ICYMI: Read this fantastic piece from Mike Lind in Commonplace on why tax-advantaged retirement accounts should not be speculating in private equity and cryptocurrency.
The monthly jobs data is out: a gain of 22,000 jobs was below expectations, and the unemployment rate, which held steady at 4.3%, was in line with expectations. As Oren wrote recently, this combination of very low absolute employment growth and an unemployment rate remaining low is exactly what you’d expect (and economists said they’d expect) during a period of aggressive immigration enforcement and declines in the foreign-born workforce. The data suggests that’s what’s happening—it’s unprecedented, but a necessary coming down from the open-borders sugar high.
Coming soon: look forward to next week’s American Compass Podcast, where we’ll be replaying yesterday’s Abundance Conference debate between Oren and Matt Yglesias on “Is Abundance Just Neoliberalism?” or, to use Oren’s preferred term, “Mitt Romney and Barack Obama’s love child with no personality and six Substacks.”
(While we’re on the subject, don’t miss Tesla’s new “Sustainable Abundance” schtick: “The elimination of scarcity will require tireless and exquisite execution … what matters most is that, together, we create a sustainable and truly abundant future for generations to come.” What do you do after you’ve handed over your key technology to China and then gotten crushed in that market, you’re hemorrhaging global market share as a result, and you find sales in a supposed-to-be red-hot EV market now set to decline for a second year in a row? There are always blog posts about Abundance! Whether those blog posts can continue to support a price-to-earnings ratio of 200 remains to be seen.)
But first, though not unrelatedly, Oren wants to highlight:
THE LATEST AI CHIPS DRAMA
Per my Twitter thread last night, there’s a fascinating drama playing out in Washington over Senator Jim Banks’s very good GAIN AI Act, which is now facing pushback from Nvidia that we can only describe as embarrassingly mendacious, even by Beltway standards.
Putting aside the larger question of whether U.S. companies should be selling AI chips to China at all (we shouldn’t), the legislation addresses the simpler question of whether U.S. companies should be selling chips to China that other U.S. companies want to buy. Because of the extraordinary demand for AI chips, especially Nvidia’s, and the long lead-time on expanding capacity, the market is what’s called “supply-constrained”: chips are being bought as quickly as they can be made; the question is who gets to buy them. The GAIN AI Act simply requires U.S. chipmakers to offer AI chips to American customers before selling them to China. It only blocks sales where more chips for China would mean fewer for American firms.
Enter Nvidia, which is leveraging every ounce of influence with the administration to get its chips into China, even when there are American firms that want the chips, because it is hell bent on gaining market share there, even if only for a little while. As Chris McGuire and I wrote in the Washington Post last week, companies like Nvidia—and their enablers in the Trump administration—are making the exact same mistake that the United States has been making in China for a generation now:
Advocates for the sales argue that the United States can further entrench its technological edge by supplying China, embedding U.S. chips at the heart of the Chinese AI “stack” and reducing the likelihood that indigenous Chinese firms develop their own alternatives.
U.S. firms spent a generation transferring their own technology into China, handing it global industrial dominance and helping to build up Chinese firms that proceeded to toss the foreign competitors out on their rears. Sure enough, the Trump administration has indicated that it might even take the disastrous step of permitting Nvidia to sell China the B30A, a modified version of its most advanced chip. Charlie Brown exercised greater caution in his attempts to kick Lucy’s football.
Nvidia and its CEO, Jensen Huang, have consistently said things that are, well, just not true, in an obvious, “we know they’re not true, and you know they’re not true, and you know that we know, and we know that you know, and yet you’re still saying them” sort of way. Recall such classics as Huang claiming with a straight face that "there's no evidence of AI chip diversion" even though by mid-2024 journalists were reporting on “eight distinct H100 smuggling networks” each moving at least $100 million of Nvidia chips into China, and the Financial Times has reported on “Nvidia AI chips worth $1bn smuggled to China after Trump export controls.” Did I mention Nvidia responded to the Trump administration’s export controls by announcing plans to open a research center in Shanghai?
It’s fair to ask why the administration is giving the time of day on policy considerations to a firm that conducts itself this way, let alone welcoming the CEO into the Oval Office to personally plead his case.
The problem for Nvidia with the new GAIN AI Act proposal is that it is on record as saying that all of its chips are sold out. Just last week, on its quarterly conference call, Huang told investors, “everything’s sold out.” Inconvenient for lobbying against a bill that asks it to sell to the United States in situations where everything’s sold out! So now their position is that the CEO of the world’s most valuable company, in the quarterly earnings call, just misspoke about the fundamental question of demand for its top products. In response to the legislation, they issued a statement that “our sales to customers worldwide do not deprive U.S. customers of anything,” calling chip supply constraints “fake news.” Mmhmm.
