Next Stop on the Krugman Apology Tour

And more from this week…

Note: Understanding America will go quiet the next couple of weeks and then back with exciting improvements at the end of the month.

The Paul Krugman faux apology tour continues. A few weeks ago, we highlighted Krugman’s acknowledgment on Wall Street Week that, “I am really reluctant to be where I am right now, but I do think that conditional tariffs on Chinese cars are probably going to be necessary. … I’ve been shocked not only by my own change of mind, but by some of my colleagues’ … It’s not 20 years ago anymore. We really do need to rethink.” Now he has a new article on “Geoeconomics” that opens:

Economists have spent the past two centuries trying to explain that global economics is a positive-sum game. That is, my nation’s success needn’t come at your nation’s expense. In fact, a country’s economy usually (though not always) benefits from economic growth in other countries because growth abroad leads to an expansion of a country’s export markets and makes better, cheaper imports available.

However, this sunny view is based on the assumption that we care about economic prosperity, not national power. True, disregarding questions of national power made sense for about 70 years after World War 2. During those years the Pax Americana created ground rules under which wars of conquest, economic blackmail and coercion, and other direct international power plays were mostly ruled out. National ambitions were focused on raising living standards. “To get rich is glorious,” declared Deng Xiaoping.

That was then.

Finally, a black and white confession of the make-or-break assumption underlying the rabid and absolutist brand of free-trade economics: “This sunny view is based on the assumption that we care about economic prosperity, not national power.” In other words, a great plan for a world that does not exist, and a nonsensical one in reality.

It’s impossible to overstate how fervently the economists now recognizing this tried not only to deny it for the past 30 years, but also to ridicule anyone who pointed out the problem. I will forever be fond of quoting this missive from National Review editor Ramesh Ponnuru and American Enterprise Institute director of economic policy studies Michael Strain, assuring readers that I had no idea what I was talking about and simply did not “understand the model”:

He allows that the standard economic model of trade is correct in holding that all countries are better off if all practice free trade, but he says the model does not account for the fact that a country that refuses to practice free trade can reap benefits at other countries’ expense. Free trade thus presents a prisoner’s dilemma.

Cass himself is prisoner to a misconception, for he does not understand the model he is criticizing. That model does not ignore the possibility of a prisoner’s dilemma but rather denies that it exists. After all, the classical case for free trade was developed in a mercantilist world, and it argued that free trade almost always benefits the country adopting it, regardless of the trade policies of other nations.

In their defense, they were just echoing Krugman, who had written, “The economist’s case for free trade is essentially a unilateral case: a country serves its own interests by pursuing free trade regardless of what other countries may do.” As recently as mid-2024, AEI’s Strain was tweeting this quote with a fist-punch emoji. Oops.

Speaking of the economist’s case, The Economist is finally abandoning its own case too. This week it railed against Chinese overcapacity, concluding:

The academic debate about Chinese overcapacity speaks to a broader and more fundamental struggle under way: a material contest over the worldwide shape of industrial production. On one side is China, supremely proficient in all manner of production. In that sense the commerce ministry is correct that China is competitive. But foreign companies are competing against not just supple, hard-driving Chinese firms but a whole-of-state approach to industry. Foreign companies, however big, stand little chance against a Leninist developmental state that has attained China’s size, wealth and modernity. As Rhodium Group, an American research firm, points out, the Chinese state once limited its intervention to a handful of sectors that it deemed to be strategic; now it pursues an “industrial policy of everything”.

On the other side is everyone else. Whether other countries are willing or able to defend what remains of their industrial turf is an open question. For at least a decade, America has been groping for a response. It has imposed tariffs on Chinese goods and worked to reshore production; despite President Donald Trump’s scorn for allies and admiration for China and Mr Xi, his administration wants to work with other countries, for instance, in securing critical supply chains. Europe is inching its way towards (embryonic) made-in-Europe plans. But both America and Europe have already run smack into Chinese dominance, above all, its rare-earth stranglehold. This is the part left unsaid in China’s rebuttal of all the overcapacity talk: try as they might, other countries struggle to fight back. Industrial might makes right.

Defending industrial turf… what a concept. It seems unlikely that anyone will ever apologize for having gotten it wrong. Krugman’s formulation that it’s not 20 years ago any more, we really do need to rethink and disregarding reality for 70 years made sense suggests we are unlikely to ever see anyone accept accountability for the damage done (20 years ago would have been an awfully good time to rethink!), but perhaps now we can at least put that era behind us for good.

