at taking advantage of undervalued stock prices during buybacks. Further examination by McKinsey & Company, however, concludes that this finding is driven almost entirely by small-cap companies with large information asymmetry.”

What’s going on here? Morgan Stanley explains, “in theory, buybacks should add value to ongoing shareholders and provide them with an ability to time their tax liabilities. In practice, companies regularly tie the magnitude of their buyback programs to the dilution that [stock-based compensation (SBC)] causes and look to buybacks as a means to manage [earnings per share (EPS)].”

Thaler’s follow-up the next day makes for a bizarre coda. Having finally thought of some evidence, he returns to the conversation. This is reminiscent of one of my favorite Seinfeld plotlines, in which George, after being insulted at a meeting, thinks of a lame comeback too late to deliver it. He then orchestrates a whole ‘nother meeting just to deliver the line (“the jerk store called, and they’re all outta you”), only to get to one-upped and mocked yet again.

Thaler doesn’t have evidence, he has a friend’s blog post. It’s mostly a blog post about stock issuance, not stock buybacks. The one study it cites on under/overvaluation is mostly about issuance, too. And it’s two decades old. That’s significant because one key, more recent finding is that buybacks used to reflect undervaluation. But not anymore. “Repurchases in the 2000s are weaker undervaluation signals than in the 1980s and 1990s,” according to the Handbook of Corporate Finance (2022). “Although stock prices still tend to jump at the announcement of repurchases, they no longer consistently rise in the long-term.”

In this respect, the whole debate is reminiscent of the one about private equity, which indeed generated impressive returns in its early years, but now fails to beat a simple public market index.

3. Thaler is exceedingly confident in his ignorance. Thaler concludes with a quote from Ken French, that “buybacks are divisive. They divide people who understand finance from those who don’t.” Good one. Ironically, this attitude is precisely the one that Zingales critiqued on the podcast, when he observed: “Economics is so hierarchical and so homogeneous. ... [Economists] believe in meritocracy, but then we look at people’s pedigrees and whether you graduate ... I can have as many citations as I want. It doesn’t make me right.”

By the end, Thaler has even conceded the case. While he initially said of buybacks, “I have not heard a case against them,” he concludes that, “yes they can be mis-used by top execs to meet targets, but go after that!” So there is a case against them, and one he would support going after. How exactly would policymakers go after “mis-use by top execs” while permitting what he apparently considers the vital other uses? Perhaps that’s just another question that divides people who understand finance from those who don’t.

But it does bring us back to where we started: Thaler’s question of whether the criticism of buybacks also applies to dividends, which likewise return capital to shareholders. It does not, precisely because dividends do indeed facilitate the legitimate purpose of payouts to shareholders while allowing much less room for gaming. Banning buybacks while permitting dividends is exactly the way to go after misuse by top execs without interfering at all with capitalism’s valuable operation.

But that kind of thinking requires clear-eyed analysis rather than the dogmatic recitation and performative in-group signaling that economists now tend to offer. The Jerk Store seems unlikely to run out any time soon. — Oren

GOOD WEEKEND READS FROM US

American Compass has just released a major new paper on which we both worked, Learning by Doing: Case Studies in Building the Infrastructure for Career Pathways. Everyone loves “apprenticeship” in theory, but what do good pathways look like in practice? We profile six programs across innovative high schools, technical colleges, employers, unions, and partnerships therein. Start with the Foreword:

A startling transformation is underway, in the economy, in the culture, and among policymakers. The ironclad, bipartisan belief in college as the “ticket to the middle class,” in former President Barack Obama’s preferred phrase, that every child should go to college, that the public education system’s primary task is to prepare everyone for college, has begun to crumble.

And this one’s a watch or listen, but last week American Compass helped host a fascinating AI + Labor Summit in Washington, which featured a conversation between Palantir CEO Alex Karp and Teamsters President Sean O’Brien, moderated by Oren. We’ve released it as this week’s podcast.

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SPEAKING OF TECH AND LABOR…

Don’t believe corporate press releases with “AI” in the title. From the Wall Street Journal: Jack Dorsey Blamed AI for Block’s Massive Layoffs. Skeptics Aren’t Buying It.

Rather than leading American corporations into a brave new future, some Wall Street analysts say, he is capitalizing on a chance to slash costs at a company with excessive staffing. What began as a company focused on card-payment systems expanded into buy-now, pay-later loans, Jay-Z’s music-streaming platform and bitcoin investments.

But this new working paper from Erik Brynjolfsson is worthy of contemplation: Minimum Wages and Rise of the Robots.

This paper studies how minimum wage policy affects firms’ adoption of automation technologies. Using both state-level measures of robot exposure and novel plant-level data on industrial robot imports linked to U.S. Census microdata from 1992–2021, we show that increases in minimum wages raise the likelihood of robot adoption in manufacturing. Our preferred identification exploits discontinuities at state borders, comparing otherwise similar firms exposed to different wage floors. Across specifications, a 10 percent increase in the minimum wage increases robot adoption by roughly 8 percent relative to the mean.

On X, Brynjolfsson asks, “Does raising the minimum wage accelerate the ‘Rise of the Robots’?” One might ask the corollary question, “Would eliminating the H-2A temporary agricultural visa program accelerate the Rise of the Robots?” The idea that higher labor standards lead to technological innovation, capital investment, and higher productivity is precisely the argument for such standards.

This was the thrust of American Compass’s recent collection, For Whom the Machine Toils:

Are American workers’ interests and American techno-industrial strength in tension? Many say yes, from labor activists who treat technological innovation as a threat, to libertarians who view worker power as an obstacle to technological dynamism, to economists who say that upholding labor standards and protecting domestic industry are both misguided.

They are wrong. An economy in which worker power and industrial power reinforce each other is possible. Rapid technological progress is precisely the formula for increasing both productivity and wages. Worker power, properly deployed, forces capital to invest accordingly, improves the return on that investment, and ensures labor enjoys its fair share. Protection of the domestic market—both workers and industry—was a central tenet of American economic strategy for decades.

Especially, read Michael Lind: “High Wages and Technological Innovation: There Is No Alternative.”

Prediction market Kalshi is allowing people to bet on the likelihood of the “Citrini scenario” that Daniel wrote about last week (i.e., sudden waves of white-collar unemployment sending the economy crashing in a vicious cycle). Supposedly, the benefit of these “markets” is that people put their money where their mouths are, providing better information than the newscycle competition for most outlandish clickbait. Unfortunately, courage here seems rather lacking. Kalshi’s version of the scenario amounts to such milquetoast milestones as 10% unemployment, a 30% decline in the S&P 500, and annual inflation falling below zero.

That’s called… a recession. Those figures were hit, or nearly so, in 1983, in 2009, and in 2020. And even still, our wise wagerers have the probability at 14%. Let’s get some more of these markets going. OpenAI CEO Sam Altman says we’ll either cure cancer or educate the world for free this year. Anthropic AI CEO Dario Amodei says AI might wipe out 50% of white-collar jobs and spike unemployment to 20% by 2030. We’d like to bet against them.

At least prediction markets are good for something: capitalizing on classified military plans. “The US attack on Iran was preceded by a number of unusually large and well-timed bets that made a combined profit of $330,000 and were placed by 12 suspicious accounts in the days before Saturday morning’s air strikes,” reports the Financial Times. So much value creation.

MORE GOOD WEEKEND READS

In the Claremont Review of Books, Michael Anton gives Laura Field’s Furious Minds its, er, due.

The various endowed-chair professors, think tank senior fellows, national newspaper columnists, and other assorted luminaries who have heaped praise on this book should be embarrassed. That they can, with a straight face, praise it as good scholarship calls into question whether they can any longer recognize even passable scholarship. More likely, however, they know bilge when they see it—but laud this particular bilge nonetheless because it furthers a common partisan interest.

And then kudos to the Wall Street Journal for a clean sweep of the week’s most interesting coverage:

What Is a City When Its Wealthiest Leave? The stickiness that once anchored people and capital to great cities is gone. It is not coming back.

America’s Ranks of Immigrant Truckers Find a Roadblock: English Tests. Over the past year, more than 10,700 truckers failed an English test, disqualifying them from driving.

High Schools Are Losing the Struggle to Block Pot—Even During Class. Legalization makes marijuana culturally acceptable and easy to get; “it was a party in the bathroom.”

CHECKING IN ON TARIFFS

Much has happened since the Supreme Court’s ruling. While some have questioned President Trump’s authority to re-impose a 10% global tariff via Section 122 of the Trade Act of 1974, Peter Harrell (who helped litigate the case against the IEEPA tariffs) argues at Commonplace that the move will very likely withstand judicial scrutiny.

Harrell also emphasizes, though, that seemingly arbitrary moves by the administration—such as quickly increasing the rate to 15%, attempting to impose different rates on different countries, and so forth—would raise more serious issues. So keep an eye on: Bessent Says Global Tariffs Will Rise to 15 Percent This Week (New York Times).

And in the meantime, what happens to the old tariff revenue? The Court of International Trade has ordered refunds (New York Times), delays of which may cost taxpayers billions more in interest (Cato Institute).

Legislation, people… legislation. Like the bipartisan Secure Trade Act, that would codify the global 10% tariff. Rep. Jared Golden, co-sponsor of that bill, has an excellent piece on it all: Our Trade Imbalance Is a Risk to Our Future.

In better news, investment from Japan continues apace. Japan, US Aim to Add Nuclear Power Project to $550 Billion Investment Package (Reuters).

AS FOR CHINA

Let’s wrap up with a couple of interesting stories about cars and chips, where things are not going well for the Chinese.

The Financial Times reported that BYD saw a 41% decline in domestic vehicle sales, offset partly by a 50% rise in export sales. This is the China problem in microcosm: insufficient domestic demand, overreliance on exports, and nowhere to turn if those get shut down.

Speaking of nowhere to turn, China’s efforts to buy advanced AI chips are also struggling. But so is the American case for selling them. The latest news is that “U.S. Considers Capping Nvidia H200 Chips at 75,000 per Chinese Customer” (Bloomberg), but of course that cuts against the stated rationale for selling Nvidia chips in the first place: the desire to “addict” China to the American technology stack. Indeed, such a cap is essentially the exact policy one might expect the CCP to impose if it wanted to ensure both that its companies had access to the Nvidia ecosystem and the best chips for the highest-value uses while also keeping up the pressure to invest in indigenous alternatives.

With exports in doubt, “Nvidia Stops Production of Chips Intended for Chinese Market” (Financial Times) and “has reallocated manufacturing capacity at Taiwan Semiconductor Manufacturing Company away from making H200 chips to its next-generation Vera Rubin hardware.” Doesn’t that imply a tradeoff between manufacturing chips for the Chinese and for the American market?

If we’re not going to get the Chinese hooked on American chips, and more chips for China means fewer chips for the United States, the rationale for these sales is…

While you’re thinking about that, enjoy the weekend!

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This week, a 7,000-word thought experiment published by Citrini Research ricocheted across the political and financial press. The research note described a hypothetical future in which AI advances so rapidly that mass white-collar layoffs destabilize the consumer economy, trigger a credit crisis, and send the S&P 500 down 38% from its highs. The Wall Street Journal called it a “doomsday report” that laid bare “Wall Street’s deep anxiety” about the future of AI.

The speculation commanded so much attention because it pinpointed a mechanism that investors, executives, and journalists intuitively understand. In the 1930s, economist Michal Kalecki identified what has since become known as Kalecki’s Paradox of Costs. His insight is simple: What is rational for any individual firm—cutting labor costs to boost margins—is catastrophic when every firm does it simultaneously, because workers are also consumers. The wages that firms suppress are the same income streams that generate the demand on which their revenues depend. A firm that replaces ten workers with a new technology saves money. But an economy in which every firm does the same destroys the consumer base that provides the revenue to keep all firms solvent, unless entrepreneurs seamlessly redeploy the labor in new and more productive pursuit—a phenomenon that economists like to assume with waving hands, but that the real world does not accommodate.

The Citrini scenario applies this logic to AI-driven headcount reduction. Companies cut staff and invest in AI, AI improves, workers become less necessary, displaced workers spend less, companies cut more: a feedback loop that doesn’t have a natural brake (unless government steps in).

Suffice to say, Citrini’s predictions may not materialize. The pace of AI progress may be slower. The buildout of physical infrastructure to support widespread deployment faces real resource constraints. Effective integration into enterprises often takes longer than technologists expect. And political backlash against a sector with a trust deficit could throw sand in the gears at every level of government. But whether or not Citrini’s scenario unfolds, the dynamic it describes is well worth contemplating, and being prepared to address.

A few days after the Citrini note was published, American Compass hosted a Summit on Labor and AI in partnership with the New American Industrial Alliance and Palantir Technologies. The program was both high-powered and eclectic:

• Compact editor Matthew Schmitz interviewed Senator Josh Hawley

• I moderated a conversation between Julius Krein and Edward Luttwak on industrial policy

• Compass policy director Chris Griswold moderated a conversation between Catholic University’s Father Aquinas Gilbeau, Valar Atomics CEO Isaiah Taylor, and Cluny Institute director Luke Burgis on how religious faith informs these issues

• Oren moderated a conversation between Teamsters President Sean O’Brien and Palantir CEO Alex Karp that covered, well, a lot

The Citrini note’s underlying prediction—that the AI revolution will replace the worker rather than augment his abilities, and that it will hit white-collar workers hardest—was a throughline in each of the panel discussions. O’Brien, in his conversation with Karp, put it plainly: For once in his lifetime, the people who have never been economically vulnerable are about to experience what most working people have experienced for decades.

O’Brien’s observation is worth dwelling on. For 30 years, the organizing logic of the American economy has been a flight from the physical: from atoms to bits, from factories to platforms, from making things to managing things. The professional class built its security on the assumption that the future would always reward credentialed, cognitive symbol manipulation and that the people who worked with their hands were on the wrong side of history. It was a reasonable bet that paid handsomely for a long time—and may now be wrong.

The same qualities that made white-collar work seem secure—its abstraction, its scalability, its distance from physical constraint—are precisely what make it vulnerable to a technology that processes information more quickly and cheaply. The professional class watched the nation’s industrial base atrophy and drew the wrong conclusion: that cognitive work was insulated from the logic of substitution. AI is correcting that assumption.

That logic has a history that animates much of our work at American Compass. Stagnant wages and productivity growth that didn’t accrue to the typical worker were the consequence of a market deliberately unbound from any recognition of mutual obligation and from a misalignment between that which generates profit and that which advances the national interest. Globalization made cheap foreign labor abundant and sent capital abroad. Mass immigration suppressed wages and discouraged investment at home. Financialization enabled profit from arbitrage rather than expansion of domestic capacity.

AI arrives in that same unbound system. If the gains flow the same way—to capital and away from the workers whose labor it displaces—the Kaleckian feedback loop Citrini describes becomes the default.

Julius Krein, editor of American Affairs and one of the sharper analysts on matters of political economy, closed the panel I moderated on an optimistic note. The professional class, he argued, shouldn’t be understood as AI’s inevitable victim. In a political moment defined by reindustrialization, AI, and competition with China, there will be ample opportunities for credentialed talent to redirect itself toward building the physical economy rather than managing the financial one. The engineers, lawyers, and financiers who spent three decades optimizing a globalized system could spend the next three building a national one. And the capital markets that exploited arbitrage opportunities could instead finance a reinvigorated industrial base.

Blue-collar workers were the losers of the last 30 years. AI threatens to make the professional class the losers of the next 30. Inversion of their fortunes is the wrong goal, as is managing the decline of one class while celebrating the revival of another. What we should strive for instead, and aim to have well-structured and well-supported markets deliver, is convergence: the talents of the professional class and the resources of our capital markets redeployed in the service of all workers. The last 30 years unbound the market from the nation. The next 30 must reconstitute and celebrate the ties that bind us together. — Daniel

SPEAKING OF LABOR AND AI

We’ve got the reliably awful: Sam Altman, foot reliably in mouth, one-upped himself in India this week, arguing:

One of the things that is always unfair in this comparison is people talk about how much energy it takes to train an AI model relative to how much it costs a human to do one inference query. But it also takes a lot of energy to train a human. It takes, like, 20 years of life and all of the food you eat during that time before you get smart.

The audience laughs awkwardly, but Altman is not joking and plows ahead. Regular reminder: If Nobody Trusts You, They’re Not the Problem.

A new standard in awful: Not to be outdone in the dehumanization derby, Secretary of Agriculture Brooke Rollins took to Fox Business to lament the rise in fertilizer, fuel, interest rates, and labor costs, then proudly tweeted the clip. One of these things is not like the others! Oren often laments the economist’s tendency to treat labor as just another input, like lumber or electricity. Equating workers instead with fertilizer and debt manages to be even more demeaning.

Some interesting progress: In 2018, Annie Lowery wrote Give People Money, which was supposed to show how Universal Basic Income “has the potential to solve some of our most intractable economic problems, while offering a new vision of citizenship and a firmer foundation for our society in this age of turbulence and marvels.”

Eight years later, contemplating the prospect of widespread unemployment for white-collar workers that Daniel discusses above, she has come to a very different conclusion: “UBI is a dystopian outcome, not a utopian one.” She explains:

For families to thrive in this new post-work paradigm, the government would need to redistribute a lot more than $1,500 per person per month, necessitating confiscatory taxes on corporations—taxes they would fight tooth and nail. The bigger problem would be that Americans would hate a world without work, where the jobless rate floats at 30 percent instead of 4 percent. Many Americans like working. They like having somewhere to go during the day. They like trading watercooler stories with their colleagues. They like getting promoted and starting their own firms. They are proud of earning a living. Long-term unemployment destroys people’s mental and physical health, and generates toxic societal unrest. Politicians love saying that Americans want a hand up, not a handout—and they aren’t wrong.

Well said.

And a more reasoned take: In the Wall Street Journal, Greg Ip takes a look at the evidence on how AI has actually affected employment and how it most likely might (given the typical trajectory of revolutionary technologies), concluding “Tech Has Never Caused a Job Apocalypse. Don’t Bet on It Now.” Even in software development, he notes, “if such a revolution were upon us, we should see some sign of it. We don’t, at least not yet. The ranks of software developers, widely assumed to be acutely vulnerable to AI, are up 5% in January from a year earlier, a pace largely consistent with the past 23 years.”

GOOD WEEKEND READS

Snaps for our friends at American Affairs, who just published an especially interesting issue. Start with:

• Rebuilding America’s Sea Power, by Senator Todd Young

• The Global Industrial Development Toolkit: Unpacking Trump’s Investment Deals with Japan and South Korea, by Peter Harrell

• Between Hype and History: Conversations with the AI Elite, by Sophia Brown-Heidenreich

Friend of the ’stack Ruy Teixeira has an excellent essay on “No Populism Without Cultural Populism”:

This is a bitter pill for most Democratic elites to swallow. In today’s America, they are the “Establishment” even if in their imaginations they are sticking it to the “Man” and fighting nobly for social justice. The failure to understand that they themselves are targets of populist anger is a central reason their populist pitch fails—and will fail—to get traction among the working class.

Panka Bencsik and Tyler Giles have posted a fascinating new paper, “Local Prosecutors and Public Health,” that finds “narrow election of a Republican prosecutor reduces all-cause mortality rates among young men ages 20 to 29 by 6.6%. This decline is driven predominantly by reductions in firearm-related deaths, including a large reduction in firearm homicide among Black men…” (h/t Santi Ruiz)

• Related: In case you missed it, be sure to read our own Drew Holden’s essay from last week, “Cities Really Can Just Enforce the Law.”

And in Fortune, a devastating deep-dive into technology in schools: “The U.S. spent $30 billion to ditch textbooks for laptops and tablets: The result is the first generation less cognitively capable than their parents.” (h/t Jonathan Haidt, who observes, “putting computers and tablets on students desks in K-12 may turn out to be among the costliest mistakes in the history of education.”)

KEEPING CALM AND TARIFFING ON

Checking in on the data: At the American Enterprise Institute, Derek Scissors takes a very fair look at the data on the first year of the global economic reset, acknowledging, “12 months of financial success worth trillions and nine months of trade success, at least on Trump’s view.” But, he says, “that’s not the end of the story. The last three quarters of the 2025 also saw manufacturing employment decline each month.”

As we emphasize repeatedly, manufacturing job growth is not the right barometer of reindustrialization’s first year. Even if one wanted to look there, the sector’s job decline slowed by half from the prior year. Scissors acknowledges as much, and then notes, “it can take time for trade and financial changes to affect employment.”

To summarize his analysis, then: the economic results from the administration’s trade policies look promising, except for the job numbers, which also improved and are not yet relevant. OK, then! (Perhaps, “2025 Trade and Investment Didn’t Yield Manufacturing Jobs” was not the right title for the piece?)

Speaking of data, Bloomberg highlights the growing gap between what China says it exports to the United States and what the United States says it imports from China, suggesting substantial underreporting by importers to evade tariffs. As one importer who does obey the law puts it, “the tariffs are just the cost of doing business, but the tariff cheats are the ones that are very, very damaging.” The problem is parallel in many ways to the employment of illegal immigrants, where law-abiding employers get undercut.

Solution: Fund the trade police. More detailed solution: Build an AI model that filed reports by importers with local data on the originating source of the products.

But what about the Supreme Court? Well, be sure to listen to this week’s episode of the American Compass podcast, in which senior political economist Mark DiPlacido and I go through the details of the ruling, the alternative authorities on which the administration is now relying, and what to expect next.

If reading is more your thing, Peter Harrell’s analysis at Lawfare is excellent.

Or, if you prefer badly uninformed commentary, there’s always economist Justin Wolfers, who seems confused by the Court’s decision regarding the interpretation of the regulatory power under IEEPA and thinks, instead, that the tariffs were declared unconstitutional.

Now underway: The Wall Street Journal explains how the administration will use new Section 232 tariffs to target sectors vital to national security. And U.S. Trade Representative Jamieson Greer announces the initiation of investigations under Section 301 to address unfair practices of trading partners.

Ambassador Greer also delivered an excellent speech at his alma mater, the University of Virginia School of Law, on international law. Of particular note: “The United States raised the alarm again and again, but it became clear that this problem could not be resolved using old, slow moving, and outdated international tools.”

This is the point where even the most ardent enthusiasts of the “rules-based trading system” ultimately get stumped. The conclusion of Oren’s interview with Ernesto Zedillo, former Mexican president and professor at the Yale Jackson School of Global Affairs, was a particularly good example.

Prior to Trump, was the WTO working as intended? No.

Was there any plausible path to WTO reform, given its failure to conclude a successful negotiating round after its establishment in 1995? No.

If the WTO was not working and could not be reformed, should the United States simply have lived with a dysfunctional status quo indefinitely? Hmmm, well things get harder there…

So then what was the alternative to abandoning the broken system and starting anew?

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BROKEN SYSTEM, CHINA EDITION

China, of course, is exhibit A in this broken system. The rest of the world largely ignored the problem as the United States absorbed its imbalances, but with Trump saying no mas, the problem is everyone’s now.

What Say You, Germany? As Thorsten Benner, Jakob Hensing, and Florian Klumpp write in an especially comprehensive look at “Germany’s China Shock” in the new issue of Internationale Politik Quarterly, “for a long time, Germany’s political and business elites have chosen to ignore the economic threat emanating from Xi Jinping’s China. It’s now time to confront it.”

Will they confront it? The Economist gives reasons for hope, and reasons for doubt:

Exports of German cars and other goods to China have fallen off a cliff, and surging imports from Chinese companies facing price pressure at home have driven the trade deficit to €90bn ($105bn), a head-spinning 2% of German gdp. With domestic demand subdued, Chinese exporters of cars and other goods are seizing market share from German rivals in third countries (see chart 1). Parts of German industry are crying foul over Chinese subsidies and a grossly undervalued yuan. “Our companies are competing not only with Chinese rivals, but with the Chinese state budget,” says Oliver Richtberg, head of foreign trade at the VDMA, an association of mainly German machinery firms….

Still, industry does not speak with one voice. Some multinationals, like basf, a chemicals giant, have doubled down on their investments in China. A growing number of German firms are “localising”: using Chinese supply chains, developing products with local workers and reinvesting profits in China. Volkswagen, among others, is accelerating its plans to use China as an export hub to the rest of the world. Meanwhile it is slashing jobs in Germany.”

What Say You, Japan? According to the Financial Times, “China has restricted exports of rare earth magnets and other critical materials to dozens of leading Japanese companies in an escalation of a dispute with Tokyo. China’s commerce ministry on Tuesday said it would freeze the flow of ‘dual-use’ materials, which have applications to both civilian and military industries, to 20 Japanese companies. Another 20 groups are being added to a new ‘watch list.’”

And What Will We Say? In the New York Times, Jonas Nahm explains that the decline in U.S. competitiveness is a function of not only unfair trade practices and economic distortions, but also a genuine productivity shortfall:

The barriers are practical rather than technological, especially for small and midsize companies. In many factories, production data is incomplete or still recorded manually, making it impossible to use digital tools that rely on continuous information. Three-quarters of manufacturers surveyed struggle to connect older machines to systems that could help them run more efficiently. And eight in 10 report shortages of workers who can use A.I.-powered manufacturing tools. More than half say the upfront cost of A.I. projects is prohibitive.

…

America has emphasized invention and breakthroughs over deployment. But sometimes, technology needs to be treated as factory work — unsexy and perhaps boring, but essential for being competitive.

REINDUSTRIALIZATION

The New York Times goes into the details of the U.S. dependence on Taiwanese semiconductors, landing on this stumper of an “intractable problem”: “New plants won’t be built in the United States unless companies agree to buy the chips produced in them, which would be more expensive and cut into profits. It has been a Catch-22 that federal intervention has struggled to solve.” What a Catch-22! How could federal intervention possibly make the purchase of domestic semiconductors more attractive than the purchase of foreign semiconductors, when the foreign ones are cheaper? Think, people, think.

And be sure to read on for this anecdote:

In an Oval Office meeting, the president told Mr. Huang that he planned to put tariffs on semiconductors because making them in Taiwan was risky, two people familiar with the meeting said. Mr. Trump told Mr. Huang that when he spoke with Mr. Xi about the island, China’s leader would breathe heavily, said one of these people who was briefed on the conversation. The president didn’t like it. He urged Mr. Huang to make chips in America.

What has us breathing heavily here at Understanding America? “Apple Plans to Manufacture Mac Mini in Houston” (Wall Street Journal). Read also the inside story of the reshoring:

The scale of construction, at TSMC and other suppliers, shows Apple’s effort to reshore its chip supply chain is bearing fruit. The Wall Street Journal toured the desert Southwest with Apple executives to see facilities that its purchasing heft and investments are helping to build.

But what has us huffing angrily? SemiAnalysis reports: “Micron spent 612 days on the environmental impact study, including a 45 day public input period. Yet hours before groundbreaking, they were hit with a lawsuit calling the process ‘unnecessarily rushed.’”

This sort of garbage has to stop. Maybe we could start a “Concerned Citizens for Reindustrialization” non-profit that goes around filing onerous litigation against whatever clowns file this sort of litigation? As SemiAnalysis notes:

The lawsuit itself didn’t come from a ground roots uprising. A CA-based workers rights group went door to door in NY seeking plaintiffs. They eventually found just 6 people willing to sign on. But that’s enough to potentially halt the project. … One member of the suit, who as a former lawyer you might expect to be smart, says that “Syracuse has the highest child poverty rate in the country. What is Micron doing about that?”

“Permitting reform” isn’t going to fix this, we need to repeal the procedural environmental statutes. Their costs wildly exceed their benefits.

FINANCIALIZATION

And finally, on Wall Street, hyper-rational financial actors whose value creating innovations are questioned only by unsophisticated rubes are up to their old value creation again.

Rubes like Jamie Dimon: “Dimon Sees Pre-Crisis Parallels as Rivals Do ‘Dumb Things’” (Bloomberg).

Rubes like this “senior partner at a leading international law firm and an adjunct professor at a leading United States law school,” who just published anonymously an article in the University of Chicago Business Law Review, which “argues that the core tools of PE value creation—high leverage, cash extraction, and short-term exit incentives—externalize predictable risks to third parties including workers, healthcare patients, consumers, unsecured creditors, communities and the environment.” Huh. Could the fact that such insider-experts feel that they cannot say these things publicly have anything to do with the fact that not a lot of insider-experts say these things publicly?

At least private equity continues to deliver tremendous value for its investors, like pension funds and universities, by… nope, not true either. “Private Equity’s Dry Spell Worse Than 2008 Crisis, Bain Says” (Bloomberg).

At least we found one good use for financialization. If you’ve made it this far, you’ll definitely want to take a few minutes to read about hero policy wonk Alan Cole betting his life savings against DOGE’s ability to reduce government spending (Wall Street Journal). Alan, we salute you.

Enjoy the weekend!

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I am surprised by how broadly and bluntly the Supreme Court blocked the use of IEEPA tariffs, when it could more easily have issued some guidelines cabining the authority and then sent them back to lower courts to work out. The decision that IEEPA allows no tariffs under any circumstances, by contrast, creates the rather bizarre situation—as President Trump noted in his press conference—where he could restrict trade, license trade, embargo trade, mandate quotas on trade, but never collect any tax or fee on it. That’s a somewhat ironic position for the Chief Justice to adopt, after he saved President Obama’s signature health care policy by rather creatively construing a tax where only a mandate existed.

But as trade experts across the political spectrum have been noting since the start of the case, and as President Trump emphasized this afternoon, the decision does not have much substantive effect on the administration’s trade agenda. One could even interpret the opinion from Chief Justice Roberts, who knew all this too, as emulating the style of John Marshall in Marbury vs. Madison: taking the opportunity to lay down principles that will constrain executive authority for all time (in this case, via the Major Questions Doctrine) at a moment when the executive would not be all that bothered.

And indeed, Trump seemed unperturbed and in downright good humor in his reaction. To understand why, and what’s likely to happen now, let’s return to the framework we’ve been using since Liberation Day, which breaks the tariffs into three categories: the Global Tariff, the Reciprocal Tariffs, and China.

1. The Global Tariff. The baseline 10% tariff is an important policy for rebalancing global trade and also raises substantial revenue, but was always difficult to fit within IEEPA’s parameters. Ideally, it would be legislated; indeed legislation has already been introduced. In the interim, the president announced he will use Section 122 of the Trade Act of 1974, which allows him to address the trade deficit by imposing a baseline tariff of up to 15% on all countries. So little will change in the short run, though that authority will expire after 150 days unless Congress votes to extend it, finally setting up an unavoidable moment of action at that end of Pennsylvania Avenue.

2. Reciprocal Tariffs. These are the targeted, country-by-country tariffs that the president has used for negotiating leverage to reach bilateral agreements with a wide range of allies. The minimal process required by IEEPA before regulating trade (which, per the Supreme Court, cannot include imposing tariffs) made it an especially potent tool for negotiations, but the president can impose comparable—or higher—tariffs through Section 301 of the 1974 Act and Section 232 of the Trade Expansion Act of 1962. Those require a more thorough process, but imposition is an entirely credible threat, and countries that have already entered negotiations or reached deals will likely recognize that they would be unwise to back out now.