But wait a minute, here’s the thing: If Nvidia has all this spare capacity, why is it so worried about the GAIN AI Act at all? If it can produce chips that U.S. firms don't want (apparently their demand is sated!), the sale of those chips to China wouldn’t be restricted. So confusing. Unless Nvidia is just lying, in which case this would all make sense.
The GAIN AI Act has bipartisan support and will move forward unless the White House blocks it. Seeing as the premise is literally “America First,” this should be an easy one. — Oren
In related and perhaps better news: Reuters reports, “The U.S. will make it more difficult for global chipmakers Samsung, SK Hynix, and Intel to produce chips in China by revoking permission for the companies to receive American semiconductor manufacturing equipment there.” And per Bloomberg, “The US has revoked Taiwan Semiconductor Manufacturing Co.’s authorization to freely ship essential gear to its main Chinese chipmaking base, potentially curtailing its production capabilities at that older-generation facility.”
And illustrating that you don’t have to sell out your nation’s interests in a futile short-term cash grab, “Anthropic will stop selling artificial intelligence services to groups majority owned by Chinese entities, in the first such policy shift by an American AI company” (Financial Times).
WHAT ELSE ARE WE READING?
Raging against the machine, Senator Josh Hawley delivered a remarkable speech at the National Conservatism Conference yesterday, on the irreconcilable tension he sees between the direction of technological progress and the prerequisites of a healthy American republic:
The technologists have discovered Gilgamesh’s plant, they believe. The question is, can America survive their quest for immortality? Can the republic?
I suggest to you the answer is no, and for one simple reason. America is a nation founded on the idea of the common man. The American republic is premised on his worth and his liberty. But the transhumanist ideal rejects the common man’s worth. And artificial intelligence threatens the common man’s liberty.
To state it in the clearest terms, then: Americanism and the transhumanist revolution cannot coexist. And it is our job to see that Americanism wins.
Defending genuine liberty, American Compass’s Brad Littlejohn likewise contemplates the effect of “free trade” and “permissionless innovation” in a review of Quentin Skinner’s Liberty as Independence:
When America runs a trillion-dollar trade deficit with China, including supply chains critical to our military power, Americans understandably do not feel free. It does nothing to dispel this feeling to argue that China is willing to keep supplying us with cheap consumer goods—for now. America’s position in world affairs highlights the gap between Skinner’s two concepts of liberty perfectly. Economists enthuse that we enjoy free trade, with no interference in individuals’ and firms’ economic decisions. Yet many Americans seethe under a sense of dependency, knowing that their fate depends on decisions in which they have no representative voice.
Although Skinner does not himself touch on this angle similar, a similar dynamic is at work in the populist revolt against “Big Tech”. Here too, we find many commentators confused at the frustration voiced by many voters. After all, technology companies don’t force anyone to use their products. And their business model means keeping customers happy—which means giving them maximal freedom to explore the digital realm. But most of us have a strong feeling that this benevolent dictatorship is not in fact so benevolent, that our actions in this arrangement are not truly our own actions, and that that whatever opaque laws and algorithms we live under, we certainly have no representative voice in framing them. We know that we aren’t exactly free, yet we no longer have a vocabulary to describe that condition. Skinner’s account of liberty as independence can help.
WHAT DO THE PEOPLE SAY?
In the United States, “Americans Lose Faith That Hard Work Leads to Economic Gains,” reports the Wall Street Journal. “The share of people who say they have a good chance of improving their standard of living fell to 25%, a record low in surveys dating to 1987. … Nearly 70% of people said they believe the American dream—that if you work hard, you will get ahead—no longer holds true or never did, the highest level in nearly 15 years of surveys.”
Also from the Journal, on the pond’s other side, “for the first time, populist or far-right parties are leading the polls in the U.K., France and Germany.” Continuing to ban the parties and candidates may not be a sustainable solution.
And as for the experts, well, they say things like “Trump Crime Strategy May Work for Now, but Not for Long.” This is just one of those funny stories for which we should be grateful to have a hopelessly blinkered and left-leaning mainstream media. Sure, “since the president deployed hundreds of National Guard troops and federal agents to patrol city streets, crime has continued to drop in Washington.” But:
“The reason that surges are not particularly effective, and are generally disfavored by crime researchers and others who look at this stuff for a living, is because it’s a resource-intensive way of temporarily reducing crime,” said Thomas Abt, director of the Center for the Study and Practice of Violence Reduction. “If it does in fact reduce crime, that doesn’t address any of the underlying conditions.”
