This week has presented several lessons in unexpected consequences. (We learn slowly, so many weeks do.) Consider a half-dozen examples:

1. Insider trading. A US special forces soldier was charged with using his insider knowledge of the forthcoming US raid on Venezuelan president Nicolas Maduro to make $400,000 on the prediction market site Polymarket.

   But the charge has backfired by highlighting a much larger scandal: records show that insiders with advance knowledge of Trump’s market-moving announcements have made tens of millions of dollars trading oil futures. The White House knows it’s a problem, so it sent a memo to staff asking them to kindly stop profiting on inside information. These are easy cases to prosecute, but don’t hold your breath.

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2. Stupid games with stupid prizes. Gerrymandering undermines democracy by allowing politicians to pick voters rather than the other way around. Trump, with characteristic forethought, started a partisan gerrymander war by demanding that Texas redraw its Congressional Districts to yield four more GOP seats.

   California responded by abolishing its well-crafted system for drawing district boundaries, which used an independent panel. Five more states followed. Four others had already redrawn mid-cycle.1

   Many Republicans now deeply wish that Trump had never started the fight. The moves are unpopular. Worse, it hasn’t worked: the GOP is unlikely to gain many new seats by jiggering the map. Moreover, leaders from partisan districts are, on average, more extreme (a problem Democrats will face as well). This does nothing to improve Congress or confidence in government.

3. Democrat overreach alert: Michigan. As Trump collapses, Democratic activists are tempted to move left and hope that voters sick of Trump will back them anyway. In the Michigan Senate race, which is critical to Democratic hopes of winning back the Senate, three members of Team Blue are competing in a primary for an open seat. Haley Stevens is a Congressional moderate whose views are closest to those of median light-blue Michigan voters. State Senator Mallory McMorrow is a liberal and a talented candidate (her TV ad is fire). Dr. Abdul El-Sayed is a progressive former public health official who has made Israeli warfighting a centerpiece of his campaign. He has held events with proud anti-semite Hasan Piker, equated Israel with Hamas, and advocated the abolition of ICE.

   Nominate him, and Trump retains control of the Senate in anything short of a blue tsunami. Continue to indulge these instincts in other states, and Democrats will struggle to recover the White House in 2028 and find themselves on the ropes after the 2030 census, which looks to shift 7-10 Congressional seats from slow-growing blue states to faster-growing red ones.

4. We enter the “Find Out” phase. As Donald Trump brings to a close his ”Fuck Around” phase in Iran (five deadlines, five capitulations), the world is about to discover the full cost.

• The first-order effects, meaning higher prices for gas, jet fuel, diesel, fertilizer, and condoms, are now obvious.

• Second-order effects are coming into view: food shortages in the world’s poorest countries. An Iran run by hardened IRGC thugs instead of zealous theocrats. The nuclear threat worsened by an emboldened regime poised to collect $60-$80 billion/year of tolls on Hormuz shipping that they had only dreamt of previously.

• The third-order effects will be the worst: a dramatically weaker US global position as adversaries are heartened by US fecklessness and domestic support for Trump implodes (although he still polls at 80% among Republicans). The US is providing swap lines to stressed Middle Eastern “allies,” so their forced asset sales do not shake our precarious private credit (“shadow banking”) system. Xi Jinping may notice that the US just shot up six years’ worth of ammo, and decide that Taiwan and TSMC are his to take. A worldwide surge in demand for Chinese electric vehicles could cripple US automakers, who just doubled down on fuel-burning cars.

5. Lip-Bu Tan may resurrect Intel. Intel’s shares have more than quadrupled in the past year, from $20 to more than $80 per share. Last August, Trump called for the resignation of the company’s new CEO, Lip-Bu Tan. Within days, Tan met with Trump and convinced him to drop the demand and take Intel shares in exchange for the release of the Biden administration’s almost $9 billion of CHIPS Act funds. Never one to turn down money, Trump agreed.2

   Trump may not realize it yet, but at today’s stock price, government shares are now worth $35 billion, making Intel one of the best financial investments in US history (although College Land Grants, the GI Bill, the Interstate Highway System, the Apollo Space Program, the Human Genome Project, and several others created more long-term value. And buying Spirit Airlines would create far less.)