The ongoing renegotiation of the USMCA with Mexico and Canada is an especially important subset of the many negotiations. Successfully concluding an agreement with those countries (whether among all three, or as two bilateral deals) that provides a framework for ensuring fair and balanced trade on our continent will provide a crucial cornerstone for trade among the U.S.’s broader set of allies. Here, again, renegotiation is underway and the president retains ample leverage through these other trade laws, and other facets of the North American relationship, to reach satisfactory terms.

3. China. On one hand, China is the easiest situation. The president imposed wide-ranging tariffs on China under well-established authorities in his first term, President Biden mostly maintained them, and now they have been expanded further. IEEPA tariffs were adding to the total, but no one really questions that Trump can use other authorities to go as high as he might want with tariffs on China, given its status both as an obvious adversary and national security threat, and as an obvious bad actor in the trading system.

On the other hand, China is where the president’s strategy has been most unclear. Since his meeting with President Xi in October, Trump has mostly tried to dial back pressure and avoid confrontation, and with the next summit now slated for the week of March 30, no one is quite sure whether he is looking to strengthen his leverage or signal a commitment to détente. If he uses the loss of IEEPA tariffs as an excuse to let the rate on China drift lower, that would be a concerning sign for the summit and it would undermine the ongoing effort to push supply chains out of China, which depends on keeping tariffs there meaningfully higher than they are on other countries.

Here is the most obvious opportunity for Congress to act, by revoking China’s permanent normal trade relations (PNTR) status. Revoking PNTR is a bipartisan recommendation of both the U.S.-China Economic and Security Review Commission and the House Select Committee on the Chinese Communist Party. Secretary of State Marco Rubio, while in the Senate, cosponsored legislation that would accomplish the task, and it has a bipartisan companion in the House. Congress could reassert its role in trade policy and settle the question of the U.S.-China relationship’s future direction, along exactly the lines where there is broadest consensus.

The ruling’s most obvious complication for the president’s agenda may come on the issue of transshipment. The U.S. can put up its own barriers to Chinese goods, but if it wants to maintain free trade with Mexico, or even Malaysia, and those countries put up no such barriers, the goods will soon make their way into the American market anyway. The president had used the IEEPA tariffs as leverage to extract commitments on blocking transshipment, and the threat of re-instituting such tariffs offered an especially potent enforcement mechanism if the commitments were not fulfilled. This is another issue on which both parties in Congress and even the most strident free traders can agree, and could provide the basis for new legislation as well.

Whatever the Court thought it was doing, Trump is correct that in many respects it “made the president’s ability to regulate trade and impose tariffs more powerful and more crystal clear, rather than less.” He had made a strategic choice to move quickly with the authority that was most flexible, even if not the one on firmest legal ground. The year since has given his team time to make enormous progress on negotiations and to initiate processes that will provide a more stable foundation for continued efforts.

Peter Harrell has been one of the sharpest commentators on the case throughout (and bested me on our respective predictions for it!). He concluded his own rundown with an assessment that I share of the tools now coming to the fore: “The greater discipline those authorities will require will make for a more orderly, disciplined, rational, and stronger tariff policy going forward.” A better framework for the global trading system, and better incentives for domestic investment, were always going to require firmer foundations than IEEPA. It is good to move toward them.

Just after Liberation Day, I wrote about the need for the administration to “move from its embattled beachhead into a sustainable forward position.” It seems likely that, in time for Liberation Day’s first anniversary, we will be celebrating such a position established.--Oren

MORE ON TARIFFS

It was good to see U.S. Trade Representative Jamieson Greer on the mic for a few minutes at the president’s press conference. Who is Ambassador Greer? The New York Times just published a great profile:

As the United States trade representative, Mr. Greer, 45, has been a powerful but behind-the-scenes force in transforming the global economy. His calm demeanor is often overshadowed in a cabinet filled with outspoken, brash billionaires. Yet few have done more in Mr. Trump’s second term to put into practice the president’s vision of altering the system governing how trillions of dollars of goods move around the world.

And what is it we’re all fighting about, again? IMF Calls on China to Halve Industrial Subsidies (Financial Times):

The IMF has called for China to slash state support for industry as international concerns mount about overcapacity in the world’s second-largest economy. The fund estimated that China spends about 4 per cent of its GDP subsidising companies in critical sectors, and said it should reduce that by 2 percentage points in the medium term. China’s industrial policies “are giving rise to international spillovers and pressures” and have combined with weak domestic demand to make China “more reliant on manufacturing exports as a source of growth”, the fund said.”

Here’s betting that asking really nicely doesn’t work.

On one hand, it’s worth noticing how quickly things have changed. “The 2024 staff report didn’t mention external imbalances at all—so there has been an important evolution in the IMF’s thinking in the last couple of years,” notes Brad Setser from the Council on Foreign Relations. On the other hand, as the Carnegie Endowment’s Michael Pettis explains:

China spends a lot more than 4% of GDP subsidizing critical manufacturing sectors, not just through direct central-government subsidies, but also through local-government subsidies and mainly through indirect subsidies. …

Rather than target a tiny part of the distortions that create large, persistent trade imbalances, the IMF should be targeting the imbalances themselves. Rather than tell Beijing which measures it must manage, it should let Beijing decide what measures it will use to rebalance domestic demand.

Asking Beijing to reduce specific subsidies is pretty meaningless and suggests more of lawyer’s approach to understanding trade than an economist’s approach.

Thus, the wisdom in the Trump administration’s strategy of imposing tariffs (rather than asking nicely), and of making its core demand from trading partners that they achieve balance, not that they correct this or that distortion, which may achieve little.

A less wise approach? Whatever it is the EU continues to do. Reports early in the week from the Financial Times indicated that “Brussels is planning to force electric-vehicle manufacturers benefiting from state support to ensure that at least 70 per cent of the components in their cars are made in the EU, as it seeks to protect the bloc’s industries from intense Chinese competition.” Good idea. But the EU commissioners voted it down, punting a decision to March. Bad idea.

These are exactly the issues USMCA will be renegotiated over. China’s BYD and Geely are seeking now to buy a Mexican car factory (per Reuters). Will they be allowed to do so? Would their product be “local content”? Hopefully not.

GOOD WEEKEND READS, EUROPEAN DIPLOMACY EDITION

Starting with the interesting and substantive, it’s worth taking a look at both Secretary of State Marco Rubio’s speech at the Munich Security Conference and Under Secretary of Defense for Policy Elbridge Colby’s speech at the NATO Defense Ministerial.

In Munich: Reiterating the key themes from Vice President JD Vance’s speech in Munich last year, Rubio criticized the Europeans harshly—on the destabilization of mass migration, their failure to maintain a robust defense, and the dangerous complacency of the post-Cold War consensus. Where Vance questions “what exactly it is that you’re defending yourselves for,” Rubio asked “what exactly are we defending?”

The same European diplomats wildly offended by Vance gave Rubio a standing ovation, confirming as always the shallow and performative nature of European diplomacy. Which style better served America? Probably both. Sometimes you need your friends to understand how upset you are, sometimes you need them to understand you still want to be friends.

In Brussels: We will give Colby a pass on the “1.0, 2.0, 3.0” cliche because this is an extraordinarily sharp way of framing the past and future of the Atlantic alliance:

Throughout the Cold War, “NATO 1.0” as we might describe it, was defined by a hard-nosed, realistic, clear-eyed approach to deterrence and defense. Allies from the beginning were expected to pull their weight, as evidenced as early as Article III of the Washington Treaty and the Lisbon Commitments of 1951…

This model was tremendously successful. It made sure that the USSR never saw military aggression against the Western Alliance as a viable strategy. It thus saw us through the Cold War with peace in Europe - an incredible achievement for which we must all be grateful.

When the Soviet Union collapsed, however, NATO transformed into something else - perhaps what one might call “NATO 2.0”. This version of the Alliance was typified by a shift of effort and focus away from Europe’s defense toward “out of area” operations and substantial disarmament on the continent, as well as a change in frame from the hard-nosed, flexible realism of the Cold War “NATO 1.0” to much more of a liberal internationalist mindset of the “rules-based international order.”

It is clear, however, that this approach of “NATO 2.0” is no longer fit for purpose - certainly not for the United States and, we would submit, not for our allies either. The times are changing, and we must adapt - in terms of how we think about the world and the Alliance’s role in it and how we posture to meet it in practical terms.

What is needed is a “NATO 3.0” - something much closer to “NATO 1.0” than the approach of the last thirty-five years…

Read the whole thing.

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GOOD WEEKEND READS, BAD WSJ READS EDITION

These missives by the Wall Street Journal’s editorial board are good reads in an America’s Funniest Home Videos sort of way.

First up, The UAW’s Southern Strategy, where the editorial board laments Volkswagen’s neutral stance in the UAW’s efforts to organize its Chattanooga plant, leading to a successful union election. “VW had also agreed not to oppose the union, perhaps to curry favor with its Biden overlords doling out electric-vehicle subsidies,” lamented the Journal, which is funny, because VW had adopted neutrality in 2014, as the Journal complained about back then.

Why would VW want a union? Because, per the Journal’s 2014 article, “Volkswagen believes that setting up a works council in Chattanooga would promote labor comity and flexibility. The UAW has promised to delegate to the council ‘many of the functions and responsibilities ordinarily performed by unions as bargaining representatives.’” The remarkable thing about the Chattanooga plant was that, in 2014, despite no opposition from VW, workers voted the union down anyway. That it has now won their support speaks to the broader national fight the Journal’s editors are badly losing.

Speaking of losing battles, be sure to also read GOP Doesn’t Know Smith From Adam, by editor Jason Riley. “Thanks to [Adam] Smith,” he writes, “today we judge the performance of an economic system based on how efficiently it allocates resources to satisfy consumers.” That this is a self-evidently inadequate way to evaluate an economic system seems lost on Riley, as does the role that industrial policy played in American economic progress for most of our history. “Industrial policy,” according to Riley, is “the antithesis of free-market economics,” which isn’t true and, if it were, might say more about the latter than the former.

GOOD WEEKEND READS, FAMILY EDITION

They Lied To Us About Having It All, And It’s Costing Us Our Children (Evie Magazine)

“Last week the internet lost its mind over Brad Wilcox’s piece in Compact. The sociologist laid out the data with the cold precision of a coroner: women who reach thirty without starting a family have roughly a fifty-two percent chance of ever having children. Not great odds. Not the odds we were sold. The outrage was immediate. ‘How dare he?’ ‘Misogyny!’ ‘Stop telling women when to have babies!’ But here’s the thing no one wants to say out loud: the people sounding the alarm aren’t the villains. The villains are the ones who spent decades lying to us.”

When Politics Comes to the Parenting Group Chat (Washington Post)

“‘I think that’s a part of why the aggression is so surprising to me and the, for lack of a better word, the rudeness and kind of how everything evolved.’ McCune, the Peanuts president, told me. ‘Like, we’re neighbors. I’m still gonna see you guys.’ But one parent’s aggression or rudeness is another’s righteousness. ‘Folks in Free Range tried everything, like, to engage in good faith,’ Stackl told me in September, listing the petition, numerous emails and formal requests for meetings.”

THE AI SLOP WILL CONTINUE UNTIL SUPPORT GROWS

Data centers remain deeply unpopular, with a new issue arising: “Land Grab for Data Centers Is One More Obstacle to Much-Needed Housing” (Wall Street Journal). But it also seems to be the case that people don’t like data centers because, well, they just don’t like AI. As Oren wrote about in “If Nobody Trusts You, They’re Not the Problem,” every dumb move by OpenAI to launch an infinite-scrolling social media app premised on deepfakes makes Americans think about AI more like the last generation of life-degrading apps, and they’re more than smart enough to recognize data centers as the tip of the spear for deployment.

“Donald Trump’s AI push fuels revolt in Maga heartlands,” reports the Financial Times, leading with Lisa Garrett, “who lives beside the site of a rapidly greenlit $6.6bn, 400-acre data centre development in the satellite city of Independence, just east of Kansas City.”

A worker for a local ministry, Garrett’s unease extends beyond the project’s demand on local water and electricity supplies to the broader social impact of the industry it is being built to support. “I have grandchildren . . . It does concern me that they’re being drawn into a world that isn’t real,” she said.

If the AI overlords want support for what they’re building, they may want to think about building something that people support. Because this isn’t getting it done:

HR Teams Are Drowning in Slop Grievances: Employees can now effortlessly create complaints using AI, leaving firms with the time-consuming job of responding (Financial Times).

And neither is this:

Ring Ends Deal to Link Neighborhood Cameras After Super Bowl Ad Backlash: A commercial about a lost dog being reunited with his family ignited concerns (New York Times).

And just wait until we get to this:

The Financialisation of AI is Just Beginning: Get ready for a new wave of securities, hedges and collateral (The Economist).

Eventually, the combination of trusted benchmarks and liquid derivatives markets could support bonds collateralised by baskets of GPUs, much like those backed by bundles of individual loans. Few investors possess detailed knowledge of Californian consumers or Ohio’s office market. Many nevertheless snap up bonds collateralised by credit-card debt and commercial mortgages.

There are some financial market innovations that not even The Economist can sell with a straight face.

SPEAKING OF FINANCIALIZATION…

Three Wall Street Journal headlines for you:

• Gen Z, Locked Out of Home Buying, Puts Its Money in the Market

• The Ivies Are Having Second Thoughts About Investing in Private Equity

• Private-Credit Warning Signs Flash After Blue Owl Unloads $1.4 Billion in Assets

But, good news too: Substack is partnering with Polymarket! Place your bet, er, thoughtfully hedge your risk now on whether Oren or Daniel will be writing the top item next week. We recommend buying Daniel, currently trading at $0.54.

AT LEAST WE CAN STILL BUILD

Encouraging movement on a number of fronts in reindustrialization. The administration released its Maritime Action Plan. Good rundown of the elements here from gCaptain. The U.S. is proceeding with plans for a critical minerals price floor, which it is pitching to allies (Bloomberg). And the U.S. and Japan announced the first $36 billion in capital investment from Japan planned as part of the recent trade agreement (Financial Times).

But our favorite story was Boeing defense headquarters to return to St. Louis after leaving the area in 2017 (NPR):

In a statement, Boeing Defense, Space and Security CEO Steve Parker said the move is part of an effort for the company’s leaders to work “side-by-side” with teammates in the area. “The headquarters move, coupled with our senior leaders being based at and spending their time at major engineering, production and manufacturing centers across the U.S., reflects our continued focus on disciplined performance across our business,” he said in a statement.

Having management close to major engineering and manufacturing centers helps to promote disciplined performance? The good news for Boeing is that, as a defense contractor, its manufacturing had never moved overseas and relocating its headquarters was thus viable. But where else besides the defense sector might that apply?

Enjoy the weekend, and your three days without the global tariff!

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Note: The application is open for this summer’s American Compass internship program. Check it out.

Another month, another jobs report beating expectations, another inflation report beating expectations, another set of economists working on explanations for how really this just goes to show that economists had it right all along, and also things would definitely be even better if everyone had listened to them.

And another journalist stumped by how the agricultural sector could ever possibly create jobs Americans would do, even as he stares right at them. Daniel explains:

In a recent New York Times column, Binyamin Appelbaum argues that immigration restrictionism is a fool’s errand for the agricultural sector. The argument is familiar: these are jobs Americans won’t do; robots can replace some workers, but not all; and if farms cannot import foreign labor, our nation will be forced to import foreign food instead. Policymakers, he concludes, should accept second-class immigrant labor as a permanent feature of American agriculture. But as happens so often with these narratives, the story he tells points precisely the opposite way.

Appelbaum’s central exhibit is Dale Hemminger, a dairy farmer in upstate New York who installed milking robots in 2007—after immigration authorities arrested one of his workers. His farm now produces 2.5 million pounds of milk per worker per year, up from 800,000 before mechanization. His remaining employees—about half the headcount he would otherwise need—earn more, work shorter hours, and do less grueling work.

Appelbaum presents Hemminger as a vision of the future without asking what created the conditions for his success. The answer is obvious: immigration enforcement drove the investment. The result was not the collapse of his dairy farm, but a transformation: higher productivity, better jobs, and a more resilient enterprise. This is precisely the outcome a serious agricultural policy concerned with feeding the nation and respecting its workers should replicate at scale. However, Appelbaum describes the solution and then spends the rest of the piece arguing that we should preserve the conditions that prevent it.

Consider what Hemminger’s example implies about untapped opportunity. A milking robot is a fun piece of technology. (Check out this video from Hemminger’s farm where cows enter the barn when they want to be milked and have their udders cleaned and pulled by a robotic arm.) But it’s not new or exotic. The Dutch company Lely commercialized the first such system in 1992, more than three decades ago, and the technology is common across Northern Europe. About 25% of dairy farms in Denmark and the Netherlands use automated milking systems, compared with about 5% in the United States. That adoption delta is not about engineering capabilities but incentives. American dairy farmers have access to cheap, abundant immigrant labor, which makes investment in mechanization economically irrational. The technology exists and is proven, but most farmers have not deployed it because they have not needed to. The difference between what is available and what farmers have deployed represents enormous potential for productivity growth that immigration enforcement and a reduction in temporary visas would unlock, by altering the firm-level incentive structure.

The deeper problem is Appelbaum’s static analysis of a dynamic market. “There are no robots to do that work,” he writes of crops on Hemminger’s farm, like cabbage, which are still planted and harvested by hand. But the Danish company ASA-LIFT has been manufacturing commercial cabbage harvesters for decades (watch a demonstration here). And the frontier is advancing: a 2024 paper from researchers in South Korea describes the development of an autonomous self-propelled cabbage harvester with AI-based attitude control for cutting on uneven terrain, while a separate team is developing an electric harvester using computer vision to detect and sort cabbages onto a conveyor. The machines exist, or soon will. They are simply not standard on American farms, for the same reason milking robots are not: cheap labor makes them unnecessary. We should wonder what other such innovations American firms might have developed, had demand existed here all along—and what they might develop if demand emerges.

America’s enormous supply of cheap labor is neither a demographic inevitably nor an accident: it was created through distortion of the labor market for the benefit of employers. Visa issuances under the H-2A Temporary Agricultural Workers program have grown from roughly 50,000 in 2005 to more than 385,000 today. And a large share of the broader agricultural workforce lacks legal work authorization, a reality sustained by decades of lax enforcement that functions as a de facto subsidy. Each additional worker, legal or otherwise, reduces the pressure to mechanize and create jobs Americans will do.

Appelbaum concludes by writing that Hemminger’s dairy farm is “a vision of a better future,” but that current policy won’t get us there. On that last point, he is right, just not for the reason he thinks. Progress towards a high-wage, high-tech agricultural economy requires immigration restriction. But it also requires an agricultural industrial policy to facilitate the transition away from labor-intensive production processes, one that provides public investment in research and development, capital subsidies for farms that cannot absorb the upfront costs, and institutional capacity to move technology from the laboratory to the field. Restriction creates pressure. Industrial policy ensures our nation can transition while not losing domestic capacity to import competition.

The phrase “jobs Americans won’t do” is an admission that businesses within certain sectors of our economy have broken business models, premised on working conditions and compensation we do not expect our fellow citizens to tolerate. This framing treats a job’s characteristics as fixed. It suggests incorrectly that agricultural work is inherently incompatible with decent wages, when the real culprits are policy choices, the market structures they create, and the rational ways employers respond. For too long, the United States has organized segments of its agricultural sector around labor access rather than labor productivity. It’s somewhat bizarre that journalists like Appelbaum, usually quick to advocate better for workers and demand more of employers, choose in this instance to shrug and look away. “A vision of a better future” for American agriculture requires policy that creates necessity and provides the conditions and the means. — Daniel

STAYING ON THE LABOR MARKET…

…and woefully bad journalism therein, the Wall Street Journal’s editorial board does not disappoint. Commenting on “Mass Deportation and Florida Jobs,” the Journal laments:

In May 2023, Florida Republicans passed legislation aimed at countering Joe Biden’s porous border policies. The law’s centerpiece requires private employers with 25 or more employees to use the federal government’s E-Verify system to confirm the work authorization of new hires ... .U.S. Labor Department data suggest that Florida’s E-Verify law has harmed job growth. In the year before the law took effect, Florida led the country in job creation. But employment growth fell by half in 2024 and has been flat since last February.

Just so we have this straight: Florida moved aggressively to reduce the presence of illegal workers, and so the number of workers stopped rising as quickly? Gasp. If only there were some measure of job quality for those legal Floridians still working, maybe a measure of their wages? There is! Average wage isn’t the best measure, but it’s what we’ve got at the state level, and in the past 32 months, since May 2023, the average real wage in Florida is up 6.4%. Strong, to quite strong.

How about in the 32 months before passage of E-Verify? Down 3.0%. OK, but that was during COVID. How much did Florida’s average wage rise from pre-COVID to the passage of E-Verify? 0.0%. In fact, it took from mid-2015 to mid-2023 for wages to rise as much in Florida as they did in the two-and-a-half years since passage of E-Verify. So there’s that.

Elsewhere, Howard University’s Ron Hira highlights a new paper from Harvard University’s George Borjas that finds “on average, H-1B workers earn 16 percent less than comparable natives.”

Comparable natives? But H-1Bs are supposed to be for job openings where the employer can’t find a native worker. So how could Borjas even… OK, when you’re done laughing, move to the next item.

One group that might include many comparable natives would be young college grads. Which might help provide Alyssia Finley’s effort in the Wall Street Journal with an answer to: Why Unemployment Is Rising Among Young College Grads. She focuses on another issue, surely part of the problem as well, that “their skills, experience and ability to function are increasingly out of step with employers’ needs.” As she sees it:

Artificial intelligence isn’t taking their jobs. Young grads’ struggles started before AI went mainstream. Between 1990 and 2014, unemployment for young college grads was generally 1 to 3 percentage points lower than for all workers. The gap started to tighten around 2014 and reversed in late 2018. Unemployment for young college grads is now about 1.4 points higher than for all workers. The real problem is a mismatch between labor supply and demand.

Supply and demand! That sounds like a job for Mr. Market, if only policymakers were not instead filling the mismatched demand with alternative, foreign supply.

GOOD READS FOR THE WEEKEND

In the Financial Times, Martin Sandbu has an excellent profile of philosopher Michael Sandel, “the pessimist who became a prophet.”

In the Wall Street Journal, Gavin Bade goes into “The Chinese Factory That Opened in the U.S. and Clobbered Its Rivals.” Or rather, he doesn’t go into it, because he was not allowed in. So all the photos are from the rivals getting clobbered. Wonder why? Could it have anything to do with illegal labor practices so blatantly illegal that the Biden administration was sending in raids?

In RealClearInvestigations, Nancy Rommelmann tells the heartbreaking story of how “Caring for Mom Is an Education in Scams and Fraud.” If we could take 5% of the “serious thinker” attention dedicated to pondering AI, and redirect it to addressing the extraordinary social challenges we will encounter as history’s wealthiest generation continues to age and then passes on, America would be a much better place.

And your academic paper of the week is Work from Home and Fertility, from a bevy of researchers who find “estimated lifetime fertility is greater by 0.32 children per woman when both partners WFH one or more days per week as compared to the case where neither does.”

• Bonus read: One of the first features ever published at Commonplace was on this topic, from EPPC’s Patrick Brown: Remote Work Created a Baby Boom. Can We Keep It Up?

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DEPRESSING READS

The New York Times reports, “In South Korea, Questions About Cram Schools, Success and Happiness. Academic pressure has become so intense that even preschoolers are taking private extracurricular classes, raising worries about children’s rights.”

The Times also profiles “Clavicular” (we didn’t know who that was either), in “Handsome at Any Cost.” This one’s pretty crazy. But so is the Times’ conclusion. “Guns, drugs, misogyny, body dysmorphia: The miasma of nihilism swirling around Clavicular has made him an irresistible symbol of social decline — a freakish avatar for the hopelessly fallen, social-media-addled state of the young American man. At the same time, he may simply be ahead of the curve.”

This echoes back to the recent Times profile of professional prediction-market gamblers, where it suggests, “making a living betting on prediction markets just might be one of those era-defining occupations.” The helpless resignation is an inevitable function of a progressive culture that precludes judging any set of choices as worse than any other, but the airy and ironic tone with which the stories are thus told is badly out of step with the challenges we face.

Sticking with the Times, it’s worth reading the editorial board’s far-too-little-too-late mea culpa on marijuana legalization: “This editorial board has long supported marijuana legalization ... .At the time, supporters of legalization predicted that it would bring few downsides….It is now clear that many of these predictions were wrong.” Go figure.

From ABC News, “MLB Players Strike Deal to Be Turned Into AI Characters That Can Chat with Fans.”

From the Financial Times, “Prediction Market Kalshi Seeks US Approval to Offer Margin Trades.” Thank goodness. Only “$24 million Was Bet On Whether Mark Wahlberg Would Attend the Super Bowl” (NBC Sports). But if people could bet borrowed money, we might have a truly liquid and predictive market. Then they’d also have more money to bet in derivative markets predicting how high the prices will go in the prediction markets.

FREE TRADE, FREE MARKETS, CHOOSE ONE

This week’s illustration comes from the OG example of drug pricing. As Oren wrote in the introduction to The Once and Future Worker, nearly a decade ago:

Things become even more complicated when we introduce an international boundary and conflicting legal regimes. We protect patents on new drugs, but what should we do when drugmakers voluntarily sell those patented drugs in Canada at prices far below what they charge in the United States—because the Canadian government requires the lower price? Should someone be allowed to buy the drug in Canada and then resell it in the United States, undercutting a drugmaker’s U.S. price? We call this drug reimportation, and we prohibit it, again on the basis of bolstering the free market, again with strong support from libertarians. Some politicians will offer a rationale of “safety,” as if we can’t trust Canadians to monitor their drug supply as well as we do. The actual rationale is that we wish to insulate what we consider to be our freer market in drugs from contamination by the more controlled Canadian market.

Canada is hardly the archetypal case of market distortion. China, for instance…

Indeed, when one allows multinational corporations to operate across legal jurisdictions that intentionally distort markets to their benefit, one becomes quickly disoriented while trying to stay true to “free market principles.” Like, for instance, the “more than 50 conservative leaders sign[ing a] letter against Trump drug pricing policy codification,” who warn that a Most Favored Nation drug pricing regime (i.e., you can’t charge more for your drugs in America than you charge in other developed countries) would “import socialist price controls and values into our country.” In fact, it is the free trade advocated by said leaders that has done just that, leaving us no choice but to respond.

AS FOR OTHER TRADE NEWS

Wall Street Journal: “The American and Chinese Economies Are Hurtling Toward a Messy Divorce.” Good.

Rhodium Group: “Over the past year, German political leaders, central bankers, business associations, and unions have begun talking openly about the risks of a ‘China shock.’ The rhetoric, however, has not been matched by decisive policy action.” Some brutal charts. Bad.

Reuters: “French Advisers Urges EU Tariffs or Weaker Euro to Counter China.” Good.

Bloomberg: “Ford Falls Behind China’s BYD in Global Sales For the First Time.” Bad.

Politico: “Warren and Banks to Introduce AI OVERWATCH Act.” Good.

Semafor: “NSA Pick Warns of China Pursuing AI Chips for Weapons.” Bad.

If the U.S. and Europe teamed up to exclude imports from China, restrict exports of advanced technology to China, and rebuild industrial supply chains, much would be achieved. Doing what we are doing right now may end less well.

And finally, from an interesting paper, Industrial Policies, Global Imbalances and Technological Hegemony:

We provide a framework that connects industrial policies to global imbalances and technological hegemony, and describe some empirical facts consistent with our model. We study the international spillovers triggered by industrial policies promoting high-tech sectors. Since high-tech goods and services are typically traded internationally, these policies boost the supply of tradable goods. Moreover, industrial policies lead to trade surpluses if the government pursues an unbalanced policy mix, such that domestic demand does not rise as much as supply. These surpluses are absorbed by the rest of the world, which in response runs trade deficits. Absent policy interventions, trade deficits reduce the competitiveness of the domestic tradable sector, stifling innovation and productivity growth. Innovation policies can help the rest of the world to mitigate these negative spillovers.

Tl;dr thread from one of the authors, and one from Michael Pettis.

Enjoy the weekend!

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Watching cities recover—or, rather, fail to recover—from the late January snowstorm reminded me of a recent conversation with friends who had moved from New York City out to my neck of the (literal) woods. They were struck by something that I never would have noticed: no one was complaining about taxes. In Brooklyn, they said, a casual social gathering among young families inevitably turned to lamentations about local taxes. Here, no one seemed bothered.

Yes, tax rates in the city were higher, but that wasn’t it. People there felt like they weren’t getting anything for their money. Here, things seemed mostly to work. Of course, we had our problems too, but you could see public servants working hard to deliver public services that benefited everyone, never taking taxpayer support for granted. How can we get more involved in local government ourselves, our friends wanted to know.

Politicians tend to focus tales of government dysfunction on “waste, fraud, and abuse,” promising to vindicate taxpayers by rooting out such poor uses of their dollars. But I suspect most people care a lot more about what they do get than about what they don’t. Even stipulating that 20% of all public funds would inevitably be misspent on absurd boondoggles, a government that delivered public services well with the other 80% of the money would probably be quite popular. An expensive car repair done on time and on budget, that indeed repairs the car, typically leaves the customer satisfied. It’s when the car breaks down again on the way home that we feel ripped off and swear never to return to that garage.

Thus, while the Minnesota welfare scandal has commanded far more attention—and it is a disgraceful scandal, indeed—the Fairfax County Public Schools remaining closed more than a week after a winter storm’s end is in many ways the bigger deal. We tolerate the many costs, inconveniences, and petty tyrannies of a government because there are many things we need it to do, that only it can do. If it cannot do them, what’s the point? Much public spending goes to preparedness for something that might rarely occur. If, when disaster strikes, we are not prepared, what’s the point?

For all the talk of “running government more like a business,” the reality is that we ask government to step in precisely where problems cannot be solved by the market, where we need things beyond the goods and services provided by businesses. And while ideologues speak of drowning government in a bathtub, American Compass research has found that Americans across the political spectrum tend to want the government to do most of what it is already doing, and more of other things as well.

Efforts to protect taxpayers by haphazardly slashing headcount and funding (see: DOGE) are neither wise nor conservative—they may save some money in the short-run, but if they do so by further degrading service capacity and quality, we are left worse off than before. If the goal is in fact to turn people against their government, justifying a downward spiral of further slashing, the strategy does have a certain logic, but it’s not one that serves the American people well or the conservative vision of limited government. The same, of course, could be said about progressive efforts to solve the problems left unaddressed by ineffective programs simply by loading more programs and more spending on top, or to “protect” public sector workers by insulating them from the requirement that they do their jobs well and maintain the public’s trust.

