Earlier today at the Reagan Library in California, Treasury Secretary Scott Bessent delivered a notable speech titled “While America Slept.” Oren has more:
When delivering remarks at a “Reagan National Economic Forum” at the “Ronald Reagan Presidential Foundation and Institute,” one generally quotes liberally from former President Ronald Reagan, connecting the speech’s themes to the Gipper’s own thinking and legacy. So this morning’s remarks by Secretary Bessent were notable for his choice of Reagan maxim:
One thing that has made our Republic great is that we don’t hide from our mistakes. We learn from them; then we go on and do things better than we did before.
This was not a speech that paid tribute to the former president, but rather one about how we had gotten American economic policy so wrong for so long, and what we now need to do about it. In that respect, it deserves to be heard as a seminal statement about the Republican Party’s return to conservative economics. These were not words you could have found coming from a Secretary of the Treasury in any other GOP administration of the past 50 years:
The truth is that for too long, America had been asleep. We mistook comfort for strength. We treated efficiency as a substitute for resilience, and consumption as a measure of prosperity. We told ourselves that so long as goods were cheaper overseas, it did not matter whether factories went dark in Michigan, Ohio, or Pennsylvania. We assumed that supply chains would always function smoothly, adversaries would always behave responsibly, and the invisible hand would correct vulnerabilities that too few in public life had the courage to confront.
Secretary Bessent argued that, fundamentally, for the nation, economic issues are issues of sovereignty. “We lost sight of a foundational principle that previous generations understood instinctively: economic security is national security,” he said, “for a nation that cannot manufacture, mine, ship, or refine its needs gradually cedes its strength—and sovereignty—to others.” And, later on, “We talked about GDP, but not enough about its composition. And we prized low-cost inputs without first asking whether a nation can remain sovereign when it loses command over the things that matter most.”
The emphasis on sovereignty elevates industrial strength from a local issue of good jobs and strong communities past the macroeconomic drivers of growth and dynamism, past the concerns about resilience in the face of crisis, all the way to the level of national grand strategy. Making things matters, ultimately, because only by making things can a country control its own destiny. In this respect, analyzing manufacturing through a lens like “comparative advantage” overlooks its indispensable role in guaranteeing liberty.
Secretary Bessent makes the point that the root cause of this miscategorization is the notion that the market is solely a tool of consumption. “In reducing economics to consumption, we forgot production. We measured abundance at the checkout counter rather than the factory gate.” And then, in the speech’s best passage, he offers a very effective metaphor:
A country cannot outsource its industrial commons, ignore strategic concentration, and expect to remain secure, for manufacturing is more than output on a balance sheet. It is a reservoir of practical capability: engineers and welders, tool-and-die makers and logistics networks, plant managers and workers who know how to solve problems on the factory floor. When that ecosystem is strong, a country can adapt quickly. When it is hollowed out, adaptation becomes slower, more costly, and less certain.
The notion of industry as “reservoir” articulates more succinctly the point that Mark DiPlacido and I made in our essay on “Big Stick Economics” about what we called 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 reason for this, we argued, is that:
No nation can afford to maintain a defense sector at permanent wartime scale, nor would such a sector—dependent entirely on government funding and direction—be an innovative, efficient, or flexible one. National power must rest on a foundation of productive peacetime economic activity that not only spreads prosperity but also provides the prerequisites of military force.
Secretary Bessent’s concept of a “reservoir” captures this idea perfectly. A reservoir is constantly drawn from and replenished, maintaining both a steady flow of output and a large stock in reserve that can be deployed at any time. The market will not sustain a reservoir if water can be sourced more cheaply from elsewhere. But a nation that puts its adversary’s hand on the tap is courting disaster.
We are now alert, Secretary Bessent concludes, to the facts: “That secure supply chains matter as much as stock indices. That productive capacity is power. That trade policy, industrial policy, and national security policy must all fit together, or they will each fail separately.” This is precisely the robust national economic policy that has long been part of the American tradition, and may finally be returning to the fore.
On Tuesday, Secretary Bessent will join me on stage at American Compass’s annual New World Gala to discuss these issues and many others. We’ll share those remarks with all of our subscribers later in the week. — Oren
DOUBLING DOWN ON THE MUDSILL
The artificial intelligence labs insist we stand at the precipice of a new industrial revolution, which will not only automate significant segments of the economy’s professional-class cognitive work, but also unleash unprecedented productivity across the physical economy of warehouses, factories, and fields. Word of the revolution has apparently not reached the House Agriculture Committee, whose chairman, G.T. Thompson (R-PA), has begun circulating legislation that would amount to a “dramatic expansion” of the H-2A Temporary Agricultural Workers program. The proposal would redefine any job lasting under 350 days in a year as “temporary”—opening the program to year-round operations like dairy farms—and would include a suite of wage suppression measures: an entry-level wage floor pegged to the 17th percentile of what comparable domestic workers earn in the state, a cap on how fast even that meager floor can rise, and permission for employers to deduct housing costs from workers’ pay.
