Last week, Daniel explained why “Canada Doesn’t Have the Cards.” By Monday, Politico reported, “Carney downplays Trump’s threats while ruling out China trade deal. The prime minister acknowledged a free-trade agreement with Beijing would jeopardize Canada’s U.S. relationship.” As James Thorne, chief market strategist at a Canadian wealth manager, observed:
Carney’s sectoral China deal, rolled out from Beijing without serious consultation with President Trump’s team, flagrantly misread where Washington’s red line now sits. It’s not about legal FTA formalities; it’s about whether Canada volunteers to be a pressure‑relief valve for Chinese overcapacity into the US market. Carney walked straight into that line of fire, then tried to hide behind technicalities. … This is not grand strategy; it is performative anti‑Trumpism masquerading as foreign policy, and it leaves Canada exposed, not principled.
Maybe Mark Carney should read Understanding America.
This week, we have some thoughts from Oren on the role of inequality in the affordability crisis, and the redistributive features of any effort to solve it.
The politicians racing to respond to the affordability crisis are hitting an unexpected stumbling block. Economic inequality is a major driver of the problem, and redistribution is an unavoidable element of any durable solution. That’s not what they expected to be talking about, or a theme on which many have much to say.
Without consideration of inequality, the current American obsession with the cost of living can be difficult to comprehend. The economic data suggest that households are doing as well as ever on conventional measures of consumption. Real wages have risen. Inflation has fallen. Beneath the surface, though, long-term trends have put increasing pressure on household budgets.
At American Compass, we publish the Cost-of-Thriving Index, which tracks the cost of middle-class security compared to the earnings of the typical worker. What we find is that the cost of the basket broadly understood as middle-class essentials—housing, health insurance, transportation, food, and education—has been rising much faster than wages, to the point of becoming unaffordable. In 1985, the typical male worker could provide those things for a family of four with about 40 weeks of earnings. By 2022, he would have needed more than 60 weeks, which is a problem, since there are only 52 weeks in a year.
The problem does not appear in the official data, because economists do not recognize prices as rising if higher prices also deliver better stuff. Houses have gotten bigger and feature endless amenities. A health insurance premium buys access to a wide range of remarkable drugs and procedures. Universities pumped their programs full of boondoggles unrelated to their educational missions. You pay more and you get more.
But it is higher-income households whose preferences have tended to define the basket of standard health care services and the prices the market can bear, the character of new houses in good neighborhoods, and the package of perks available to each freshman on campus. As the disposable incomes of those households have exploded, the market has followed, leaving most families priced out or dependent on public subsidies, which in turn fuel further price increases.
No sane market oriented toward serving the middle class would push the price of one year at university toward $100,000, or the median age of first-time home buyers to 40. In-state tuition at a public university costs much less, but those schools want to attract strong students too, and thus have had no choice but to expand their programs and costs proportionally. No sane market oriented toward the middle class would be pushing health insurance premiums over $30,000. Yes, a family could still afford 1970s health care, no problem. Where exactly would you suggest they shop for that?
For many of the same reasons, addressing these challenges will require both implicit and explicit redistributions of the nation’s wealth. Take housing. For every family struggling to afford the high prices in the housing market, another one is celebrating its skyrocketing home value. Making homes more affordable for younger families will, by definition, require reducing the wealth of those who have accumulated wealth in the value of their real estate.
In health care, the United States has adopted a model that already results in dramatic redistribution from the typical, healthy family to older and sicker Americans, with predictably higher costs. We disguise the redistribution through what we pretend is “limited government” and a “market-based” system, in which everyone is expected to pay comparable insurance rates in a shared risk pool. In practice, this means that those who could otherwise afford perfectly reasonable insurance premiums (and who tend to consume a limited amount of health care) are required to pay exorbitantly more—not as “taxes,” technically, just the “price” in the “market”—to hold down the cost for those who cannot possibly afford to cover their own costs.
The $25,000 to $30,000 now being charged to a healthy family of four has no actuarial basis; it is the amount necessary to cover costs for others that would otherwise require a public subsidy, and to compensate care providers for the much lower payments they receive from Medicare and Medicaid. Life would become instantly more affordable if those families could just pay what a reasonable insurance plan should actually cost them. But to do that, we would need the government to pick up the tab, as it should, for the care we, as a nation, have decided we want to ensure everyone receives. And to do that, we would need to raise more tax revenue from higher-income households who are having no trouble making ends meet.
In education, we have funnelled trillions of dollars into reducing the cost of higher education, which has landed almost entirely in the pockets of professors, administrators, and the builders of student centers. We created a small class of highly successful graduates, and a pool many times larger that was poorly served, if at all, and left with more debt than career opportunities. If you didn’t choose college, we offered, well, nothing. The solution is not yet more subsidies, but a model that invites those attending college to pay its cost, from the higher earnings it should be delivering, while channeling public resources into non-college pathways.