   

   Credit for restoring Intel goes to Lip-Bu, a famously hard-working, Andy-Grove-caliber CEO, a capable engineer, and one of the most decent and popular leaders in Silicon Valley (admittedly, a low bar). The Malaysian-born, MIT-educated Tan created a culture at Intel that is much more disciplined, engineering-centric, and customer-focused. This, along with his formidable reputation as both an investor (he founded a venture fund that famously backed hundreds of early-stage Asian technology companies) and an executive (he turned around Cadence, a US electronic chip design company), enabled Tan to move quickly.3 He sold Altera, Intel’s programmable chip unit, and raised money from Nvidia and Softbank. This month, he repurchased the minority stake in Intel’s Ireland fab, persuaded Elon Musk’s Terafab to sign a strategic partnership, and announced a partnership to deploy Intel Xeon 6 processors across Google’s data centers.

   The market noticed. Intel is not out of the woods, but a year ago, the pioneering company was widely dismissed as unsalvageable. Thanks to new leadership, a sustained AI boom, and timely federal backing, Intel is back on its feet and starting to run. Every American should be grateful.

6. Trump’s election fraud lies are working. A new Reuters/Ipsos poll shows that Donald Trump’s five-year campaign to convince the public that US elections are rigged and voter fraud is rampant is working. Although court and state investigations consistently find these claims to be false, 46% of voters believe that large numbers of fraudulent ballots are cast by non-citizens in US elections. 82% of Republicans and 38% of independents agree. Trump’s campaign aims to lay the groundwork for restrictive voting measures.

   Note, however, that Trump rarely anticipates first-order effects, never mind second-order ones. In recent years, marginal and occasional voters have heavily favored Trump. If this remains true, voting restrictions, while bad in principle, could end up helping Democrats politically.

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At first, I thought it was my imagination. Had Chinese cities really become quieter? A quick check revealed the story: cities were calmer because the Communist Party now treats noise as pollution and suppresses it like an unwelcome dissident.

The Quiet War

China’s battle to quiet its cities has several fronts. Even the famous “dancing grandmothers” in public parks are required to dance to directional speakers.

• More EVs. The shift to ghostly-quiet electric vehicles and scooters has significantly reduced street noise. EVs use silent regenerative braking. Traffic studies also show that Chinese EV drivers accelerate more smoothly than combustion-engine drivers, further reducing engine noise.

• Quieter roads. China is resurfacing streets to make them quieter. It laid more than 32 million square meters of noise-reducing surfaces last year alone. Many new arterials use porous asphalt whose tiny voids “swallow” the air trapped between the tire and the road, muting the small pop that is the dominant source of highway noise. Some districts mix in recycled tire rubber and get a further 3–5 decibel reduction.

• No-honking zones. In the 1990s and early 2000s, Chinese cities were like Bangkok or Mexico City. Drivers honked aggressively and pointlessly. Most seemed stressed, as though their cortisol levels were through the roof. Today, no-honking zones cover the bulk of the urban core in cities like Guangzhou and Beijing. Honk in a restricted zone and acoustic cameras triangulate your position, read your plate, mail you a fine, and dock your social credit score.1 In less than a decade, this system has trained drivers to stay off their horns. There are still plenty of aggressive drivers, but they don’t honk.

• Less construction. The construction slowdown has helped quiet things down. For two decades, the “sound of China” was the round-the-clock throb of pile drivers and cement mixers. Since the residential property market crashed in 2021, there are fewer cranes on urban skylines, and in many neighborhoods, the background hum of heavy machinery has simply vanished. (Infrastructure construction — rail, highway, industrial — has not slowed nearly as much; what you notice in cities is the absence of high-rise residential work.)

The war on noise has changed the sound of Chinese cities. Nonetheless, every day starting around 11 a.m., a new sound rises on Chinese streets. It’s too quiet to be an EV, too steady to be a bicycle. It is a high, insectile hum, layered dozens of times, approaching and receding from every direction at once. If you’re standing at a crosswalk, the sound flows by like water around a midstream rock.