Bonus Link: U.S. Factory Activity Expands Again in July (Wall Street Journal). “The ISM’s purchasing managers’ index was 55.6 in July compared with 53.3 in June. Analysts polled by The Wall Street Journal were expecting 54.” The ISM PMI is a closely watched measure of the manufacturing sector’s health, and was pointed to by anti-tariff commentators as the proof that tariffs were not working when it didn’t immediately shoot up after Liberation Day. They don’t talk about it any more. 🤷‍♂️

SAD READS FOR YOUR WEEKEND

The news out there is not good, friends. Sorry. Read these anyway:

Demoralized But Not Defeated: What 2,000 Young Men Told IFS About Their Lives (Institute for Family Studies). “About half of young men agree with the statement, ‘No matter how hard I work, people like me will never achieve the American Dream.’ Similarly, 72% agree that ‘Who you know is more important than ability or hard work in getting ahead.’ For a significant share of young men, the meritocratic story is a myth. Still, they are not giving up on themselves: a remarkable 84% say that having ambitious plans for the future describes them at least somewhat well.”

The Live Shopping App Where Some People Bid Until They’re Broke (Wall Street Journal). “Seven-year-old Whatnot is one of the fastest-growing shopping platforms in America. It allows people to bid, around the clock, on trading cards, squishy toys, designer fashion and instant ramen, auctioned live in high-energy shows within the app. It has tapped into the addictive qualities of social media, with opportunities fed to you in an algorithm-controlled scroll. Often, users don’t search for a particular item, but instead hope to hit on something by being on the app at the right time.”

Bookended Obsessive Parenting, from Crib to Career!

• Aw, It’s Baby’s First A.I. Surveillance System (New York Times). “Nanit and other start-ups want to track your children through the night — and soon, for much longer than that.”

• Helicopter Parents Are Co-Piloting Their Adult Children’s Careers (Wall Street Journal). “Mom and dad are calling up hiring managers, applying for jobs on their kid’s behalf, and even lurking just off-screen on Zoom calls.”

The A.I.-enabled baby monitors were too much for the American Compass team, so rather than just ranting about it on Slack we channeled our energies into this very constructive and enjoyable discussion at Commonplace: But Who Monitors the Baby Monitors?

GOOD READ FOR YOUR WEEKEND

And after all that, you deserve at least one good read, so check out this amazing post from Nobunaga on X, which begins:

I needed to move a sofa.

I mentioned this to an American. He said, “You know anybody with a truck?”

I did not know anybody with a truck.

He looked at me with real concern. Not pity. Concern. The way you look at a man who has told you he does not have a name.

“You gotta know somebody with a truck.”

I asked how one acquires such a person.

A SUBSTACK RECOMMENDATION ON LABOR

The new Center for State Labor Innovation has launched a publication, which you should be reading if you care about labor reform. Read the introduction from Sohrab Ahmari, Ron Bloom, Wilma Liebman, David Rolf, and Andy Stern: Labor Has to Innovate, Too.

DEFENDING INDUSTRIAL TURF (NOW WITH APPROVAL FROM THE ECONOMIST!)

No one better in the business on this front than Adam Chan, senior advisor to FCC chairman Brendan Carr and director of the commission’s Council on National Security. He joins ChinaTalk to talk about, well, China… and, in particular, the ban on imported robots:

The US has a nascent industry but is overwhelmingly reliant on foreign imports of devices. There’s a real risk of a supply chain dependence that, as these devices become critical to the industries of the future, we could end up in a situation where we are very dependent on foreign sources. Maybe these devices are critical to military applications, maybe to manufacturing and other industrial sectors, in which case it is very important for the US to have its own supply.

And then there’s Europe. *sigh* The German Auto Industry, a Pillar of the National Psyche, Is Trembling (New York Times). In his August update for Watching China in Europe, Rhodium Group’s Noah Barkin notes, “the CEO of VW has called on the EU to take tougher trade measures against China - a sign that the economics of EU-China relations have reached a tipping point. But the politics is about to get messy.” He illustrates:

Volkswagen, by the way, is now pursuing a strategy that consists of:

Doubling down on manufacturing at its EV hub in Hefei, China as part of what Blume describes as an “in China for China” approach.

Exporting the cars it produces in China, in Blume’s own words, to Southeast Asia, Australia, India, South America, Africa and Europe, in what looks more like an “in China for the world” strategy (minus the US market).