Of course, it was just five years ago that funding police forces was itself an underlying condition that needed to be solved… so it’s good to see a return to the idea that yes, policing does reduce crime, and funding it consistently with capable local forces should be the goal.
WHAT DOES THE DATA SAY?
The opioid epidemic has seen an encouraging decline in deaths over the past couple of years, but is that because opioid addiction is declining, or because we have gotten better at preventing deaths among users? New evidence from random drug-testing suggests that the rate of use may still be increasing: “More Fentanyl Shows Up in Random Workplace Tests.The positive rate in urine tests has doubled since 2020, lab firm Quest Diagnostics says” (Wall Street Journal).
AND WHAT DO THE PRIVATE EQUITY MANAGERS SAY?
Another week, another story about how “in recent years private equity has lagged behind the S&P 500. And much of what those funds earned for their investors in that time was on paper; endowments and other institutions were getting less and less cash that they could put to work in the booming stock market.” Sad!
This one was special, though, for the detail that higher interest rates are “making it hard for managers to get the prices they want for the companies in their portfolios.” Most kids learn at their first yard sale that just putting a $5 sticker on your baseball card doesn’t mean it’s worth $5 or that anyone will buy it, but the Masters of the Universe on Wall Street are still working that out.
MORE ON THE LABOR MARKET
At Spiked, Phil Mullan detects the gradually shifting consensus on the economics of immigration, conveniently timed to coincide with the political unsustainability of the old position on immigration, placing in stark relief the question of whether purportedly impartial economic models provide foundational truths on which to build policy or tend rather to reflect and support the prior political determinations of the economists building them.
The Conversable Economist notes that, “an American worker is at 1,811 hours/year, while a German worker is at 1,340 hours/year. If one thinks in terms of 40-hour work weeks, the German worker is working about 12 weeks per year less.” Always worth keeping in mind when comparing economic strength and standard of living across countries.
The New York Times discovers that enforcing immigration law reduces the number of workers. Who would have guessed! And get this, “‘If interest rates drop at all, the Florida market is going to pop. There are a number of big buildings that are just waiting on the sidelines to go,’ Mr. Arkin said. ‘Now you’ve got demand again, without supply. [Wages] goes up.’” Mr. Arkin said “the price of labor,” but it’s OK, we know what he meant.
And, Salesforce CEO Marc Benioff Says His Company Has Cut 4,000 Customer Service Jobs as AI Steps In (Fortune): “I’ve reduced it from 9,000 heads to about 5,000, because I need less heads.” But wait a minute, isn’t that the same Marc Benioff who said in July that “AI is doing 30% to 50% of the work at Salesforce now”? Yes, it is! As we noted at the time, that was obviously implausible, especially given that Salesforce’s financial results indicated neither dramatic reductions in costs nor increases in output. Now he’s promoting the rather more modest claim that AI is doing 30% to 50% of the work in the one department most suitable to AI deployment, accounting for less than 10% of staff. Makes more sense. And, given this track record, it’s probably safe to say that’s wildly overstated too. Remember to make such order-of-magnitude adjustments whenever you hear bold CEO claims about AI.
ALL IN THE FAMILY
In the Financial Times, John Burn-Murdoch finds “that the assumption that birth rates are falling across society in general is not really true. From the US to Europe and beyond, people who identify as conservative are having almost as many children as they were decades ago.”
In the Atlantic, Jean Twenge comments on a new Institute for Family Studies survey: “A common narrative has it that commitment and motherhood make women unhappy. New data suggest the opposite is true.”
And sure, if you want to close out the trilogy, you can check out Nate Silver on why conservatives are, in fact, happier. (We suspect it’s because so many of them enjoy reading Commonplace…)
CHINA SHOCK 2.0
Fascinating chart from The Economist’s Mike Bird on the decline in China’s capital productivity. He contrasts this with “panic over Chinese industrial prowess [which] has reached fever pitch.” However, the two go hand in hand: a willingness to accept lower returns on capital is key to China’s continued ability to strengthen its industrial base and grab global market share. “Free trade” with an economy willing to accept a lower return on capital to dominate strategically vital industries will not end well for those temporarily enjoying the much higher return of cryptocurrency and social media apps.
Relatedly, listen to Dan Wang on Santi Ruiz’s Statecraft podcast, discussing why we need to take the China challenge seriously, despite the economic headwinds it faces.