Riders on electric scooters — dressed in yellow, orange, or blue — materialize from the gaps between cars. They mount and dismount the sidewalk. They surge ahead of traffic to make left turns. One might thread the needle between a delivery truck and a baby stroller, then vanish into a residential compound whose gate they somehow know how to open. The rider parks and heads inside. It turns out that thirty minutes earlier, a resident of the compound had opened an app and tapped on a picture of a bowl of noodles.

The Machine Behind the Hum

Delivery riders on fast scooters now make up China’s urban circulatory system. Something like 12 million people, nearly all of them young men and a quarter of them with recent college degrees, make their living moving objects on two-wheeled electric vehicles.

The platforms that coordinate them — Meituan above all, with Ele.me a distant second — have built the most sophisticated last-mile infrastructure ever assembled. A cup of bubble tea in Hangzhou moves from shop to hand in about 22 minutes. A forgotten phone charger in Shenzhen can be fetched from an apartment and delivered to an office in under an hour. Groceries, prescription medicine, a single lightbulb, a live crab in a plastic bag — the system does not care. It routes. It dispatches. It delivers. Instant delivery is now a trillion-yuan market — roughly $138 billion. In Shenzhen, we watched Meituan’s prototype drone delivery and, for fun, had a lemon tea flown to us from a mile away.

The ubiquitous bright-yellow Meituan scooters are much more than Chinese DoorDash. Yes, food delivery pays the bills — the way search pays Google’s. But Meituan’s actual business is a real-time dispatching engine that continuously solves one of the nastiest combinatorial problems in applied computer science. Given N couriers in motion, M restaurants with variable prep times, and K customers with soft deadlines, it must find an assignment that minimizes total cost, subject to hard constraints on food temperature, rider load, and promised delivery times. This is classically NP-hard.2 Meituan solves approximations of this problem a hundred million times each day.

The noise comes from e-scooters, the bastard offspring of a bicycle and an electric motorcycle. Scooters feature squat step-through frames with lead-acid or lithium batteries tucked under the seat. Manufacturers claim the bikes have a top speed of 15 mph (25 km/h), but delivery riders can easily modify their bikes to go twice that fast. They carry saddlebags or an insulated rear box large enough for four bowls of soup that the rider nurses over potholes so nothing spills. The scooter costs about as much as a new phone.

These things are ubiquitous to a degree that is hard to convey until you’ve stood on a Chinese street corner at rush hour and watched the river flow by. There are more than 350 million e-scooters in China. They outnumber cars. They outnumber, by something like five to one, the entire global stock of e-bikes sold in the West. You can rent one off the street in seconds — just scan a QR code and hop on.

The real instant-delivery sorcery lies in the software layer. When you place an order, an algorithm (what Meituan sinisterly calls its “super brain”) estimates the restaurant’s prep time, predicts traffic on every candidate route, calculates how many other orders each nearby courier is already carrying and in what sequence they’re stacked, and produces a delivery estimate before you’ve finished typing your address.

The app then promises each customer a delivery time. If the rider misses the deadline, the app docks their already meager pay. A rider who misses badly is electronically fired, or “deactivated.” The system is what control theorists call a tightly coupled feedback loop: the algorithm learns from every delivery how fast this particular route can be completed under these conditions, and then demands that future deliveries complete it at least that fast.

The Chinese magazine Renwu detailed what this does to drivers in a now-famous 2020 investigation titled Delivery Riders, Trapped in the System. Couriers run red lights, drive the wrong way down one-way streets, and sprint up stairs because the thirty seconds they save by jaywalking are the ones the algorithm learned to shave off their allotted time. For a new perspective on what this work is like, I recommend Hu Anyan’s grim but funny memoir, I Deliver Parcels in Beijing.

As in many modern industries, hell for workers produces magic for consumers. A Beijing office worker orders a single egg tart from a bakery four blocks away and receives it, still warm, for a delivery fee of about three RMB — forty cents. The system is so cheap and so fast that it has reshaped urban life.