If government cannot deliver the basics, none of our debates about the public sector’s proper role in sustaining supportive communities and productive markets will matter much. At every level, the leaders who emphasize and get right the most pressing and visible government functions will be the ones who earn the right to implement their broader visions. — Oren

AND NOW FOR SOMETHING COMPLETELY DIFFERENT

Last week, we highlighted reporting from Reuters that “the Trump administration is stepping back from plans to guarantee a minimum price for U.S. critical minerals projects, a tacit acknowledgment of a lack of congressional funding and the complexity of setting market pricing,” giving the move a thumbs-down. In fact, it turns out, a robust critical-minerals strategy was about to be unveiled, as Daniel now explains:

Throughout 2025, an escalatory tit-for-tat tariff spiral with China culminated in the Chinese Communist Party weaponizing its rare-earth dominance—restricting exports of critical materials and magnets essential to everything from fighter jets to wind turbines. Beijing’s message to the United States—and the rest of the world—was clear: mess with us and your factories go dark. The detente struck by President Donald Trump and Xi Jinping in October provided breathing room, preventing a de facto trade embargo and a sudden break in economic relations. But the underlying vulnerability was exposed for all to see.

In response, Treasury Secretary Scott Bessent called for a new “Operation Warp Speed” to secure the supply chain—invoking the pandemic-era program that compressed vaccine development from years to months through advance commitments, risk-sharing finance, and relentless coordination. As I wrote in October in “America Gave Away Rare Earths,” Bessent understood what should have been obvious all along: in a hyper-globalized economy, in which adversaries like China deploy an industrial policy to monopolize global commodity markets, the United States cannot opt out of industrial policy—it can only decide where that policy is designed. For decades, we pretended otherwise and ended up living under the industrial policy imposed by the Chinese government. The question was not whether the United States should have an industrial policy, but whether we’d wake up and start executing our own before it was too late. (The issue is one that Secretary of State Marco Rubio has been working on for almost a decade.)

This week marked a turning point in the struggle for critical minerals independence. On Monday, President Trump unveiled “Project Vault”—a $12 billion strategic reserve for rare earths and other essential materials, financed through $1.7 billion in private capital and a $10 billion loan from the Export-Import Bank of the United States. On Wednesday, the State Department held a Critical Minerals Ministerial with 55 countries represented, while the president was, amusingly and perhaps not coincidentally, on the phone with Xi. In the event’s keynote address, Vice President J.D. Vance articulated the problem well:

….we know that today the international market for critical minerals is failing. Supply chains remain brittle and exceptionally concentrated. Asset and commodity prices are persistently depressed, driven downward by forces beyond any individual country’s control. Now, how many times, cumulatively, have one of us or many of us in this room heard some variation of the story that I’m about to tell? A lithium mine, a gallium recovery center—you name it—is announced, sometimes with years in planning and financing nearly in place. Then overnight, foreign supply floods the market, the prices collapse, and investors pull out. The project stalls, and eventually the project dies on the vine. We’ve all seen it firsthand in all of our countries. And the result is a global market where consistent investment is nearly impossible, and it will stay that way so long as prices are erratic and unpredictable.

The vice president then announced that the administration would work to form a preferential trade zone with allies to combat these predatory practices, protected by tariff-enforced price floors, correctly identifying an appropriate place for multilateralism—bringing allied scale to bear against a common threat. Shortly thereafter, the administration announced a plan of action with Mexico and memoranda of understanding with Japan, the EU, and the UK. Reports indicate there’s more to come.

Both initiatives directly counter China’s playbook. Project Vault will procure and store critical minerals for U.S. manufacturers—uniquely serving private sector needs, not just defense—while leveraging Export-Import Bank financing to mobilize private capital. The preferential trade zone defends against China’s predatory dumping. Beijing has repeatedly flooded markets with below-cost minerals to destroy Western competitors, then jacked up prices once rivals disappeared. Price floors enforced through adjustable tariffs within the allied bloc aim to combat that.

The administration has deployed a flood-the-zone strategy that mobilizes every available lever. Following the ministerial, the State Department published a lengthy press release—which is really worth scrolling through—detailing over $60 billion in financing mobilized across agencies—from Defense Production Act Title III grants for domestic processing to Development Finance Corporation loans for mining projects, and Treasury-backed loan guarantees for refining capacity. The breadth of mechanisms deployed—grants, loans, guarantees, stockpile purchases, tariff floors, and diplomatic coordination—reflects the scale Bessent called for last fall.

Building a mine-to-magnet ecosystem that meets the scale our economy demands will take years, billions more in investment, and sustained political will through multiple administrations. But the pieces are coming together: the stockpile, the allied trade bloc, the price floor mechanism, the financing architecture. What matters now is execution; turning memoranda into mines, announcements into magnets. Significant work remains, and implementation details will matter enormously. But this week showed we’re finally taking serious efforts to break free from China’s chokehold. — Daniel

GOOD READS FOR YOUR WEEKEND

The Problem With Using AI in Your Personal Life (Dan Brooks, The Atlantic)

“To prevent hard-core get-it-done types from inflicting slop on the rest of us, we need to agree that my sending you material written by ChatGPT is insulting, the same way you would be insulted if I were to play a recording of myself saying ‘Oh, that’s interesting’ every time you spoke.”

What a Comparison With Roosevelt Reveals About Trump (Jack Goldsmith and Samuel Moyn, New York Times)

“Roosevelt implicitly justified his approach — attacks on the judiciary, iron-fisted control of the bureaucracy, weaponization of government and opportunistic constitutional interpretation — by the ends of saving the country, transforming fundamental arrangements to serve the needy and to win World War II. Today many progressives view his imperious tactics in a benign light, if they remember them at all, because of what he accomplished. Mr. Trump and his supporters have justified their tactics on a claimed need for similar fundamental change. … but he is teaching revealing lessons about the genuine limits of executive power, not just about its nefarious uses.”

‘There’ll Be Consequences’: Trump WH Warns Defense Contractors (Philip Wegmann, RealClearPolitics… feat. Daniel Kishi!)

“Between 1994 and 2018, prime defense contractors returned $240 billion to shareholders via stock buybacks and dividends but made less than $90 billion in capital expenditures, a recent American Compass analysis found. … ‘These companies receive up to 70% of their revenue from the government. They’re not state-owned enterprises, but they have chosen to become state-dominated given their heavy reliance on taxpayer money. The American people are the customers. The government can dictate the terms of their contracts, and then it’s up to the businesses to meet those terms if they want the revenue,’ Kishi said.”

• Bonus Read, from the Department of Sticks Work: US Defense Firms Boost Spending After Trump Calls for Expedited Arms Deliveries (Reuters)

“Major U.S. defense contractors are significantly ramping up capital expenditure this year in response to President Donald Trump’s threat to limit dividends and share buybacks in his push to speed up weapons deliveries. Despite ballooning demand for arms due to rising geopolitical conflicts, capital expenditure growth at large defense firms has stayed sluggish since 2022. However, companies have reversed course and now expect capital reinvestments to increase by more than a third this year.”

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THE SOFT BIGOTRY OF LOW EXPECTATIONS

Fascinating to see these essays both run in The Atlantic over the past week. First, Rose Horowitch laments The Film Students Who Can No Longer Sit Through Films:

After watching movies distractedly—if they watch them at all—students unsurprisingly can’t answer basic questions about what they saw. In a multiple-choice question on a recent final exam, Jeff Smith, a film professor at UW Madison, asked what happens at the end of the Truffaut film Jules and Jim. More than half of the class picked one of the wrong options, saying that characters hide from the Nazis (the film takes place during World War I) or get drunk with Ernest Hemingway (who does not appear in the movie). Smith has administered similar exams for almost two decades; he had to grade his most recent exam on a curve to keep students’ marks within a normal range. The professors I spoke with didn’t blame students for their shortcomings; they focused instead on how media diets have changed.

But then, Walt Hunter suggests, Stop Meeting Students Where They Are:

Two things became clear in the early weeks of class. First, the students were reading. They were reading everything, or most of it. I know this because I had them identify obscure passages, without notes, devices, or books at hand. Second, they were experiencing life in a way that was not easy outside the class and its assignments. They were expected—required—to give huge chunks of time to an activity, reading, that was not monetizing their attention in real time. They had, in effect, taken back their lives, for an hour or two each day. … I agree with those who argue that universities find themselves in a state of crisis. But narratives about the “end of reading” strike me as self-inflicted, the manifestation of a collective depression.

Who would have thought, giving students passing grades when they don’t even know which World War the film was set during leads to… students not watching the films. Drilling students on whether they have in fact done the reading leads to… students doing the reading.

Unfortunately, the therapeutic and “gentle professoring” style is pervasive in higher education, and has led to further erosion of the exercise’s value. Further contributing to the trend that…

For the First Time in 50 Years, College Grads are Losing Their Edge (Washington Post):

For nearly 50 years, research has shown that having a bachelor’s degree or higher led to better employment prospects, from higher pay to greater job security. Now, with the stability of white-collar work in question as U.S. companies embrace artificial intelligence, federal data suggests that’s beginning to change. The unemployment gap between workers with bachelor’s degrees and those with occupational associate’s degrees — such as plumbers, electricians and pipe fitters — flipped in 2025, leaving trade workers with a slight edge for six months out of the past year, according to the Bureau of Labor Statistics. It’s the first time trade workers have had a leg up since the BLS started tracking this data in the 1990s.

BUT WHAT CAN YOU DO, WITH A B.A. IN SPECULATION?

Axios has a good rundown of how Gen Z Is Playing the Economy Like a Casino, because “in a world where AI can take your job, a global pandemic can disrupt your future, home ownership is the most expensive it has ever been, and the return on investment in a college education is increasingly murky, betting no longer seems like a risk.”

Commonplace had a more in-depth treatment of this phenomenon in Young Men Refuse to Fight in the Hunger Games Economy, where John Ehrett argued:

Gambling is not symptomatic of an amorphous social problem; it is, in fact, the essence of the underlying “metacrisis” facing young men. Over the last few decades, more and more domains of life have been quietly subjected to the zero-sum logic of a Hunger Games-style lottery, in many ways thanks to powerful digital technology that allows this to occur at scale. In the simplest terms: everything seems random all the time, with no clear logic behind who wins and who loses.

The New York Times puts a peculiarly positive gloss on all this, suggesting that “making a living betting on prediction markets just might be one of those era-defining occupations — like being a Wall Street trader in the 1980s, a dot-com founder in the 1990s or an influencer in the 2010s.” Except, of course, betting on prediction markets is not an occupation at all, in the sense of being a job or profession through which one contributes to the world and earns a living. It is merely less-than-zero-sum speculation, with the house taking a cut at each step. “Most users on the two big platforms lose money, and losing it on sports (which accounts for 90 percent of trading volume on Kalshi) has become the newest way for a cohort of young men, many careerless and laden with student or credit-card debt, to make long-shot bets through frictionless, gamified apps.”

Speaking of which, if you haven’t seen it already, be sure to read Oren’s feature essay in the New York Times today: The Finance Industry Is a Grift. Let’s Start Treating It That Way.

IMMIGRATION ENFORCEMENT WORKS

Migrant Encounters At the U.S.-Mexico Border Are At Their Lowest Level In More Than 50 Years (Pew Research)

“The Border Patrol recorded 237,538 encounters with migrants at the U.S.-Mexico border in the 2025 fiscal year, which began in October 2024 and ended in September 2025. That was down from more than 1.5 million encounters in fiscal 2024, more than 2 million in fiscal 2023 and a record of more than 2.2 million in fiscal 2022. The 2025 total was the lowest in any fiscal year since 1970.”

Amazing how quickly the Trump administration succeeded in solving so many root causes that eluded border czar Kamala Harris’s efforts!

Also amazing, people continue not to understand that absolute job growth will be much lower in an economy experiencing out-migration. We’ve been explaining this here for months, and it turns out the Federal Reserve Bank of Dallas has made the point too. We missed this at the time, but thought it worth highlighting: “The goalposts have moved. A break-even rate of around 30,000 appears to be the new reality for the U.S. labor market. This means modest payroll gains, which might have seemed alarming in 2023, are now indicative of a stable and balanced market.” Economics. Not that hard, folks. At least, if you’re trying to get it right, which, perhaps, many people are not.

Like, for instance, the people asking in the Wall Street Journal, Do More Deportations Mean Lower Housing Costs? You’d think lower demand for housing might have an effect on a supply-constrained market, but no, “economists and housing industry analysts largely attribute price declines in those and other markets to oversupply…” Really? “Oversupply” seems like a relative term. Relative to what?

TRADE NEGOTIATIONS WORK TOO

One finds a similar pattern, of course, on matters of trade. Credit where due to the Peterson Institute, an inveterate opponent of Trump administration policy, for a pretty balanced analysis of the investment commitments made by other countries in The America First investment pledges: How are they structured and are they realistic? “It is likely,” they conclude, “that if implemented, the deals will lead to more growth and employment in the United States—with some positive fiscal effects, too. It is also likely that they will improve the US balance of payments in the long run.”

Some goods news may be on the horizon from Japan, in particular, reports the Financial Times:

At least three deals, making plausible inroads into Japan’s overall commitment of $550bn, are now due to be unveiled once the election on February 8 is over, according to several people familiar with the matter. Their main purpose is to keep an implacable White House from slapping punitive tariffs back on its closest ally in Asia. Many of those involved in the dealmaking in late October would later conclude they were also part of something bigger: the opening act in a fundamental recasting of the US-Japan alliance that has underpinned American power in Asia for nearly eight decades.

Pity the Wall Street Journal, though, which had clearly invested substantial effort in a big feature on how manufacturing is weakening in the United States, only to get surprisingly good news in January as the story went to print. What to do? Carry on, apparently, with “an index of factory activity tracked by the Institute for Supply Management shrunk in 26 straight months through December, but showed a January uptick in new orders and production that surprised analysts.” (It wasn’t an uptick, it was the strongest reading in years.) And also, “Lehner and other economists also say there are signs output has stabilized, if not inched higher, though gains in efficiency could limit the number of new jobs. A White House spokesman noted that manufacturing productivity ticked upward in recent quarters and that workers’ wage hikes outpaced inflation over the past year.” Sounds promising.

Listen to Harold Bevis, CEO of metal-component market NN. He:

believes tariffs will ultimately benefit NN by curbing Chinese competition for precision parts that appear in steering systems, audiovisual controls and more. But meanwhile, import taxes have helped push up costs for steel and aluminum, adding to pressures from soaring market prices for the gold and silver NN uses in some products.

That has squeezed how much cash the firm has to invest in new, potentially lucrative sectors such as data centers and electrical equipment. “So you take a hit,” Bevis said. NN is trying to recoup costs by raising prices in subsequent orders.

Bevis said business has accelerated while Ford and GM, which recently took multibillion-dollar write-downs on their EV businesses, have pushed for domestic parts.

Almost as if rebuilding domestic industry would unavoidably impose short-term costs, those will lead to long-term benefits, and we are headed in the right direction.

Enjoy the weekend!

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Carney’s sectoral China deal, rolled out from Beijing without serious consultation with President Trump’s team, flagrantly misread where Washington’s red line now sits. It’s not about legal FTA formalities; it’s about whether Canada volunteers to be a pressure‑relief valve for Chinese overcapacity into the US market. Carney walked straight into that line of fire, then tried to hide behind technicalities. … This is not grand strategy; it is performative anti‑Trumpism masquerading as foreign policy, and it leaves Canada exposed, not principled.

Maybe Mark Carney should read Understanding America.

This week, we have some thoughts from Oren on the role of inequality in the affordability crisis, and the redistributive features of any effort to solve it.

The politicians racing to respond to the affordability crisis are hitting an unexpected stumbling block. Economic inequality is a major driver of the problem, and redistribution is an unavoidable element of any durable solution. That’s not what they expected to be talking about, or a theme on which many have much to say.

Without consideration of inequality, the current American obsession with the cost of living can be difficult to comprehend. The economic data suggest that households are doing as well as ever on conventional measures of consumption. Real wages have risen. Inflation has fallen. Beneath the surface, though, long-term trends have put increasing pressure on household budgets.

At American Compass, we publish the Cost-of-Thriving Index, which tracks the cost of middle-class security compared to the earnings of the typical worker. What we find is that the cost of the basket broadly understood as middle-class essentials—housing, health insurance, transportation, food, and education—has been rising much faster than wages, to the point of becoming unaffordable. In 1985, the typical male worker could provide those things for a family of four with about 40 weeks of earnings. By 2022, he would have needed more than 60 weeks, which is a problem, since there are only 52 weeks in a year.

The problem does not appear in the official data, because economists do not recognize prices as rising if higher prices also deliver better stuff. Houses have gotten bigger and feature endless amenities. A health insurance premium buys access to a wide range of remarkable drugs and procedures. Universities pumped their programs full of boondoggles unrelated to their educational missions. You pay more and you get more.

But it is higher-income households whose preferences have tended to define the basket of standard health care services and the prices the market can bear, the character of new houses in good neighborhoods, and the package of perks available to each freshman on campus. As the disposable incomes of those households have exploded, the market has followed, leaving most families priced out or dependent on public subsidies, which in turn fuel further price increases.

No sane market oriented toward serving the middle class would push the price of one year at university toward $100,000, or the median age of first-time home buyers to 40. In-state tuition at a public university costs much less, but those schools want to attract strong students too, and thus have had no choice but to expand their programs and costs proportionally. No sane market oriented toward the middle class would be pushing health insurance premiums over $30,000. Yes, a family could still afford 1970s health care, no problem. Where exactly would you suggest they shop for that?

For many of the same reasons, addressing these challenges will require both implicit and explicit redistributions of the nation’s wealth. Take housing. For every family struggling to afford the high prices in the housing market, another one is celebrating its skyrocketing home value. Making homes more affordable for younger families will, by definition, require reducing the wealth of those who have accumulated wealth in the value of their real estate.

In health care, the United States has adopted a model that already results in dramatic redistribution from the typical, healthy family to older and sicker Americans, with predictably higher costs. We disguise the redistribution through what we pretend is “limited government” and a “market-based” system, in which everyone is expected to pay comparable insurance rates in a shared risk pool. In practice, this means that those who could otherwise afford perfectly reasonable insurance premiums (and who tend to consume a limited amount of health care) are required to pay exorbitantly more—not as “taxes,” technically, just the “price” in the “market”—to hold down the cost for those who cannot possibly afford to cover their own costs.

The $25,000 to $30,000 now being charged to a healthy family of four has no actuarial basis; it is the amount necessary to cover costs for others that would otherwise require a public subsidy, and to compensate care providers for the much lower payments they receive from Medicare and Medicaid. Life would become instantly more affordable if those families could just pay what a reasonable insurance plan should actually cost them. But to do that, we would need the government to pick up the tab, as it should, for the care we, as a nation, have decided we want to ensure everyone receives. And to do that, we would need to raise more tax revenue from higher-income households who are having no trouble making ends meet.

In education, we have funnelled trillions of dollars into reducing the cost of higher education, which has landed almost entirely in the pockets of professors, administrators, and the builders of student centers. We created a small class of highly successful graduates, and a pool many times larger that was poorly served, if at all, and left with more debt than career opportunities. If you didn’t choose college, we offered, well, nothing. The solution is not yet more subsidies, but a model that invites those attending college to pay its cost, from the higher earnings it should be delivering, while channeling public resources into non-college pathways.

Debates about inequality focus too much on abstract concepts of “fairness,” rather than on the very tangible ways that rising inequality harms those left behind, even when their material living standards appear to rise. Likewise, debates about redistribution assume the project’s key parameters are how much is taken from some and given to others. A much wider range of policy choices have much more nuanced effects on how markets behave, where wealth accumulates, and who can afford what. Getting those choices wrong has created a situation in which ever-higher GDP and ever more stuff can coincide with ever greater strain on family budgets. Getting them right, not quick fixes and payouts, will be necessary to place middle-class security back in reach for all. — Oren

LET’S CONTINUE WITH EDUCATION

In the Wall Street Journal, Dartmouth president Sian Leah Beilock asks, Is a Four-Year Degree Worth It? “Assuming that most Americans value our mission is a recipe for irrelevance and decline,” she writes. “We must demonstrate to students and families—and to the broader public—that we’ve heard their criticisms and will address them. I see five areas where we can build back trust.”

• “Make college affordable.”

• “Institutions should be held accountable for student outcomes.”

• “Re-center higher education on learning rather than political posturing.”

• “Reintroduce differentiation” (i.e., end grade inflation).

• “Testing is important.”

Good points, though in practice they operate primarily as a brutal indictment of how badly misled these institutions have been—and continue to be— in almost every case.

All of which helps explain Why This 26-Year-Old Skipped College and Took Up a Skilled Trade (Reuters). “Don’t overlook nontraditional paths. Going to university isn’t the only path to economic mobility. For people like Parades who want to start earning sooner—and, crucially, avoid student debts—trade work can offer long-term stability.”

Meanwhile, The Economist checks in on the ongoing disaster that is technology in K-12 education. Ed tech is profitable. It is also mostly useless.

Although ed-tech companies tout huge learning gains, independent research has made clear that technology rarely boosts learning in schools—and often impairs it. A 2024 meta-analysis of 119 studies of early-literacy tech interventions, led by Rebecca Silverman of Stanford University, found the studies described programmes that delivered at best only marginal gains on standardised tests. The majority had little effect, no effect or harmful ones.

One reason for its rapid adoption: “The prevalence of tech in schools owes less to rigorous evidence than aggressive marketing. Teachers are now flooded with daily offers for free tech.” Now, why would they do that? Doesn’t seem very profitable… Let’s ask Google. Reports NBC News: “Newly filed internal documents show how Google viewed its work with schools as a way of turning children into lifelong customers—while the company simultaneously acknowledged research suggesting that YouTube, one of Google’s main platforms, can be unsafe and distracting.”

In an excellent new essay, “When Education Becomes Information,” Brad Littlejohn sounds harmonic notes of optimism and concern: “I have no doubt that AI could be used to strengthen and augment the work of educators. Our problem is that we do not know what education is anymore.”

HEDGE FUNDS WITH ENRICHMENT CLASSES…

At least universities are really good at earning huge returns in their endowments. Or rather, they were. Evidence continues to pour in that alternative asset classes like private equity, Canadian lumber, and so on, made famous by Yale, especially, have become stinkers, just in time for more schools to jump in and lose out. “Many copied the Ivy League school’s bets on private equity and other illiquid investments,” notes Bloomberg. “Now plain old stocks and bonds are outperforming.”

It’s yet another cautionary tale of financialization, which is promoting all sorts of useful questions, like, from Brian Shearer at the Vanderbilt Policy Accelerator: “What Ever Happened to Usury?”

I’m not recommending this, and this isn’t how it would work in the real world, but if we got rid of rewards and capped interest at zero, banks would make enough off interchange and fees to cover all borrower defaults and operating expenses, and still generate a return. That is how much margin and rewards spending is built into the credit card business right now.

In the auto industry, meanwhile, GM beat earnings expectations and, per the Wall Street Journal, announced a 20% dividend increase and $6 billion share buyback. (Despite tariffs!? What? No! How!?)

And in other earnings news, Intel stock declined roughly 20% after releasing its own earnings report, prompting some peculiar framing from the Journal: “How Intel Came Crashing Back to Earth After Its Trump Bump.”

Intel’s stock has crashed 17%, wiping out more than $46 billion in market value, since executives revealed the flub on the company’s fourth-quarter earnings call Thursday. “The stock went vertical on vibes and tweets,” said Stacy Rasgon, a semiconductor analyst at Bernstein. “In theory, they should be in place to capitalize on this demand, but they’re not. What a shame.”

Intel’s continued execution struggles are indeed a shame. But the drop after earnings did not wipe out the past year’s gains, only the run-up in the days just before the report. The stock is still trading at its mid-January level, double the level from August when the United States took its 10% stake. While the company has a long way to go, earning-week volatility is not the way to analyze its progress.

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DON’T GET SORE, BUY SOME MORE!

The Trump administration continues to invest in operations that could play a vital role in reindustrialization. The United States will pay $1.6 billion for a 10% stake in USA Rare Earth, according to the Financial Times.

And construction of the first U.S. aluminum smelter in 46 years is moving full steam ahead, and expanding planned capacity, according to Reuters. The smelter will more than double domestic capacity and helps illustrate why it’s so important for efforts at reindustrialization to focus on the full supply chain, not just final goods. The conventional wisdom still holds that we should let industrial inputs in cheaply to make production of final goods more competitive:

But as Oren was already explaining here at Understanding America, just a couple of weeks after Liberation Day, the American strategy is not, and should not be, to reindustrialize by assembling cheap goods for export, as has been typical in many developing countries. We want to rebuild the entire supply chain, including materials and industrial equipment, and we have a massive domestic market otherwise reliant on imports that can provide the demand. If that causes some prices to rise a bit in the short run, and the entire process to take a bit longer, that’s OK. Indeed, it’s the kind of long-term thinking that economists would typically applaud, if not for suffering from tariff derangement syndrome.

GM, it seems, is doing just fine. And one can read in Nikkei Asia the until-recently-unthinkable headline: “U.S. steel production exceeds Japan’s for first time in 26 years.” So, since 2000. What happened in the interim?

Meanwhile, the Trump administration has finalized two more reciprocal trade deals, one with El Savador and the other with Guatemala.

Less encouraging, though, was news on Wednesday that “the Trump administration is stepping back from plans to guarantee a minimum price for U.S. critical minerals projects, a tacit acknowledgment of a lack of congressional funding and the complexity of setting market pricing, multiple sources told Reuters.”

China’s manipulation of global commodities markets has been a key tool in securing a chokehold on the processing of critical minerals. It can drive prices down at will, making the extraordinarily long-term, capital-intensive investments in capacity uneconomical for Western firms that believe in capitalism. Daniel has told the story of how China did just that. Price floors are a vital element of a Western strategy, and the United States should be leading an effort with allies to effectuate them.

WRAPPING UP WITH SOME GOOD READS

In the Washington Examiner, Byron York asks, “Does America have the resolve to deport illegal border crossers?”

In the Wall Street Journal, Greg Ip writes, “The First Three Weeks of the Year Will Reshape the World.”

In the Financial Times, Rana Foroohar argues, “Trump Is the Wrong Answer to the Right Questions,” which rightfully credits Trump’s critiques of the neoliberal world order and makes some valid critiques of his own policies, but leaves us wondering: what exactly is the progressive alternative? Democrats had a decade to develop a response of their own and came up with… the Kamala Harris campaign.

Foroohar writes that “Democrats running in the midterm elections this autumn need strong ideas about how to craft a better immigration policy,” that they “also need to get serious about addressing corporate power,” and that they “need to disassociate themselves from Davos Man and the Epstein Class and reclaim the populist tradition.” The whole world, she says, “needs answers: to challenges of Chinese mercantilism, the falling labour share of GDP and the new threats of technology-based job destruction.” How’s that going?

In the New York Times, Tom Edsall observes, “‘I Wouldn’t Say the Democrats Are in Good Shape.’” He quotes Dartmouth political scientist Sean Westwood, who says, “Democrats are engineering a super-strain of progressive in a lab, purpose-built to alienate the middle of this country and the middle of the ideological spectrum.”

Here at Commonplace and American Compass, we are fairly confident we can do better.

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Last week, Canadian Prime Minister Mark Carney announced a new “strategic partnership” with Beijing, attempting to signal that Ottawa won’t simply accept Washington’s terms as the Trump administration remakes the international trading system. Then, on the first anniversary of President Trump’s return to the White House, Carney took the stage at the World Economic Forum in Davos to make the case for middle-power autonomy. “When we only negotiate bilaterally with a hegemon, we negotiate from weakness,” he argued, warning that middle powers risk “the performance of sovereignty while accepting subordination.” He criticized the habits of great powers, including using “tariffs as leverage” and treating “supply chains as vulnerabilities to be exploited.” He said that when they “abandon even the pretense of rules and values,” middle powers will pay the price.

But no matter how loudly Davos applauds or how warmly a favorable press receives him, Carney doesn’t have the cards. He has geography. And that geography still governs the fundamentals of the Canadian economy.

Carney has marketed his deal with China’s Xi Jinping as a significant pivot. For now, it’s mostly symbolic. Canada’s “agreement in principle” with China is not a comprehensive trade deal but a narrow swap: Ottawa will allow up to 49,000 Chinese electric vehicles per year under its most-favored-nation rate of 6.1%, down from the 100% duty Canada imposed in 2024. That’s about 3% of annual new-vehicle sales. In exchange, China will cut tariffs on Canadian canola seed from approximately 84% to 15%, with limited relief promised for other agricultural exports.

Whatever pose Carney strikes, Canada’s balance sheet still points south. In 2024, the United States bought 76% of Canada’s exports and supplied 62% of its imports, with Canada running a $102 billion goods surplus in the relationship. China sits on the other side of the ledger: Canada ran an almost $60 billion deficit with Beijing that year, even though the relationship is far smaller in scale. China accounted for 12% of Canada’s imports but took only 4% of its exports. In other words, China sells into Canada far more than it buys from it, making it a source of intensive competition for Canadian producers without offering them a substitute for U.S. demand.

Nor could Canada replace the U.S. market with a grab bag of “middle” powers. That’s a playbook it has already tried. As Financial Times columnist Alan Beattie points out, Canada spent the last decade pursuing the same diversification strategy through trade deals with the EU and the CPTPP (a quasi-Trans-Pacific Partnership without U.S. participation). Yet those agreements barely moved the needle: the percentage of Canadian exports to the U.S. market remained in the mid-70s. Geography, as Beattie puts it, remains close to destiny. For Canada, the upside of middle-power diversification is limited.

Carney’s China gambit can take only two paths, and neither ends well.

If it’s intended as leverage—an attempt to conjure a bargaining chip ahead of this year’s USMCA review—it invites blowback. USMCA is Canada’s most valuable strategic asset because it affords Canada preferential access to the U.S. market. Signal a closer embrace with China, and the United States will treat Canada as a backdoor for Chinese goods. In the worst-case scenario, Carney’s gambit could tempt the Trump administration to cut a bilateral deal with Mexico that sidelines Canada, turning a supposed leverage play into a loss of privilege.

If Carney’s strategic positioning isn’t a bluff—if he genuinely believes Canada can diversify toward China—then it becomes something worse: setting Canada down the road to deindustrialization. China does not “open up” to create balanced trade. It exports its way out of domestic weakness, using state support and industrial policy to dominate global manufacturing. Any “partnership” that lowers barriers in autos or manufactured goods will run the same script: Canadian market share shrinks, local capacity erodes, and dependence on resource exports deepens. As Lawrence Zhang of the Information Technology and Innovation Foundation writes, “by treating electric vehicles and canola as roughly equivalent trade-offs, Canada is confusing industrial platforms with bulk exports.” Trading industrial exposure for agricultural export access would turn Canada into a permanent resource economy and give Beijing another outlet for its overcapacity.

A rational Canadian leader would double down on North American strength. Coordinate with the United States on sectoral defenses against Chinese overcapacity, pair them with stricter rules-of-origin enforcement, and block transshipment. If USMCA survives on preferential terms while reciprocal tariffs rise elsewhere, investment will crowd into North America. Canada should position itself to capture that investment, not repel it.

