The Math Problem at the Heart of the Family Budget

And more from the week that was...

Good morning. This past week we’ve been reading the Wall Street Journal’s series on the cost of raising a child in 2025, crystalized helpfully in These New Parents Give Us an Unvarnished Look at How They Spend Their Money. The deep dive on three families reveals a simple truth that gets obscured in much of the rhetoric: The cost of raising a child is mostly the time required to care for a child.

For one family with two working parents, the cost of a nanny represents three-quarters of the household’s increase in monthly expenses after the child is born. For the other, daycare accounts for 100% of the increase. A third couple has a stay-at-home parent. Their monthly spending with child? Unchanged from pre-child (but a significant income reduction with the father quitting his job to be at home).

Another story from the series, Child Care in America Is Broken. Here Are Five Ideas for How to Fix It., describes the reality that “parents are paying more than they can afford, but daycares and preschools can barely make ends meet” as “a market failure.” But that’s exactly backward. Here, the market is doing what a market does well, using price signals to relay the cost of employing people to care for young children while their parents work, making it clear to all involved that this cost exceeds what the typical household can afford. Unfortunately, the solutions proposed revolve around subsidizing commercial childcare because “companies benefit when parents are freed up to work—and the government, for its part, benefits from getting taxpaying citizens.”

But as American Compass survey data has repeatedly shown, most families don’t want subsidized childcare so that both “parents are freed up to work,” they want to have a parent at home with young children. The problem is the paradoxical economic model in the United States that depends upon two incomes to obtain middle-class security, even though families rightly recognize that middle-class security requires being able to support themselves on one income. If the typical income were enough to support a family, the economic crunch of having a child and needing either to have a parent at home or to pay for childcare would be manageable. The “market failure” of paid childcare would vanish.

As American Compass’s Cost-of-Thriving Index demonstrates, the need for two incomes to achieve middle-class security is a relatively recent phenomenon. Until the underlying economic challenges are resolved, family budgets will be under enormous strain, and “solutions” that provide only for covering the cost of daycare—in direct conflict with the desires of most families—will not solve the problem at all.

Can We Afford To Do Better? American Compass has long advocated for what we call the Family Income Supplemental Credit (or “Fisc”), a cash benefit for working families that would help to bridge the aforementioned gap in a way that would give families genuine choice. The obvious drawback has always been the cost, especially with budget deficits spiraling out of control.

But some good news on that front…

BUDGET NEWS

Analyses now suggest that robust tariff revenue could fill almost entirely the gap created by the One Big Beautiful Bill. A new report from CBO finds that tariffs “will decrease primary deficits (which exclude net outlays for interest) by $3.3 trillion if the higher tariffs persist for the 2025‒2035 period. By reducing the need for federal borrowing, those tariff collections will also reduce federal outlays for interest by an additional $0.7 trillion. As a result, the changes in tariffs will reduce total deficits by $4.0 trillion altogether.” The Committee for a Responsible Budget’s Marc Goldwein notes that, with tariffs in effect, debt as a share of GDP lands on a similar trajectory to what was forecasted by CBO before President Trump took office:

Credit Rating Maintained: Bloomberg reports that “S&P Global Ratings said revenues from Donald Trump’s tariffs will help soften the blow to the US’s fiscal health from the president’s tax cuts, enabling it to maintain its current credit grade.”

Of course, while a debt-to-GDP ratio of 120% is better than one of 134%, it is still unacceptably high and would be rising steadily. But combine the tariffs with a return to pre-2017 tax rates and additional spending cuts beyond those in OBBB, and the picture brightens considerably. Those are entirely plausible goals, not some outlandish hypothetical, and they underscore that the path back toward fiscal sanity, especially in a world with tariff revenue, runs through prudential, incremental steps, not blue-ribbon commissions slashing entitlement programs.

IN CHIPS LAND

An Intel Stake: The United States has moved forward with plans to acquire a 10% stake in Intel, in return for roughly $9 billion in CHIPS Act funding, “perhaps the most notable government intervention in a U.S. company since 2008, when the government poured tens of billions into Chrysler and General Motors to prevent their collapse” (New York Times). But is that likely to improve the prospects of the struggling chipmaker?