As a matter of developmental economics, the proposal is folly. Cheap labor is a technology policy by other means. When an apple grower can staff its orchard with cheap and exploitable workers, the robotic harvester that costs tens of thousands of dollars is an uneconomic investment; the machine is never commercialized at scale, and the industry remains locked in a low-technology trap. In other words, permissive immigration policy not only suppresses the wages and conditions under which domestic workers toil, but also the innovation that would make higher wages possible. Thompson’s bill would flood the fields with more cheap labor at the precise moment the technology to replace it may finally be maturing, removing the pressure that would induce farmers to adopt it.
In defending the legislation, a committee aide reached, inevitably, for the oldest line in the cheap-labor playbook: farmers “can’t find Americans willing to do these important jobs.” As Daniel wrote this week in Commonplace, in “From Human Bondage to Open Borders,” the phrase “jobs Americans won’t do” is the latest translation of the “mudsill theory”—one of the oldest arguments in American political economy, which the antebellum South used to justify slavery, most notoriously by a slaveholding senator named James Henry Hammond:
The “mudsill theory” rests on three premises: that certain work is beneath the dignity of citizens, that a civilized society nonetheless requires someone to do it, and that the solution is to source a subordinate class whose legal status forecloses the possibility of refusal. That structure persists to the present day.
Substitute “immigrant” for “slave,” and a modern mudsill theory echoes Hammond’s in its core premise. It does not argue that agricultural work should be improved, mechanized, or made attractive to American workers with better wages and conditions. It argues that Americans are “done” with it, permanently, and that the nation must therefore allow for the importation of a labor force willing to do what its citizens will not. In other words, it does not call for the abolition of the mudsill, but for its outsourcing.
As a matter of both economics and principle, Congress must reject Thompson’s attempt to double down on the modern mudsill theory and the two-tiered labor system it rationalizes.
GOOD WEEKEND READS (AND LISTENS)
Pope Leo XIV released his much-anticipated encyclical, Magnifica Humanitas (“Magnificent Humanity”), on Monday. The document addresses the social, economic, and political dimensions of AI, and addresses questions of human dignity, labor, and the common good within the tradition of Catholic social teaching running from Rerum Novarum (1891) through Centesimus Annus (1991).
BONUS LISTEN: American Compass Policy Director Chris Griswold, Leah Sargeant, and Max Bodach joined Oren to discuss the encyclical on this week’s podcast.
BONUS READ: Idols of the Valley by Yuval Levin in The New Atlantis
The New A.I. Money Should Be Spent on Beauty, by Ross Douthat in the New York Times
How Ben Sasse Raised Me, by Alex Sasse in The Free Press
THE TRADE WAR’S EUROPEAN THEATRE
As we have been arguing in Understanding America for much of the past year, the European Union cannot remain neutral in a global trade war wrought by China’s export-driven growth model and the high tariffs the Trump administration has imposed to protect the American market from it. By walling off the U.S. market, those tariffs push China’s overcapacity toward whatever economies remain open to it, leaving Europe near the front of the line and facing a very simple choice: absorb Beijing’s glut, or build the barriers required to defend its own industrial base.
Evidence this week suggests the Europeans might, at long last, be ready to fight. The New York Times reports that Europe Is Edging Closer to a Trade War With China, writing that “as cheap goods pour in, threatening the continent’s manufacturing sector, a search for solutions is becoming increasingly urgent.” The Financial Times reported that the trading bloc’s industry commissioner, Stéphane Séjourné, said Brussels will broaden its safeguard tariffs and import quotas to cover entire sectors—chemicals, metals, clean technology—in an escalation from heretofore firm-specific duties, describing the Chinese import surge as an “existential” threat.
The Financial Times also published an op-ed by columnist Soumaya Keynes that begrudgingly argues the Europeans must embrace the t-word, international-rules-based order be damned:
I spent years feeling smug, criticising the Trump administration for blowing up the rules-based trading system. It seemed clear that China’s economic model was causing problems elsewhere, but equally clear that chaotic unilateralism was the wrong approach. Better to join with allies and file a big, boring dispute at the World Trade Organization, accusing China of foul play. It’s time to move on. Sadly, navigating today’s era of economic conflict by appealing to the rule book is like turning up to a knife fight with a Scrabble manual. You might feel principled complaining that “stabbing your opponent” isn’t fun and certainly won’t deliver 50 bonus points. But you’ll still lose. Since the game has changed, so must the strategy. Which for the EU means turning to trade barriers—and tariffs.
