For the week’s focus, I’m going to look at the inability of the U.S. to make what it needs, and the two different approaches unveiled this week to address it. The first approach is Trump’s 25% tariff scheme on automobiles, as well as his April 2nd “liberation day” of trade barriers. And the second is the promotion of a new book called Abundance by Ezra Klein of the New York Times and Derek Thompson of The Atlantic, a revamped version of 1980s-style supply side politics.
Let’s start with the problem of production.
it’s quite clear at this point that the U.S. has a serious deficit in producing physical things.
we have shortages in baby formula and pharmaceuticals, not to mention infrastructure and housing being wildly expensive. Moreover, the U.S. is getting killed globally. The Chinese car industry is going exponential in exports, Airbus is taking market share over Boeing, and the U.S. military is sounding the alarm on production of artillery shells and missiles. If you look at the U.S. trade deficit, it’s a massive trillion dollar plus set of imports over exports.
Typically this problem is understood as a manufacturing story, but that’s incomplete. It’s also an agricultural story. In 2022, the U.S., which has the most exceptional farmland in the entire world, began running a trade deficit in food, and now it’s quite significant.
Ford CEO Jim Farley made a fascinating point about why Ford is so behind Tesla and Chinese automakers.
“We farmed out all the modules that control the vehicles to our suppliers because we could bid them against each other, so Bosch would do the body control module, someone else would do the seat control module, someone else would do the engine control module. We have about 150 of these modules with semiconductors all through the car. The problem is the software are all written by you know 150 different companies and they don’t talk to each other. So even though it says Ford on the front, I actually have to go to Bosch to get permission to change their seat Control software.
So even if I had a high-speed modem in the vehicle and and I had the ability to write their software, it’s actually their IP and I have 150, we call it the loose Confederation of software providers, 150 completely different software programming languages, you know all the structure of the software is different.
Farley says that now Ford has to rebuild everything from scratch.
It’s clear the U.S. has a serious problem in building. Why? And what happened?
The answer is pretty simple. In the 1980s, after 20 years of debate over the U.S.’s roll in the world, we decided that the U.S. shouldn’t make things anymore. We decided to become a ‘service’ economy, focused on design, research, and finance, leaving the grubby work of physical stuff to others. Here’s Washington Post columnist Fareed Zakaria, whose job it is to maintain the conventional wisdom, making the point:
The idea that America should make more things is a seductive one… But it is an image of the past, not the future. The most advanced economies in the world today are almost all dominated by services. Services account for the vast majority of jobs in the world’s richest industrialized countries… America’s distinctive exports to the world are software and software services, entertainment, financial services, and other such intangible things — and in these, the U.S. runs not a trade deficit but a surplus with the rest of the world.
In January, Democratic economist Paul Krugman attacked Trump for trying to restore manufacturing, arguing that “people should understand both that we are going to be a service economy no matter what, and that that’s OK: a fixation on manufacturing as the only source of good jobs is generations out of date.”
Wall Street-types are deeply hostile; billionaire Ray Dalio recently said the U.S. can’t make things and should stop trying. Bloomberg’s Joe Weisenthal was puzzled at the very notion of preventing foreign goods from undercutting domestic production.
Stoller explains it was a bipartisan decision to quit making stuff and become a service economy.
The trade deficit exploded under Reagan and continue to do so under Clinton and successive presidents.
Wharton professor and stock booster Jeremy Siegel, explaining the virtues of a trade deficit.
Suppose an American buys a $40,000 Toyota made in Japan. Toyota has three options for what to do with these dollars. It can buy $40,000 worth of U.S. goods or services, in which case there would be no trade deficit. Or, because it expects the American economy to grow, it can invest $40,000 in U.S. capital—say, the S&P 500 index, U.S. government bonds or American real estate…
This demand for U.S. assets boosted the value of American stocks and bonds and helped fund the country’s growing budget deficit.
U.S. consumers lost jobs, but got cheap stuff. Meanwhile, foreigners got to build out their industrial base and received dollar assets that would probably appreciate. Wall Street made money managing the global flow of dollars, and institutions like the Fed became more important. In fact, appreciation of financial assets became the U.S. strategy.
At the same time: there was a revolutionary expansion of intellectual property rights, which foreclosed vast swaths of the public domain. For instance, in 1980 Congress updated the copyright act to include software, paving the way for Microsoft and the modern software industry.
Shifting patents and copyright, deregulating finance, and allowing monopolization led to two things. First, they shifted ownership from workers and business people to Wall Street. Three scholars just published a [paper]**(https://www.journals.uchicago.edu/doi/abs/10.1086/734089) on the distributional effects of these choices.
From 1989 to 2017, the real per capita value of corporate equity increased at a 7.2% annual rate. We estimate that 40% of this increase was attributable to a reallocation of rewards to shareholders in a decelerating economy, primarily at the expense of labor compensation. Economic growth accounted for just 25% of the increase, followed by a lower risk price (21%) and lower interest rates (14%). The period 1952–88 experienced only one-third as much growth in market equity, but economic growth accounted for more than 100% of it.
The result. Bill Gates become a billionaire as do the Waltons as they can force lower prices from suppliers that smaller independent can’t do. So they die. And WalMart can then increase prices.
*Corporate strategy in America today is about orchestrating bottlenecks, because if you can create a chokepoint, aka some form of a monopolistic toll booth or restraint of trade, you can charge more money. *
Whether done through copyright, patent, cost of capital, merger, price discrimination, foreclosing a rival from getting access to the market, surveillance, limiting homebuilding by sitting on land, or any other tactic, broadly speaking, all inflating financial assets does is hinder production. That’s the point, withhold supply, increase the price.
In effect killing the “invisible” hand.
Gradually, this appreciation of financial assets got baked into every part of our society, what Joe Weisenthal calls the “number go up” dynamic. Every university endowment, every union pension plan, every 401k, and every foreign entity which holds U.S. assets is now dependent on financial valuations.
Of course if you are a “goober” that lost his manufacturing job and have no money for stocks; you are SOL.
And that’s why we keep seeing endless monopolization no matter how destructive. It’s why the U.S. didn’t take Covid seriously until the stock market dropped, because the stock market dictates our social policy. It’s why it’s so hard to block pharmacy benefit managers, despite them being obvious predators, and why the crypto scammers seem to have some sort of moral legitimacy. American policymakers, economists and thinkers, on the right and left, have a hard time imagining a different model other than “number go up.”
The president’s view is that we have been screwed by foreign interests, which is only half true. He wants to shift some of the external trade arrangements so that the U.S. isn’t just producing dollars anymore but is making real things.
It’s not just foreigners who screwed America, it’s also high finance.
Thompson and Klein are proposing a path for the Democrats in the book Abundance , where they argue that liberals need to rededicate themselves to building by reforming zoning laws.* It’s a short book, mostly reprints of their columns.*
If Trump doesn’t want to displace Wall Street, Klein and Thompson just ignore it altogether.
Do Americans want a world where asset valuations are everything. But that’s the world we’re in. And until someone figures out an off-ramp, the rage will appreciate in parallel with financial assets.