• Nobody cooks. Not in the way Americans mean it. Why would you? A prepared meal delivered in 20 minutes for 8 RMB is competitive with — often cheaper than — the groceries and the time it would take to make the same thing at home, especially once you price in cooking time. Kitchens in new apartments have become vestigial, like the human appendix — present because tradition demands them, shrinking because nobody uses them.

• Empty restaurants. Why eat out? Tourists do, and groups still do. But for the solo diner or the weekday lunch, most urban Chinese now eat in. Hotels accept food deliveries as a matter of course, usually at the entrance or the front desk, so the driver doesn’t have to negotiate elevators and hallways.

The New Sound of the City

No traffic system can gracefully absorb tens of millions of new vehicles weaving through traffic, many of them straining to meet an algorithmic deadline. The results are not great for riders, pedestrians, or delivery workers.

• Riders. Start with the risks to riders themselves. The Chinese government does not publish regular statistics on delivery-related crashes. Still, the figures that leak out — from Shanghai traffic police in 2017, from journalist reports in 2020, from various municipal campaigns that periodically announce crackdowns and then just as periodically go quiet — suggest that delivery couriers are involved in something like a quarter of all two-wheeler crashes in major Chinese cities, despite being a much smaller share of the two-wheeler population.

  They run red lights because the algorithm demands it. They ride on sidewalks because the road is slower. They carry loads that destabilize their scooters. They ride in thunderstorms and in the 400-ppm smog of a north China winter, because surge pricing during bad weather is the only way the platform can hit its monthly income target.3

• Pedestrians. A sidewalk in a Chinese city is not pedestrian-only. It is a contested zone that pedestrians share, grudgingly, with e-scooters that have mounted the curb to skip a congested intersection. Older residents, in particular, have learned to walk with a vigilant shuffle and head swivel because the scooters are fast and nearly silent. The consequences of a collision fall entirely on the slower, softer party. Understandably, e-scooters are among the top grievances at neighborhood committee meetings across urban China.

• Transferring risk from the strong to the weak. Meituan and Ele.me classify the overwhelming majority of their riders as independent contractors, or as employees of labor-dispatch agencies two or three corporate layers removed from the platform. As with Uber and DoorDash in the U.S., Chinese delivery platforms are built on this legal foundation.

  This means that when a rider runs a red light to meet a tighter delivery window, the platform has no legal liability if the rider is hit by a car. Investigative reports and a handful of high-profile incidents — a rider who set himself on fire outside a Meituan office in 2021 over unpaid wages; another who died of a stroke mid-shift, and whose family was offered 2,000 RMB (about $300) in “humanitarian assistance” — have periodically produced promises of reform. The algorithms have been tweaked to add buffer time. The underlying arrangement has not changed: the platform transfers the risk of too much, too little, or too demanding work to young, low-paid, and frequently desperate drivers.

The Sound of Pigeons Flying: What Scooters Replaced

To understand how 12 million young men ended up on scooters running red lights for an app, it helps to remember what they replaced.

Chinese cities once moved on bicycles. In the 1980s and early 1990s, China had the world's best cycling infrastructure. This was the result of policy, not accident: China declared bicycles the workers’ vehicle, and built cities around them as a socialist virtue. This led to rivers of heavy black Flying Pigeon bikes flowing through cities on dedicated lanes. Riders rode five or six abreast, protected from car traffic by raised medians.

That world is now gone. As commuter vehicles, human-scale bicycles have been displaced by e-scooters designed for urban flow. For the price of two decent bikes, you can buy a scooter that goes three times faster, carries your groceries, and gets you to work unsweaty. It handles the kind of sprawl that Chinese cities, in their explosive growth, now demand. If you’re a working-class commuter in a second-tier city who has to cover eight kilometers to the factory, it isn’t really a choice. E-scooters displaced bikes for good reasons.

As a committed urban cyclist, I’ve biked through more than fifty global cities. In Guangzhou, I tried riding the back alleys and bike lanes with a local guide. Both were full of stealthy e-scooters — the most aggressive of them ridden by delivery drivers threading bike lanes like fighter pilots in an air corridor. I was repeatedly passed at forty kilometers an hour by riders on desperate deadlines whose vehicles outweighed mine by a hundred kilos.