Pursuing mass layoffs in Germany, while luring Chinese carmakers into the German factories that Volkswagen is struggling to sustain.

Urging the EU to accelerate and broaden its trade defense measures against Chinese competitors that are seizing market share for plug-in hybrids at an astonishing rate.

If your head is spinning, you are not alone …

And Japan Says Combat Drones Key to Adapting to New Warfare as Regional Tensions Rise (Associated Press). “Experts say developing fully homemade drones while Japan’s commercial drone market is dominated by Chinese imports would be a challenge.” Thank you, experts!

AND FINALLY, CHECKING IN ON THE AI

Jasmine Sun has an excellent essay on the true sources of opposition to data centers, No Data Centers in My Backyard: Money, Power, and Populism in the AI Buildout. You can also hear her on a recent episode of the Ezra Klein Show.

Following up on last week’s American Compass podcast episode with Princeton philosopher Greg Conti on the damage that artificial intelligence is doing to the academic psyche, worth also reading this short essay from mathematician Kirwin Hampshire, The Dark Night of Mathematics. This passage is striking:

Here is one story I have heard from mathematicians trying to cope with our emergency: Even if AI can prove theorems and theory-craft more efficiently than humans, and even if these proofs and theories are beautiful and interesting, and even if they are presented with elegance and clarity of thought, mathematicians will still have a place in the appraisal, presentation, understanding and appreciation of this new abundance of pleasing non-human proofs. We can still practice mathematics, learn mathematics, teach mathematics and do mathematics together. We can even still write proofs for fun, in our old-fashioned inefficient way. That is, even if LLMs can advance math in a manner objectively superior to our every effort, we can still basically do what we’ve always done.

Of course, under our system, no one is going to pay for this. Mathematicians are paid to prove theorems. Mathematicians are, indeed, also paid to teach, peer-review, go to conferences and learn mathematics, but all of that better result in some damn good theorems. This isn’t looking good.

It seems to capture well the misunderstanding among academics about what academia is for, as well as a misunderstanding among technologists about the value of abstract processing. Is it really the proving of theorems for which mathematicians are paid, as opposed to the appraisal, presentation, understanding, appreciation, and teaching of mathematics, to use Hampshire’s words, or the application of mathematics, to add the word that probably matters more? In a world where mathematicians proved theorems and did none of the other things, what would their work be worth? Conversely, in a world where theorems are a dime a dozen, their work would seemingly become much more valuable. So is the crisis here one of purpose and value, or just the deflation of an overinflated balloon of self-importance?

Speaking of overinflated balloons of self-importance, someone from a real business offered some useful thoughts on what LLMs are doing in the real world: I Helped Run Lululemon. Companies Need to Stop Kidding Themselves About A.I. (New York Times). “This brings me to A.I. washing. The insidious cousin of A.I. wishing, it is when a company — under pressure to immediately show results — claims to be doing more with A.I. than it actually is. … Perhaps the best-known version of A.I. washing is the most tragic one: the A.I. layoff. A company proclaims it needs fewer people because A.I. made its operations more efficient. Often the efficiency doesn’t exist yet. The cut is really about freeing up cash, sometimes to spend more on A.I.”

As for the many emerging social harms, Michael Strain lectures at National Review that Adults Are Responsible for How They Use AI. The argument takes a peculiar turn:

A person on the right who shares my view about the importance of human relationships should respond to this by arguing that Celeste should take responsibility for her decisions and change her behavior. A conservative should not respond to this by blaming the technology.

And yet, the impulse of many seems to be to conclude that, to the extent that chatbots threaten real-world human relationships, chatbots are harmful. A better instinct: To the extent that chatbots threaten real-world human relationships, humans need to be on guard and use chatbots responsibly in a way that promotes their own flourishing. And culture, communities, and other institutions need to help individuals make choices that advance genuine human flourishing (emphasis added).

So Strain doesn’t really mean that people can or should just “use chatbots responsibly” themselves. He recognizes that “culture, communities, and other institutions need to help.” This raises two interesting questions: First, do people need the same amount of help making choices about all technologies, or do some pose greater challenges than others, perhaps even by the sellers’ design, and thus might be legitimate causes for concern? Second, what are these other institutions that need to help–can the people of a republic take collective action through democratic processes to advance genuine human flourishing or is that disallowed?

As Abraham Lincoln wrote, “the legitimate object of government, is to do for a community of people, whatever they need to have done, but can not do, at all, or can not, so well do, for themselves—in their separate, and individual capacities.”

Enjoy the weekend!