SR: Let’s talk about the future of Chinese economic growth. Productivity growth has been flat for many years. Wherever tariffs end up, there are likely to be constraints on Chinese exports. The population is aging rapidly. What do you think about the bear case for Chinese economic growth?
DW: I think that every factor you cite is indisputable. I also want to ask, “How could the leadership succeed?” There's no dispute that China is facing a huge amount of debt, broad deflation, a property crisis, the population is going down, and consumption spending has been limp. There's problems left, right, and center. But you can find all sorts of headwinds in any major economy. Coexisting with this ugly picture, you can cherry-pick some nice points too:
China is the world's largest automotive exporter.
China's trade surplus in manufactured goods continues to rise.
China is doing very well in artificial intelligence, which was not my expectation a year ago.
China is still making these very good strides in advanced manufacturing.
So, if we want to be Marxist about this — which I like to do every so often as a former reader of Quishi — Marxists reason through this concept of the contradiction. What is the central contradiction of the moment? [There are] economic headwinds. Move onto the business headlines, and you will see that electric vehicles and all sorts of products are continuing to make great advances overseas.
How do we reconcile that? About 50% of China's economy is pretty dysfunctional, but there's 5% that's gaining spectacularly. That 5% is the part we need to spend much more time thinking about. It will continue to de-industrialize Michigan, Ohio, and Germany. It’s the part threatening Silicon Valley's dominance. That has been my career so far: not to look at the broader morass of China's economy, because there is also a broad morass in the American economy as well. But to look at the 5% — maybe even the top 0.05% — of successes and ask, “What if that momentum continues?” We're going to have a much weaker Germany and Japan, and a somewhat weaker United States, because these countries will all be de-industrialized. What if China keeps making big strides in everything aside from AI, or even including AI? That is a pretty bad situation for the US. That's the scenario we need to be driven by, not the headwinds that are more macro in nature.”
As the Financial Times notes, “Chinese factories are installing about 280,000 industrial robots every year, or half the global total, bringing the country’s robot-to-worker density ahead of Germany and closing in on leader South Korea.” (Robot density in the United States is at roughly one-quarter of South Korea’s level.)
AND FINALLY, A RAPID-FIRE TARIFF CORNER
Always read Michael Pettis, this time at the IMF on what’s “Behind the Veil of Tariff Fixation.”
In the New York Times, “A Move to the U.S. to Avoid Tariffs? There Are Trade-Offs.” Quotes the leader of a fifth-generation family-owned company, on the tariffs, “We are now almost at the point where it makes sense to produce certain products directly in the U.S., instead of trying to find new workarounds.”
On Europe’s time for choosing, at Bloomberg: “Chinese Ecommerce Giants Rush to Europe as Trump Upends Trade.” Speaking of which, the Telegraph reports, “Chinese giant BYD is dramatically growing its share of the British car market as sales of electric vehicles (EVs) pick up.” Good luck! See also:
“Why China Is Trying to Tame Its Electric Car Frenzy” (New York Times)
“When the Trump Administration came out and said they were looking at tariffs in auto, we embraced that... We've seen a lot of the good come out of that already... GM's already announced $5B in investment — in bringing jobs back here in America.” (UAW President Shawn Fain)
Credit where due: Joey Politano gets it right, noting that “Car Imports Fell Amidst Tariffs.”
As Don Draper would say,
In legal news, the Trump administration is urging the Supreme Court to hear oral arguments for the IEEPA tariff case in November, which could set the stage for a decision before the end of the year. (SCOTUSblog)
Jonathan Adler argues in the Wall Street Journal that while the Federal Circuit Court of Appeals ruled against the administration, the ruling may increase the likelihood that the administration prevails before the Supreme Court. The Washington Post’s Jason Willick, who has been all over the case and skeptical of the administration’s position, reaches a similar conclusion.
Peter Harrell (who joined the American Compass Podcast this week, along with Chad Squiteri, to hash all this out!) argues that, whatever the outcome of the IEEPA litigation, our trading partners are unlikely to walk away from the agreements that they’ve struck with the Trump administration.
And finally, even the most robust trade policy on paper means little without the administrative capacity to enforce it. “Department of Justice Promises to Step Up Tariff Enforcement with Joint Task Force.”
Enjoy the weekend!
Great Links for plenty to read on a quiet post labor day weekend. Lind's piece on how we fund retirement offered lots to think about.
This really was a ktchen sink post. Ideas and links all over the place. You could have put out 3 more focused, but still well sourced posts. Think about it. Too much for one post.