Plenty of people still ride bicycles in Chinese cities, but they do it as a hobby, a workout, or perhaps as a political statement. Outside a few suburban college campuses, it is rare to see a mass of bicycle commuters.

The last gasp of bikes was the dockless bike-share boom of the late 2010s, when companies like Ofo and Mobike raised venture money on the hallucination that the bicycle could be made viable again at scale. It couldn’t. By 2017, mountains of blue, yellow, and orange frames lay rusting in huge municipal lots. Even though there are still some 20 million shared bicycles available in China, the game was over. Electric scooters had won.

But the scooters didn’t just win as commuter vehicles. They became the substrate for something much larger: the world’s largest urban delivery platform.

The Silent, Invisible Trap

China’s urban delivery platforms are both an achievement and a cage. The cage is hard to see because it consists of logistics that China can no longer easily build.

An efficient delivery system is “many to many” — it enables millions of dispersed retailers to serve billions of dispersed consumers. This requires consolidation points where shipments can be pooled into trucks, airplanes, and local delivery vans. A well-designed delivery system is so productive that it can pay above-median wages in most countries. Ask UPS or FedEx.

“Point-to-point” delivery is very different. It’s a courier service that moves goods from a single retailer to a single customer. China’s world-class instant-delivery network depends on cheap labor willing to do point-to-point deliveries. But this system makes it much harder for China to build a world-class many-to-many delivery network that rationalizes shipments and is productive enough to pay well.

This sounds counterintuitive. Surely, if you can deliver a bowl of noodles in 22 minutes, you can deliver a box of shoes in 22 hours? But the two systems operate very differently. Paying millions of riders for point-to-point instant delivery is only sustainable at very high density and very high velocity. Moreover, it absorbs the resources needed to modernize into a high-productivity system.

• Customer expectations. To start, instant delivery shapes a broad range of consumer expectations. Customers who expect shoes to arrive within an hour can only buy from local merchants, which apps like Alibaba facilitate. This effectively shrinks the consumer market or requires retailers like Temu to maintain far more local distribution centers throughout China.

• Resources. A modern delivery service needs to compete for the same talent pool, the same vehicle fleet, and the same last-mile access arrangements with residential compounds. Labor that could staff parcel routes is on scooters, making instant deliveries at piece rates. The vehicle fleet that could be consolidated into efficient vans is fragmented across tens of millions of individually owned two-wheelers.

• Regulations. The regulatory regime that could have encouraged standardized addressing and universal service is a patchwork that assumes every delivery is coordinated through a platform app. The residential compounds that could have been required to install uniform mailbox or locker infrastructure have instead been allowed to wave through individual riders, compound by compound, app by app.

• Opportunity cost. The economics of a 22-minute point-to-point delivery of bubble tea are fundamentally different from those of high-volume, many-to-many, two-day parcel delivery intermediated by cross-dock warehouses. China has ruthlessly optimized for the former at the expense of the latter.

The result is a system that is extraordinary at instant delivery, but mediocre at everything else. Moreover, it is now large enough to be buried in path dependencies that will be very hard to overcome.

Building a Japanese-quality parcel network in urban China — with its dense web of neighborhood of koban equivalents, its universal addressing, its seamless integration of postal, private, and municipal services — would require resources and policy attention that are instead flowing into the instant-delivery machine.

Moreover, the machine is too successful and too important to redirect. Meituan alone processes enough daily transactions that disrupting its logistics would register as a minor macroeconomic event. Ele.me is owned by Alibaba, which means disrupting it would be a minor political event.

Will drones replace drivers? It’s tempting to imagine Meituan’s drone prototypes as the next wave — quieter, faster, cleaner, and less exploitative of workers. Don’t hold your breath. After several years of operation, Meituan’s drone program runs a few hundred thousand deliveries per year, compared to its scooter network, which handles tens of millions of deliveries every day. Drones require dedicated takeoff-and-landing infrastructure (Meituan has built rooftop stations at malls and office towers), while scooters require a rider with an app. Payload limits of around 2.3 kilograms rule out highly profitable grocery orders. Only a few major cities have opened their low-altitude commercial airspace to designated pilot zones.

