While America Bends, Europe Looks Ready to Snap

And more from this week…

Hello from London, where we are both on Old Queen Street today for a conference on The Great Realignment: Are There Lessons for British Conservatives from the American New Right? It’s cohosted by American Compass and The Spectator and features a phenomenal lineup of speakers, including Robert Jenrick, Michael Gove, Miriam Cates, Nick Timothy, Rachel Wolf, and Juliet Samuel. Oren has some further thoughts on the experience of talking politics on this side of the pond, but first, one thing we’re watching…

“Administration officials are weighing whether to approve a more advanced product that runs on Nvidia’s Blackwell architecture for sales in China, but it is far from a done deal,” reports the Wall Street Journal this morning. Is the chip designer’s deal to invest $5 billion in Intel an effort to curry favor with the White House and win the approval? Who knows. The important question is whether the White House would be swayed. Here’s hoping not. Bad enough that it would be a lousy deal on the merits, even if the United States wanted to make such deals, which it should not. More importantly, as the Journal quotes Anthropic CEO Dario Amodei, “It could be the single most disastrous national security decision made in this term.” For a deeper dive on Nvidia, Intel, and more, check out Oren’s appearance this week on The Dynamist Podcast.

And now back to London, where Oren says:

Nothing restores faith and pride in American democracy faster than a few days spent in Europe, where the political class alternates between tut-tutting over the U.S. controversy du jour and finding new and more absurd ways to shut down opposition in their own countries to their own failed policies and ideologies.

The UK is grappling at the moment with the fallout from its policy of arresting people by the hundreds for mean tweets and inappropriate signs, brought into focus last week after five police officers were dispatched to Heathrow Airport to arrest a comedian coming off an airplane for the offense of having suggested months earlier that someone encountering a transgender woman in a “female-only space” should “make a scene, call the cops and if all else fails, punch him in the balls.” You can also be arrested for praying silently in the vicinity of an abortion clinic. So imagine my surprise when a rather globalist British “Defender of Democracy”(TM) began to lecture me that my own country was sliding toward fascism because an FCC chairman threatened a network over its own comedian spreading disinformation. Sorry, I forgot, we don’t use the term “disinformation” any more. That was just for when the Biden administration pressured media companies to censor speech.

Perhaps the bigger problem for the British, of course, is that their own political system has utterly failed to respond to the frustrations and views of British voters. After a brief bout with populism in 2019, the UK Conservative Party’s choice of leaders has been the equivalent of the Republican Party returning to Nikki Haley and Paul Ryan. The party now holds just 119 of 650 seats in Parliament and polls at about 15%, barely holding on to third place. As reported in the Wall Street Journal and covered recently in U/A, rather than take seriously the need to control immigration, “The U.K. Tried to Clamp Down on Migration—and Wound Up With an Unprecedented Wave.”

France and Germany are doing even worse, attempting to just exclude parties and candidates who would threaten the corroded status quo. A French court has banned Marie Le Pen from running for president in the next election, while in Germany, a campaign is underway to ban the right-wing AfD. I wish I were making this up—but honestly, I couldn’t—in Cologne, the political parties beside AfD all made a pact not to say anything negative about immigration.

For all of the messiness in American democracy at the moment, we should be grateful that our system is proving responsive to public sentiment and that those who previously held political power are either unwilling or unable to prevent change from happening. Any such populist moment is bound to press against guardrails and undermine norms, all of which were installed and upheld (selectively) by the people being thrown out on their ears. What we should want, and what we appear to have, is a system that can bend without breaking. Pushback is good too, and helps to keep bends from becoming breaks. But some perspective is in order.

Much worse is a system that does not bend. The alternative to a bend is not an absence of pressure; it is pressure that leads to a snap. In the United States, gaining power still requires being more popular than the other guy. That’s undoubtedly frustrating when you’re less popular, but the question is what you do then. The European answer thus far is to futz with how power is gained, to render popularity less important. So long as the American answer remains that you have to change your positions to be ones that better align with public sentiment, I will bet on us to have the better outcome. – Oren

Speaking of Europe: “The European Union Chamber of Commerce in China, which has more than 1,600 member companies, recommends in its latest position paper that China should use its 2026-2030 plan to shift towards a ‘new, productive development model,’” reports the South China Morning Post. The chamber warns, “While consumption in China is actually growing, a core issue is that manufacturing output has grown faster.”

And, the Financial Times notes, “European companies are reporting renewed delays obtaining Chinese rare earth export licences, less than two months after EU leaders won commitments to address the issue during a visit to Beijing.”

Meanwhile, per Reuters, “China’s steel exports are set to hit an all-time high this year, defying predictions that unprecedented trade barriers would drive down shipments.” Good luck, Europe—and choose wisely!