The deal is probably best understood as a new set of conditions for money already pledged to the company during the Biden administration. Giving Intel any funding in its current state has substantial risks, but now at least it comes with the potential for a substantial return if it works. In that respect, the Trump administration is rightly treating Intel differently than successful chip firms like Taiwan Semiconductor (TSMC) and Micron Technology, both of whom are receiving major CHIPS Act funding. Per Bloomberg: “The Trump administration will not seek equity stakes in chipmakers like Taiwan Semiconductor Manufacturing Co. and Micron Technology Inc. that are boosting their US investments.”

An equity stake is a sensible tool in the industrial policy toolkit where the government is supplying cash that a firm could not otherwise access to fund major capital projects important to the national interest. The Department of Defense’s MP Materials deal is another good example of this approach. But where the government is trying to induce a firm with a strong balance sheet to make an investment that wouldn’t be economically attractive on its own, the benefit that the United States gets from providing the funding is the investment itself. Demanding an equity stake in that situation would likely lead firms to say “no thanks,” undermining the effort to induce the domestic investment.

• See also: Julius Krein’s recent essay at Commonplace on how an American Sovereign Wealth Fund could use tools including equity stakes to finance needed investment in the nation’s industrial base.

• See also: Michael McNair’s analysis of the Intel stake as perhaps a geopolitical hedge or an effort to increase leverage over TSMC and Samsung.

Meanwhile, “The Trump administration is considering a plan to reallocate at least $2 billion from the CHIPS Act to fund critical minerals projects and boost Commerce Secretary Howard Lutnick's influence over the strategic sector, two sources familiar with the matter told Reuters.”

ON THE LABOR FRONT

Teamsters Backing Republicans: “For the second year in a row, the labor union’s political arm donated to the Republicans’ House campaign arm after nearly two decades of mostly backing Democrats. … The group also gave this year to GOP Sens. Deb Fischer of Nebraska, Lisa Murkowski of Alaska, Jon Husted of Ohio, and Dave McCormick of Pennsylvania. And it’s not just Congress: the Teamsters’ political arm donated $50,000 to the Republican Attorneys General Association this past June” (Politico).

While in Ohio, the Northwest Ohio Building and Construction Trades Council has endorsed Republican Senator Jon Husted in his re-election campaign, likely to be against pro-labor stalwart Sherrod Brown (Toledo Blade).

IN TRADE NEWS

ICYMI, my debate with Noah Smith on the a16z Podcast was pretty interesting. We had to cover a lot of ground to reach the crux of the matter, but when we get there just after the one-hour mark the result is fairly telling:

Noah Smith: I think that when we have trade with allies, we should work to make sure trade deficits, trade imbalances are minimized.

Oren Cass: How would you do that?

NS: How would I do that? Oh, just negotiations. Say, “You know what? We'll open our markets to you if you help us rectify some of these imbalances.”

OC: But what if our market’s already open and that in fact is contributing to the imbalance?

NS: Well, we can offer a lot of other incentives to these countries. There's tons of other stuff we can do.

OC: I just want to understand the logic. So we agree there are imbalances. We agree that's a problem…

NS: We could defend them militarily.

OC: Well, it seems to me we've been doing that.

NS: Right. We could say, alright, we'll step up our commitment to your defense if you help us do this or we'll, you know, various other things.

OC: [literally giggling] This fascinates me…

I try not to giggle on podcasts, but this was too much. Having railed against tariffs for an hour, Noah ended up landing on the Trump administration’s position: that imbalances are a problem and that the United States should condition market access (and defense commitments!) on allies helping to solve them. What can you do but shrug? And perhaps giggle.

Speaking of the EU, the Carnegie Endowment’s Peter Harrell has a good summary of the U.S.-EU joint statement going into detail on the terms of agreement there.

And in the New York Times, former Customs and Border Protection official George E. Bogden explains the closing of the de minimis loophole:

The goods that benefit from the de minimis loophole, like dollar-store electronics, are cheaply made and built to break, blurring consumption with constant replacement. U.S. competitors that paid tariffs and met safety standards were habitually undercut and driven out. In 2024, the U.S. Consumer Product Safety Commission issued 63 unilateral safety warnings involving products made in China. They included folding stools that collapsed, baby loungers posing suffocation risks and lithium‑ion e‑bike batteries that caught fire. In May, the same agency set a new weekly record by issuing 28 separate product safety recalls and warnings — almost all on Chinese imports.

