An Indefensible Increase in Defense Spending

And more from this week…

Whether it was celebrating each new Section 232 announcement, partying at a rooftop happy hour, or just kicking back with a cold, refreshing, duty free domestic brew, we hope you’ve enjoyed Liberation Day week.

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.”

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!