Carney says the old order is over. He’s right. But under the rules of the new game, his cards just aren’t worth much on their own, and they are lying face-up on the table, making grandiose bluffs rather ineffective. He can still play a winning hand if he uses geography to his advantage and partners with the one other player that can sustain Canadian prosperity and Canadian industry: the United States. — Daniel

WE INTERRUPT THIS BROADCAST…

Sorry, Oren here, from somewhere in the Swiss Alps. I just needed to add one other thing about the Carney speech, which seems to have gone puzzlingly underanalyzed: What was with that greengrocer bit? Carney reportedly wrote the speech himself, and it showed, in an analogy that any globalist financier would wield proudly in proof of his worldliness and historical acumen, but anyone with a shred of political intuition would recognize instantly as self-defeating.

“In 1978,” began Carney, “the Czech dissident Václav Havel, later president, wrote an essay called The Power of the Powerless, and in it, he asked a simple question: how did the communist system sustain itself? And his answer began with a greengrocer.”

Every morning, this shopkeeper places a sign in his window: ‘Workers of the world unite’. He doesn’t believe it, no-one does, but he places a sign anyway to avoid trouble, to signal compliance, to get along. And because every shopkeeper on every street does the same, the system persist – not through violence alone, but through the participation of ordinary people in rituals they privately know to be false.

Havel called this “living within a lie”.

So far so good. Solid fodder for a bold speech on the international stage. So, to what modern calamity does Carney liken this totalitarian oppression? He went on: “For decades, countries like Canada prospered under what we called the rules-based international order.” Oh no.

We joined its institutions, we praised its principles, we benefited from its predictability. And because of that, we could pursue values-based foreign policies under its protection.

…American hegemony, in particular, helped provide public goods, open sea lanes, a stable financial system, collective security and support for frameworks for resolving disputes. So, we placed the sign in the window. We participated in the rituals, and we largely avoided calling out the gaps between rhetoric and reality. This bargain no longer works.

So participants in the rules-based international order, delivered through American willingness to provide public goods, were… “living within a lie,” that they all knew was a lie, all in weak-willed service to totalitarianism? Or, no, we should recognize and celebrate its collapse as akin to one of the great triumphs for freedom in human history? No, that can’t be it.

Carney seems to be saying that living within the lie was good so long as the lie was working for him and someone else footed the bill, but living within the lie is no longer good if that bargain changes, at which point standing on stage to declare it a lie all along represents some form of bravery. But ultimately, he seems to be making President Trump’s precise point—it was the president who announced first that the United States would no longer display the sign, and Carney apparently thinks he was right to do so.

None of this makes any sense. World leaders should be making the case for continued adherence to cooperative norms on realist grounds, explaining why they do benefit all participants and accepting that they will have to change where the equation no longer pencils out. Instead, Carney is arguing that the cooperative norms were a lie, that they were good specifically because the United States was willing to bear the cost of supporting them, and if that’s no longer the case, well then he’s out.

This, apparently, was the highlight of Davos, which tells you everything you need to know about the audience’s disinterest in thinking seriously about the world and its challenges. — Oren

LET’S STAY IN DAVOS

Speaking of Davos speeches that don’t reflect reality: Chinese Vice Premier He Lifeng told the World Economic Forum—with a straight face—that China never pursued a trade surplus; that its development has been “achieved mainly through reform, opening up and innovation, rather than so-called government subsidy”; and that despite “being the world’s factory,” China hopes to be “the world’s market too.” He also warned that “tariff and trade wars have inflicted significant shocks on the world economy,” doing the greatest damage to “multilateralism and free trade.”

In a “news analysis” headlined “China Wins as Trump Cedes Leadership of the Global Economy,” the People’s Daily New York Times dutifully relayed the message: “China is—at least rhetorically—invested in economic values that Mr. Trump has renounced: engagement in multilateral institutions to advance its causes, faith in the wealth-enhancing powers of global trade and recognition that no country is large enough or powerful enough to go it alone.”

Of course, rhetoric is cheap. Here in the real world, China just posted a $1.2 trillion trade surplus in 2025—the largest ever recorded, even adjusted for inflation—and is preparing a new five-year plan that will, to no one’s surprise, double down on export-led manufacturing dominance. That surplus reflects an export-dependent, beggar-thy-neighbor model that manufactures “competitiveness” through scale, state power, and suppressed consumption. Whatever one thinks of President Trump’s tariffs, Chinese overcapacity poses a greater risk to global economic growth than his administration’s trade agenda.

In other China news:

• Russia, Ukraine and the Race for Chinese Drone Components (Financial Times): “As both sides scramble to source vital parts, some experts are convinced Russian buyers are being favoured by Beijing.” Perhaps China is not a great power that liberal democracies and middle powers should align with…

• Brussels in Move to Bar Chinese Suppliers from EU’s Critical Infrastructure (Financial Times): “Brussels is to propose phasing out Chinese-made equipment from critical infrastructure in the EU, barring companies such as Huawei and ZTE from telecommunications networks, solar energy systems and security scanners, according to officials.”

• Chinese EVs Blow Past Tesla and Tariffs En Route to Global Reign (Wall Street Journal): “U.S., European Union and Mexico try to quash accelerating demand for China’s hottest electric vehicles.”

• China Registers Lowest Number of Births Since Records Began (Financial Times): “China last year registered the lowest number of births since records began, marking the fourth consecutive year of population decline as policymakers grapple with a demographic crisis. On Monday, the government reported that 7.92mn babies were born in 2025, down from 9.54mn the year before, and the lowest number of births since 1949.”

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WHAT ELSE SHOULD YOU BE READING?

Democrats and the Siren Call of Culture Denialism: In The Liberal Patriot, Ruy Teixeira provides a one-year check-in on Democrats under President Trump’s second term, and argues that the party still refuses to internalize one of 2024’s clearest lessons: cultural issues mattered, and they still matter. Instead of reassessing these issues, Democrats have retreated into what he calls “culture denialism” because party leaders would rather appease activists and professional-class constituencies than risk a fight that might broaden their appeal to the electorate. The problem is that voters notice what Democrats won’t talk about; a strategy of avoidance can only get them so far.

Warning Lights for Team Blue: Relatedly, and also published at The Liberal Patriot, Henry Olsen digs into the data and finds that Democrats might not be as strong headed into the midterms as the vibes among the chattering class suggest.

Don’t Underestimate Shame as a Way to Fight Back Against Tech: In the New York Times, Jessica Grose argues that the most effective check on our AI overclass isn’t a new regulatory framework, but the oldest one in politics: shame. (That said, a new regulatory framework would be nice, too….) She notes how quickly AI experiments can go off the rails, citing an AI-enabled teddy bear that users could prompt into recommending BDSM, as well as xAI’s Grok’s foray into sexualized deepfakes, which Elon Musk finally clamped down on amidst public pressure.

And for a different look at a dystopian societal development that could also benefit from a regulatory framework, read Betting on Prediction Markets Is Their Job. They Make Millions.

CHINA HAWK BADGES OF SHAME

One week after Oren testified before a House Foreign Affairs Committee hearing titled “Winning the AI Arms Race against the Chinese Communist Party,” the committee passed legislation that would help the United States do just that. The AI OVERWATCH Act, sponsored by Chairman Brian Mast (R-FL), advanced by a vote of 42–2–1, marking the first congressional vote to restrict AI chip sales to China, and providing a rare bipartisan check on a White House that’s been less restrictive than it ought. The legislation would give Congress a formal review process for proposed AI chip exports to China, modeled on the mechanism already used for arms sales, and it would impose a two-year ban on selling China any AI chip more advanced than NVIDIA’s H200 or AMD’s MI325x. Forty-two China Hawk Badges of Shame are printed and headed to Capitol Hill for a job well done protecting the national interest.

• Bonus Badge of Shame: Ahead of the vote, the Midas Project’s Model Republic reported “suspicious similarities in posts from over a dozen conservative influencers including Laura Loomer, Brad Parscale, and Ryan Fournier hint at a coordinated-yet-slapdash effort to stop the AI OVERWATCH Act,” wondering “are they getting paid to kill it?” Now, who might have a financial interest in killing it? Rep. Mast has a theory.

And speaking at Davos, Anthropic CEO Dario Amodei criticized the decision to allow Nvidia to manufacture AI chips for China, comparing it to “selling nuclear weapons to North Korea.” Amodei argued that while the United States remains “many years ahead of China” in chipmaking, the move by Nvidia (one of Anthropic’s major investors) and the Trump administration has “incredible national security implications.” We agree. Revisit Chris Griswold’s Commonplace essay on why we should “Stop Arming Our Adversary” to learn more.

In other concerning U.S-China technology news, “TikTok Strikes Deal for New U.S. Entity, Ending Long Legal Saga” that allows “ByteDance to keep 19.9 percent of the company, keeps the new U.S. entity run by a longtime TikTok senior executive, and that will “retrain the algorithm on U.S. data.”

ON TRADE

Despite the weeping and gnashing of teeth amid President Trump’s moves on Greenland—and the warnings in the press that the Europeans will choose China—the inertia of the international trading system’s realignment continues apace:

• EU Leaders to Push for Ratification of US Trade Deal Despite Anger with Trump (Politico)

• Irish journalist Finbarr Bermingham notes: “More signs an EU-China détente [appears] unlikely, despite transatlantic mess. Brussels wants to change WTO rules on most-favoured nation to allow it to more easily raise tariffs, according to a paper circulated in Geneva today. Trade perks should be tied to reciprocity, it says.”

• And in the Financial Times, the EU commissioner for trade and economic security questions the utility of one of the postwar international trading system’s sacred cows: “We must also rethink how the “most favoured nation” principle functions and whether the current balance of rights and obligations remains fit for purpose.”

Ending on a high note: General Motors is moving production of its only made-in-China auto exported to the U.S. market back to the United States because of the Trump administration’s auto tariffs: GM to move production of Buick SUV from China to U.S. (Reuters). Why would they do that? Don’t they know that tariffed steel is more expensive here? Questions to ponder as you…

Enjoy the weekend!

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The question of foreign policy toward Israel, and the question of that question’s centrality to conservative politics, has risen rapidly in prominence over the past year, prompting headlines like “A Rupture Over Israel Is Tearing MAGA Apart” in the New York Times. In his Foreign Affairs essay on “A Grand Strategy of Reciprocity” in the fall, Oren argued both that Israel’s commitment to taking responsibility for security in its region illustrated well the posture that the United States should demand from other allies, but also that direct U.S. aid to Israel should end. So for the new “Conservative Crossroads” series that the EPPC’s Henry Olsen launched this week, Oren joined the Hudson Institute’s Michael Doran to debate the issue. Here is his (lightly edited) opening statement:

In my mind, there are two related questions. First, what should be the formal U.S. foreign policy toward Israel and then, second, what should be the conservative movement’s posture toward Israel. So I will take those in turn.

When it comes to our foreign policy toward Israel, my view is that Israel is a good ally for the United States. We have a general commonality of values and, as a result, of interests. We have historically had a quite good relationship. And there are many ways in which we benefit from maintaining that relationship, whether in terms of intelligence sharing, in terms of technological development, in some cases, even in terms of joint military or diplomatic action. The United States should aim to maintain that.

My concern is that Israel has tended to have a special status as a U.S. ally that looks very different from the relationship with other allies like, say, Korea or Australia. Israel occupies an outsized position in our politics and we have tended to become overly entangled in what might be very strong Israeli interests but are not necessarily strong U.S. interests.

Obviously, one place the rubber meets the road is on the very tangible question of whether the United States should be providing foreign aid to Israel. I know it is argued that they take the aid and use it to buy weapons from us, but that doesn’t fundamentally change the character of the assistance. If you want to ignore that we’re giving them money and say instead that we’re giving them weapons, fine. Regardless, the question is why would we be giving them anything? They’re a quite wealthy market economy with a strong government and robust defense spending, perfectly capable of acquiring by their own means the equipment that they might need.

As we would say about any other ally, the clear answer is that we do not need to be providing aid to Israel. We should be happy to sell weapons to them, as we do to other allies. But arguments in favor of offering them aid invariably make clear that we are not engaging in the relationship in a way that best advances U.S. interests or, in the long run, advances Israeli interests. Because the special relationship produces an entanglement that has broad implications for the influence we think we should have, or need to have, over their actions, leaving us with responsibility we don’t want to have and them with obligations they don’t want to bear. A more arm’s-length and conventional allied relationship would be a lot better.

This points to the second and related problem within the conservative movement, where it seems to me that political leaders in the United States have been particularly focused on and overly solicitous of issues related to Israel. A very concrete example: look at the 2024 Republican platform. Israel is the only country mentioned positively. There is a separate line declaring, “We will stand with Israel.” I don’t know why that’s there. We wouldn’t put, “We will stand with Korea, we will stand with Australia, we will stand with Japan, we will stand with the United Kingdom” in the platform.

Of course, in the context of our alliances, we should stand with these countries, but we should be doing so in a measured and balanced way. It’s impossible to reconcile a clear-eyed view of American priorities with the way a lot of Republican politicians at times focus on Israel-related issues and the way activist groups attempt to elevate what are, from the American perspective, third-order concerns into first-order concerns.

So again, to make this tangible, I think we need to ask: What does the term pro-Israel mean? Why do we ask of politicians, “Are you pro-Israel?” in a way we would not about any other country, about any other relationship. I am “pro-Israel” in the sense that I think Israel is generally a force for good in the world, and I think they are and we should want them to be a good American ally. But pro-Israel isn’t how I would describe the relevant policy choice. I would say that I am pro-America and, to the extent that an alliance with Israel is healthy for America, we should pursue it. But our approach to foreign policy cannot be one that asks whether our policies are oriented toward the benefit of a particular other country.

Listen to the full debate.

WHAT ELSE SHOULD YOU BE READING?

James Pogue profiles Rep. Marie Gluesenkamp Perez (D-WA) in the New York Times: “This Rural Congresswoman Thinks Democrats Have Lost Their Minds. She Has a Point.”

• Here’s an interesting idea from MGP: “Expand options for college credit for technical classes like welding and woodworking,” so you don’t have to give them up for AP French.

• Not unrelated, from the Wall Street Journal: “AI Can’t Touch These Skilled Trade Jobs. If Only Enough Humans Would Fill Them.”

Opioid deaths have been falling dramatically over the past couple of years, but why? A new paper from Keith Humphreys et al. in Nature argues: “There was a major disruption in the illicit fentanyl trade, possibly tied to Chinese government actions, that translated into sharp reductions in overdose mortality beginning in mid- or late-2023 and continued into 2024 across both the US and Canada.”

• Charles Fain Lehman dives in further on X.

A story we’ve been tracking for some time, with huge social and economic consequences, gets some attention in the Wall Street Journal: “Gen X and Millennials Will Inherit Trillions in Real Estate Over the Next Decade.” Reminder to everyone eagerly working to bring down housing prices… the flip side of that coin is bringing down home values – a massive (implicit) redistribution of wealth. That doesn’t mean we shouldn’t do it, but it’s important to understand that the core political problem is not so much obnoxious NIMBYism as the core economic interests of the Americans who built wealth in exactly the way they were told they should.

Yuval Levin joins the Ezra Klein podcast to discuss the first year of the Trump administration. Levin asks, “How do you reconcile the amount of activity with the absence of durable action? To me, that’s the story of the first year of this presidency.”

And, in the Wall Street Journal, “Why This CEO Won’t Let Private Funds Near His Company’s 401(k).” Great quote:

Private-fund managers and politicians pushing for wider use of nontraded assets in 401(k)s say it’s unfair that big institutions have long invested in nontraded assets while small investors haven’t been able to. Why shouldn’t the little guy have equal access to the potentially higher returns on private assets?

“That sounds like ‘mom and apple pie,’ but it’s a bulls— argument,” fumes Sullivan, the RPM CEO. “The reality is, now they’re having a hard time raising money and returns are reverting to the mean.”

In fact, fundraising for private-equity, venture-capital and other nontraded funds has shriveled, and their portfolios are glutted with thousands of unsold companies. Private-equity funds held by major institutional investors trailed the S&P 500 by an average of 4 percentage points annualized over the 10 years ended June 30.

Speaking of which! Read Oren’s new policy brief, “No Alternative Assets in Tax-Advantaged Retirement Accounts,” which tackles the issue head on. The “Pinpoint Policy Institute” published a blistering riposte depending entirely on the claim that “private equity produced average annual returns of 10.48% over the 20-year period ending on June 30, 2020,” which apparently is what you say when it’s already 2026 and you’re shilling for an asset class that underperformed a simple public index over the last quarter, year, three years, five years, and ten years. (Come for the bad data, stay for the financial illiteracy: Pinpoint also claims that “the ‘tax advantages’ for [retirement] accounts are deferrals, not handouts” and thus do not constitute subsidies. Again, these are the arguments for putting private equity in your 401(k)...)

IMMIGRATION

An important comment from Vice President J.D. Vance on Monday:

Just spoke with a guy who owns a small business. Complaining about the fact that that he pays his employees $18-20hr (minimum) but the people who hire illegal aliens pay them $6.50 an hour and hurt his business. Many of the people threatening law enforcement and interfering with deportations are just mad that this system is coming to an end.

True! And yet! If the goal is to bring that system to an end, shouldn’t a vital part of the strategy be to… enforce the law against the people who hire illegal aliens and pay them $6.50 an hour? The absence of enforcement against employers remains a yawning gap in the White House strategy. As a substantive matter, relying on more aggressive and invasive action elsewhere is in many cases less efficient and effective. As a political matter, it allows opponents to frame their criticism around tactics that are broadly unpopular with the public instead of forcing them to defend exploitative corporations undercutting American workers.

• Not unrelated: Axios reports today, “President Trump’s team recently reviewed private GOP polling that showed support for his immigration policies falling. The results, reflected in public surveys, bolstered internal concern about the administration’s confrontational enforcement tactics.”

Zooming out, though, the administration has unquestionably succeeded in reducing the population of illegal immigrants. ABC News headlines: “U.S., for first time in 50 years, experienced negative net migration in 2025.” The underlying report, from the Brookings Institution, estimates “net flows of -295,000 to -10,000 for the year.” Of particular importance: “We estimate the sustainable pace of monthly job growth to be between 20,000 and 50,000 in late 2025 and believe it could be negative in 2026.”

This is a point you’ve seen us harp on repeatedly here at Understanding America, and in Oren’s Commonplace article last summer, “Coming Down from the Open-Border Sugar High.” That article, drawing on earlier estimates from the same authors who wrote this more recent report, emphasized that the slowdown in job growth could be attributed entirely to the reversal from a large influx of immigrants to an outflow. This new paper confirms that result (as does, more obviously, the unemployment rate!). And as it notes, we could even see job growth turn negative next year, not because the economy is weakening, but because we will have a smaller population of people not authorized to live and work in the country.

Speaking of disingenuous efforts to find economic disaster in immigration enforcement, the New York Times went on a search for crops rotting in the fields and food prices surging, and came up empty. “Data released Tuesday by the Bureau of Labor Statistics found the cost of food at home rose 2.4 percent overall in the previous 12 months,” in other words, not out of the ordinary. Our intrepid reporters continue:

A lack of workers in some areas has led to cherries rotting in Oregon fields, blueberries rotting in New Jersey fields and Pennsylvania dairy farmers selling off cows. But the cost of other fresh fruits, which include berries, has fallen 1.2 percent over the last year, and the price of milk is down 1 percent.

Fruit farms and dairies are especially reliant on immigrant labor. Given that those prices have fallen, it isn’t clear if the immigration crackdown hasn’t yet affected them or if perhaps prices would have decreased more if labor was more readily available.

Yes, perhaps prices would fall more if we didn’t enforce our laws that regulate the labor market. Goes for many things!

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IS THAT… CONGRESS’s MUSIC?

The Constitution’s structure almost guarantees that action on federal policy in the first year of a new administration will focus on the executive branch, where the president will tend to hold the most political capital and his team will be prepared with a long list of executive actions to take. Certainly, that has been the case in Year 1 of Trump 2.

But then things start to shift. Partly, that which can be done easily through executive action has been done. Partly, the president’s popularity tends to decline. Partly, Congress gets restless, especially as it looks ahead toward the midterms, and also frustrated with those executive actions it dislikes. We seem to be going through that moment now, as Congress finds itself in the spotlight on a range of issues.

On Affordability:

The president is calling for action on credit card interest rates and swipe fees. This latter issue is one on which we’ve done a lot of work at American Compass, and good bipartisan legislation already exists. Read policy director Chris Griswold on the Credit Card Competition Act. See also, the Federal Reserve’s analysis of the existing credit card market, in which high swipe fees fund rewards programs that benefit “sophisticated individuals … at the expense of naive consumers.” What do we think of capping credit card interest rates? You’ll have to listen to today’s episode of the American Compass podcast.

The ACA subsidy debate is also coming to a head, and the president has weighed in as well with what he is calling the “Great Healthcare Plan.” As the New York Times notes, “the long-awaited plan would leave much to Congress.” Has anyone in Congress given the issue the thought necessary to move forward with real action?

On Workers:

Things got spicy on the House floor this week, as a group of Republicans joined Democrats to vote down a law that would have relaxed overtime rules. A business-friendly definition of “joint employer” responsibility looks destined to fail too, which “likely sends House Education and Workforce Chair Tim Walberg (R-Mich) back to the drawing board as he seeks to pass an ambitious labor agenda,” per Politico. Not a good week for the Chamber of Commerce.

Meanwhile, interest in workforce development is picking up. Rep. Riley Moore (R-WV) has introduced the Jumpstart Savings Act to help workers save for training expenses. At American Compass, we are seeing unprecedented interest in proposals like the American Workforce Act, from unions, employers, and Congress.

On Trade:

The House is pushing back aggressively against the Trump administration’s plans to license Nvidia’s advanced AI chips for sale to China. The House Foreign Affairs Committee held a hearing on Wednesday, in which both party’s representatives and all three witnesses were unanimously opposed to the White House approach. Oren was one of the witnesses, you can read his opening statement here. Excerpt:

We are here today because the administration has inexplicably reversed course, and is now poised to begin licensing the sale to China of Nvidia’s H200, a far more advanced chip, in mass quantities.

U.S. policy has been seemingly reshaped by business executives who promote China as a partner and prioritize short-term profit over the national interest.

Most prominently, Nvidia CEO Jensen Huang has argued that the term “China Hawk” should be a “badge of shame.” Huang has also argued that Chinese leaders “want companies to come to China and compete in the marketplace,” and says that we should take statements by the Chinese Communist Party “at face value.”

Of course, under our constitution, citizens have the right to petition their government, no matter how unwise their ideas. But also under our constitution, it is the people’s representatives, not multinational corporations, that set national policy, to ensure that it advances the national interest.

We’ve reached the point where Laura Loomer is posting on X that the White House is “aggressively blocking CCP access to these chips” and efforts by Congress to actually block access represent “pro-China sabotage.” Gee, wonder who paid for that one?

Psssst, Congress, if you are all agreed on the matter, you don’t have to hold more hearings, you can actually pass a law.

And Sens. Todd Young (R-IN) and Jeanne Shaheen (D-NH) have just introduced the SECURE Minerals Act, an important proposal to establish a $2.5 billion “Strategic Resilience Reserve” for critical minerals, per Axios. This resembles Dean Ball’s proposal in the Techno-Industrial Playbook, drawing on work done by Employ America on “Reimagining the Strategic Petroleum Reserve.”

Congress will be indispensable to making progress on reindustrialization this year, from fostering industries like critical minerals and shipbuilding, to legislating on tariffs (especially if the Supreme Court confines the president’s IEEPA authority), to establishing a permanent institution that can facilitate industrial financing. Whether they are up for it is another matter.

SPEAKING OF INDUSTRY…

Lots of good news to report. Sticking with critical minerals for a moment, Treasury Secretary Scott Bessent is focused on bringing the G7 together to establish non-China supply chains by, for instance, agreeing on price floors that would ensure other sources remain economically viable:

Bessent on Friday told Reuters that he had been pressing for a separate meeting on the issue since a G7 leaders summit in Canada in June, where he delivered a rare earths presentation to gathered heads of state from the U.S., Britain, Japan, Canada, Germany, France, Italy and the European Union. Leaders agreed to an action plan at the summit to secure their supply chains and boost their economies, but Bessent has grown frustrated about the lack of urgency demonstrated by attendees, the official said.

On the defense industrial base, Secretary of War Pete Hegseth’s speech at SpaceX Starbase in Texas, drew on key themes from last year’s American Compass essay on “Big Stick Economics.” As we wrote then:

After 1993’s “Last Supper,” that behavior flipped on its head. In both 1994 and 1995, all five primes were Eroders. For the next decade, the primes collectively operated as an Eroder every year. Over the 25 years from 1994 to 2018, the individual firms were Sustainers 33% of the time and Eroders 67% of the time. They returned $240 billion to shareholders through buybacks and dividends while making less than $90 billion in capital expenditures.

But this predictability comes at a (severe) cost to innovation and efficiency as procurement regulations and contracting models eliminate incentives for the risk-taking, capital commitments, and cost savings driven by competition in a well-functioning commercial sector.

Said Hegseth this week:

A generation ago, one of my predecessors, in a dinner speech to industry now infamously known as the Last Supper, advocated for the consolidation of our defense industrial base. This consolidation created a closed innovation ecosystem dominated by just a handful of prime contractors. The results have been characterized by soaring costs, sluggish delivery and stagnant innovation. That’s what President Trump’s recent executive order on the defense industrial base and defense companies seeks to address. It makes crystal clear that the priority of the legacy prime contractors must be our nation’s national security, not the next earnings call. That means less focus on stock buybacks and more investment on the men and women on the factory floor. It means less stockholder dividends and more investment in infrastructure, plant and equipment. Today that old era comes to an end.

Anduril’s Palmer Lucky has been notably supportive of the executive order: “I think that when you are effectively run on the public’s wallet, the public should be able to impose whatever restrictions they want on you. … If they want to say that I only pay myself $5m until I’m caught up with my schedules, they should be allowed to do that.”

On chips: “Micron Sets Groundbreaking for $100B Chip Megafab in Upstate NY” (ConstructConnect).

On drugs: “AbbVie Strikes $100 Billion Investment Deal With Trump, Will Lower Medicaid Prices” (Wall Street Journal).

On energy: “Trump Praises Microsoft’s Pledge to Lower AI-Linked Electricity Costs” (Wall Street Journal). We’ve been talking for a while about this question of who will pay for the electricity to power data centers. “It’s a market, prices will rise, consumers can cut back” was always going to be a non-starter. Good to see Microsoft recognizing that and taking action on their own. The White House is stepping up pressure too: “Trump Moves to Make Tech Giants Pay for Surging Power Costs” (Bloomberg).

AND FINALLY, YOUR MOMENT OF TRADE

“Taiwan Reaches Trade Deal With Trump and Pledges More U.S. Chip Factories” (New York Times).

“In addition to the billions in investment by Taiwanese companies, the two sides agreed that Taiwan’s government would provide an additional $250 billion in credit guarantees to support smaller firms in the industry’s complex chip supply chain to expand in the United States. The Trump administration said it would lower the U.S. tariff rate on Taiwanese goods to 15 percent from the current 20 percent, an important concession since the United States overtook China in 2024 as Taiwan’s largest export market.”

The Economist interviews USTR Jamieson Greer: “Are America’s Tariffs Here to Stay?”

Bloomberg interviews Peter Navarro, who says: “we are strongly encouraging Europe to adopt exactly the same level of tariffs [on China]. When the president puts up tariffs to defend America from Chinese cheating, China can’t sell as much here. Where does it sell it? Europe. Mexico. Mexico did exactly what I’m suggesting. At the urging of our trade team, the Senate in Mexico passed 50% tariffs on China. Europe should follow the lead—they are doing that in steel [and] EVs.” https://www.bloomberg.com/features/2026-peter-navarro-weekend-interview/

Less encouraging, the president spoke in Detroit this week, and reiterated his unfortunate enthusiasm for Chinese vehicle manufacturing in the United States: “If they want to come in and build a plant and hire you and hire your friends and your neighbors, that’s great, I love that. Let China come in, let Japan come in.” The failure to distinguish between China and Japan in this context is a dangerous one, which Congress will have to address if the president does not change course.

And just plain silly: the Canadians. It’s worth watching the 45-second clip of Mark Carney in China, where he declares himself “heartened by the leadership” of Xi Jinping and envisions Canada and China as “strategic partners” including on “issues of security.” Canada is going to start letting in Chinese EVs at low tariffs, in return for selling more canola products in China. Per the New York Times, “Mr. Carney also announced on Friday that China would make a ‘considerable investment into Canada’s auto sector’ within the next three years as part of the agreement to lower tariffs on electric vehicles.”

It looks increasingly likely that USMCA may break into separate bilateral agreements for the U.S. with Mexico and with Canada, or not with Canada, if they continue in this direction.

Enjoy the weekend!

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Obviously, there has been no shortage of news over the past few weeks, but we’ll try to focus here on what might otherwise have escaped your attention, starting with a sudden shift of the tectonic plates in conservative economic orthodoxy.

Oren explains the significance of the new Heritage Foundation report, Saving America by Saving the Family:

The question of whether and how to provide support for working-class families has been a central fault line in conservatism for the past decade. A number of economic forces have heightened the need for such support, and a number of political forces have heightened the Republican Party’s interest in providing it, but the legacy of the 1996 welfare reform has always pushed in the other direction.

Welfare reform was perhaps modern conservatism’s signal policy victory, correctly diagnosing the failures of the Great Society’s antipoverty strategy, which targeted the greatest support to the greatest dysfunction and thus created strong incentives that shattered families and pushed people away from working to support themselves. With welfare reform, conservatives rejected that model in favor of one that tied support to work and immediately delivered better outcomes for program participants. Unfortunately, rather than conclude that incentives matter and good antipoverty policy promotes connection to the workforce, many conservatives took the lesson to be that all cash assistance is “welfare” and all welfare is bad. Any policy that gave a family back a dollar it had paid in income tax would be embraced as a conservative tax cut; any policy that gave a family a dollar beyond what they had paid in taxes would be condemned as liberal welfare.

But working-class families don’t tend to owe much in federal income taxes, which left the Republican Party designing policy that mostly left them out. The child tax credit, especially, was aimed at helping families raising children, but if it could only reduce taxes owed, efforts to make it more generous would primarily help an upper-middle class that owed enough in taxes to claim the credit. When then-Senator Marco Rubio led the charge to double the CTCin the 2017 tax bill, he had to attract Republican support by creating a complex and kludgey design that pretended to give families back the payroll taxes both they and their employers had paid.