And — the quiet truth of the whole system — the scooter network’s cost advantage is its ability to arbitrage labor. Until drone deliveries are cheaper than a rider's 5 RMB per run, drones cannot compete on cost. The drones are cute, but they are a rounding error, not the future of China’s urban circulatory system.

Behind China’s New Hum.

American and European commentators look at Chinese urban logistics and usually conclude one of two things: either China is the future and we should copy it, or China is a dystopia and we should be grateful to live somewhere else. Both of these views miss the more interesting lesson: China’s technological trajectory is emergent and path-dependent, as it is in most places.

China’s e-scooter delivery system is not a glimpse of the future. It is an unplanned, contingent response to a specific set of conditions: cheap labor, dense cities, lax vehicle regulation, a regulatory environment willing to tolerate enormous algorithmic wage pressure, and a population that — for reasons of income distribution and urban form — found the service irresistible.

The country has built something that works so well at its intended purpose that it cannot easily build the other things it might want. The infrastructure isn’t neutral. It isn’t a platform in the Silicon Valley sense — something you build more things on top of. It is a structure that grew to fit its market so completely that it reshaped the market around itself. Now the market can support this structure, and not much else.

When we talk about “advanced logistics” as a civilizational capability, we should specify what we mean by it. A network that moves a hot bowl of noodles four kilometers in 22 minutes is not the same thing as a network that reliably delivers a package from any address to any other address within two business days. They are different achievements. China has one of them, to an astounding degree. It does not really have the other. And it is not obvious that it ever will.

Somewhere in China right now, the urgent mosquito-whine is out there. Riders are moving, algorithms are routing, and someone is about to get their hot noodles. It is a marvel. It is also the sound of choices whose alternatives are receding fast.

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Returning from China risks whiplash. It is jarring to leave the land of gleaming cars, abundant housing, new roads, spectacular greenways, and spotless bridges, tunnels, train stations, and airports, and arrive in a city known for its $1.7 million public toilet.

I Thought Capitalists Overproduced and Communists Starved?

It was not supposed to turn out this way. Because we encourage investors to independently bet on the same opportunity, we expect competitive capitalism to produce large surpluses. Each investor wants to strike it rich, but coordination is impossible, and optimism is cheap, so we get railway manias, dot-com or fiber-optic gluts, and too many car or steel companies. The all-American result is overcapacity, which wastes capital and causes companies to fail, but leaves society with lower prices, fewer weak players, and lots of shiny new infrastructure.

Communist state planning, on the other hand, tries to avoid this waste by matching production to social need. But central planners can’t really foresee demand – they only see plan targets – so shortages of things people actually want typically coexist with warehouses full of things they don’t.

So how exactly did China end up looking more like the 19th-century American railroad boom than like Gosplan, while outside the AI frenzy, the U.S. and Europe look more like cautious, return-on-capital-obsessed late-stage firms than the industrial dynamos of our recent past?

China Has Overbuilt. A Lot.

Understanding overcapacity in China requires separating industrial overcapacity (factories that make too much stuff) from infrastructure/real estate overinvestment (local governments that build things that nobody uses).

Housing. The most visible sign of this when you visit China is “ghost towns” or “ghost hotels”. This is not a minor problem. China has about 65 million empty houses – enough to house the entire population of France. This is about 20-30% more residential floor space than China’s (shrinking) population needs.

In contrast, the U.S. needs more housing. We could use 5-10 million more homes to meet demand, mainly in our most productive cities. Although housing remains tight in Tier-1 cities like Beijing and Shanghai, vacancy rates in Tier-3 or 4 Chinese cities often exceed 30%. As noted previously, this has led China to relax its hukou system, which controls who can migrate from the countryside to new cities.