WHAT ELSE WE’RE READING

The World’s Worst Bet: Good excerpt from Washington Post reporter David Lynch’s new book on “How The Globalization Gamble Went Wrong.” It’s a fascinating interview with Bill Clinton. To say the former president has learned little would be an understatement. His “new pitch” for globalization, notes Lynch, “is precisely the argument that Clinton made, and other politicians echoed, 30 years ago. And it didn’t work.”

How to Build 300,000 Airplanes in Five Years. Self-recommending, from Brian Potter at Construction Physics, on the extraordinary expansion of American industrial production before and during World War II. Not unrelatedly, check out the big Reuters report on the unprecedented expansion of China’s auto industry in recent years and the shockwaves it is sending through global markets.

Also not unrelated, but a much happier story, is a fascinating new paper from Iowa State’s Joshua Rosenbloom: “The Industrial Revolution in the United States: 1790-1870.” Michael Pettis says:

It starts off (perhaps a little maliciously) by quoting Adam Smith: "Were the Americans to stop the importation of European manufactures, and divert any considerable part of their capital into manufacturing, they would retard instead of accelerate the further increase in the value of their annual produce, and would obstruct instead of promote the progress of their country toward real wealth and greatness."

This is the same advice that economists give today. The article then goes on to show how the US implemented a wide range of industrial and trade policies, including tariffs, and by doing so transformed the US economy from a producer of commodities for England and Europe into the greatest manufacturing power (and the richest country) in the world.

Perhaps it was lucky that the US (not to mention Germany, Japan, South Korea, China, and many others) was such a torpid student when it came to economic theory. Among American academics, the prestige of economic historians and development economists may be lower than that of mainstream economists, but the US economy would probably be better off if economic policy advisors came more from the former than the latter.

The Two-Speed Economy Is Back as Low-Income Americans Give Up Gains. The Wall Street Journal highlights that “high-earners and older Americans are faring better than ever, while fortunes are sliding again for low-wage and young workers.” Relatedly, also from the Journal, “On the Fence About a Spending Decision? Try the 0.01% Rule: Nick Maggiulli, author of a new personal-finance book, proposes a way to calculate the amount of money you can spend worry-free.” If you’re part of the roughly 20% of households with a net worth greater than $1 million, in this thinking, you can probably spend $100 without pause. That’s a rather different budgetary experience than the one faced by the typical household.

CREDIT WHERE DUE… You will have read a lot in recent months about the Trump administration’s unconscionable destruction of American science funding, so you should be aware that in fact funding now appears on track to be at normal levels this year: “After lagging far behind, NIH now seems on pace to spend its entire $47 billion budget by Sept. 30” (Stat News).

And, pharma continues to look like an area where tariffs are producing major shifts in investment and production planning: “Drugmakers Have Pledged to Invest $350 Billion in U.S. After Tariff Threat” (Wall Street Journal).

More broadly, the Journal also reports that “Trump’s Team Explores Government-Backed Manufacturing Boost,” highlighting discussions around how to deploy the $550 billion committed by Japan to U.S. reindustrialization in recent trade negotiations. How should that be done? Read American Affairs editor Julius Krein’s proposal in Commonplace for the design of a sovereign wealth fund, or listen to his discussion with Oren on The American Compass Podcast.

• Plus, “US in Talks to Set Up $5 Billion Fund for Critical Mineral Deals” (Bloomberg) plus “U.S. Government to Invest $75 Million in Ukraine’s Minerals.”

THAT’S WHAT THE TIGHT LABOR MARKET IS FOR: Federal Reserve chair Jerome Powell noted this week that “if you're looking at why employment is doing what it's doing that’s much more about the change in immigration. So the supply of workers has, obviously, come way down.” As Oren explained in the New York Times:

There have been some very in-the-weeds statistical debates on the reliability of the government’s data on immigrants departing the labor force, and whether that explains what we’re seeing in the broader labor market data. Powell clearly thinks the answer is yes.

That reduction is putting the squeeze on employers, who would need to respond by raising wages to attract more workers and investing to improve their productivity. But President Trump continues to express discomfort with that outcome, siding instead with the employers demanding easier access to cheap labor. “Trump’s Reversals on Immigration Mount Over Economic Concerns,” reports the Times. And, somewhat under the radar, the administration is also moving to lower the prevailing-wage rates for temporary farmworkers with H-2A visas, further undermining incentives to improve productivity and job quality in agriculture.

In yet another twist, breaking late Friday, Bloomberg reports that the administration plans to add a $100,000 fee for H-1B visa applications, which would immediately and dramatically curtail the program.

