Like A Bridgewater Troubled Over China

And more from the week that was...

It has been a good week for vibe shifts, beginning with Bridgewater’s exit from all US-listed China stocks. The hedge fund’s iconic founder, Ray Dalio, infamously defended the Chinese Communist Party’s authoritarianism as merely that of a “strict parent,” dismissed the idea that he could or should distinguish between the human rights records of China and the United States, and explained that he is “basically just trying to follow the rules, understand what’s going on, and invest properly”; as for where it was appropriate to invest, he would “leave it to the government to make those decisions.” We finally have a government that is obliging, he is now out at Bridgewater, and Bridgewater is now out of China.

At the Washington Post, George Will has discovered the wonders of industrial policy. Six years ago, Will said that I was an “Elizabeth Warren conservative” and a socialist:

The Manhattan Institute’s Oren Cass advocates “industrial policy” — what other socialists call “economic planning” — because “market economies do not automatically allocate resources well across sectors.” So, government, he says, must create the proper “composition” of the economy by rescuing “vital sectors” from “underinvestment.” By allocating resources “well,” Cass does not mean efficiently — to their most economically productive uses. He especially means subsidizing manufacturing, which he says is the “primary” form of production because innovation and manufacturing production are not easily “disaggregated.”

But now he is concerned that “America’s withered defense industrial base urgently needs ramping up.” You see, “our nation, which faces global challenges from two near-peer adversaries, has chosen to not have an adequate defense industrial base.” We must repeat the “exhilarating” story of “how the nation magnificently marshaled its talents for making things” to win World War II.

The sentence construction is painfully funny, with “nation” as the subject followed by active verbs. How does a nation “choose” to not have an adequate industrial base? How does it “marshal” its talent? *whisper* He means public policy. To rescue vital sectors. From underinvestment. By allocating resources to things other than what the market decides is their most economically productive uses. He especially means manufacturing. Which is the primary form of production necessary to a defense industrial base. *end of whisper*

Meanwhile, the administration has sounded a number of encouraging notes, on China and trade:

• Semiconductor tariffs to start low, ramp up. Reuters reports that new tariffs on semiconductors “would be lower at the start to allow companies to build up domestic manufacturing in the U.S., rising sharply later, following a pattern he has also outlined for tariffs on pharmaceuticals.” Such phase-ins, we have been arguing at American Compass, are vital to minimizing the costs and maximizing the benefits of tariffs.

• Chinese foreign direct investment off the table: Bloomberg reports that “Treasury Secretary Scott Bessent dismissed the possibility that Chinese investments in the US could be part of any trade pact, comments that narrow the options for the two sides to resolve their running dispute. When asked if China could make pledges worth billions of dollars like Japan, South Korea and the EU have as part of their trade agreements, Bessent said ‘my sense is no because a lot of the buyout or the funds from the buyout are going to go to critical industries that we need to reshore and a lot of those need to be reshored away from China.’” That’s by far the clearest sign yet from the administration on the very important point that foreign direct investment from China cannot be an element of reindustrialization and rebalancing trade.

• China tariffs holding steady: Bessent also indicated, per Politico Pro, that he “expected Trump’s tariffs on China totaling 55 percent to remain in place, even though the two sides plan to engage in more high-level talks in coming months. The one exception could be possibly lifting the 20 percent tariff punishing China for fentanyl shipments to the U.S., that is if Beijing addresses U.S. concerns, he said. But even there, Trump could wait up to a year before removing it to ensure any Chinese action to stop fentanyl traffic has been effective.”

And in Congress, the House Select Committee on the Chinese Communist Party released its own redlines for any prospective deal with China that are, to put it mildly, aggressive. Any deal, they say, must: eliminate PRC subsidies and industrial overcapacity, end the trade deficit, end currency manipulation, close Xinjiang camps and allow inspections, tear down the Great Firewall, and enshrine Taiwan’s sovereignty. Suffice to say, there is zero chance of such a deal emerging. In effect, the committee’s statement implies the same view that we’ve advanced at American Compass, which is that no deal is possible and a hard break from China must proceed.