Debates about inequality focus too much on abstract concepts of “fairness,” rather than on the very tangible ways that rising inequality harms those left behind, even when their material living standards appear to rise. Likewise, debates about redistribution assume the project’s key parameters are how much is taken from some and given to others. A much wider range of policy choices have much more nuanced effects on how markets behave, where wealth accumulates, and who can afford what. Getting those choices wrong has created a situation in which ever-higher GDP and ever more stuff can coincide with ever greater strain on family budgets. Getting them right, not quick fixes and payouts, will be necessary to place middle-class security back in reach for all. — Oren
LET’S CONTINUE WITH EDUCATION
In the Wall Street Journal, Dartmouth president Sian Leah Beilock asks, Is a Four-Year Degree Worth It? “Assuming that most Americans value our mission is a recipe for irrelevance and decline,” she writes. “We must demonstrate to students and families—and to the broader public—that we’ve heard their criticisms and will address them. I see five areas where we can build back trust.”
“Make college affordable.”
“Institutions should be held accountable for student outcomes.”
“Re-center higher education on learning rather than political posturing.”
“Reintroduce differentiation” (i.e., end grade inflation).
“Testing is important.”
Good points, though in practice they operate primarily as a brutal indictment of how badly misled these institutions have been—and continue to be— in almost every case.
All of which helps explain Why This 26-Year-Old Skipped College and Took Up a Skilled Trade (Reuters). “Don’t overlook nontraditional paths. Going to university isn’t the only path to economic mobility. For people like Parades who want to start earning sooner—and, crucially, avoid student debts—trade work can offer long-term stability.”
Meanwhile, The Economist checks in on the ongoing disaster that is technology in K-12 education. Ed tech is profitable. It is also mostly useless.
Although ed-tech companies tout huge learning gains, independent research has made clear that technology rarely boosts learning in schools—and often impairs it. A 2024 meta-analysis of 119 studies of early-literacy tech interventions, led by Rebecca Silverman of Stanford University, found the studies described programmes that delivered at best only marginal gains on standardised tests. The majority had little effect, no effect or harmful ones.
One reason for its rapid adoption: “The prevalence of tech in schools owes less to rigorous evidence than aggressive marketing. Teachers are now flooded with daily offers for free tech.” Now, why would they do that? Doesn’t seem very profitable… Let’s ask Google. Reports NBC News: “Newly filed internal documents show how Google viewed its work with schools as a way of turning children into lifelong customers—while the company simultaneously acknowledged research suggesting that YouTube, one of Google’s main platforms, can be unsafe and distracting.”
In an excellent new essay, “When Education Becomes Information,” Brad Littlejohn sounds harmonic notes of optimism and concern: “I have no doubt that AI could be used to strengthen and augment the work of educators. Our problem is that we do not know what education is anymore.”
HEDGE FUNDS WITH ENRICHMENT CLASSES…
At least universities are really good at earning huge returns in their endowments. Or rather, they were. Evidence continues to pour in that alternative asset classes like private equity, Canadian lumber, and so on, made famous by Yale, especially, have become stinkers, just in time for more schools to jump in and lose out. “Many copied the Ivy League school’s bets on private equity and other illiquid investments,” notes Bloomberg. “Now plain old stocks and bonds are outperforming.”
It’s yet another cautionary tale of financialization, which is promoting all sorts of useful questions, like, from Brian Shearer at the Vanderbilt Policy Accelerator: “What Ever Happened to Usury?”
I’m not recommending this, and this isn’t how it would work in the real world, but if we got rid of rewards and capped interest at zero, banks would make enough off interchange and fees to cover all borrower defaults and operating expenses, and still generate a return. That is how much margin and rewards spending is built into the credit card business right now.
In the auto industry, meanwhile, GM beat earnings expectations and, per the Wall Street Journal, announced a 20% dividend increase and $6 billion share buyback. (Despite tariffs!? What? No! How!?)
And in other earnings news, Intel stock declined roughly 20% after releasing its own earnings report, prompting some peculiar framing from the Journal: “How Intel Came Crashing Back to Earth After Its Trump Bump.”
Intel’s stock has crashed 17%, wiping out more than $46 billion in market value, since executives revealed the flub on the company’s fourth-quarter earnings call Thursday. “The stock went vertical on vibes and tweets,” said Stacy Rasgon, a semiconductor analyst at Bernstein. “In theory, they should be in place to capitalize on this demand, but they’re not. What a shame.”
Intel’s continued execution struggles are indeed a shame. But the drop after earnings did not wipe out the past year’s gains, only the run-up in the days just before the report. The stock is still trading at its mid-January level, double the level from August when the United States took its 10% stake. While the company has a long way to go, earning-week volatility is not the way to analyze its progress.
DON’T GET SORE, BUY SOME MORE!
The Trump administration continues to invest in operations that could play a vital role in reindustrialization. The United States will pay $1.6 billion for a 10% stake in USA Rare Earth, according to the Financial Times.