Five years ago, in our seminal paper on conservative family policy, American Compass proposed a new way to approach the issue and a new structure for a generous family benefit worth roughly $5,000 per young child per year, which we called the Family Income Supplemental Credit, or the Fisc. It envisioned that benefit as the core of a new social compact, targeted directly to working families and tied to work based on prior year’s earnings. That framework became the basis for the Parent Tax Credit proposed by Senator Josh Hawley in 2021, and the Family Security Act proposed by Senators Mitt Romney, Richard Burr, and Steve Daines in 2022, and was reflected as well in the CTC expansion proposed by House Ways & Means Committee Chairman Jason Smith in 2024. Later in 2024, shortly after becoming the nominee for vice president, then-Senator J.D. Vance likewise endorsed a $5,000-per-child credit, noting, “I think you want it to apply to all American families. I don’t think that you want this massive cut off for lower-income families, which you have right now.”

As I wrote at the time for Understanding America: “It’s worth noting how sharply anything along these lines rejects the position of the Old Right’s legacy institutions, which hold that letting people keep their own money is a ‘tax cut’ but sending them money beyond what they might have paid in taxes is ‘welfare.’” The usual suspects at the Wall Street Journal, the Heritage Foundation, the American Enterprise Institute, and Advancing American Freedom were all steadfastly opposed to anything along these lines, trotting out generic objections to “welfare” and “dependence.” Discussing objections to Chairman Smith’s proposal, I elaborated:

It’s unfortunate that a small segment of the American right-of-center, like the former high school quarterback who hasn’t done much since, can’t stop talking about the welfare reform of 1996. Every policy fight is that policy fight. The problem is always that people are not working enough; the primary measuring stick for every policy is whether it will get people working more.

But it is not 1995 anymore. Back then, a truly perverse safety net paid parents cash not to work at all and withdrew the cash if they did. That is a recipe for trapping people in poverty and creating a permanent underclass; that is a program to be fought against. Conversely, if a policy provides benefits only to families that do work and provides the same or higher benefits to families that work more, the welfare reform playbook is inapt. Conservatives should oppose a move back toward the pre-1996 model. But they should support policy that gets the most resources to the working families most in need, that makes joining the labor force and earning income generally more attractive, and that also affords a parent greater flexibility to take time off after giving birth, or to spend fewer hours in the labor market and more hours at home with a young child. If any of those outcomes strike you as a problem, you may be the problem.

Well, the Heritage Foundation has come around. In its massive new report, it proposes several new programs that would provide support to working families far in excess of their tax liability. Most notably, its Family and Marriage Tax Credit would be worth roughly $5,000 per young child per year and would be payable in full to working-class families, regardless of income taxes owed. This should sound familiar. Two years ago, Heritage’s senior scholar Robert Rector condemned Chairman Smith’s far more modest proposal because:

Although the bill claims its aim is to provide “tax relief” to families with children, there is little “tax relief” in it for working families. Instead, over 90% of the “family benefits” would be new cash welfare payments to families who pay no federal income taxes and little or no Social Security tax. Nearly all family benefits in the bill are overt cash welfare payments, not “tax relief.”

…

The welfare portion of the bill directly and explicitly repudiates the principles of successful welfare reform, which have governed the welfare system since the mid-1990s.

…

Overall, the welfare portion of the bill would overturn the principles that conservatives have stood for in welfare and family policy for three decades.

If enacted into law, it would be a major victory for the Left and a heavy blow for American families. It also would be a big step backward on the road to reform of America’s broken welfare system.

Rector is a co-author of the new Heritage paper and proposals, which, under Heritage’s “One Voice” policy, now represent the entire institution’s official position.

In their specifics, the Heritage proposals leave much to be desired. Rather than replacing existing programs and creating a simple, broadly available benefit, they layer new programs atop existing ones, each with different eligibility, rationales, and uses. Under the Heritage model, a family would receive one credit only for the first four years of the child’s life unless the child is adopted in which case a different credit applies, another for providing home-based care, different from the one received if using paid childcare, and an investment account that children could access decades later with tax treatment differing depending on the age at which they marry. Notwithstanding the convert’s admirable zeal, this level of social engineering and faith in the bureaucracy is a bit much.

But that’s OK. To repurpose the old joke, we’ve agreed on the appropriate role for government, now we’re just haggling about the price. As conservatives coalesce around a commitment to providing a generous benefit to working families, we can draw on plenty of good work already done about the form it should take. The transformation of intransigent opposition into enthusiastic support is the process by which political and, then, policy change occurs, and in this instance it is cause for genuine optimism. As a mentor of mine once advised, never overestimate what you can accomplish in two years, or underestimate what you can accomplish in ten. — Oren

MORE GOOD TIDINGS FOR THE NEW YEAR

Why stop with family policy? Positive economic news has been rolling in as 2025 wound down and 2026 got rolling. The “blowout” Q3 GDP report (Wall Street Journal) showed strong and higher-than-expected economic growth. Productivity also surged higher (Barron’s), and the Bureau of Labor Statistics data shows consecutive quarters of encouraging gains, especially in manufacturing, with output, productivity, and real wages all rising. Yesterday, we learned the “U.S. Trade Deficit Fell to Lowest Level Since 2009 as Tariffs Reshape Trade” (New York Times), and today delivered another healthy employment report, with 50,000 jobs created and the unemployment rate ticking down to 4.4%. The Wall Street Journal headlines this as “Job Gains Cooled in December, Capping Year of Weak Hiring,” but Understanding America readers are accustomed by now to parsing the confusion over low net job growth in the face of unprecedented immigration enforcement.

Speaking of confusion, what happened to all the tariff “inflation”? Yet another study, this one from Northwestern University, tries to recover from the foolish claims made last year by economists that tariffs would translate straightforwardly to higher prices. The Wall Street Journal reports:

When President Trump announced sweeping tariffs last spring, economists widely predicted surging inflation, a stronger dollar and a significant slowdown in economic growth. That largely hasn’t come to pass. Inflation has picked up since April and remains well above the Fed’s 2% target, frustrating voters, but it hasn’t surged. Hiring is down and unemployment inching up, but the economy is chugging along. At the same time, the Trump administration’s predictions of a manufacturing renaissance also haven’t materialized.

“Mainstream economics has something to answer for on this,” said Jonathan Ostry, an economist at the University of Toronto.

Many people are saying!

• Bonus Quote: “There’s the exporter, there’s the importer, and there’s the consumer. And so far the consumer is carrying the least of the burden.” — Mohamed El-Erian, Chief Economic Adviser, Allianz

For a better explanation of what is happening in our economy than you’ll get from most economists, read these two end-of-year commentaries from senior Trump officials, which offer some of the clearest articulations yet from the administration:

Peter Navarro: Tariffs Are a Discipline, Not a Press Release (Wall Street Journal)

The tariff debate remains distorted by two opposing misconceptions: that tariffs would instantly resurrect American industry, that they would immediately crash the economy and ignite runaway inflation.

The experience of 2025 has disproved both. The economy didn’t collapse, but neither did a manufacturing renaissance appear on demand. These outcomes should surprise no one who understands how industrial capacity is built.

Tariffs aren’t a press release. They’re an instrument that reshapes bargaining leverage, investment math, and supply-chain location decisions. Their success can be measured only using the right metrics and the right timeline. Capital needs time to respond. But when supported by stable policymaking, tariffs can powerfully and positively address trade deficits.

Jamieson Greer: The Year of the Tariff (Financial Times)

There are three ways I measure the success of this new trade policy. In addition to boosting overall economic growth (3.8 per cent in the second quarter), it should reduce the trade deficit, raise wages for American workers and increase manufacturing’s share of our economy.

The outlook is good. The core inflation rate, 2.7 per cent, is the lowest in five years. Since August, our global trade deficit in goods is down, including an approximately 25 per cent year-on-year decrease in our goods deficit with China. Inflation-adjusted wages are up. And manufacturing is coming back.

This last piece is admittedly difficult — it took decades to lose our industrial primacy; rebuilding it won’t happen overnight. But this autumn, the first rare earth magnets made in North America in 25 years rolled off the line in South Carolina. The Philadelphia Shipyard has orders for a dozen commercial vessels, including two liquefied natural gas carriers — the first to be built here in nearly 50 years. Foundries and forges are being rekindled, and concrete has been poured for the foundations of new pharmaceutical facilities. Auto production lines are returning to America.

If some want to criticise that as a rocky start, I’ll take it. They should consider the counterfactual: if tariffs came off, would this new production be happening at all?

Our re-industrialisation requires more than just smart trade policy. We need better technology, workforce, regulatory, tax and energy policies — all priorities for the Trump administration. Looking at it from the trade portfolio, I’m glad to see the plan is working.

WHAT ELSE SHOULD YOU BE READING?

The $160,000 Mechanic Job That Ford Can’t Fill (Wall Street Journal)

Fascinating to compare, at each stage in the pipeline, the value proposition of a high-skilled and essential blue-collar career like transmission repair to that of, say, a business consultant. Seems like we need to start treating the former more like the latter, which would be a good thing.

The Return of the Jewish Question (David Azerrad in Compact)

“All conspiracy theories are appealing and most contain at least some element of truth. But they also contain many falsehoods and, just as importantly, they conveniently ignore all the facts that contradict their worldview. Even more so than outright lying, selective noticing is the hallmark of the JQ.”

Goodbye Gentle Parenting, Hello ‘F—Around and Find Out’ (Wall Street Journal)

An interesting map of cultural onto political trends, featuring cringe-inducing quotes like, “People feel weird about creating a generation of soft kids and my opinion is, would that be so bad?” (Don’t worry too much… that one’s a Canadian.)

• Bonus Bad-Parenting Read: Parents Are Going Broke From Their Kids’ Sushi Obsession (Wall Street Journal)

Minnesota’s Fraud Should Be a Wake-Up Call for Democrats (Ruy Teixeira in the New York Times)

“Mr. Walz admitted that some fraud happened on his watch but deflected, saying that Republicans are appealing to racism and xenophobia. Mr. Walz’s departure indicates this is no more effective than Democrats’ response to welfare fraud accusations in the Reagan era. Americans detest people getting something for nothing — the very essence of fraud. As the party that typically wants more and more generous social programs, Democrats have a special responsibility to ensure that these programs are clean as a whistle and reward only those who ‘work hard and play by the rules.’”

What Social Science Knows About the Value of Diversity (Arthur Brooks in The Atlantic)

A masterclass in presenting progressive dysfunction as some sort of general social trend. “In aggregate,” writes Brooks, “people’s resistance to accepting political differences is growing.”

According to the polling firm YouGov, back in 2016, only 10 percent of both Republicans and Democrats said they had no friends with whom they significantly differed politically; by 2020, this figure had risen to 12 percent for Republicans and 24 percent for Democrats. This trend was corroborated by the research firm Generation Lab and the publication Axios, which found in 2021 that 71 percent of college students who are Democrats said they wouldn’t go on a date with a Republican, while 31 percent of Republican college students said they wouldn’t date a Democrat. Similarly, 41 percent of Democratic college students would not support a Republican-run business, 37 percent would not be friends with a Republican, and 30 percent would not work for one. (The Republican numbers regarding Democrats were 7, 5, and 7 percent.) You probably have your own ideas about how to account for this. Unfortunately, though, I am not aware of any differential studies of the amygdala response of progressives and conservatives.

So, not in aggregate, just with the Left. And yes, we have some thoughts.

YIKES, THIS IS ALREADY GETTING LONG, AND WE HAD SO MUCH MORE TO TELL YOU ABOUT…

So we’ll pick up the pace.

On Healthcare

Even the New York Times has discovered that Obamacare has become the Unaffordable Care Act: “With Obamacare’s Higher Premiums Come Difficult Decisions”: “As enhanced subsidies expire, many Americans covered under the Affordable Care Act are having trouble paying for insurance.”

A recent entry from its “Ethicist” is a fascinating glimpse into the cognitive dissonance, and the ship abandonment that is upcoming from the professional-managerial class. “Should I Feel Bad About Joining a Concierge Medical Practice?” One sympathizes with the problem of this 69-year-old New York Times reader from Massachusetts, which is the obvious consequence of an effort at healthcare reform that we’ll go out on a limb and guess she enthusiastically supported, expanding “affordable” “access” by trying to crowd everyone into a uniform system at mandated prices:

The large medical practice I have been going to for more years than I can count is struggling to recruit and retain primary-care doctors and is short-staffed in general. Wait times for appointments have grown longer, the nurse practitioner I’ve seen most regularly will be retiring soon and I just don’t feel confident that I will receive the attention and care I will want, if and when my health takes a turn. No one at the practice besides this nurse even knows me.

Should she switch to a concierge practice that takes her insurance but charges an annual fee to keep out the riff-raff?

On the one hand, it obviously excludes most people, and it further strains the larger clinics (like the one I want to leave) as they try to absorb the patients whose doctors are adopting the concierge model. On the other hand, settling for care I don’t fully trust in order to stand on principle will do nothing to fix the horribly broken health care system in our country, and going with the new doctor could bring me great peace of mind.

Ethicist says: Yes! Go for the concierge medicine! After all, “plenty of goods in our society are available only to the minority that can afford them… The general idea is that, as long as everyone’s getting what they’re entitled to, it’s OK to distribute other goods by price.” And anyway, “one fewer patient won’t affect a big clinic’s financials; if it had any marginal impact on the other patients, it might be in slightly reducing their wait times.” (Comically, the questioner has a better grasp on the actual problem here, diverting those who provide the care away from the accessible institutions, but maybe that’s why we shouldn’t ask ethicists about health care policy.)

Ultimately, says our ethicist, “the consequences of an individual consumer’s specific choice are so hard to calculate, this is a problem best addressed on the level of public policy. If you do want to try to do something about it, get involved in the politics of health care, or at least bear it in mind when you vote.” Vote for… what exactly?

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On Immigration

Republican Congresswoman Monica De La Cruz wants action “after South Texas builders voiced frustration with how immigration arrests at construction sites were negatively impacting their industry,” reports the Associated Press. Following the law is indeed a bummer. But she has a solution: “a special visa program for construction workers, similar to the H-2A visa program that allows foreign nationals to work in the agriculture sector.” We need a temporary worker program for seasonal jobs that Americans won’t do, so we should create one also for permanent jobs that Americans often do, because the real goal is just wage suppression.

And speaking of special visas that have become dumpster fires, check out the O-1B arts visa! The Financial Times reports, “Influencers and OnlyFans models dominate US ‘extraordinary’ artist visas. Work permits increasingly being awarded on basis of online reach, favouring content creators.”

But now a growing number of those contacting him to seek visas are social media influencers and models on OnlyFans, the streaming platform for sex workers and celebrities.

“I knew the days of representing iconic names like Boy George and Sinéad O’Connor were over,” Wildes said, as he described the shift towards what he called “scroll kings and queens”.

The number of influencers who have successfully applied for an O-1B visa, reserved for “exceptional” creatives, has exploded since the Covid-19 pandemic, according to immigration lawyers like Wildes, talent managers and creators.

Which is as good a segue as any to your weekly helping of dystopia…

On Dystopia

Elon Musk managed to find some limit on the AI-fueled drek that American society is willing to tolerate, as his apparent decision to further relax controls on xAI’s Grok led quickly to a deluge of sexualized deepfakes flooding the X platform. The backlash was sufficiently strong and swift that, as of last night, Musk has paywalled those features, but the question remains what the appropriate regulatory response should be.

The recently passed TAKE IT DOWN Act requires platforms to remove illicit images at the request of victims, but imposes no obligation to prevent the initial posting, and if anything, insulates them from liability so long as they comply with requests. For the tech moguls to prioritize basic human decency in developing their platforms, they will have to face massive and immediate liability for getting it wrong. xAI announced this week that it had raised another $20 billion from Nvidia, Cisco, and Fidelity, among others. If they had to pay $100 million every time the model generated deepfake pornography, they’d probably solve the problem pretty quickly.

• Bonus Embarrassment: Podcaster: “What’s one invention that’s made us worse, not better?” Elon Musk: “Maybe short form video. It’s rotting people’s brains.”

For serious thinking from serious people, the new issue of National Affairs has two excellent essays.

• John Ehrett and Brad Littlejohn: The Post-Human First Amendment

  “On TikTok’s view, it is not merely speech, but an automated speech-selection algorithm that enjoys First Amendment protections. In the formulation of this argument, all three free-speech revolutions converge. TikTok, as a business corporation, is not a human being. It has no “natural right” to free speech in any sense recognizable to the founders. TikTok’s algorithm is plainly not “speech” in the standard sense, but complex computer code. And TikTok’s algorithm is a product deployed in service of its business activities, not speech directed to any public interest or expressing any content about the world. And yet TikTok claimed a free-speech right to do business as usual. Would the founders have agreed?”

• Charles Fain Lehmann: The Case for Prohibiting Vice

  “As Americans become increasingly wary of this new wave of vice proliferation, opponents of it should look elsewhere for a way to frame their attacks. Talk about harm, yes. But those concerns should also be grounded in a comprehensive and coherent account of why vice is incompatible with human freedom — an account that, if framed correctly, can appeal to Americans on both sides of the political spectrum.”

THIS WEEK’S GOOD, BAD, AND UGLY FROM 1600 PENN

The Good: “Trump Orders Crackdown on Defense Industry Stock Buybacks” (Wall Street Journal). “President Trump lashed out at U.S. weapons manufacturers Wednesday, announcing new restrictions on executive pay and stock buybacks while also threatening to cancel contracts with one of the country’s largest defense contractors.” (Read the executive order.)

Daniel wrote about this just before the break, in “You Can’t Spell ‘Defense Industrial Base’ Without ‘Industrial Base.’” An important point:

The same problem extends far beyond the defense sector. In all the places where the United States needs more capital investment—energy infrastructure, shipbuilding, advanced manufacturing, critical minerals, residential housing—financial engineering can pull in the opposite direction. If Washington is willing to say that buybacks and dividends in the defense sector are inconsistent with the national interest, it should apply the same analysis to other industries that require greater capital investment. No principle of economics would limit the disconnect between shareholder return, industrial capacity, and economic progress to tanks and missiles.

The Bad: “Defense stocks surge after Trump calls for $1.5 trillion military budget in 2027” (CNBC). Respectfully, Mr. President, the country does not have an extra $500 billion per year to spend on the military, and that was the case before the One Big Beautiful Bill’s $5 trillion in tax cuts. To the contrary, your budget director, Russ Vought, before joining the administration, published a blueprint for bringing the federal budget back toward balance that required substantial cuts to defense spending, bringing the total down to roughly half of what you are now proposing.

An expansive vision of a new American empire may be fun to contemplate in the abstract, but actually pursuing it would require abandoning virtually all of the administration’s other fiscal priorities and certainly those of most American voters.

The Ugly: Are Chinese automakers headed to America? The White House still refuses to signal any opposition. One such producer, Geely, is now indicating plans to enter the market in the next few years.

Meanwhile, Waymo appears to be preparing to build out its autonomous fleet with Geely vehicles.

Senator Bernie Moreno has been an outspoken opponent of these developments. It would be good to see more conservative leaders, and the president, join him.

MORE OF THE GOOD

But hey, we’re kicking off the year on a positive note, and there’s more good to celebrate on the policy front.

• The FCC has taken important action barring Chinese drones from the American market. Peter Harrell notes, “this should boost demand for domestic and allied drone-makers, so also an industrial policy measure,” while Chirs Miller writes in the Financial Times, “by adding all foreign-made drones and key components to its ‘Covered List’ of equipment that poses an unacceptable national security risk, the commission de facto banned China’s DJI, the industry leader in drones. This opens the market to US drone companies. It may also mark a shift towards greater use of import restrictions in Washington’s tech competition.”

• Fund the trade police! Yesterday, the House passed a bipartisan appropriations bill that would increase funding for the U.S. Trade Representative’s office and the Commerce Department’s bureau for export controls.

• In an interview with The Harvard Political Review, President Biden’s USTR Katherine Tai praises the Trump administration’s continued use of USCMA’s Rapid Response Mechanism:

  I really give my successor credit for this. In the first Trump administration, one of the biggest initiatives on trade, separate from the tariffs, was the renegotiation of NAFTA and the creation of the U.S.-Mexico-Canada agreement. That came into being, and it required congressional ratification, through a partnership and renegotiation between the first Trump administration and congressional Democrats. As part of that renegotiation, we together created an enforcement mechanism that’s specific to workers and worker power.

  …it is absolutely revolutionary when it comes to trade practice in America and worldwide. We call it the rapid response mechanism. The current administration and the current trade representative have continued our practice of using that mechanism. The cases that I started are concluding successfully. Cases that I saw coming in the pipeline, I see them starting because they have continued to work on those cases and launch them. I think that that’s quite remarkable, but nobody’s reporting on it.

  Bonus Link: Last year in Compact, Daniel wrote about the importance of the Rapid Response Mechanism and the need to expand it.

• Outbound investment restrictions bite—in a good way. Meta’s $2 billion acquisition of Manus, an AI startup with Chinese origins, provides a fascinating case study. Manus relocated itself to Singapore and, as a condition of the deal, will have no Chinese ownership and will cease operations in China. “Manus’s moves to avoid violating U.S. rules that restrict outbound investments in key technologies,” reports the Wall Street Journal, “eased concern about its China ties.” Officials in Beijing are not pleased. They “believed that the sale would give the U.S. access to technology developed by Chinese engineers and encourage other startups to pursue a similar funding path, the people said. Beijing appears to have few tools to influence the deal given Manus’s foothold in Singapore.”

• Peter Harrell says, “when I worked on developing the outbound investment control regime that the government set up several years ago, Meta’s acquisition of Manus is precisely one of the types of impacts we were hoping for. Top Chinese AI talent decides to decamp from China in order to get access to western capital, avoid potential export controls, and keep access to western markets.”

• And now, per South China Morning Post, “China to probe Meta’s purchase of Manus over export controls, tech outflow concerns. Probe comes amid concerns the US$2.5 billion acquisition could breach tech export controls and encourage more start-ups to relocate offshore.” Womp, womp.

AS FOR THE GLOBAL TRADE WAR

Why China is Doubling Down on Its Export-Led Growth Model (Financial Times)

“‘They’re telling other countries, don’t mess with us, don’t compete with us, you can’t beat us,’ he says. But even as China touts its domination of global manufacturing — trade figures released in December show it is set for its first surplus in goods of more than $1tn in 2025 — vulnerabilities are building in its domestic economy.”

The Pentagon and A.I. Giants Have a Weakness. Both Need China’s Batteries, Badly. (New York Times)

Notable mostly for your regular reminder that this is precisely what long-time Intel CEO Andy Grove predicted, 15 years ago, would happen as a result of America forsaking manufacturing. “The U.S. lost its lead in batteries 30 years ago when it stopped making consumer electronics devices. Whoever made batteries then gained the exposure and relationships needed to learn to supply batteries for the more demanding laptop PC market, and after that, for the even more demanding automobile market. U.S. companies did not participate in the first phase and consequently were not in the running for all that followed. I doubt they will ever catch up.”

A good thread from Michael Pettis on Paul Krugman’s recent commentary on persistent trade imbalances. “Trade deficits are self-correcting” is no longer the most important thing Krugman wants to teach undergraduates!

And more people continue to discover that America’s trade problem is now the world’s:

• In his Financial Times Big Read on “Top 10 trends to watch for 2026,” Ruchir Sharma predicts: “‘China Dumping’ Becomes Target.” He writes, “signs of a backlash are building. The number of trade investigations into Chinese dumping has more than doubled since 2023 to 120, worldwide. From Japan and Canada to Mexico and Thailand, nations are beginning to hit China with retaliatory tariffs. The EU is considering ‘made in Europe’ rules. French President Emmanuel Macron recently warned — in Beijing — of ‘unbearable’ trade imbalances. Given its economic troubles at home, however, Beijing is not likely to listen. In 2026 ‘China dumping’ could come to rival ‘Trump tariffs’ as a target of global anger.”

• “Europe Becomes Main Battleground for Chinese Exporters as US Tariffs Bite” (Yicai)

  “Chinese exporters have shifted focus to the European market this year as they face pressure from US tariffs. While many have seen strong results, the move has also ramped up competition across the region.”

• “German Exporters Face Prolonged Slump in Key U.S., China Markets” (Reuters) “German exporters should prepare for continued weakness in 2026 in their two largest markets, the United States and China, with little prospect of recovery.”

• “China Readies Its Favorite Trade War Weapon For Japan Feud” (Bloomberg)

  “China’s warning to Japan that it could choke off supplies of rare earths, its favorite weapon in trade conflicts, targets a persistent vulnerability among Japanese manufacturers after more than a decade of Tokyo trying to reduce reliance on its rival.”

And finally, a great big clown emoji for Canadian Prime Minister Mark Carney:

• “Carney to Visit China to Talk Trade With Xi as US Tariffs Hit Growth” (Bloomberg)

  “Carney said he has a longer-term goal of opening up ‘a much bigger set of opportunities for a broader range of Canadian businesses’ in China.”

Best of luck to you, sir. As for everyone else, enjoy the weekend!

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We start this week with news from the White House on defense contractors. Daniel writes:

Reporting this week indicates that President Trump might soon sign an executive order to limit share buybacks, dividends, and executive pay for defense contractors whose projects are over budget and behind schedule, part of an effort to bring more discipline to what the administration has described as an “expensive, slow-moving and entrenched” defense industry. The action would complement the Pentagon’s recent procurement process overhaul, intended to reduce bureaucracy, boost capacity, improve capabilities, and address “unacceptably slow” acquisition systems stemming from fragmented accountability and misaligned incentives. The basic idea of these efforts is simple: If Washington’s current contracting structure cannot reliably deliver on time and on budget, then the government should stop acting like an annoyed customer and start behaving like the actual underwriter it is, using its leverage to reshape incentives accordingly.

Details of the rumored executive order are scarce, and it’s unclear what final form it might take. But the administration has rightly focused its ire on how financial engineering in the defense sector has created perverse incentives that are incongruent with a robust and innovative defense industrial base capable of securing the national interest.

After the 1993 “Last Supper” pushed the Pentagon’s supplier base into a small set of giant primes, the industry’s financial posture shifted. In “Big Stick Economics,” one of my favorite essays published in Commonplace this year, Oren and American Compass policy advisor, Mark DiPlacido, detail how the major defense contractors drifted from productive investment to financial extraction as sectoral consolidation narrowed the field of competition. They apply the straightforward taxonomy developed in American Compass’s “The Corporate Erosion of Capitalism”: firms can be Growers, which tap financial markets for needed capital; Sustainers, which use profits to maintain or grow their capital base while returning some capital to shareholders and creditors; or Eroders, which disgorge profits so rapidly, instead of investment, that they consume fixed capital faster than they make new capital expenditures. They write:

For the 20 years from 1974 to 1993, the primes collectively operated as a Sustainer in every single year. The individual firms were Sustainers in 69% of years and Eroders in 18%. After 1993’s “Last Supper,” that behavior flipped on its head. In both 1994 and 1995, all five primes were Eroders. For the next decade, the primes collectively operated as an Eroder every year. Over the 25 years from 1994 to 2018, the individual firms were Sustainers 33% of the time and Eroders 67% of the time. They returned $240 billion to shareholders through buybacks and dividends while making less than $90 billion in capital expenditures.

That contrast—$240 billion out the door to shareholders, less than $90 billion in productive capital investments—perfectly illustrates the pathology of “shareholder capitalism” that we’ve long criticized at American Compass. Share buybacks, the purest form of financial engineering, raise earnings per share by shrinking the denominator, boost short-term stock prices, and inflate executive compensation. The result is a corporate environment in which executives can be paid handsomely for making the stock perform well, even if the firm’s long-run capacity degrades.

The typical defense of this behavior is that capital returned to shareholders will be “reallocated” toward better uses elsewhere. But in an economy where firms are buying back their shares at a record pace, it’s reasonable to ask: reallocated to what, exactly? If corporations consistently return cash rather than deploy it, then the story we’re watching is not one of efficient capital markets matching savings to productive opportunity. It’s a story of incentives steering managers toward extraction because extraction is what financial markets—and boards, and compensation committees—reward.

This is why the Trump administration’s instinct—imposing limitations on payouts and compensation pegged to performance—is directionally correct, especially in the defense sector. The government, after all, is not merely a customer in this market. It designs the procurement rules and funds the production lines. If a program is failing, the government is within its rights to demand that cash stay inside the firm until the problem is fixed.

But the same problem extends far beyond the defense sector. In all the places where the United States needs more capital investment—energy infrastructure, shipbuilding, advanced manufacturing, critical minerals, residential housing—financial engineering can pull in the opposite direction. If Washington is willing to say that buybacks and dividends in the defense sector are inconsistent with the national interest, it should apply the same analysis to other industries that require greater capital investment. No principle of economics would limit the disconnect between shareholder return, industrial capacity, and economic progress to tanks and missiles. — Daniel

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SPEAKING OF FINANCIALIZATION…

Flashing Out: The Wall Street Journal reports on “High-Speed Traders Feuding Over a Way to Save 3.2 Billionths of a Second.” High-frequency traders are no longer satisfied trying to beat competitors by milliseconds with faster broadband connections to trading floors. They’re now fighting with each other over algorithms that manipulate their connections to the floors in pursuit of nanosecond advantages worth hundreds of millions of dollars. Seems super productive.

Up In Flames: The New York Times, meanwhile, has “Private Equity’s New Source of Profit: Volunteer Fire Departments.” This is a good example of what Oren has called “moral arbitrage,” in which private equity tracks down niches not run ruthlessly to extract maximum cash flow from consumers, buys up firms less profitable than they otherwise might be, and then turns the screws. Seems super productive.

But better investment news also continues rolling in too. In an early example of JPMorgan’s newfound commitment to investment in the real economy, it is helping to finance a $7.4 billion critical minerals project led by a Korean firm with U.S. government support as well (Wall Street Journal).

That’s good industrial policy, and contrasts with news out of Detroit… where “Ford Takes $19.5 Billion Hit in Detroit’s Biggest EV Bust” (Wall Street Journal). One can imagine a world in which the Biden administration had focused the bulk of its own industrial policy efforts and dollars on critical minerals and reindustrialization instead of green boondoggles. Sadly, that is not the world we live in. That reality sometimes gets raised as a critique of industrial policy writ large—see, once you embrace industrial policy, you’re stuck with progressives using it foolishly. But of course, that’s what politics is for. Progressives can use any policy mechanism foolishly, and they can and will pay a political price when they do.

As Vice President JD Vance observed at an American Compass event back in 2023:

Joe Biden’s doing a lot of crazy crap with the Defense Department that I don’t think that he should do. Does that mean we shouldn’t have a U.S. military? No. It means we should advance a political program that’s popular, and that can win, so that when we win, we can get to do with the military what we want to do. And in fact, the real solution here, is to win a durable enough governing majority, not that we’re going to win every election, but that the craziest stuff that the left tries to do, it stops trying to do, because it realizes there are political downsides to doing it.

SOME GOOD WEEKEND READS

If you’re Very Online, or heck, even A Little Online™, you’ve already read Jacob Savage’s “The Lost Generation” at Compact. But if you’re not, well, you should read it:

But for younger white men, any professional success was fundamentally a problem for institutions to solve. And solve it they did. Over the course of the 2010s, nearly every mechanism liberal America used to confer prestige was reweighted along identitarian lines.