One area where greater access to temporary workers would be welcome is in roles where the United States needs to rebuild expertise to support reindustrialization. The crackdown on illegal workers at a Hyundai battery plant in Georgia thrust that issue into the spotlight, and the Financial Times reports that “Hyundai chief executive José Muñoz has called for new visas for short-term work travel in the wake of an immigration raid on its facilities in Georgia.” This makes sense. As we’ve noted previously at American Compass:

A temporary visa program may still make sense for the United States, if it operates explicitly as an element of industrial policy aimed at building capabilities and capacity in strategically important sectors. The CHIPS and Science Act’s subsidies for domestic semiconductor producers provide a case in point. The issue has arisen that firms hoping to participate are struggling to find the engineers and construction specialists necessary to develop a multi-billion-dollar fabrication plant.

At first glance, this appears to be another lame complaint of “labor shortage,” to which the answer should be that the real failure is in the business plan. But note what’s different: policymakers have chosen a specific need that the market was not meeting, chip capacity, and they are seeking to override price signals and private capital allocations. The unavailability of labor to support the objective should be neither surprising nor discouraging. The projects are ones that private actors did not consider economical and were not pursuing. That’s what the industrial policy is for.

Back to the FT, which also says of Hyundai, “The world’s third-largest carmaker blamed US tariffs for the cut in its profit guidance, but maintained its commitment to making 80 per cent of the vehicles sold in the US locally by the end of the decade, up from the current 40 per cent.” A hit to profits does not mean a reduced incentive to expand U.S. capacity, you see, which in fact is what will now be needed to get those profits back up.

CHECKING IN ON THE AI BUBBLE: AEI’s Jim Pethokoukis quotes a J.P. Morgan report that “30 AI stocks now command 43% of S&P 500 market cap and have driven nearly ALL returns since ChatGPT launched. These companies invested a staggering ~$800B in Capex/R&D last year (50/50 split) with 33% growth expected next 12 months.”

Not good. Especially when “OpenAI’s Funding Challenges Loom Over Oracle, Broadcom Deal Spree” (Wall Street Journal). “The fate of OpenAI’s massive commercial deals relies on what is increasingly looking like an uncertain prospect: the need for hundreds of millions of people to pay a lot more money for its tools and services in the near future. … A June survey by consulting firm McKinsey found that eight in 10 companies report no significant bottom-line impact of using AI products. A similar report from a Massachusetts Institute of Technology initiative said AI use at hundreds of companies hasn’t produced significant revenue growth or profits.”

And, “OpenAI Chief Executive Sam Altman himself compared the AI investment boom to the dot-com era at a dinner last month and said that some AI startups and investors will ‘get burned.’”

“He doesn’t think OpenAI is among them.” You don’t say.

Fun fact: an investment in Build-a-Bear Workshop five years ago would have delivered you a higher return than investments in Nvidia or Palantir. As always, bet on American manufacturing.

BAD TAKES WITH TYLER: This commentary from Tyler Cowen caught our eye, criticizing:

strange theories of trade imbalances, as presented by the non-economists Oren Cass and Michael Pettis but rejected by virtually all serious researchers in the area. Their view is that a huge economic restructuring is needed because China and Germany keep running trade surpluses while the US is in perpetual trade deficit. But in reality this arrangement seems as stable as any other macroeconomic state of affairs could be.

There are lots of interesting debates about trade imbalances these days, but it’s genuinely bizarre to say that “virtually all serious researchers” consider them benign and the status quo “seems as stable as any other macroeconomic state of affairs could be.”

Here’s John Maynard Keynes in The General Theory of Employment, Interest and Money: “Thus, the weight of my criticism is directed … against the notion that the rate of interest and the volume of investment are self-adjusting at the optimum level, so that preoccupation with the balance of trade is a waste of time. … For we, the faculty of economists, prove to have been guilty of presumptuous error in treating as a puerile obsession what for centuries has been a prime object of practical statecraft.” Here’s IMF managing director Kristalina Georgieva in April: “Countries also need to address the imbalances that fuel many of the tensions we see.” Here’s economist George Magnus this week: “Global imbalances are unsustainable, and always unwind. The circumstances under which they do herald moments of crisis.”

Meanwhile, Tyler continues to beat the drum for not worrying about smartphones in schools, because the effects on GPA are not large. Throwback to maybe Tyler’s greatest question of all time, “If screen time is making kids so miserable, why won’t they seek out methods to make their screen time more efficient?” Why indeed…

AND IN LABOR NEWS THIS WEEK: GOP Senator Bernie Moreno and Congressman Riley Moore spoke (alongside Daniel, by the way!) at the annual Teamsters Political Coordinators Meeting. A notably large contingent of GOP congressmen cosponsored introduction of the Faster Labor Contracts Act in the House, which you can read more about in Teamsters general president Sean O’Brien’s article at Commonplace. And, NBC News reports, “Unions Place Early Bets on Republicans in Key Ohio Races.” Even sleepover opponent Vivek Ramaswamy is landing a Teamsters endorsement!

Enjoy the weekend… studying math, not spending time with friends, obviously.