ONE THING TO READ

Read this feature by Ros Thomas in The Australian about the effects of social media on kids: These kids told us they want to stop scrolling. But they don’t know how.

Anika, 15, from the coastal suburbs of Perth, says her phone addiction has become impossible to manage. She points out that kids have had free reign on social media for a decade.

“We’ve watched anything, any time we want. Like, I was only ten when I saw porn for the first time, and I was so shocked by it but then so curious that I got low-key addicted for a while and had to talk to Mum about it. Which makes me worried about what my little brother will be watching soon – he’ll be getting hold of porn and thinking weird stuff is OK.”

Anika shows me her screen time from a recent weekend: “Friday, eight hours 57 minutes.” She gasps. “Saturday was nine hours 31 minutes – look! I stayed up on TikTok until 2am. I can’t last a day without it. Probably not even an hour. To delete that would be like turning off my life support. It’s like an oxygen tube to my friends because my phone is my real life more than my actual life. Unless everyone stops, there’s no way any of us can stop.”

Now seems a good time to mention that Meta finds itself in hot water yet again, this time for apparently creating, per Reuters, a “content risk standards” document approved by legal and policy staff that would permit the company’s AI chatbots to “engage a child in conversations that are romantic or sensual.” And of course, that’s when Meta knows the child is under the age of 13.

I’ll take this opportunity to just reprint an excerpt from an early-May U/A:

Meta’s ‘Digital Companions’ Will Talk Sex With Users—Even Children | Jeff Horwitz, Wall Street Journal

The question is no longer whether the tech companies plying kids with their toxic wares will allow any shred of morality to weigh on their decisions (they will not), but whether the rest of us are prepared to do anything about it. Especially when it comes to AI tools, we should probably consider a form of “strict products liability”—no need to prove “negligence,” a firm is automatically liable for whatever its AI does. And then we are probably going to need to impose real-world standards on the digital world by default. Would it have been illegal for a person to do something? Then it’s illegal for an AI to do it. And finally, we’ll need to impose personal liability: if your AI commits the crime, you go to jail.

We know what we would think if Mark Zuckerberg started engaging in sexually explicit conversations with thousands of minors. Why should we feel differently if he’s just unleashing a software program to do the same, for profit?

If you ran a convenience store and repeatedly sold hardcore pornography to a nine-year-old, you would lose your store and probably go to prison. The same should go for the tech overlords.

As best I can tell, the argument against that approach amounts to: but it will be impossible to comply, they’ll have to shut down video sharing on social media. Fine. What is the benefit of those services that exceeds this harm? “If widespread children’s access to hardcore pornography is the price of my TikTok feed, it’s a price I’m prepared to pay!” said no one. Or at least not publicly… maybe people do in fact feel that way, but are precluded by some sense of shame and whatever public norms remain. OK. Good. Or if someone does want to make the case, by all means, let’s hear it. (And here’s a crazy thought, maybe if social media could only be profitable if provided safely, companies would innovate to provide it safely. Markets!)

To again quote Anika, age 15, from Perth, who is apparently much wiser than most of the policymaking establishment, “Unless everyone stops, there’s no way any of us can stop.”

TARIFF CORNER

Another week, another bout of confusing economic data. After last month’s producer price index (PPI) came in well below expectations, this month’s came in well above, in both cases driven by large swings in services prices—of course prompting dramatic inferences about impacts of tariffs on goods. The consumer price index again came in cooler than expected.