Then read Ross Douthat on the topic too:

Even if you set aside the moral problem of collective punishment — is a young white man who wants an academic job in 2020 responsible for how white men behaved in 1960? — and the legal issue of discriminating on the basis of race and sex (quite a lot to set aside!), you are still left with the political problem: This particular attempt at revolution has created a cadre of potential counterrevolutionaries with a clear material grievance against the entire system, especially against its claims to moral superiority on issues related to race.

At The Dispatch, Megan McArdle wrote about “The Brother I Lost. What a deathbed confession and a long-disappeared sibling taught me about a woman’s right to choose.”

And in the Wall Street Journal, “The Chinese Billionaires Having Dozens of U.S.-Born Babies Via Surrogate” is self-recommending (the article, not the conduct of the Chinese billionaires). While obscene abuses of our open society and our market economy are on your mind, head over to the New York Times as well for “Hospitals Cater to ‘Transplant Tourists’ as U.S. Patients Wait for Organs.” Even by the gross standards of profit maximization in the U.S. health care system, it’s fairly shocking to learn that hospitals

have advertised abroad, promoting short wait times and concierge services, particularly to patients in the Middle East, where about two-thirds of overseas transplant recipients are from. … A handful of hospitals are increasingly catering to overseas patients, who make up an ever-larger share of their organ recipients: 11 percent for hearts and lungs at the University of Chicago; 20 percent for lungs at Montefiore Medical Center in the Bronx; 16 percent for lungs at UC San Diego Health; 10 percent for intestines at MedStar Georgetown University Hospital in Washington; and 8 percent for livers at Memorial Hermann-Texas Medical Center in Houston. In many countries, this would be illegal.

Ya think? How is it not illegal here? We need the brief from the Mercatus Center on the laudable efficiency of the practice and perhaps how we’re really all better off for it because surely the additional revenue is being invested in research into other life-saving cures…

WHEN IS A MARKET NOT A MARKET? WHEN IT’S A HEALTH CARE MARKET

Or maybe, the unique challenges and dilemmas of health care make it uniquely ill-suited in many situations to benefit from the wonders of market forces. American Compass is beginning to dive into the issue, and Commonplace had two excellent essays on it this week (if we do say so ourselves).

• How Health Care Became a Financialized Hellhole, by Oren Cass. “ACA subsidies are a bailout for a financial product groaning under the weight of its own poor design. It has reached a price where politicians feel they must help even households with incomes more than four times the poverty line in order to deliver the holy grail of universal coverage. Meantime, access to actual health care is generally in decline and Americans are generally in lousy health. There is a hole in the bucket.”

• The Drug Price Delusion, by Michael Lind. “The challenge, in our time as in Jefferson’s, is in balancing the need to incentivize innovation with the need to prevent drug companies from abusing their government-created monopoly power by extracting rent or excess profits at the expense of patients and taxpayers. … As in many other American industries, pharmaceutical firms have shifted their emphasis from production to financialization, using market power to extract rent from patients, insurance companies, businesses, and the government.”

If you’re still feeling good about the U.S. health care system after all that, head over to Bloomberg’s “Cancer Capitalism” series. “One Generic Cancer Drug Costs $35. Or $134. Or $13,000.”

CHECKING IN ON THE CHINA CHALLENGE

The Washington Post editorial page, whose writing Jeff Bezos seems to be sourcing from Temu these days, deserves an award for producing the worst column written about the U.S.-China relationship in a long while. Are U.S. Tariffs on China Working? No, says the Post:

The latest evidence suggests they haven’t achieved their stated goals. China’s trade surplus, the evidence of its industrial overcapacity, cleared $1 trillion for the first time this year. China has more than compensated for its trade war with the U.S. by expanding exports to other countries.

Of course, contained right there in the paragraph (more than compensated for its trade war with the U.S.) is an acknowledgment that the U.S. tariffs have achieved their goals, which concern trade with the United States. And as we discuss frequently here at Understanding America (and again below), the “expanding exports to other countries” is itself unsustainable and triggering further consequences that strengthen America’s hand.

Perhaps recognizing this, the Post tries to make the opposite point a few paragraphs later, claiming, “Elevated U.S. levies on Chinese goods have not significantly altered the amount of trade or the trade balance on a bilateral basis, with levels approximately the same in 2024—the last full year for which data are available—as they were in the early 2010s.” But even just glancing at the chart they provide shows this is untrue.

Looking at the data shows the claim to be, well, kind of a lie. The Census data cited is in nominal terms, so comparing a $295 billion trade deficit in 2024 to a $295 billion trade deficit in 2011 actually indicates a decline of more than 25%. But more importantly, China tariffs began in 2018, when the trade deficit was $418 billion. Again, adjusting for inflation, the decline is more than 40%.

And how convenient of the Post to use 2024, “the last full year for which data are available,” when the aggressive tariffs about which they are editorializing came into effect in 2025. If only more recent data were available, which it is, by month, at the page to which they link. Comparing the first 9 months of 2025 to the first 9 months of 2018, adjusting for inflation, the trade deficit with China is down almost 60%.

The Post concludes, “Tariffs aren’t working to correct China’s economic misbehavior or reduce its industrial overcapacity. American policymakers have only fooled themselves into believing they can micromanage the Chinese economy by micromanaging the American economy through trade restrictions.” Of course, the fact that China will not correct its economic misbehavior or reduce its industrial overcapacity is precisely why the tariffs are necessary, and their effects are already so encouraging.

In other China news, on AI chips, House Republicans are pushing back aggressively against White House enthusiasm for selling off American leadership. Legislation filed today, the AI OVERWATCH Act, would build on the export controls proposed in the GAIN AI Act (that got booted from this year’s National Defense Authorization Act) and, importantly, would force the Commerce Department to explain what on Earth it is thinking. The chairmen of the House Foreign Affairs, China, and Intelligence committees are all consponsors.

Relatedly, the Council on Foreign Relations has an excellent report on “China’s AI Chip Deficit: Why Huawei Can’t Catch Nvidia and U.S. Export Controls Should Remain.” Nvidia and its collaborators in the administration have been shopping the claim that China has basically caught up with the United States anyway, so we may as well sell what we can. That’s not true. But the CCP sure is trying, Reuters explains in “How China built its ‘Manhattan Project’ to rival the West in AI chips:

The team includes recently retired, Chinese-born former ASML engineers and scientists—prime recruitment targets because they possess sensitive technical knowledge but face fewer professional constraints after leaving the company, the people said. Two current ASML employees of Chinese nationality in the Netherlands told Reuters they have been approached by recruiters from Huawei since at least 2020.

We’ll say it: Allowing Chinese nationals to work on sensitive technology, whose export to the People’s Republic is banned, may not be a good idea. If that earns us even shinier China Hawk Badges of Shame, we’ll wear them.

Also a bad idea: “This One Gadget Could Give China a Back Door Into the U.S. Power Grid” (Washington Post). “As the United States leans on solar power to meet soaring energy needs, its reliance on a Chinese-made component has created a mounting security threat, according to energy industry executives and congressional investigators who warn it can be weaponized to trigger blackouts.”

WHICH WAY EUROPEAN MAN?

Meanwhile, the award for worst continental punditry goes to Martin Wolf for this effort at the Financial Times, which works from the premise that real democracy requires denying your opponents “the right to seek power democratically,” because Hitler. Europeans are “scarred by the memories of the two world wars” (which ended more than 80 years ago) and suffering from “learned helplessness,” so now they must “rouse themselves” by… supporting Ukraine. That’s it, that’s the plan. Or, that and writing resentful columns that the United States isn’t doing it for them. Learned helplessness, indeed.

Of course, this strategy, not anything emanating from the United States, is the one that will “help put rightwing ‘patriots’ into power across the continent,” through undemocratic means if democratic ones are foreclosed. At least we know the columnists will be ready with their broadsides blaming someone, anyone else.

A close second in the worst-column sweepstakes surely goes to this Oxford lecturer, writing from Brussels, in the New York Times, “Europe Is in Decline. Good.” Anton Jäger suggests “critical integration with China,” especially because “such engagement is vitally necessary for the fight against climate change, an effort now mostly led by China.” (Interestingly, Wolf likewise worried that inadequate leadership on climate is “a way to hand the future to China.”) Of course, the only effort that China is leading in this respect is the one to pump carbon dioxide into the atmosphere.

Best writing in a comedy, meanwhile, goes to French President Emmanuel Macron, for a Financial Times column on the totally unsustainable nature of the EU-China economic relationship in which he declares himself “convinced that by genuinely taking into account each other’s needs and interests, we can establish an international macroeconomic agenda that will benefit us all.” Mmhmm. Adorably, he laments that “placing tariffs and quotas on Chinese imports would be an uncooperative answer” before suggesting, more seriously, “We should not be ashamed of a ‘European preference’ as long as it means supporting strategic production — in automotive, energy, healthcare and tech — within our own borders. Protection against unfair competition is the foundation of resilience.”

In other words, as Michael Pettis writes in the Financial Times column you should read, “Europe Has No Choice But to Intervene on Trade.”

Likewise, Sander Tordoir, chief economist at the Centre for European Reform, chastises The Economist, which “lays out the profound pressure China is putting on EU manufacturing, but then recommends that Europe give up and switch to services.” That, he suggests with admirable restraint, “feels thin.”

The Headlines Behind the Columns…

Wall Street Journal: Why Germany Wants a Divorce With China. Some German manufacturers think once-symbiotic partnership has turned into an abusive relationship and they want out.

Wall Street Journal: All That Cheap Chinese Stuff Is Now Europe’s Problem. Trump’s tariffs have redirected the flow of low-valued packages away from the U.S. into backyard warehouses on the Continent; the ‘new Silk Road.’

Financial Times: VW Gears Up for First Production Closure in Germany in Its 88-year History. Ending manufacturing at Dresden site comes as Europe’s largest auto producer battles weak demand in its key markets.

AND FINALLY, SOME POLL DANCING TO BRIGHTEN THE SEASON

These all caught our eye:

• Most CEOs say AI has increased their hiring across levels; most investors say it should.

• Most Americans agree, “When it comes to politics and society, nothing really matters because powerful people will always do whatever they want.”

• 52% of Americans say the economy is currently in recession… and that’s the lowest figure in the past 15 years!

With that, we are signing off for a little break. Will Vivek Ramaswamy find another way to destroy his credibility and political prospects this Christmas? If he does, we’ll be sure to cover it when we return with a double-wide edition on January 2.

Enjoy the holidays!

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Donald Boudreaux is an economics professor at George Mason University. As far as I know, he’s a very nice guy. We had a fun conversation once on a “Critic’s Corner” episode of the American Compass Podcast, and he writes frequent “open letters” to me about my incorrigible failure to grasp even the most basic economic concepts. The one he published last week was numbered “Another Open Letter to Oren Cass 6” by his content management system, which gives a sense of his oeuvre.

This latest effort is noteworthy for its sheer sophistry, and what that sophistry illustrates about the core assumptions and quality of thinking atop which the market fundamentalist’s worldview is built. Boudreaux’s first, somewhat bizarre point is that the United States actually has balanced trade, notwithstanding its $1 trillion trade deficit. After all, the trade deficit in the so-called “current account” is precisely offset by a surplus in the “capital account”; other countries are not sending us an extra $1 trillion out of the goodness of their hearts, they are exchanging it for $1 trillion in American assets. Thus, says Boudreaux, “only by ignoring the capital account can you describe U.S. trade as being unbalanced.”

As a preliminary matter, it’s worth noting that Boudreaux is playing a silly word game. The term “trade imbalance” refers to an imbalance between imports and exports, such that a deficit or surplus emerges. The answer to his question, “why do you continue to describe America’s trade as being unbalanced?”, is that this is how language works. We use terms with agreed upon meanings to communicate ideas.

But let us more generously credit him with attempting to make a perhaps interesting point, which is that this commonly understood definition of trade imbalance is a confusing one. In the view that he is advancing, analysts should be indifferent between goods and assets. If the United States exports $100 billion of airplanes and imports $100 billion of cars, we would call that “balanced trade” rather than lamenting an airplane imbalance. So why feel differently when the export is $100 billion of treasury bonds?

As against the conventional view that producing and exporting $100 billion of airplanes has very different economic implications than printing a piece of paper that says “we owe you $100 billion,” Boudreaux posits the purportedly sophisticated thought that the wise economist is indifferent between the two. Each basket is worth $100 billion, who are we to say that one is better than the other?

I belabor the point not because it is interesting but, to the contrary, because it is so banal. The investment, innovation, jobs, capacity, skill, and so on associated with the production of goods for export all have social and economic value for the nation. Issuing debt instead imposes costs on both the present and future. Economists literally do not understand this, and pride themselves on not understanding it. They write open letters to advertise that they do not understand it, in the belief that they are landing blows on behalf of their discipline.

Boudreaux is not some loon. He is a tenured professor at a prominent university. On Monday, the Wall Street Journal published his latest essay on the wonders of free trade. You can find his sentiment throughout his profession, on both the left- and right-of-center. Jason Furman, the former chair of Barack Obama’s council of economic advisers and now a professor at Harvard University, would actually go further, and say that insofar as an imbalance exists it is to the benefit of the side issuing debt rather than making anything. Lecturing last year in Geneva, he explained, “economists understand imports are actually the good thing that is what we enjoy, it’s the benefit we get from trade. Exports are the unfortunate thing we do just so we can get those desirable imports.”

Where Boudreaux’s first complaint relies upon unwisely abstracting away the distinction between production and debt, his second erases the social reality in which his economic policy needs to operate: A concern about a trade imbalance with foreign countries would suggest that the existence of countries matters. His razor-sharp intellect seizes on this undefended assumption. “I don’t see why the nationalities of savers and investors matter economically. You, in contrast, apparently do. What am I missing?”

The pattern repeats itself, the banality beggars belief. Why would Americans care whether economic transactions, productive activities, and long-term control of assets are located in the United States? That’s the question?

It can admittedly sound like strawmanning to say that economists resent the existence of borders and build their case for free trade on a globalist indifference to the wellbeing of their countrymen and the strength of their nation. But it’s just true. More dangerous, they will genuinely be unaware that their work relies upon these assumptions, or that the assumptions are neither compelling nor widely held ones.

In a new collection for American Compass, our policy advisor Mark DiPlacido has written a wonderful series of essays tracing the intellectual decline from the political economy that shaped early thinking about free trade to the dogmatic economics that drove globalization off a cliff. “Ideology Over Interest” is of particular relevance. He and I also discussed these issues on this week’s podcast. Check it out. — Oren

TRADE AND CHINA

Speaking of imbalances: China reported a trade surplus in goods of more than $1 trillion, a level “never before seen in recorded economic history.” Remarkably, China’s undervalued currency suggests that its export dominance is understated, as the Wall Street Journal reports: “When calculated by value, China accounts for roughly 15% of global goods exports. But in volume terms…every shipping container being sent from Europe to China is outnumbered by the four containers heading in the other direction. In volume terms…China accounts for some 37% of everything being exported in shipping containers.”

China has achieved this record-breaking export volume even as the United States turns its own back, with President Trump’s tariffs drivingAmerican imports from China down by nearly 20% over the past year. This fact pattern has led many observers to claim that China is winning the U.S.-China trade war, but is that true? In Commonplace, trade attorney Nicholas Philips makes the compelling argument that “On Trade, China Isn’t as Strong as It Looks.”

The recent pessimism ignores a fundamental reality: tariffs on China are significantly higher than tariffs on the rest of the world, and as long as that remains the case, it will drive a structural realignment in the global trading system that disadvantages China. In order to keep exports growing in the face of U.S. tariffs, China must increase sales to new markets. But those new markets tend to be exporters themselves, and don’t have the ability to painlessly replace U.S. demand. China can only access these markets by aggressively underpricing its exports—weakening the balance sheets of its manufacturers and subjecting its trading partners to China Shock dynamics of bankruptcy, unemployment, and deindustrialization. That encourages China’s replacement markets to block its exports, just as the U.S. did following the first China Shock. In essence, the measures China must take to fuel its export machine end up undermining it.

Indeed, China’s rising export volumes amid declining exports to the United States requires exports rising even faster to other countries. And that’s what we’ve seen: China’s exports to Africa, Southeast Asia, and Latin America have increased by 26%, 14%, and 7%, respectively. Its exports to Europe increased by 15% year-over-year in November; exports to Germany, France, and Italy increased by 15%, 18%, and 25%, respectively.

The U.S.-precipitated trade diversion presents these countries with a stark choice: Absorb China’s overcapacity and deindustrialize (or, in the case of developing countries, fail to industrialize) or join the United States in raising tariffs on Chinese goods to protect their home markets. Toward this end, Philips says the Trump administration should do “more diplomatically to create a united anti-China trade bloc, conditioning preferential tariffs on blocking Chinese exports and levying high tariffs on countries that remain open to them”—our preferred posture at American Compass. A recent Bloomberg article puts it bluntly: “China Forces Reckoning in Europe as Trade Turns Existential.” They should act accordingly.

Also worth reading:

• China’s Growth is Coming at the Rest of the World’s Expense (WSJ): “China is swallowing up a growing share of the world’s market for manufactured goods. This reveals an uncomfortable truth: Beijing is pursuing a ‘beggar thy neighbor’ growth model at everyone else’s expense.”

• ‘Unbearable Imbalances’ Cast Shadow on Emmanuel Macron’s Beijing Bonhomie (FT): “‘These imbalances are becoming unbearable,’ Macron said at a joint appearance with Xi in Beijing on Thursday. It was a remark that reflected sharpening French demands on Beijing to spur consumption and curb exports…Paris is demanding Beijing recalibrate its trade and investment relationship with the EU. ‘We are at the last stop before a crisis,’ a French official warned. ‘If we don’t change course, we will worsen global fragmentation,’ they added, suggesting Paris would have to consider ‘protective measures.’”

• Ford’s Jim Farley: Europe is Risking the Future of Its Auto Industry (FT): “On one side, we face the world’s most aggressive carbon mandates, regulations that demand a pace of electrification that is decoupled from the reality of consumer demand. On the other, we face a flood of state-subsidised EV imports from China, structurally designed to undercut European labour and manufacturing.”

• A Grand Strategy for Europe in the New Cold War (The Republic): An excellent essay on Europe’s time for choosing, which in many ways pairs well with Oren’s recent Foreign Affairs essay on a grand strategy of reciprocity: “Europe’s path to renewed agency lies not in emancipation from the West but in deepened integration within it as an equal partner with clearly defined responsibilities.”

And finally, U.S. Trade Representative Jamieson Greer recently sat down for two longform interviews to discuss the administration’s trade agenda, one with Politico for a general political audience and one with the Atlantic Council. Both interviews provide insights into what the administration has done, why it has done so, and what it might do next.

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THIS WEEK’S GOOD, BAD, AND UGLY FROM THE NDAA

• The Good: As part of this year’s National Defense Authorization Act (NDAA), Congress included authorities for the federal government to review outbound investment into the Chinese economy. Reports Politico: “The inclusion of so-called outbound investment restrictions puts lawmakers on the brink of capping off a multi-year effort to pass legislation that would curtail U.S. capital from flowing into certain sectors of the Chinese economy, such as semiconductors and artificial intelligence.” American Compass has been leading this effort and we are pleased to finally be crossing the finish line.

• The Bad: The Trump administration blocked inclusion of the GAIN AI Act in the NDAA, which would have restricted advanced chip exports to China, and instead gave Nvidia the green light to export its H200 chip to China in exchange for a 25% cut of all sales remitted to the U.S. government. This is great news for Nvidia and its shareholders, as well as for Chinese companies that want advanced semiconductors that their own economy cannot produce. Suffice to say it’s bad for U.S. competitiveness. Oren joined Steve Bannon’s WarRoom to explain why. And for a longer explanation, it’s a good time to revisit the recent American Compass paper on why the government should impose stronger—not weaker—export controls on advanced semiconductors: Stop Selling the Rope.

• The Ugly: After Congress rejected a moratorium on state-level artificial intelligence regulation in both this year’s reconciliation bill and the NDAA, President Trump took unilateral action and signed an executive order to preempt such regulation, which is… not something an executive order can do. The principle of federal preemption for regulation of a general-purpose technology is defensible—a patchwork of state-level laws that allows the lowest common denominator to establish a national standard is suboptimal. But such preemption assumes the federal government has a standard it wishes to impose, not merely a protective handout to Big Tech allies it wishes to distribute. The White House’s approach here is neither legal nor sensible nor popular.

IMMIGRATION

Nearly a year after President Biden left office, the New York Times has published a damning retrospective on his administration’s immigration policies: “How Biden Ignored Warnings and Lost Americans’ Faith in Immigration.” The report details what most Americans already knew, that the decision to allow for an unprecedented number of immigrants to enter our nation unlawfully was precisely that—a decision. Advisors warned Biden before taking office that “his positions threatened to drastically increase border crossings.” Instead of heeding them, he plowed ahead, reversing the policies of his predecessor in a bout of thermostatic reactionism and imposing others that worsened the problem. Only after the immigration crisis became an undeniable electoral liability did he use his executive authority to begin addressing what had become an unmitigated disaster for his administration and for the nation.

President Biden’s failure to secure the border and enforce the nation’s immigration laws is one of the primary reasons President Trump sits in the White House for a second term, where he is prosecuting an even more aggressive immigration policy than in his first term. He has proven that the border can, in fact, be secured with executive action. Having “lost Americans’ faith” on immigration, the question for Democrats will be whether they learn from the mistakes of the Biden administration or repeat them the next time they are in power. If they hope to reclaim power, they’ll need to nominate candidates who credibly believe in securing the border and enforcing our immigration laws as a matter of sound public policy. It’ll be a tall task.

In other immigration news, NBC reports that “ICE Has Arrested Nearly 75,000 People with No Criminal Records, Data Shows,” and the New York Times reports that “Most Immigrants Arrested in City Crackdowns Have No Criminal Record.” While both outlets are presumably attempting to make the point that such arrests do not represent efforts at deporting the “worst of the worst,” they seem oddly unaware that being arrested for committing unlawful acts is exactly how one develops a criminal record, which each of these individuals now has.

Also read: the latest commentary from Craig Fuller at FreightWaves—“How America’s Trucking Industry Became a Hellscape”—on the impact of illegal immigration on the trucking industry and the deleterious effects for American truckers and trucking companies that follow the law:

Over the past few months, I’ve spoken with hundreds of senior executives at America’s largest trucking companies. Nearly all say they only recently discovered the massive influx of foreign drivers and motor carriers. Most assumed the trend was gradual; none realized it was exponential….These minimally trained foreign drivers cannot pass the vetting of large, compliant carriers (no work authorization, poor English, zero experience). They end up at small, often foreign-owned fleets that pay 40% below market ... .The results are undeniable: Legitimate carriers and drivers can barely break even; trucking has become an economic backwater motor carriers that follow the rules. Cargo theft is now an industrial-scale national-security crisis coordinated by foreign dispatchers and brokers working in concert with foreign-born drivers inside the United States. Despite billions spent on safety technology, fatal truck-involved crashes are up ≈40% since 2014—almost entirely because of untrained, overworked, and inexperienced drivers now operating 80,000-pound rigs. In short, a well-intentioned but catastrophically naive campaign to “fix the driver shortage” combined with regulatory loopholes, unchecked immigration, technology back doors, and offshoring has fundamentally broken America’s trucking industry in less than a decade—and virtually no one in Washington or in corporate corner offices saw it coming.

WEEKEND READS:

• How Private Equity Is Changing Housing (The Atlantic)

• Education in an Age of Polarization (Democracy Project) by American Compass advisor Ashley Rogers Berner.

REINDUSTRIALIZATION

Some positive news to end the week:

• U.S. Steel to Restart Blast Furnace at Plant Trump Pushed to Preserve (WSJ): “U.S. Steel plans to resume steelmaking at an Illinois plant where the Trump administration intervened last summer to keep production going. The company stopped making steel at Granite City Works two years ago and had planned to further curtail operations before the administration blocked the move in September. It said it now sees signs of rising demand that justify restarting one of Granite City’s two blast furnaces early next year to produce molten iron for steel….The company expects to add about 400 employees at Granite City to operate the blast furnace, raising the plant’s workforce to about 1,200…”

• Eli Lilly to Build $6 Billion Alabama Plant as Part of U.S. Investment (WSJ): “Eli Lilly plans to build a $6 billion facility in Huntsville, Ala., to make active pharmaceutical ingredients, including those used in weight-loss drugs. The site is the third of four new facilities in the U.S. that the pharmaceutical company plans to announce, Eli Lilly said Tuesday ... .The site will bring 450 jobs to the area, including engineers, scientists and lab technicians. Construction is scheduled to begin in 2026 and is anticipated to create 3,000 construction jobs. Completion is slated for 2032.”

Enjoy the weekend!

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The words on everyone’s mind, in discussions about AI’s diffusion through the economy, are “fear” and “trust.” There’s too much “fear” of AI, you see, especially from workers. The important thing is to build people’s “trust” in the technology. These shortcomings of the American proletariat are typically lamented with some combination of condescension and frustration at the failure to comprehend the promise of progress and the imperative to pursue it. And they are contrasted with the brave, bold, forward-looking attitude in China, where enthusiastic citizens are embracing the opportunity… to do things like strap brain-monitoring headbands on elementary school students.

But perhaps American workers are fearful of technological disruption because “experts” have spent the last generation telling them that technological disruption is responsible for their hardship. As I observed back in 2018 and have been arguing ever since:

Historically, economists and policymakers have led the effort to explain that technological innovation is good for workers throughout the economy, even as its “creative destruction” causes dislocation for some. So why, suddenly, are economists so eager to throw robots under the bus? It’s hard to avoid the conclusion that they wish to direct attention away from themselves. Without automation to blame, the stalling of the nation’s industrial economy begins to look like the result of poor policy choices, not unstoppable forces.

Heck, listen to my conversation on today’s American Compass podcast with Yale professor and former Mexican president Ernesto Zedillo about “Reassessing Globalization.” Count how many times he tries to change the subject to “technology.” Our expert friends can’t have it both ways, incoherently scapegoating technology for their past mistakes while getting frustrated that people have listened and now believe technological change is a force likely to make their lives worse.

As for the lack of trust, maybe that stems from, I don’t know, Big Tech’s truly outrageous abuse of the American people’s trust over the same period, on issues ranging from data and privacy to addictive algorithms to bias and censorship to kids’ safety. The only lesson the frontier AI labs seem to have learned from that experience is that such behavior is a great way to become really rich.

OpenAI, in particular, was founded as a nonprofit dedicated to the development of software that would benefit humanity. Then it launched an untested chatbot that became so popular, the organization converted itself to a for-profit company now worth perhaps half-a-trillion dollars and charged straight down the Facebook/TikTok path. Yes, Sam Altman still says he labors over the dilemma of whether to prioritize curing cancer or educating the world for free next year. But the actual product OpenAI rolled out the following week was its own infinite-scroll video-sharing service, specifically designed to encourage deepfakes. The New York Times had a nice story on the dynamic this week:

Until its A.I. can accomplish some incredible feat — say, generating a cure for cancer — success is partly defined by turning ChatGPT into a lucrative business. That means continually increasing how many people use and pay for it.

“Healthy engagement” is how the company describes its aim. “We are building ChatGPT to help users thrive and reach their goals,” Hannah Wong, OpenAI’s spokeswoman, said. “We also pay attention to whether users return because that shows ChatGPT is useful enough to come back to.”

Useful. Like cigarettes. OpenAI put a 30-year-old “product guy” in charge of ChatGPT, made addictiveness a key metric, and then wants us to be shocked, shocked that the resulting product became downright dangerous for many users. Now, worried that its product is falling behind competitors in the race for user eyeballs (and educating the world for free really soon, right after that, I’m sure), OpenAI is “pushing back work on other initiatives, such as advertising,” according to the Wall Street Journal. Let’s hope they fix it soon so they can focus more attention on advertising.

Zoom out from the AI race, and you find a broader ecosystem of “innovation” being sold as important and useful but in fact designed simply to separate people from their money.

Wall Street Journal: “Traders Are Flooding Markets With Risky Bets. Robinhood’s CEO Is Their Cult Hero.”

Financial Times: “The Housing Crisis Is Pushing Gen Z into Crypto and Economic Nihilism.”

Bloomberg: “Gambling, Prediction Markets Create New Credit Risks, BofA Warns.”

Kalshi just raised $1 billion at an $11 billion valuation. “The long-term vision is to financialize everything and create a tradable asset out of any difference in opinion,” says co-founder Tarek Mansour, creating “a new consumer habit that I don’t think is going to be undone.”

Milton Friedman advised that businesses should be managed “to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.” We are seeing what happens when that ethical custom either erodes or is simply ignored. In a sufficiently oversimplified economic model, namby-pamby custom just gets in the way of efficiency and growth, which are best achieved through the single-minded pursuit of profit. At a sufficiently isolated conference in Davos, free trade must obviously be preserved at all costs, even if that means telling a nonsensical little white lie about how technology rather than globalization and immigration and financialization is to blame for deindustrialization and wage stagnation. Stock market lines go up.

But leading a nation is the ultimate repeat game, and when elites don’t play it like one, everyone loses. This was the key insight from the recent recipients of the Nobel Prize in economics, emphasizing “the importance of society being open to new ideas and allowing change.” The “general equilibrium” models assuring us that free trade and financial deregulation will maximize growth do not have variables for trust and fear, and so economists have ended up advising policymakers and business leaders to consider neither.

The typical discussion turns eventually to solutions, which invariably require better marketing. How do we get people to trust us? When business leaders show that they use the technology and like it, perhaps that will put everyone’s minds at ease. Sure, if workers believe that what’s best for the boss is going to be best for them too, that might improve trust. But now success relies upon a solidarity and mutual obligation that the market fundamentalists have also thrown to the wind. Some worker power would help; too bad that too was dismissed as an unnecessary friction.

The only way to gain trust is to earn it. Democratic capitalism requires trust, which means it requires business leaders to be trustworthy. Failing that, the “basic rules of society” will more frequently have to be “embodied in law,” per the other half of Friedman’s formulation. While placing a tone-deaf and obviously conflicted tech investor in charge of setting national AI policy and then trying to sneak through a nationwide ban on regulation might seem like a pro-innovation masterstroke, its inevitable result will be the opposite. Which we can discuss, with condescension and frustration, at our next roundtable.—Oren

WHILE WE’RE ON THE SUBJECT…

Another interesting theme emerging, at the intersection of technology and reindustrialization, is the divergence between the American emphasis on frontier models and “artificial intelligence” and the Chinese emphasis on just using “good enough” AI to make things.

In “Robots and AI Are Already Remaking the Chinese Economy,” the Wall Street Journal reports that “Sam Altman wants artificial intelligence to cure cancer. Elon Musk says AI robots will eliminate poverty. China is focused on something more prosaic: making better washing machines.”