SPEAKING OF CHINA…

The Hoover Institution’s Dan Wang has an excellent new book coming out tomorrow, Breakneck: China’s Quest to Engineer the Future. An adaptation published in The Atlantic gives a good sense:

Think about it this way: China is an engineering state, which treats construction projects and technological primacy as the solution to all of its problems, whereas the United States is a lawyerly society, obsessed with protecting wealth by making rules rather than producing material goods. Successive American administrations have attempted to counter Beijing through legalism—levying tariffs and designing an ever more exquisite sanctions regime—while the engineering state has created the future by physically building better cars, better-functioning cities, and bigger power plants.

On the news that China has driven EV battery capacity to 3x global demand, Michael Dunne writes: “Imagine you're a battery startup in America or Europe. You've got financing, a smart team, know-how and ambition. Let's goooo. Then, whoah, you step into an industry where capacity is running 3x demand. And frontrunners CATL and BYD keep adding plants. What to do?” A great illustration of how free trade with China is not an extension of free markets but rather their antithesis.

I was delighted to see Mike Gallagher call for refusing student visas to CCP members and their children. This is a crucial step toward what we at American Compass call a hard break from China.

DATA OF NOTE

S&P Global Flash PMI: “The S&P Global US Manufacturing PMI rose from 49.8 in July to 53.3 in August, according to the flash reading, signaling a renewed improvement of factory business conditions after a brief deterioration in July. August’s reading was the highest since May 2022. Production rose for a third successive month, rising at a pace not recorded since May 2022, buoyed by the largest influx of new orders since February 2024. Factory employment meanwhile rebounded after a decline in July to register the largest payroll gain since March 2022.”

But if you prefer more pessimistic news, the Institute for Supply Management’s PMI from the start of the month reported that “economic activity in the manufacturing sector contracted in July for the fifth consecutive month.”

CHECKING IN ON THE SINGULARITY

It was a rough week for artificial intelligence, as OpenAI’s GPT-5 largely disappointed. Reports the Wall Street Journal:

Those nerves were compounded by the lackluster launch for OpenAI’s GPT-5, which the company had marketed as “a PhD-level expert.” OpenAI faced an intense backlash when the product failed to answer basic math questions or carry out other simple tasks. Some were put off by its colder tone and how it routed user queries to its different AI models.

OpenAI CEO Sam Altman compared current market enthusiasm for AI investments to the conditions during the dot-com boom and bust more than two decades ago. Meta froze its AI hiring spree. And a report from one MIT initiative said that AI use at hundreds of companies hasn’t produced significant revenue growth or profits.

Altman’s comments have left everyone scratching their heads of late, from his blog post a couple months back that began, “we are past the event horizon; the takeoff has started,” to his suggestion that export controls on advanced AI chips might not work because “maybe people build fabs or find other workarounds” (China is 10–15 years behind in chip-making technology), to his contradictory assertions that AI valuations have become “insane” and the sector is in a “bubble,” but OpenAI will “spend trillions of dollars on datacenter construction in the not very distant future.” He continued, “And you should expect a bunch of economists wringing their hands, saying, ‘This is so crazy, it’s so reckless,’ and we’ll just be like, ‘You know what? Let us do our thing.’”

The roll-out of ChatGPT’s “study mode” for kids also appears to be the sort of disaster you might expect. Over at LinkedIn, Rebecca Winthrop has a great example of how bad this product is. I had to try it for myself and got an even worse result: Study Mode seems to make a point of helping you cheat by offering to modify its responses to seem more like a student’s so that a teacher could not detect it came from AI.

On that happy note, head on over to Jonathan Haidt’s After Babel for a discussion of how many teens are engaging regularly with AI companions.

FINALLY, IN POLITICS

Democrats in Decline: The New York Times reports, “Of the 30 states that track voter registration by political party, Democrats lost ground to Republicans in every single one between the 2020 and 2024 elections — and often by a lot. That four-year swing toward the Republicans adds up to 4.5 million voters, a deep political hole that could take years for Democrats to climb out from.”

“I Came Here for a Good Argument.” “No, You Come Here for an Argument.” The newly launched magazine, The Argument (tagline: “We’re Libbing Out”) has been greeted by a significant amount of derision. I recommend particularly this fine piece from Sohrab Ahmari at UnHerd.

I also recommend one of the opening essays, from staff writer Jordan Weissmann, which specifically celebrates “open-ish borders” as a tool for supporting business interests while holding wages down: “So what was the impact of the historic post-COVID immigration wave? Mostly, it allowed businesses to hire more workers. A lot more. … Crucially, they did it without putting extra pressure on inflation, unlike if they were posting help-wanted ads in a job market with a serious labor shortage.” This does frame the argument well.

Enjoy the week!