And construction of the first U.S. aluminum smelter in 46 years is moving full steam ahead, and expanding planned capacity, according to Reuters. The smelter will more than double domestic capacity and helps illustrate why it’s so important for efforts at reindustrialization to focus on the full supply chain, not just final goods. The conventional wisdom still holds that we should let industrial inputs in cheaply to make production of final goods more competitive:
But as Oren was already explaining here at Understanding America, just a couple of weeks after Liberation Day, the American strategy is not, and should not be, to reindustrialize by assembling cheap goods for export, as has been typical in many developing countries. We want to rebuild the entire supply chain, including materials and industrial equipment, and we have a massive domestic market otherwise reliant on imports that can provide the demand. If that causes some prices to rise a bit in the short run, and the entire process to take a bit longer, that’s OK. Indeed, it’s the kind of long-term thinking that economists would typically applaud, if not for suffering from tariff derangement syndrome.
GM, it seems, is doing just fine. And one can read in Nikkei Asia the until-recently-unthinkable headline: “U.S. steel production exceeds Japan’s for first time in 26 years.” So, since 2000. What happened in the interim?
Meanwhile, the Trump administration has finalized two more reciprocal trade deals, one with El Savador and the other with Guatemala.
Less encouraging, though, was news on Wednesday that “the Trump administration is stepping back from plans to guarantee a minimum price for U.S. critical minerals projects, a tacit acknowledgment of a lack of congressional funding and the complexity of setting market pricing, multiple sources told Reuters.”
China’s manipulation of global commodities markets has been a key tool in securing a chokehold on the processing of critical minerals. It can drive prices down at will, making the extraordinarily long-term, capital-intensive investments in capacity uneconomical for Western firms that believe in capitalism. Daniel has told the story of how China did just that. Price floors are a vital element of a Western strategy, and the United States should be leading an effort with allies to effectuate them.
WRAPPING UP WITH SOME GOOD READS
In the Washington Examiner, Byron York asks, “Does America have the resolve to deport illegal border crossers?”
In the Wall Street Journal, Greg Ip writes, “The First Three Weeks of the Year Will Reshape the World.”
In the Financial Times, Rana Foroohar argues, “Trump Is the Wrong Answer to the Right Questions,” which rightfully credits Trump’s critiques of the neoliberal world order and makes some valid critiques of his own policies, but leaves us wondering: what exactly is the progressive alternative? Democrats had a decade to develop a response of their own and came up with… the Kamala Harris campaign.
Foroohar writes that “Democrats running in the midterm elections this autumn need strong ideas about how to craft a better immigration policy,” that they “also need to get serious about addressing corporate power,” and that they “need to disassociate themselves from Davos Man and the Epstein Class and reclaim the populist tradition.” The whole world, she says, “needs answers: to challenges of Chinese mercantilism, the falling labour share of GDP and the new threats of technology-based job destruction.” How’s that going?
In the New York Times, Tom Edsall observes, “‘I Wouldn’t Say the Democrats Are in Good Shape.’” He quotes Dartmouth political scientist Sean Westwood, who says, “Democrats are engineering a super-strain of progressive in a lab, purpose-built to alienate the middle of this country and the middle of the ideological spectrum.”
Here at Commonplace and American Compass, we are fairly confident we can do better.
Enjoy the weekend!
We've convinced ourselves that everyone "deserves" to have high quality homes, health care, education, etc... It's demeaning to have "substandard" levels of quality, so we regulate them until providing bare bones versions is illegal.
Housing: We used to have boarding houses, SROs, hostels, etc... But middle-class activists got rid of those options via zoning codes. Unfortunately, middle-class+ legislators never got around to actually providing a cost effective alternative.
Health Care: Health insurance used to all be "catastrophic" only. Minor stuff was on you, but if you had a car accident or got leukemia, they'd step in to cover (most usually) of the costs. But we decided making sick people worry about price was icky, and after all, everyone deserves health care, so we did away with those. Obamacare was the final nail in the coffin of those plans. And not surprisingly, health care costs skyrocketed.
Education: Why couldn't we have small, public schools that replicate the 1-room schoolhouse (or 2-3 room if you like) model of 100 yers ago? We know it works. Less overhead. More parental involvement. More accountability both ways. But rules about school construction and red tape have effectively made that impossible. Oh, it still exists, but only for parents that can afford private or home education.
We need to learn to tolerate more diversity of quality in many things. One size fits all generally fits almost no one well.
Health insurance costs are driven by health care costs. One should not conflate the two. The margin is fairly thin. All sane employers try to reduce that margin in their negotiations with the insurance industry. CMS appears to do the same. Adding mandatory benefits greatly increases costs as more providers get to play. Initially, Obamacare did this big time but seem to have backed off a bit. Raising deductibles and copays has a pretty dramatic impact on premiums but that just offloads some of the costs to households. But the big influence on costs is financialization of the health care industry including medical practices, hospitals, nursing homes, physical therapy practices, pharmacies and even veterinary practices. Another large influence is the aging of the population for which there is no solution. The big influence on premiums is all the people getting free stuff. Basically Medicaid and the EMTALA. This drives up the costs for everyone else as providers seek to recover their losses. Medicare is a benefit paid for by a career's worth of mandatory deductions. This is buried in the FICA deductions so many don't realize it exists. There are also ongoing premiums for Parts B and D. And for tall poppies, there is IRMA. Health insurance has always subsided the sick at the expense of the healthy. It is a design feature. If you are healthy and subsidizing the sick, you are the winner. This feature is perverted when health insurance covers predictable, routine stuff.