In “Is China Winning the Innovation Race?” the Financial Times notes, “whereas the biggest focus of US innovation has become potential moonshot technologies such as artificial general intelligence, for Beijing R&D largely focuses on addressing shortcomings in the real economy — part of Xi Jinping’s pursuit of technological self-sufficiency.”

In this context, preserving American leadership in advanced AI chips is critical as a matter of economic competitiveness, and as one of the key advantages the U.S. can leverage in rebuilding globally competitive domestic industry. To quote Palantir CTO Shyam Sankar, celebrating the announcement of his company’s partnership with Nvidia, “AI isn’t about AI – it is our asymmetric advantage to deliver country-scale transformation. AI is about Reindustrialization. AI is how we give the American worker superpowers and make them 50x more productive.”

Nvidia hopes to erode that asymmetric advantage by selling advanced chips to China. Once upon a time, ethical custom would have pointed them away from that path. Today, ensuring their conformance with the basic rules of society will require law. So it was encouraging to see a bipartisan group of senators respond to the latest Jensen Huang publicity tour across Capitol Hill with a new bill, the Secure and Feasible Exports (SAFE) Act, that would codify needed constraints.

IN OTHER REINDUSTRIALIZATION NEWS

Five months after releasing a plan to accelerate the development of artificial intelligence, the Trump administration is turning to robots. Commerce Secretary Howard Lutnick has been meeting with robotics industry CEOs and is “all in” on accelerating the industry’s development, according to three people familiar with the discussions who were granted anonymity to share details. The administration is considering issuing an executive order on robotics next year, according to two of the people. A Department of Commerce spokesperson said: “We are committed to robotics and advanced manufacturing because they are central to bringing critical production back to the United States.

Segueing smoothly from the AI theme, the Wall Street Journal explains why “Data Centers Are a ‘Gold Rush’ for Construction Workers,” noting that “workers who move into the data-center industry—in roles ranging from electricians to project managers—often earn 25% to 30% more than they did before.”

All quiet on the tariff front? After the enormous volatility in the months after Liberation Day, rules of the road for U.S. trade have mostly stabilized with a strong finger on the scale for domestic investment and absent any of the predicted catastrophic effects to markets, industry, workers, or consumers. Shipments and orders remain healthy, unemployment and inflation remain low, interest rates have finally begun declining. A fascinating analysis from the Wall Street Journal finds that CEOs have calmed down too:

Executives are starting to chill out about tariffs after a year of anxiety. Months into President Trump’s roller coaster of a global trade war, something has shifted. Business leaders sound less gloomy about tariffs than they have for much of the year. They are talking less about risk when they discuss them with investors. And the subject is no longer dominating earnings calls like before.

Industrial policy continues to ramp up. The Department of Energy announced $134 million in funding to strengthen rare earth supply chains. The administration is taking a $150 million equity stake in a startup developing new chip-making technology. And, a deal under negotiation “could commit Taiwan to fresh investment and training of U.S. workers in semiconductor manufacturing and other advanced industries” (Reuters).

Green energy continues to flounder. It was always obvious that an overly aggressive push into uneconomic green energy sources would devastate energy-intensive industries. As the Wall Street Journal reports, “Europe’s Green Energy Rush Slashed Emissions—and Crippled the Economy” 🤯. Surprising, given that amazing green technologies are already cheaper than fossil fuels 🙄. Now, per the Financial Times:

Germany’s Friedrich Merz will request that Brussels scrap its strict ban on combustion engine cars and allow hybrid vehicles beyond its 2035 deadline, as the conservative chancellor seeks to ease the problems in his country’s automotive industry….“This is the key decision for the future of Europe as a centre of automotive manufacturing,” Merz said. “Our common goal should be innovation-friendly and technology-neutral regulation that reconciles climate protection and industrial competitiveness.”

At least we’ll always have Paris.

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AS FOR THOSE EUROPEANS…

We’re on a roll with the segues today. Developments in the inevitable crisis between the EU and China were coming fast and furious over the past couple of weeks, but start with this fascinating column from Financial Times Asia editor Robin Harding: “China is making trade impossible.”

On a recent trip to mainland China, I found myself posing the same question, again and again, to the economists, technologists and business leaders who I met with. “Trade is an exchange. You provide something of value to me, and in return, I must offer something of value to you. So what is the product, in the future, that China would like to buy from the rest of the world?”

The answers were revealing. A few said “soyabeans and iron ore” before realising this was not much help to a European. Some observed that Louis Vuitton handbags are popular and then went on to talk about the export prospects for fast-rising Chinese luxury brands. “Higher education” was another common answer, qualified sometimes with the observation that Peking University and Tsinghua are harder to get into, and more academically rigorous, than anything on offer in the west.

Several of the economists, who had perhaps pondered the issue already, jumped ahead to a different point altogether: “This,” they said, “is why you should let Chinese companies set up factories in Europe.”

It is a train of thought that gives away the real answer to the question. Which is: nothing.

Sometimes it seems the Europeans are finally getting serious:

• Back to the Drawing Board: EU Revives Faltering China De-Risking Plans (SCMP)

• Brussels Pushes for 70% of Critical Goods to Be ‘Made in Europe’ (FT)

• EU to tighten investment rules to stand up to China (FT)

Other times not so much:

• ‘Buy China’ Trend, Price Wars Push German Industry to Localise [in China] (SCMP)

• EU Reviews Removing Tariffs on Volkswagen EVs Built in China (Reuters)

• Europe Needs a Plan for Decoupling from America (Financial Times)

That last one is, bluntly, hilarious. Highly recommended. FT columnist Martin Sandbu scores high on self-righteousness while offering a “plan” that, um, does exactly what President Trump and his administration are demanding the Europeans do:

1. Reduce subsidies that encourage a European economic model predicated on exports to the United States. “The case is strong, then, for a conscious policy of reducing trade exposure to the US below what private companies will do by themselves. Merely stating a political goal of disengaging economically from the US would send a powerful message to the private sector. Authorities could withdraw trade promotion incentives for exports to the US.”

2. Stop dumping your savings into the acquisition of dollar-dominated assets (the flip-side of a trade surplus). “The EU should not be sending up to half a trillion euros’ worth of net savings outside the bloc every year. This may require leaning against individually rational decisions to invest outside rather than inside Europe.”

3. Step up on defense. “Europe needs a homegrown alternative to the strategic military capabilities for which it now depends on the US.”

That would show us. It is a testament to the administration’s trade strategy that proud Europeans now see doing the thing they need to do as the rational and necessary response. Whether they can do it, of course, is another matter entirely – one that Sandbu never gets around to considering, in a piece that mentions the word “China” not at all.

WHAT ELSE SHOULD YOU BE READING

And finally, a grab bag of what you might have missed over the holiday:

In a Dramatic Shift, Americans No Longer See Four-Year College Degrees as Worth the Cost (NBC):

Almost two-thirds of registered voters say that a four-year college degree isn’t worth the cost, according to a new NBC News poll, a dramatic decline over the last decade. Just 33% agree a four-year college degree is “worth the cost because people have a better chance to get a good job and earn more money over their lifetime,” while 63% agree more with the concept that it’s “not worth the cost because people often graduate without specific job no skills and with a large amount of debt to pay off.” In 2017, U.S. adults surveyed were virtually split on the question — 49% said a degree was worth the cost and 47% said it wasn’t. When CNBC asked the same question in 2013 as part of its All American Economic Survey, 53% said a degree was worth it and 40% said it was not.”

Two Men. One Identity. They Both Paid the Price. (New York Times): A very good story about the impacts felt by American citizens when their government accepts rampant identity theft as a way of life for an underclass of expendable labor… at least once you get past the framing of, “One guy stole from another guy, that other guy got stolen from. Two sides of the same coin, when ya’ think about it.”

The G.O.P. War on Property Taxes Will Lose Them the Suburbs (Aaron Renn, New York Times):

Republicans should be boasting about these successes and looking to Carmel as a model for other towns and cities. Instead, some of the most prominent Republicans in the country are waging war on the revenue model that powers them. In doing so, they pander to retired baby boomers who are eager to shift taxes away from their homes and onto those still working.

A Promising U.S. Healthcare Startup Battles for Survival Against Its Chinese Investor (Wall Street Journal): The Chinese company “had initially seemed to be a promising partner.” [Narrator: it wasn’t.]

Accommodation Nation (The Atlantic):

Accommodations in higher education were supposed to help disabled Americans enjoy the same opportunities as everyone else. No one should be kept from taking a class, for example, because they are physically unable to enter the building where it’s taught. Over the past decade and a half, however, the share of students at selective universities who qualify for accommodations—often, extra time on tests—has grown at a breathtaking pace. At the University of Chicago, the number has more than tripled over the past eight years; at UC Berkeley, it has nearly quintupled over the past 15 years.

AOC and Bernie Sanders are Not the Same (Liberal Patriot): “Progressives need to come to terms with the fact that Sanders’ enduring appeal stems from past moderation on issues of crucial importance to non-college workers, not just his authenticity.”

Enjoy the weekend!

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Daniel is serving up the appetizer:

The cost of living was on the ballot earlier this month, and Democrats deployed an “affordability theory of everything” that helped carry ideologically diverse candidates in New York City, New Jersey, and Virginia across the finish line. A pocketbook-first message alone won’t erase the party’s ideological baggage or abysmal favorability rating. But the lesson for Republicans is straightforward: Take ownership of the affordability concern—foremost housing and homeownership—or risk losing Congress in 2026 and the White House in 2028.

The YIMBY movement has heretofore provided the go-to answer to the housing crunch in policy circles—build more, primarily by building up. Its main objective is to reduce rents, and its toolkit includes up-zoning and by-right approvals, constructing mid-rises near transit, and scrapping parking and lot-size mandates. This approach aligns with basic principles of supply and demand and is congruent with a supply-side agenda that conservatives have long supported.

And yet, as a professional-class project that’s progressive in its orientation, the YIMBY movement faces obvious limitations. Informed by a Yuppie reference point, it often defaults to densifying places where most Americans don’t live or want to move, and that treats suburban growth and single-family neighborhoods as problems to fix.

The American people have other preferences. Survey research from American Compass finds that, by an 80–20 margin, Americans value “building a decent life in [one’s] hometown, raising and supporting a family, and contributing to the community” over “moving to a place of great opportunity and reaching the top of a prestigious field.” At the same time, the Institute for Family Studies has found that when asked to visualize their ideal home, nearly 80% of respondents choose “detached single‑family housing.”

The YIMBY movement’s ideological blinders present a political opportunity for conservatives to deliver a housing agenda that’s responsive to what Americans actually want. Such an agenda must begin with an accurate diagnosis of the problem, which is not an abstract shortage of “units” but rather the inability of working- and middle-class Americans to buy single-family homes in or near the communities where they grew up. This plays to conservatives’ advantage because they respect where and how people want to live. They do not presume that every ambitious 18-year-old should leave for a four-year college and then a coastal “opportunity hub” to climb a narrow professional ladder. The goal, instead, should be a geographic redistribution of opportunity—more good jobs in more places—so people can stay rooted and still achieve middle-class security for their families.

At the same time, conservatives should be explicit that policy can affect demand—a fundamental truth that progressives find difficult to acknowledge. Commentators with a more permissive immigration posture are happy to admit that immigration raises housing demand and prices, then tell struggling renters and would-be buyers that “that’s okay.” A conservative answer is the opposite: it is not okay to keep bidding up rents and entry-level home prices in already tight markets while American families are shut out.

Border enforcement and a more restrictive legal immigration policy should therefore be understood partly as housing policy: calibrating inflows to what our housing stock and construction capacity can actually absorb, and relieving pressure in the metros where affordability is strained. Policymakers, economists, and business leaders should be laughed out of any room in which they declare building homes to be somehow a “job Americans won’t do.” Rather than push unskilled and even illegal immigration as the only way to fill essential jobs, they should train their sights on the failures that have led the sector’s productivity to decline for half a century.

Policy can also influence demand by refusing to treat Wall Street and absentee investors as neutral actors in the housing market. Federal policy has been far too accommodating to investors buying up single-family houses. We should tighten the screws. Limit Fannie and Freddie’s support for investor loans beyond primary residences; adjust tax rules to discourage bulk purchases of starter homes by REITs and private equity funds; and scrutinize non-resident and foreign ownership.

On the supply side, the federal government should resist the easy, politically attractive mistake of juicing demand with more subsidies and looser credit while construction is constrained. Instead, Washington should use the levers it controls to make it cheaper and faster to build family-sized homes in the places people want to live. Put federal land to work for owner-occupied subdivisions; tie infrastructure dollars to states and metros that are actually permitting new single-family and family-sized units, not just luxury apartments; and encourage the housing finance system to favor mortgages for modest primary residences in non-superstar regions over high-end urban speculation.

Progressives promise to densify the same handful of “opportunity metros,” wave in more people, and hope the cranes keep up. Building more in dense metros is fine—many people do want to live there, and no one who already lives there should have to leave. But there’s a big difference between solving the laptop class’s problem and solving the country’s. A conservative alternative would emphasize: We are going to move opportunity closer to where Americans already live; we are going to shape demand so that families, not financiers or foreigners, set the pace of the market; and we are going to make it possible again for a young father with an ordinary job to buy a single-family home. This should be the foundation of a pro-family, pro-nation policy program that takes voters’ preferences seriously and gives them a concrete reason to trust conservatives with power. — Daniel

STRUGGLES ON THE OLD RIGHT

The Wall Street Journal editorial board lectured congressional Republicans for their lack of an agenda, which, well, fair enough. But how should an agenda look? According to the Journal, item one is “immigration reform” (i.e., more immigration). Then comes “permitting for energy, mining or public works.” Sure. And, of course, a “health freedom agenda,” for which the Journal perhaps has concepts of a plan it just hasn’t shared yet? The rest is tax cuts and spending cuts.

This would be predictable, pointless, and boring, except for the bit at the end where the Journal laments, “this year’s One Big Beautiful Bill Act won’t be nearly enough if voters still feel sore about prices.” OB3, you may recall, had roughly $5 trillion in tax cuts and $1 trillion in spending cuts. To which the Journal says: unimpressive, how about some tax cuts and spending cuts? And what would the Journal say if Congress did another $5 trillion of tax cuts and $1 trillion of spending cuts? Take a guess.

The American Enterprise Institute had a rough week as well, with its black-tie gala overshadowed by the unfortunate choice to list CCP-controlled TikTok as a sponsor. Credit to President Robert Doar, the mistake was immediately acknowledged and the money returned. There’s a man who doesn’t spend too much time watching sports.

Of note, the AEI gala honored historian Gordon Wood, who delivered remarks in which he declared: “Immigration must be handled carefully. Because assimilation is not easy, no nation should allow the percentage of foreign born to exceed about 15 percent of its population.” Even at the peak of the late nineteenth-century wave, America’s immigrant population never exceeded that level. But in the Biden years, it did. Indeed, we are above 15% now. The implication would be that the United States now needs dramatic immigration restriction if not an outright moratorium—an interesting message for an AEI gala, indeed. Some things change.

And some things stay the same. Do read the appallingly bad Bret Stephens column in the New York Times on “The Case for Overthrowing Maduro.” It can be easy to forget, in this age of political polarization and hyperbole, that the neocon inclination to adventurism is as outlandish and ungrounded as any parody could attempt to offer. The “vital American interest at stake,” according to Stephens, is that Maduro’s regime is “an importer and exporter of instability.” He has ties to our enemies. His misgovernance has had ruinous results. Throughout the hemisphere. Though he links only to an obscure missive from a British university about possible preparations in “neighbouring Latin American nations.” That’s how you can tell when the results are ruinous throughout the hemisphere: the most relevant commentary comes from Europe.

Send in the 81st Airborne! Again, not a parody. Doing nothing is not even an option considered among “alternatives to conflict” (failure to entangle the United States in yet another conflict would embolden Russia and China). The correct path is a full, on-the-ground invasion of the country, with the “seizure of its major military bases” and the arrest of all senior officers. (We’ll be lenient on the ones who turn themselves in.) “Could this turn into another fiasco?” Stephens asks himself. He is encouraged by “the fact that we can learn from our past mistakes.” Less encouraging, this morning’s Times headline: “U.S. Ran a War Game on Ousting Maduro. Venezuela Fell Into Chaos.”

What would Napoleon do? Again, not a parody. Stephens concludes by offering President Trump the little corporal’s advice, “If you start to take Vienna, take Vienna.” Which perhaps seems a good reason not to start.

STRUGGLES IN THE ECONOMICS DEPARTMENT

What Is A Tariff Shock? So asks a new paper from the Federal Reserve Bank of San Francisco, yielding an answer that has our pointy headed friends in a tizzy: “we find that a tariff hike raises unemployment (lowers economic activity) and lowers inflation. Using only tariff changes driven by long-run considerations—a traditional narrative identification—gives similar results.”

Commonplace readers will be less confused. “Perhaps you could construct an inflation story from the concern expressed by many economists that tariffs will reduce output. But raising interest rates would be an odd response,” Oren wrote back in July. “Indeed, if one takes seriously the view that tariffs are likely to slow economic growth, then their imposition should strengthen the case for rate cuts.” Tariffs should always have biased the Federal Reserve toward rate cuts, and Jerome Powell’s bizarre concession that he would have cut sooner but for tariffs will go down as a major policy blunder and foolish politicization of the Fed.

If you’re an American Compass podcast subscriber, you heard Bloomberg chief economist Anna Wong in August, describing her own experience at the Federal Reserve, where the economic models in fact suggested that tariffs would be disinflationary. Wong reiterated the point this week on X: “This finding is similar to the conclusion in a simulation in a FOMC meeting presentation back in late 2018. Question is why finding like this was no where to be published or uttered in the last twelve months.” What could possibly explain such a failure from so noble, impartial, and scientific a profession as that of the economist?

Another interesting finding, meanwhile, over at Goldman Sachs, per the Wall Street Journal’s Greg Ip:

Fascinating and important report from Goldman Sachs. They have upgraded long-term GDP of China because of increased exports, but see this as reducing, not increasing, rest of world GDP. Chinese displacement of domestic manufacturing swamps any positives from cheaper goods.

This confirms what I have long suspected: Chinese growth does not “contribute” to global growth except in the purely arithmetic sense. It does not actually create positive feedbacks that lift other countries’ growth. That’s by design.

The point of Xi’s “dual circulation” is to make the world more dependent on the Chinese industrial supply chain, while making China self-sufficient, that is buying less from the rest of the world. The model is inherently “beggar thy neighbor” (as Goldman notes).

When the U.S. grows, its imports expand, which has positive spillovers to foreign growth (although Trump is trying to weaken this link). This does not happen under China’s model.

Commerce with China has benefits other than selling it exports. But its unique status as a “beggar thy neighbor” partner should motivate other nations into forming a trading system without it. There’s opportunity here for the U.S. if it knows how to seize it.

Who could’ve guessed, besides absolutely everyone watching events unfolding in the real world instead of listening to economists lecture incorrectly about how free trade really works.

Did someone say economists lecturing incorrectly? It must be Justin Wolfers time.

And indeed it is. Like the Kool-Aid Man bursting through the wall, he leapt excitedly into the room to accuse Vice President J.D. Vance of hating foreigners because Vance said:

No robot can replace a great blue-collar construction worker. You know, you see some of the houses, some of the things they do, the trim they’re able to do there, there’s an art there that I don’t think a robot’s ever gonna be able to replace. But can a robot maybe make it easier for a construction worker to put more nails in more walls over a shorter period of time?

Gee, you might think, that doesn’t seem racist. But as an Understanding America reader, you are neither as bad at economics, nor as good at missing the point, nor as desperate to appear on MSNBC as is Professor Wolfers. “It’s a revealing moment,” for him. “JD Vance welcomes a two-legged robot helping on the job site. But if that helper is a person named Jose, he calls it a threat. Same tasks, same productivity boost.”

Of course, that’s the opposite of what Vance said. Indeed, the distinction between technology that can augment human capabilities and technology that simply substitutes for human workers entirely is one of the key distinctions often emphasized by economists. That’s the difference between a robot and a person named Jose, which Vance explains articulately, and Wolfers pretends to forget.

Ironically, the argument Wolfers attempts to make cuts precisely the other way. Analysts who do think that AI will achieve “artificial general intelligence” such that its systems and robots can fully substitute for the work of human beings often worry that American workers will be driven out of the labor market. Which would be an argument against an uncontrolled influx of Joses.

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STRUGGLES FOR ARTIFICIAL INTELLIGENCE

Speaking of artificial intelligence, the Wall Street Journal has the story of why leading researcher Yann LeCun believes large language models are leading the field astray. “He has been telling anyone who asks that he thinks large language models, or LLMs, are a dead end in the pursuit of computers that can truly outthink humans. He’s fond of comparing the current state-of-the-art models to the mind of a cat—and he believes the cat to be smarter.”

One place the Big AI companies continue to excel, though, is creepiness. At Compact, Michael Toscano has an excellent essay on How Trump Can Save the Future. “America has long been attached to three doctrines about the adoption of new technologies: that it is inevitable, that it advances social progress, and that it will work neutrally. As recently as the 1990s, these ideas enabled the unlimited expansion of the internet, social media, and the screen. Now, belief in all three has been profoundly shaken.”

“Stop Hiring Humans” provides a great example. You may have seen the controversy surrounding the bizarre billboard campaign featuring that slogan, launched by a company called Artisan. The full story is even stranger. As they explain in a truly creepy blog post:

We didn’t expect people to get so mad. The goal of the campaign was always to rage bait, but we never expected the level of backlash we ended up seeing. … Luckily, the people who were mad aren’t our target audience. We target tech companies, and the vast majority of people who work at and run tech companies loved the campaign. … Finally, we learned that when something works, double down.

At least they’re doing really important and groundbreaking work on…

Actually, their best example of their biggest product, featured on their homepage, is a bot that will scan social media to find personal details about you so that it can then send you spam congratulating you on your recreational tennis victory before trying to sell you an “all-in-one product that can centralize your support across channels.”

How long before they offer another product, detecting crappy marketing messages from their spamming product to keep your inbox clear?

There does seem to be some tension between the two key messages from AI developers: “trust us” and “we are clearly lunatics who should never be trusted.” Wonder how that resolves…

STRUGGLES FOR THE KIDS

In High School: The Screen That Ate Your Child’s Education (New York Times)

In College: What happens when even college students can’t do math anymore? (The Atlantic)

In Recruiting: A Campus Backlash Is Brewing Over Wall Street’s Ivy League Recruitment Drive (Wall Street Journal)

What Does Peter Thiel Think? Capitalism Isn’t Working for Young People (The Free Press). “The rupture of the generational compact isn’t limited to student debt, either. I think you can reduce 80 percent of culture wars to questions of economics—like a libertarian or a Marxist would.”

And How About Some Statistics?

• Young Adults are Growing Increasingly Economically Dislocated (Financial Times): The share of Americans ages 20 to 24 who are not working, not looking for work, not studying, and not raising kids has just cracked 10%, roughly doubling over the past two decades.

• Millions of Kids Are on ADHD Pills. For Many, It’s the Start of a Drug Cascade (Wall Street Journal): “Tens of thousands of kids who take prescription ADHD medication also wind up on other powerful psychotropic drugs—including antipsychotics and antidepressants, studies show. For some of them, the ADHD drugs themselves can be a trigger, according to doctors, patients and psychologists, who say additional medications are often prescribed to manage side effects such as insomnia, despite limited scientific evidence supporting these combinations in young, developing brains.”

• Record Numbers of Younger Women Want to Leave the U.S. (Gallup): “In 2025, 40% of women aged 15 to 44 say they would move abroad permanently if they had the opportunity. The current figure is four times higher than the 10% who shared this desire in 2014, when it was generally in line with other age and gender groups.”

• 12th Grade Girls are Less Likely Than Boys to Say They Want to Get Married Someday (Pew Research): “The drop in the share of 12th graders who say they want to get married reflects shifting views among girls. ... The share of boys saying this is virtually unchanged over the 30-year period. But the share among girls dropped by 22 percentage points.”

NOT STRUGGLING? REINDUSTRIALIZATION

Decoupling continues apace, as businesses accept that the era of free trade with China is over. That’s Why Factories Will Keep Looking for Alternatives to China (New York Times):

So executives like Mr. Lichtenberg are opting out of China for their U.S. business, motivated by a fear of getting caught on the wrong side of what they expect to be an even more unpredictable bilateral relationship. Where it once seemed like having a factory outside China was a fallback, it is starting to look like an economic imperative. “Nobody trusts that there is stability between China and the U.S.,” Mr. Lichtenberg said.”

Et tu, Elon? Yes, even Tesla Wants Its American Cars to Be Built Without Any Chinese Parts (Wall Street Journal).

Europe continues to search for answers. Stellantis Chair Presses EU to Gut 2035 Combustion Engine Ban (Politico Pro). “It’s a tipping point,” says Stellantis Chair John Elkann. “We have this moment where growth can be a choice, which is what has been decided in different parts of the world, or we accelerate the decline.”

And the U.S. pushes ahead on nuclear, with a “$1 billion federal loan to restart the Three Mile Island nuclear power plant” (Wall Street Journal).

Finally, don’t miss a remarkable acknowledgement from Benn Steil, Director of International Economics at the Council on Foreign Relations: Free Trade Can’t Bring Peace.

The geopolitical case for free trade, however, rested on little more than wishful thinking. To be sure, Tennesseans like Hull, who decried the harm that Northern manufacturing tariffs inflicted on Southern farm exports, had legitimate economic reasons to champion freer markets. But in reality, the causal arrow points in the opposite direction. It is peace that makes trade possible – a crucial distinction for understanding both globalization and its current retreat.

Of course, “The economic argument was always marginal,” C. Fred Bergsten famously wrote in Foreign Affairs, back in 1971. “It was the foreign policy case which provided the real impetus for liberal trade policies in the United States in the postwar period.” So if that’s true, but the geopolitical case for free trade “rested on little more than wishful thinking,” then what exactly is the case?

SOME HOLIDAY READS

Here’s what else we’ve been reading this week, that you should read too when you have a minute:

Wall Street Journal: Why Ford Can’t Find Mechanics

“We are in trouble in our country. We are not talking about this enough,” Mr. Farley said. “We have over a million openings in critical jobs, emergency services, trucking, factory workers, plumbers, electricians and tradesmen.” He said Ford is struggling to hire mechanics at salaries that Ivy League grads might envy.

City Journal: “The Largest Funder of Al-Shabaab Is the Minnesota Taxpayer”

Much like with the HSS program, autism claims to Medicaid in Minnesota have skyrocketed in recent years—from $3 million in 2018 to $54 million in 2019, $77 million in 2020, $183 million 2021, $279 million in 2022, and $399 million in 2023. Meantime, the number of autism providers in the state spiked from 41 to 328 over the same period, with many in the Somali community establishing their own autism treatment centers, citing the need for ‘culturally appropriate programming.’ By the time the fraud scheme was exposed, one in 16 Somali four-year-olds in the state had reportedly been diagnosed with autism—a rate more than triple the state average.

Lever: Wall Street Is Paywalling Your Kids’ Sports

As the $40 billion youth sports industry comes under private equity control, corporate-owned facilities and leagues — from hockey rinks to cheerleading arenas — have begun prohibiting parents from recording their own kids’ sports games. Instead, parents are forced to subscribe to these companies’ exclusive recording and streaming service, which can cost many times more than the streaming costs for professional sporting events.

Wall Street Journal: Medicaid Insurers Promise Lots of Doctors. Good Luck Seeing One.

“It’s a fake system,” said Elisha Yaghmai, a Kansas doctor who runs a company that provides physicians to rural hospitals. “It doesn’t actually get them care.”

Enjoy Thanksgiving!

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DO: HAVE CHILDREN

A salute to Timothee Chalamet, for his comments in Vogue on the importance of family:

No spoilers, but the specter of fatherhood hangs over Marty Supreme too. It’s something Chalamet would like to experience. He remembers sitting with a friend, watching an interview with someone whose name he is “definitely” not going to share. The person in question was “bragging about not having kids and how much time it afforded them to do other stuff,” he says. Chalamet and his friend turned to each other: “Like, holy shit. Oh my God. Bleak.” He knows some people can’t have children or are never in a position to. But he does believe procreation is the reason we’re here. Yes, children: “That could be on the radar,” he says.

And a Bronx Cheer to The Economist for this tweet: “With Trump and Vance in power, many pro-natalists believe this is the moment to jump-start baby-making. But some critics see pro-natalism as part of an insidious project to create a whiter America.” Did they find racists who support having kids? Yes. There are racists who support free markets, too, but that doesn’t make The Economist part of an insidious project to create a whiter America.

Also notable, The Economist characterizes pro-natalist policy, from child allowances to subsiidized taxis for pregnant women, as evidence that “governments have tried to bribe people to have more babies.” Not sure whether they likewise characterize “pro-growth” corporate tax cuts as “bribes” to business leaders to get them investing more; we’ll have to check.

Choose your own reaction to “Give Parents the Vote,” a fascinating new article by Joshua Kleinfeld and Stephen Sachs in the Notre Dame Law Review. Kleinfeld joined Oren on the American Compass podcast last year to discuss his argument for demeny voting.

DON’T: DO… WHATEVER THIS IS

The AI creepiness continues, with a company called 2wai encouraging you to record your elderly mother before she dies so that you and your child can pretend to interact with her after she has passed away. Other “AI-powered apps allow you to ‘text with Jesus’ or ‘talk to the Bible,’ giving the impression you are communicating with a deity or angel,” reports Axios. In Japan, meanwhile, “a 32-year-old woman in Japan has officially married an AI persona she built using ChatGPT. After the virtual character ‘Klaus’ proposed, she accepted, ending a three-year relationship with a real partner, saying the AI understands her better.”

OK, but it’s not like the mainstream tech leaders are focused on these applications. Yes they are. Recall, “Zuckerberg’s Grand Vision: Most of Your Friends Will Be AI.”

Here’s Sam Altman, with a characteristically half-baked and incoherent attempt at sounding thoughtful on a serious issue:

Most users can keep a clear line between reality and fiction or role-play, but a small percentage cannot. We value user freedom as a core principle… Encouraging delusion in a user that is having trouble telling the difference between reality and fiction is an extreme case and it’s pretty clear what to do, but the concerns that worry me most are more subtle. There are going to be a lot of edge cases, and generally we plan to follow the principle of “treat adult users like adults,” which in some cases will include pushing back on users to ensure they are getting what they really want.

And when the adult user doesn’t want to tell the difference between reality and fiction? It’s pretty clear to do… what exactly?

A lot of people effectively use ChatGPT as a sort of therapist or life coach, even if they wouldn’t describe it that way. This can be really good! A lot of people are getting value from it already today.

If people are getting good advice, leveling up toward their own goals, and their life satisfaction is increasing over years, we will be proud of making something genuinely helpful, even if they use and rely on ChatGPT a lot. If, on the other hand, users have a relationship with ChatGPT where they think they feel better after talking but they’re unknowingly nudged away from their longer term well-being (however they define it), that’s bad.

Where does talking to an app pretending to be your deceased mother about your pregnancy, or marrying your AI friend, fall in all this? Looks good to Sam.