An especially sorry effort to explain what’s going on came from the Wall Street Journal: “Why Haven’t Tariffs Boosted Inflation? This Theory Is Gaining Traction.” The theory? That the weighted-average tariff rate is closer to 9% than 12%, in part because “because many U.S. companies and consumers bought less from countries with higher levies, particularly China.” But, see, encouraging a shift in purchases away from countries with higher tariffs is, like, the point of tariffs. Discovering that your model of tariff impacts is wrong because tariffs are having the impact they are supposed to have isn’t a new “theory,” it’s just a reminder that most economic models forecasting tariff disaster entirely fail to account for the way tariffs work. Next we’ll learn that tariffs aren’t slowing GDP growth the way the models expected, because tariffs encourage more domestic investment in manufacturing, which the models also tend to ignore.

A Private Equity Digression… Meanwhile, the S&P 500 hit yet another high—now up about 30% from its post–Liberation Day plunge. That’s a nice return if you can get it, though not as nice as some private equity funds are apparently claiming by buying up depressed stakes in other private equity funds and then marking the value of those stakes right back up to the value the depressed funds still try to claim. Let’s say Bad At Deals Capital has a fund that it claims has $500 million worth of assets, but its investors know that’s a gross overstatement. So Woeful Joe, who is paying a hefty fee to BAD Capital to slowly lose his money, decides to sell his stake at a lower valuation. Maybe he owns 10% and wants to get $25 million for it while he still can. Enter another fund, Also Bad Capital. ABC buys Joe’s 10% stake for $25 million, and then immediately records the value on its own books as 10% of the $500 million valuation claimed by BAD Capital. $50 million. ABC just doubled it’s money!

(No, it didn’t. It would be more accurate to say ABC just committed fraud. But if you were a not especially sophisticated private equity investor, you’d think ABC was doing a great job… for now. This is why we have traditionally not let unsophisticated investors invest in private equity. And it’s one of the reasons why the Trump administration’s move to allow 401(k) investments in private equity is a very bad idea.)

Consumption Requires Production. Michael Pettis had an excellent Financial Times column (and Twitter thread) arguing, “We must rethink the conventional wisdom that the purpose of trade in the US is mainly to lower the price of imports. Ultimately, rising consumption can only be sustained by rising production. That is why for the US to improve long-term prosperity, it must recognise that the only way trade boosts domestic welfare and consumption is by boosting domestic production. In the end, it is only rising productivity growth that sustainably drives consumption growth.”

This is the definitive rebuttal to market fundamentalism’s argument that production matters only as a means to enjoying consumption. Even stipulating that blinkered understanding of human flourishing, you’re still left with the problem that the means is necessary to the end, and celebrating a model of consumption not supported by the prerequisite production is an absurd exercise in shortsightedness.

Trade Imbalances and Inequality. Pettis also highlights “an interesting new paper by Jan Mazza and Andrej Mijakovic that shows a relationship between income inequality and trade imbalances: ‘We document that higher income inequality is associated with higher current account balances. This link is economically meaningful, stronger for advanced economies, and robust to different ways of measuring income inequality.’”

Labor Standards. Relatedly, American Compass’s Daniel Kishi had an excellent piece in Compact on the importance of, and potential for, much higher labor standards in trade deals as the vital mechanism to ensure trade based on mutually beneficial increases in production rather than one-sided labor arbitrage:

Of all the technical flaws in the badly broken international trade system, the one most intuitive to the layman is the race to the bottom on labor. In the global free market, multinational corporations have a strong incentive to set up shop not where labor is most productive but where it has the least power and can be most easily exploited. For nations eager to attract investment, selling out their own workers is a sure path to success, and sometimes a necessary one.

…

Trading partners that want access to the US market must ensure their workers have the right to organize and collectively bargain with their employers. Although there are many ways lawmakers can reform US labor law to better serve American workers, international trade must not force them to compete against those who do not enjoy the same rights they do.

But What About the Law? And finally, much discussion continues on the legality of the tariffs that Trump has imposed using emergency authority. The U.S. Court of International Trade has ruled that the tariffs are unlawful, a decision stayed pending appeal to the U.S. Court of Appeals for the Federal Circuit, which has heard the case and will likely issue a decision in the Fall. That decision itself would then be appealed to the Supreme Court, which would most likely issue a decision early in the new year.