Keynes is describing, with unusual candor, the basic math problem we’ve been writing about. It remains to be seen whether Europe will be quick enough to defend its manufacturing base before China’s glut turns the continent into a “museum” of a once-great industrial power, and whether it will have the resolve to hold the line in the face of retaliation: China Threatens to Launch Trade Probes Against the European Union (Wall Street Journal).
ON THE HOME FRONT
Writing in the International Monetary Fund’s Finance and Development Magazine, U.S. Trade Representative Jamieson Greer argues that “trade theory must catch up with tariffs, industrial policy, and the costs of globalization” while defending the use of tariffs to remedy persistent global imbalances:
The United States is using tariffs and agreements on reciprocal trade to encourage inbound productive investment, increase incentives for domestic production, and open markets for US exports. The IMF concedes that durable rebalancing requires action by both surplus and deficit economies. Without real pressure a surplus economy has no reason to act, but that does not mean that deficit countries must remain inert. Hence, the United States is taking bold action to lay the foundation for an international economic system grounded in balance, reciprocity, fairness, and resilience.
And speaking of the administration’s Agreements on Reciprocal Trade, Peter Harrell has a new paper in Brill’s journal of Law & Geoeconomics with an exhaustive account of their economic security provisions, and what it means for the future of trade deals and the administration’s China-containment strategy. Read the paper and his Twitter thread.
Meanwhile, as negotiation for the renewal of the United States-Mexico-Canada Agreement heats up, the Trump Administration Wants Autos Under USMCA to Be at Least 50% Made in America (Wall Street Journal), a demand that would significantly increase the amount of U.S. content required in cars to gain preferential access to the American market. And in other reindustrialization news, The Trump Administration Is in Talks to Fund U.S. Drone Companies (Wall Street Journal) “as part of its effort to increase domestic production and lower the costs of the increasingly vital weapons.”
For a Bonus Reindustrialization Weekend Read, Friend of the ‘Stack Patrick McGee asks “Can Intel Save America?”
THE FRUITS OF OUR LABOR
In the Wall Street Journal, Greg Ip writes about a concerning number buried in this week’s GDP report: labor’s share of national income fell to 51%, the lowest since records began in 1947, while profits’ share hit 12%, the highest since 1950. Since the end of 2019, real hourly wages are up 3% and profits are up 50%. The AI boom is widening the gap further.
What can be done? One potential answer comes from Seoul. Samsung’s union just approved a landmark profit-sharing deal, handing 78,000 workers 10.5% of operating profit—an average bonus of nearly $400,000—on the heels of a similar agreement at rival SK Hynix. It is a model of pre-distribution: workers capturing a share of the AI windfall directly, at the point of production, instead of leaving the question to after-the-fact transfer taxes on profits and billionaires. It takes a unionized workforce to pull it off, but the approach could be replicable; the unionized building trades laying the foundations of America’s data center buildout are well placed to claim a share of the boom they are physically constructing.
For too many executives, a successful AI rollout is measured by how many workers it lets them shed. But as American Compass argued in For Whom the Machine Toils, and our colleague Chris Griswold wrote in I, Sharpie, it doesn’t have to be that way.
The latest example comes from Schneider Electric, the French electrical equipment and energy-management conglomerate. As the New York Times reports, the company is deploying AI across its 160,000-person workforce to make employees more productive rather than to replace them. In its call centers, the company uses AI for document hunts that agents once did by hand, surfacing the answer and its source so customers get faster, more reliable responses. And at one of its plants in Normandy that produces the switches used to control motors, elevators, and electric vehicles, Schneider uses AI to tell operators exactly when a production batch has been washed enough (a process that was long a matter of guesswork), cutting waste by nearly three-quarters.
If the gains of the AI boom are going to reach workers, policy will have to make augmenting them the profitable choice, not just the principled one.
Enjoy the weekend!
As long as both parties focus on the stock market and financial engineering, manufacturing cannot survive. I spent 40 years in manufacturing. Just went to my college reunion. All the engineers that switched to financial sales and advice are now worth 100-200 x more than me……and I graduated at top of dept in on,y 3 years from on of top 10 Chemical engineering schools in the country. Our congress can’t even pass a no stock trading rule (forget Trump 3,711 trades last reporting period. We need Mike Rowe as head of Commerce department.
The best example of Bessent's point is the extraordinary mobilization of industry for WW2. We had a robust manufacturing base in the civilian sector. Kaiser pivoted from civil engineering to producing massive numbers of ships building the shipyards first. We would be hard pressed to do that today.