Notice the parallel between Matthew McConaughey’s nonsensical promotion of his own AI voice and ChatGPT’s promotion of its “Sora” social media app. “You’re helping create a future where we can look up from our screens and connect through something as timeless as humanity itself — our voices,” says McConaughey. Sora “kind of felt like a natural evolution of communication—from text messages to emojis to voice notes to this,” says the Sora team.

Prepare to be bombarded with this message, that the artificial and inhuman is indeed the true and natural endstate of progress.

At least when it comes to illegal genetic engineering of embryos, Sam Altman is… no, wait, sorry, he’s an investor in a company that is “searching for places to experiment where embryo editing is allowed, including the United Arab Emirates.”

SPEAKING OF MISERABLE AND HIGHLY PROFITABLE SOCIAL TRENDS…

Let’s check in on gambling, where Cleveland Guardians pitchers Emmanuel Clase and Luis Ortiz have been indicted for pitch rigging. In response, Major League Baseball has limited prop betting on individual pitches. And the NFL has now announced that it will prohibit a narrow set of prop bets as well. That’s really great, how they’re totally open to regulating this when it comes to the wellbeing of the leagues. The wellbeing of the fans remains irrelevant.

Also irrelevant is the wellbeing of players. The New York Post reports:

“I get death threats all the time — every day,” the veteran relief pitcher [Ryne Stanek] told The Post. “It’s not anything that every baseball player doesn’t deal with all the time. Like, ‘You cost me my parlay, I hope your family dies.’

“Gambling in baseball is doing nothing but making the day-to-day lives of players substantially worse. It’s just people that recklessly bet their money on just anything that they can and if you mess up their bad life choice, you’re the problem and you should die.”

Giants kicker Graham Gano — the team’s representative for the NFL Players Association — shed light this week on a not-new-but-growing epidemic in sports: Athletes learning to cope with abhorrent, violence-threatening messages sent on social media by nameless, faceless, overly invested strangers.

At OnLabor, Harvard Law School student Ben Gantt dives into the reasons for banning prop bets as a matter of player safety.

As for the ordinary people, read Derek Thompson on “The Monks in the Casino,” connecting the gambling craze to the larger set of social problems for young men:

The pro-social script—date around, marry, settle down, buy a house, have a kid—feels more like a luxury every year. The anti-social script—porn, posting, parlays—feels easy and even costless. If young people are throwing out the old script, it’s because they’re hunting for a deal, just like everybody else.

Thompson also highlights an interesting piece by Max Read, focused especially on “predictions markets and suckerfication crisis facing American men.” As online brokerage accounts become enabled to allow betting on virtually anything, the rest of the information ecosystem is cashing in too: “Gambling’s reach is extending deeper into the investment ecosystem as Google strikes a deal to pipe prediction market data from Kalshi Inc. and Polymarket into its finance platform,” reports Bloomberg.

What would it take for Google or the NFL to decide they are making enough money already? Insofar as all this is the profit motive at work, would anyone argue it represents progress?

Bonus link: “Jon Gray Is Reshaping Blackstone Into Everybody’s Investing Megastore” (Bloomberg). The famously exclusive Blackstone has suddenly decided it needs to begin marketing itself to retail investors. Is this a magnanimous awakening to the importance of serving the everyman? Or is it perhaps not a coincidence that the move comes just as the most sophisticated investors sour on the consistently poor returns and high fees of the private equity industry? Who’s to say, really.

THE KIDS ARE NOT ALRIGHT

Goodness, this is a depressing edition of Understanding America. But that’s what you get for your heart-warming dose of Chalamet up top.

Many students at the University of California San Diego cannot do elementary school math. That’s the conclusion of a new report issued by the university, which finds:

Between 2020 and 2025, the number of students whose math skills fall below middle-school level increased nearly thirtyfold, reaching roughly one in eight members of the entering cohort. This deterioration coincided with the COVID-19 pandemic and its effects on education, the elimination of standardized testing, grade inflation, and the expansion of admissions from under-resourced high schools.

Remember when you see high school graduation rates, college enrollment rates, and even college completion rates rising, there is no corresponding evidence that the education system is actually producing better outcomes on standardized test results. The data does not show a strengthening education system, but a fraudulently weakening one.

Did someone say “Fraudulent” and “Weak”? Meet the Harvard students upset that their university might do anything about absurd levels of grade inflation. “Harvard’s report on its undergraduate college found that about 60% of grades were A’s during the 2024-25 school year, a jump from about 25% in 2005-06. The median GPA upon graduation is now 3.83.”

Students “say they already study a lot, sleep very little and face immense stress to perform academically.” The data says they study no more than they used to.

IN HAPPIER NEWS… [drumoll]

TIME TO AWARD A JENSEN HUANG CHINA HAWK BADGE OF SHAME

Let’s meet the nominees for excellence in recognizing that China is not a friendly open market and technology partner.

Anthropic, for disrupting a highly sophisticated AI-led espionage campaign. The attack targeted large tech companies, financial institutions, chemical manufacturing companies, and government agencies. “We assess with high confidence that the threat actor was a Chinese state-sponsored group.”

Norwegian and Danish Authorities, for discovering that China had installed remote kill switches on electric buses sold to Europe. “The investigation comes after transport authorities in Norway, where the Yutong buses are also in service, found that the Chinese supplier had remote access for software updates and diagnostics to the vehicles’ control systems – which could be exploited to affect buses while in transit.”

General Motors, for directing “several thousand of its suppliers to scrub their supply chains of parts from China, four people familiar with the matter said, reflecting automakers’ growing frustration over geopolitical disruptions to their operations.”

The United States, for maintaining restrictions on the sale of advanced semiconductors to China. “Shortages of advanced semiconductors are so acute that the government has begun intervening in how the output of China’s largest contract chip maker, Semiconductor Manufacturing International, is distributed, according to people familiar with the matter. … Chinese tech companies are fighting to secure limited domestic capacity and, in some cases, labs are smuggling coveted supplies of high-performance chips.”

So hard to choose—you’re all winners in our book.

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A TIME FOR CHOOSING, CONTINUED

We may not have to choose, we can give out Jensen Huang China Hawk Badges of Shame to everyone.

But Europe does have to choose: Join the United States in pushing China out of its economy, or get steamrolled. “China’s Massive Surplus is Everywhere (Yet The IMF Still Has Trouble Seeing It Clearly),” Brad Setser explains at the Council on Foreign Relations. And, per Bloomberg, Chinese overcapacity is triggering of deflation, which it will now export to trading partners:

Deflation signals a lopsided economy where supply dwarfs demand. That hurts companies, which in turn hurts workers. As consumption weakens, businesses spend less, economic activity slows, debt burdens rise, which then causes more deflation. The downward loop, known in economics as a deflationary spiral, feeds on itself once entrenched. The trend also carries global implications: cheap Chinese exports can depress prices abroad, strain relations with trading partners, and create knock-on effects for multinational companies. Global institutions are sounding the alarm, with the International Monetary Fund projecting that consumer inflation in China will average zero this year — the second-lowest of nearly 200 economies it tracks. The Bank of Korea warned in July that China could export deflation to its trading partners.”

All this continues coming home to roost in Germany, where “industrial production sits at the 2005 level even after a partial rebound in September,” reports the Financial Times. One problem: “A large industrial base that is hard to decarbonise.” Maybe don’t do that? And then, note this asymmetry in reporting: “All this is exacerbated by two distinct political decisions in the US and China, taken 10 years apart: Donald Trump’s trade war, and Beijing’s decision a decade ago to turn itself into a global high-tech engineering powerhouse.” When China upends the global trading system to beggar-its-neighbors and seize control of vital industries, it’s just “turning itself into a global high-tech engineering powerhouse.” But when the United States decides to confront that abuse and restore sanity, that’s a “trade war.”

While Europe would so desperately like the United States to be the bad guy here, the FT continues:

The Trump tariffs have already hit German exporters hard: over the first nine months of the year, their US exports plunged by 7.4 per cent. But the prospects in China are if anything even bleaker, creating a “China shock” that is now biting into the bottom lines of globally successful German companies.

Brussels can be as angry as it wants at Washington—over trade policy, climate, Ukraine… but every single time, it will find Beijing the worse offender and the implausible partner. One positive sign? The EU is backing off its absurd efforts to impose its own uncompetitive ESG rules on American firms (Bloomberg):

The EU responded to concerns raised by America’s fossil-fuel industry and the American Chamber of Commerce, said Pascal Canfin, a senior lawmaker for the centrist Renew Party. “They won,” he said. As a long-time bastion of ESG, Europe’s decision to slash regulations once viewed as standard-setting marks a stunning retreat.

Perhaps not so much “stunning” as “wise,” and “inevitable.”

FINALLY, YOUR INDUSTRIAL POLICY READS FOR THE WEEK

At Ecologica Americana, “An American Shenzen?” Christopher Sandbatch tells the story of the Chinese one:

By the late 1990s, Shenzhen Bao’an International Airport was handling cargo 24/7 and linked directly to manufacturers via bonded “logistics parks,” warehouses where components could enter duty-free, be assembled, and re-exported without clearing customs. A dense mesh of Tier-1 and Tier-2 suppliers emerged around anchor firms like Foxconn, Huawei, and ZTE, compressing supply chains from thousands of miles to tens. It became normal for a prototype smartphone to go from CAD file to physical unit in forty-eight hours.

And the Institute for Progress launches Factory Settings, a new project from leaders of the Biden administration’s CHIPS office:

In the coming years, the federal government will try to increase our resilience in domains like energy, critical minerals, and advanced pharmaceuticals. By default, those interventions are likely to fail. If they do, they’ll deepen Americans’ sense that the government can’t do its job.

The CHIPS office succeeded in dramatically increasing investment in a critical domain, and it executed that goal quickly and effectively. But to succeed, the team had to optimize an operating model that too often fails.

The lessons the CHIPS team learned are applicable whether you’re a socialist or a libertarian, an industrial policy fan or skeptic. If you care about making government work better, the story of CHIPS has lessons for you.

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Moving between financial and political circles, I’ve been struck by how far behind the curve the business community is lagging. One can still attend a dinner of investment bankers who believe globalization is unstoppable and further integration of the American and Chinese markets inevitable. On Wednesday, I participated in a debate on tariffs at Harvard Business School, teamed up with former U.S. Trade Representative Katherine Tai and opposed by Harvard economists Larry Summers and Robert Lawrence (the audience voted; we won). The organizers found it challenging to frame the question and notable that such a topic was even being addressed on campus.

Unfortunately, business leaders are as bubbled as anyone else, relying for their news and analysis on a set of sources—the Wall Street Journal’s editorial page, CNBC, whatever inane briefings the Business Roundtable sends around—carefully tailored to flatter their sensibilities and retain them as an audience. CNBC’s “SquawkBox” is my favorite example, as they talk about American Compass from their own point of view regularly, but show no interest in having me participate in the discussion.

The charade reached absurd proportions on Wednesday, in an interview that host (and rock-ribbed Reaganite) Joe Kernen conducted with Rockbridge Network founder Chris Buskirk. Most of the questions were about me, what I think, and why I’m wrong. Chris is a friend and did a great job, I just wish he’d been able to spend the segment talking about his work, and that Kernen would have been willing to talk to me about mine.

But here at Understanding America I can do what I want, and what I want to do today is participate in the interview to which I was not invited. So here are Joe’s actual questions, and the answers he could have gotten from me.

Joe Kernen: We’ve had Oren Cass on a couple of times...

Thanks, Joe. Haven’t seen you this year, good to be back.

JK: The overlap between differing philosophies is apparent to me, and whenever we had Oren Cass on it was always apparent to me. Isn’t there a slippery slope when conservatives start talking about raising corporate taxes, start talking about, I mean, the worker class is helped when companies succeed using time-tested conservative, free market principles. Not adopting a lot of socialist principles or left-wing principles and sort of trying to dress them up as something different because you’re a Republican.

I’m not quite sure what principles you’re talking about, Joe. I agree that the working class can benefit when companies succeed, especially if they do so within the constraints of time-tested conservative principles. But one of those principles is protection of the domestic market, which was the American tradition through most of its history and a core plank in the Republican Party’s platform. Another is fiscal responsibility, which fosters more productive investment. Another is worker power, which ensures that workers and employers meet in the market on a level playing field.

You know, in The Wealth of Nations, Adam Smith emphasized that the invisible hand works because “every individual endeavours to employ his capital as near home as possible as he can, and consequently as much as he can in the support of domestic industry, … and to give revenue and employment to the greatest number of people of his own country.” John Stuart Mill warned that “the laborer in an isolated condition, unable to hold out even against a single employer…will, as a rule, find his wages kept down.” He condemned those who did not “wish that the laborers may prevail, and that the highest limit [for wages], whatever it be, may be attained.”

So I don’t think it’s left-wing or socialist to advocate for those kinds of things. It’s commonsense, conservative, and also entirely necessary if we want capitalism to succeed and the free market to deliver for workers.

JK: When I had... what’s Cass’s organization?

American Compass.

JK: That’s it, American Compass. I’ve asked whether the Vice President really does adopt a lot of those principles whole-heartedly because I know that President Trump doesn’t. Do you? Which of the basic tenets of Oren Cass and American Compass do you adhere to?

Well I guess I adhere to all of them, but the point is not to have everyone adhering to the exact same ideas. What’s needed on the right-of-center is a robust debate about how to apply conservative principles to the challenges of the 2020s, instead of just flipping through a dusty 1980s playbook to find another tax cut.

JK: That sounds like Mamdani. And then you can say, OK so how do we affect that for people to get there? Do you think raising corporate taxes is the way to effect that?

You certainly are obsessed with the corporate tax rate. I wonder how much you’ve really thought about public policy and the prerequisites of a healthy market economy? But that’s fine, we can talk about the corporate tax rate. No, I don’t think raising it is an end unto itself.

JK: That’s not what Cass says.

I promise you, it is what I say. It’s not an end unto itself. Other things equal, I’d love to have tax rates be as low as possible. But we have a federal government that will spend 19 to 20% of GDP under any plausible plan of conservative spending cuts, including entitlement reforms, which means that we are going to have to collect about that much in revenue. That used to be Paul Ryan’s plan, by the way. And so we are going to have to increase some taxes, and I would include the corporate tax in that discussion, bringing it at least back up to 25%. That also used to be Paul Ryan’s plan, by the way. “Corporate rates go lower, no matter how much we have to borrow,” may get you through a five-minute segment on cable TV, but it is not going to get our country where we need to go. [end scene]

Kernen concluded with a spectacular comment, “supply side trickle down is all we got, you grow the pie and hope for the best,” that I wish we could have discussed in more depth. Maybe someday soon.—Oren

In Case You Missed It: Oren had a great conversation on the School of War podcast with Aaron MacLean about his recent Foreign Affairs essay, “A Grand Strategy of Reciprocity.” If you’re in the Boston area, he’ll be discussing the essay on November 18 at the Harvard Kennedy School with former Biden national security adviser Jake Sullivan.

ON TO THE MIDTERMS

Democrats are riding high after decisive wins in, checks notes, blue cities and states that Democrats were expected to win. Up next, the midterms; just over the horizon, 2028—where Politico reports that Kamala Harris leads among possible Democratic presidential candidates and is also the only Democrat in double digits on the question: “Who do you consider to be the leader of the Democratic Party?” (The ticket of Don’t Know and Nobody has her beat 2-to-1, though.)

At Unherd, Ryan Zickgraf has a particularly incisive breakdown of the various factions vying for influence within the party, each backed by white papers and institutes. That debate is not translating to the political realm, where prospective leaders are competing primarily on personality and mean tweets. Usually a party resolves its dispute among factions and then the personality contest for leadership begins within the victorious one. Choosing on soft skills absent any concern for ideas may work less well.

Speaking of challenges for the coalition, the Wall Street Journal reports on “The Growing Divide in the Rainbow Coalition.” “More gay people are speaking out against the gender ideology of trans and queer activists.”

And: Congressman Jared Golden, a standout moderate Democrat in a conservative Maine district, has announced he won’t seek reelection. His explanation of why is worth reading in full.

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IN TRADE NEWS

Those of you still waiting for China to embrace market democracy, as was foretold by the economic prophets of the new millennium, will be disheartened to hear from the Wall Street Journal: “The Trade War Couldn’t Change China’s Economy. American hopes for political reform in China faded years ago, and now hopes for economic liberalization are fading too.”

Instead, reports the New York Times, “China’s Export Juggernaut Marches On.” Some nice graphics here, helpfully underscoring the point that U.S. policy is forcing ever-larger surpluses elsewhere, putting other countries to the question of whether they will let their industrial bases fall to China Shock 2.0 or join the U.S. in opposition. The calculus is different for developing countries without an industrial base to lose, to whom China can make a more appealing offer:

The rest of the world is caught between the two superpowers. Some countries, including Vietnam and members of the European Union, are deeply concerned about the risk posed by China’s exports to their own industries, and China faces a backlash in the form of tariffs in regions like Europe. Other nations, like Argentina and Nigeria, are buying low-cost Chinese technology to modernize their economies but running up wider trade imbalances with China.

But, some developing countries also seem interested in the American offer. The deals with Cambodia and Malaysia include a number of striking, “China Out” provisions—including “poison pills … inserted by Washington into tariff deals with Cambodia and Malaysia seen as ‘loyalty test’” (Financial Times).

And, the Europeans may still not get it. “VW to build its own AI chips in China in autonomous driving push” (New Straits Times). Seriously, guys? Maybe they have a good reason, like…

By designing and developing the System-on-Chip here in China, we are taking control of a key technology that will define the future of intelligent driving,” chief executive Oliver Blume said.

Who is the “we” that will be “taking control” here? Makes more sense in the original Mandarin.

At least Trump didn’t offer Xi any advanced AI chips. The Wall Street Journal reports that “as they prepared to meet Xi, top officials including Secretary of State Marco Rubio told Trump the sales would threaten national security, saying they would boost China’s AI data-center capabilities and backfire on the U.S….Others against the approval, the officials said, included U.S. Trade Representative Jamieson Greer and Commerce Secretary Howard Lutnick, who helped lead trade talks….Faced with nearly unified opposition from his top advisers, Trump decided not to discuss the advanced Nvidia chips during his Oct. 30 meeting with Xi.”

How did Jensen Huang respond? By telling the Financial Times, “China is going to win the AI race.” We’d beg the Nvidia PR team to take away his microphone, but honestly this is way more fun. Of course, the cleanup statement came hours later, with Huang clarifying: “As I have long said, China is nanoseconds behind America in AI. It’s vital that America wins by racing ahead and winning developers worldwide.”

But wait a minute… that’s not a cleanup at all. It doesn’t contradict the claim that China is going to win. Though it does contradict another recent Jensen Special, “Does it really matter who gets there first? I think in the final analysis, I don’t think it does.” So if you’re following along. It doesn’t matter who is going to win, but China is going to win, and that’s why our focus should be on selling Nvidia chips to China and winning developers there. Love this guy.

SPEAKING OF ARTIFICIAL INTELLIGENCE

The Bad. Why Even Basic A.I. Use Is So Bad for Students (New York Times).

The Ridiculous. OpenAI Wants Federal Backstop for New Investments (Wall Street Journal).

And the Ugly. Here’s How the AI Crash Happens (The Atlantic).

WRAPPING UP WITH SOME FEMINISM DISCOURSE…

Ross Douthat hosted a fascinating conversation with Helen Andrews and Leah Libresco Sargent on the question, “Did Liberal Feminism Ruin the Workplace?” They discuss Andrews’s recent essay in Compact, “The Great Feminization” (featured recently in Understanding America!), and Sargent’s new book, The Dignity of Dependence (reviewed recently by Evie Solheim for Commonplace!). The Atlantic has a new essay discussing Sargent’s book as well, “A Conservative Rejoinder to the Manosphere.”

Finally, at the New York Times as well, read “What Women Really Want: To Not Answer Work Emails at 10 p.m.,” but ignore the headline, which is not the point of the article. It’s not necessarily about women, and it’s not about late night email: “It’s not a matter of working remotely, during which personal life and work life can seep into each other, nor of simple flexibility. It’s about a clear delineation between work and every other aspect of life.”

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As Gord Magill explained last year in an American Compass essay, “Crash and Churn”: “There is, in fact, an oversupply of truck drivers in the United States. The problem for trucking companies is retaining drivers, but doing something about this problem costs them more than ignoring it and using government funds to paper it over.” Time to let the market rip!

This week brought a number of exciting technological developments, about which Oren would like to have a word:

Many opponents of reindustrialization don’t even consider the goal to be a valuable one. “Exports are the unfortunate thing we do just so we can get those desirable imports,” said Jason Furman, chair of President Obama’s Council of Economic Advisers, at the World Trade Organization’s Public Forum in Geneva last year. “We should not want to be” a manufacturing center again, according to Michael Strain, director of economic policy studies at the American Enterprise Institute.

But then comes the claim that the horse has already left the barn, and the United States has no plausible pathway to regaining leadership. That argument is frustrating in part because it underscores the folly of abandoning manufacturing in the first place—supply chain control, hard-won expertise, technological leadership supposedly didn’t matter as we were losing them, but now that they’re gone, it turns out they are in fact vital to building anything new. Oops. More importantly, though, with better policy that creates the right incentives, dramatic shifts can occur quickly. We know this because… that’s exactly what created the problem.

Companies were really good at taking supply chains they had spent decades developing, picking them up, and moving them to an entirely foreign business environment and culture with little experience and an underdeveloped workforce. Indeed, it is exactly those companies now whining that they can’t possibly be expected to do the same, but for the benefit of the United States. It won’t be cheap or easy. It won’t happen by magic or through the power of an invisible hand. But it has been done and it can be done again.

Helping matters along, new technological breakthroughs have the potential to let the United States “leapfrog” other countries that have invested heavily over the prior generation. The concept of leapfrogging usually applies to developing countries—for instance, not having to install traditional telephone infrastructure because the population can just adopt mobile phones. But after decades of failing to invest in our industrial base, we now find ourselves in a similar position. Skipping the entire wave of industrial process developments and robotics around which other countries have built their advanced manufacturing sectors, we can embrace the incoming wave of innovation, on which we are not already behind. Of course, a disproportionate share of upstream scientific research and technological progress always originates here, but we have usually been happy to see it commercialized and scaled abroad. What happens if we actually keep it here?

Artificial intelligence is the obvious example. AI can enable not only new forms of robotics and automation, but also new basic materials science, improved machine tooling, and more efficient logistics. Dean Ball wrote a fantastic essay on these opportunities last year, “Move Fast and Make Things”:

What constitutes the basic industrial infrastructure of manufacturing? Generically, it is the ability to move raw materials through processes such as casting, machining, welding, and finishing, and then assemble those processed materials reliably into useful things. Basic as these steps may sound—in fact, partially because they sound basic—the U.S. lags behind in virtually all of them.

A new generation of firms and entrepreneurs is rebuilding our industrial base with fresh thinking and new technologies applicable at each step—first and foremost, artificial intelligence.

This week, Shyam Sankar, Palantir’s Chief Technology Officer, made a similar point: “AI isn’t about AI – it is our asymmetric advantage to deliver country-scale transformation. AI is about Reindustrialization. AI is how we give the American worker superpowers and make them 50x more productive. American leadership in industrialization is re-emerging: Mobilize.”

He was doing this in the context of celebrating a new partnership with Nvidia, which is somewhat ironic, because Nvidia’s position is that we should erase this asymmetric advantage by quickly expanding China’s own AI capacity (which Nvidia would profit from). In Nvidia CEO Jensen Huang’s view, “Does it really matter who gets there first? I think in the final analysis, I don’t think it does.” All of which suggests that perhaps the White House should not take Huang’s advice on selling his chips to the CCP.

But I digress. Exciting news emerged on other fronts as well this week. Be sure to read the New York Times story on Substrate, a new company trying to develop new ways of etching transistors on silicon. (And for more, read SemiAnalysis’s breakdown of the new technology.) Researchers at UT-Austin, meanwhile, are pioneering new ways of processing rare earths. (Tanvi Ratna has a good breakdown there.)

Commercializing and scaling technologies like these will take years; they do not constitute an argument against making the investments necessary today to re-shore advanced semiconductor manufacturing or rare earth processing. As importantly, they do not provide some counterargument against trade protection and industrial policy. One might be tempted to think, this is why concern about China’s dominance is overblown; the winds of creative destruction are always blowing and one era’s dominant producer is the next era’s laggard. And in free markets, there’s truth to that sentiment. But globalization has replaced that model with one in which the winds only blow in one direction, ensuring that, regardless of who develops the technology, certain countries are the best places to build it. By refusing to play that game, the United States has ensured only that it loses every time.

A unique culture of upstream innovation combined with rules and incentives for scaling that innovation in the United States, with American workers, was the secret sauce of American capitalism for most of the twentieth century. We can succeed again. Not by rebuilding mid-twentieth-century factories, or by just replicating ones operating abroad today, but by being the place where the next generation of technology takes root. – Oren

CHECKING IN ON THE GOVERNMENT SHUTDOWN

Political winds may have begun shifting this week, as some prominent union leaders began putting pressure on Democrats to reopen the government. Teamsters president Sean O’Brien joined Vice President J.D. Vance at a White House press conference, and wrote, “Senators should stop screwing around and pass the House-passed clean, short term funding bill.” Everett Kelley, president of the largest federal workers’ union, likewise issued a statement calling on Congress to “reopen the government immediately under a clean continuing resolution that allows continued debate on larger issues.” Asked about his break from the Democratic Party line, he responded, “I don’t feel like I owe anybody.”

SPEAKING OF THE DEMOCRATIC PARTY’S COLLAPSING COALITION…

“Left-wing ideas have wrecked Democrats’ brand, new report warns.” At Semafor, David Weigel has the story on a new analysis of where Democrats have gone wrong. The underlying report, Deciding to Win, is chock full of interesting data, like the exploding emphasis on race, climate, guns, and LGBTQ issues in the party’s platform.

One fascinating finding, apropos of Oren’s essay earlier this week on the liberal elite’s foolish opposition to tracking and empty platitudes about a “life of the mind,” is that “get rid of tracking in public schools” is among the least popular of the Left’s positions, right up there with “defund the police” and so on.

In other collapsing consensus news, Bill Gates has abandoned climate catastrophism:

Although climate change will have serious consequences—particularly for people in the poorest countries—it will not lead to humanity’s demise. People will be able to live and thrive in most places on Earth for the foreseeable future. Emissions projections have gone down, and with the right policies and investments, innovation will allow us to drive emissions down much further.

Unfortunately, the doomsday outlook is causing much of the climate community to focus too much on near-term emissions goals, and it’s diverting resources from the most effective things we should be doing to improve life in a warming world.

As Oren wrote more than eight years ago:

The idea that humanity might prepare for and cope with climate change through adaptation is incompatible with catastrophists’ outlook. Yet if the damage from climate damage can be managed, anticipating challenges through research and then investing in smart responses offers a more sensible path than blocking the construction of pipelines or subsidizing the construction of wind turbines. Catastrophists countenance progress only if it can be fueled without carbon-dioxide emissions. Yet given the choice, bringing electricity to those who need it better insulates them from any climate threat than does preventing the accompanying emissions.

Welcome back to sanity, Bill.

PROGRESSIVE BILLIONAIRES MAKING GOOD POINTS, CONT’D

As long as we’re celebrating Bill Gates, a tip of the hat to Michael Bloomberg as well, for his eminently sensible editorial: “AI Won’t Give American Children the Education They Need”:

…tech companies that seek to sell hardware and software to American schools march to the beat of shareholders, not students — and if their utopian vision takes a dark turn, it is children and families who pay the price. If history is any guide, parents and educators should think twice before joining the big parade.

For the seminal discussion of these misaligned interests, the repeated harm to education, and the framework necessary in the context of AI, check out the recent paper from American Compass’s Brad Littlejohn: Teaching to the Tech.

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AND OF COURSE, THE MOMENT YOU’VE BEEN WAITING FOR…

YOUR TRADE ROUND-UP

A big week this week, to say the least, with President Trump touring Asia and meeting with China’s President Xi Jinping. The big news is that there was so little news, which is a good thing. The United States and China have settled into a ceasefire posture in which each is attempting to limit investment and disentangle supply chains from the other, while limiting unnecessary costs along the way, and that’s as it should be.

Two areas of concern to watch closely:

• Is President Trump still considering advanced AI chip sales to China? That would be a huge mistake, as American Compass lays out in a new policy brief, Stop Selling the Rope: Protecting American AI Dominance from China’s Globalization Playbook.

• Does President Trump want to encourage direct investment by Chinese companies in the United States? That would be a huge mistake too, as American Compass has explained in its seminal paper on A Hard Break from China.

In Southeast Asia, the United States struck what appear to be quite robust agreements with Malaysia and Cambodia that would contain China’s mercantilism. Peter Harrell has the rundown.

In Japan, channels for the $500B+ in investment commitments are beginning to take shape, according to the Financial Times: “The US government and the owners of Westinghouse have struck an $80bn deal to build a fleet of nuclear reactors, using funding from a trade agreement with Japan.”

In Europe, the time for choosing continues to steam toward EU leaders like an oncoming train. “There is a growing sense that for officials in Brussels, Paris and increasingly Berlin, an independent Europe needs to be more muscular when it comes to policy towards Beijing,” reports the South China Morning Post. Meanwhile, “Chinese Auto Giant BYD Posts Fivefold Sales Surge in Europe,” per the Wall Street Journal. And, “German Firms Hand Over Secrets That China Could Use for Leverage,” according to Bloomberg.

How did we get here? Rest of World has the story of “China’s $143 Billion Push to Dominate the Global EV Industry.”

Where are we going? “China Will ‘Save’ European Auto Jobs But Devour Rivals, Warns Ex-Stellantis Chief,” in the Financial Times:

Chinese carmakers will end up as “saviours” of European factories and jobs, in a creeping takeover that will hasten the demise of some western manufacturers, the former head of Peugeot and Jeep maker Stellantis Carlos Tavares has warned. In a return to the limelight after leaving Stellantis nearly a year ago in a boardroom clash, Tavares sketched a gloomy picture for European auto groups in particular, as they grapple with stringent emissions regulations, the global trade war and shifting policy on electrification. Tavares told the Financial Times that this fallout over the next 10 to 15 years would happen in part as China’s carmakers, already on the lookout for takeover targets, make further inroads in Europe, building up capital stakes or buying factories on the verge of closure.

The Council on Foreign Relations’ Brad Setser has the brutal epilogue: EU car exports to China are in freefall and “will drive a shift in German politics, but with a lag. Relying on China for demand proved almost as costly as relying on Russia for natural gas supply.”

All of which explains why Canada is… oh no, wait, in a fit of spite, “Canada Set to Side With China On EVs.” If Canada were to do this, it would find itself outside the renegotiated USMCA (USMA, then). Which is why it won’t happen. But sure, have fun Canucks. Not much else to do there in the winter…

As for everyone else, enjoy the weekend!

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