As we’ve repeatedly emphasized at American Compass, these tariffs should be codified in legislation, to cure any legal deficiencies and to create the stability and permanence necessary to restructures supply chains and induce higher levels of domestic investment. To that end, note that Congressmen Jared Golden (D-ME) and Greg Steube (R-FL) have just introduced the Secure Trade Act, which would do just that. Bipartisan legislation to advance the administration’s top policy priority? It would be nice to see a full-court press from the White House to move this forward, and for Members of Congress who claim to support the agenda get on board.

In the meantime, if you want the in-depth case for the legality of the tariffs, read the new essay by Catholic University’s Chad Squitieri in the Harvard Journal of Law & Public Policy. Breitbart’s John Carney provides a good summary here. For the case against, the Carnegie Endowment’s Peter Harrell provides a good summary here, and is co-author of the amicus brief filed by members of Congress opposing the tariffs.

In the Washington Post, Jason Willick argues that the administration’s own advocacy on the matter has not been especially effective, from an over-the-top letter sent by the Department of Justice to the appeals court (“These deals for trillions of dollars have been reached, and other countries have committed to pay massive sums of money. If the United States were forced to unwind these historic agreements, the President believes that a forced dissolution of the agreements could lead to a 1929-style result.”) to Secretary Bessent’s assertion on Fox Business that the Supreme Court will have a hard time ruling against the tariffs given the massive amount of revenue collected. Willick notes that the case turns in part on whether the tariffs primarily “regulate importation” (authorized by the statute) or usurp Congress’s taxing power. That the president is using the power to collect massive amounts of revenue is not exactly an argument in his favor.

MORE GOOD READS

How Technology Is Remaking the Family | Symposium, The New Atlantis. This whole issue of The New Atlantis is terrific, but the symposium on technology and the family is especially strong and timely. Relatedly:

• Inside Silicon Valley’s Growing Obsession With Having Smarter Babies | Zusha Elinson, Wall Street Journal

• The Next Parenting Trend Starts Before Conception | Ross Douthat, New York Times

How Canada Is Killing Itself | Elaina Plott Calabro, The Atlantic. You have to read an article that opens, “The euthanasia conference was held at a Sheraton.”

The Harvard-Trained Lawyer Behind Trump’s Fight Against Top Universities | Michael C. Bender, New York Times. A notable distinction between this Trump White House and prior Republican administrations is that they seek to counter the prior Democratic administration’s creative use of legal authority not by undoing it, but by doing it equally hard in the opposite direction. Lawyers like Ms. Mailman are the tip of that spear.

Data Centers Need Own Power Supply, US Grid Watchdog Says | Naureen S. Malik, Bloomberg. The fuse continues to burn on the political powder keg and case study in the limits of market pricing that is data-center energy demand…

Why the Divorce Decline Might Be Bad News | Leah Libresco Sargeant, Institute for Family Studies. Diving into the data, on both fertility and divorce, continues to show that the decline in marriage rates—affecting primarily people without college degrees—is the driver of demographic trends.

Does Earning $142,000 in New York City Make You Rich? | Eliza Shapiro, New York Times. Andrew Cuomo’s attacks on Zohran Mamdani for living in a rent-controlled apartment have highlighted the bizarre economics of New York City, where the median household income is $77,000 and the rent on an average studio apartment would consume half that. Relatedly: Zohran’s Park Slope Populists | John Carney, Commonplace.

Nobody’s Buying Homes, Nobody’s Switching Jobs—and America’s Mobility Is Stalling | Konrad Putzier and Rachel Louise Ensign, Wall Street Journal. Discussions of geographic mobility often conflate three different issues: who needs to move, who wants to move, and who is able to move. The goal should be that those who want to move can do so, and those who want to stay can do that too. Somehow, we seem to be achieving the opposite.

Enjoy the week!