Factories. China has massively overbuilt factories as well. China’s “New Three” (EVs, lithium batteries, and solar) are the current focus of global trade tensions. China’s total vehicle production capacity is nearly 50 million vehicles/year. Domestic demand sits closer to 25-27 million, so China is flooding the world with low-cost cars and slashing prices. North American auto and steelworkers are not amused, although U.S. consumers will soon lust after the low-cost, high-quality EVs being driven by our Canadian and Mexican neighbors. These cars are effectively banned in the U.S. (unless they are rebadged as Volvos or Polestars.)

Infrastructure. Finally, China’s public transportation infrastructure is impressive, but it is a combination of highly efficient hubs and vastly underused regional projects. The Chinese have become at least as good at building ”Bridges to Nowhere” as the U.S. has. Specifically:

• Airports. China has built more than 270 airports, but 41 of these handle 84% of all passengers. The vast majority lose money.

• Trains. At least a quarter of all high-speed rail stations are overbuilt and run only a handful of trains each day. High-speed rail debt in China is almost a trillion dollars.

• Bridges and tunnels. In very poor rural provinces like Guizhou, many world-class bridges serve low-traffic rural roads, leading to a debt-to-GDP ratio in that province exceeding 150%. (It is also possible that without bridges and tunnels that lessen Guizhou’s isolation, the province can never catch up to the rest of China.)

What does wasted infrastructure spending actually cost the average Chinese citizen? It represents a drag on economic growth that can show up as high youth unemployment, widening income disparities, and lower living standards.

Economists measure capital-output ratios, which indicate how much growth an economy generates per unit of investment. In the 2000s, China could get a unit of growth by investing three units of capital. Today, they need to invest more than 9, meaning China now has to spend three times as much to achieve the same level of economic growth as it did 20 years ago. These diminishing returns reflect the ultimate “cost” of overcapacity.

You can also measure the debt that China has used to finance public infrastructure. The money is typically borrowed by so-called Local Government Financing Vehicles – the “hidden” companies that governments use to build roads and bridges. Fitch estimates that these LGFVs face a $4.7 trillion debt-service gap. The interest paid on the “Special Purpose Bonds’ used for infrastructure now accounts for 10% of local government budgets.1

How Did This Happen?

To understand the paradox of a state-planned economy overproducing while the headquarters of global capitalism underproduces, we need to ask who bears the downside of overinvestment. And whose interest does the financial system serve?

In China, local governments, state banks, and SOEs can absorb enormous losses because the political and economic system doesn’t force them to mark losses to market or answer to shareholders.2 Near term, waste costs less in China.

Still, a Chinese municipality can build a metro that won’t break even for forty years; a U.S. transit authority facing the same math can’t get it funded. This isn’t planning defeating markets — it’s a system with a very high tolerance for sunk capital costs outcompeting one with a very low tolerance.

Second, ask: whose interests does the financial system serve? Post-1980s, Western capitalism reorganized itself around shareholder returns, share buybacks, and asset-light business models. Capital became disciplined in a specific way: far more allergic to long-duration, low-return physical investments.

Housing underproduction in the U.S. and UK, for instance, isn’t really a failure of markets in the abstract — it’s the predictable output of a system where incumbent homeowners are voters, zoning is local, and developer capital demands quick returns. China’s system has the opposite distortions: developers overbuild because land sales fund local governments, housing is the main vehicle for household savings, and buyers pay for a house before it is built. And there is no legal infrastructure that enables incumbent homeowners to fight new development.

So the paradox is less markets vs state planning than the kind of overcapacity that capitalism generates in its competitive, industrial phase. Once economies mature into a rentier-friendly, financialized form, they lose the overcapacity-generating property that had once defined them. (Of course, the current AI investment frenzy may refute this theory. We’ll know soon enough.)

China, meanwhile, built a hybrid system that preserves the “throw capital at physical stuff until it’s cheap” logic of early industrial capitalism but funds it through state-directed credit rather than equity markets. It’s not that Chinese planning beat Western markets; it’s that early-stage state-backed investment “out-capitalism’d” mature Western capitalism.3

It may be shiny for the moment, but overcapacity in China is expensive and economically destructive. Ghost cities, Evergrande-style property collapses, and the current deflationary pressures suggest that overcapacity in China can be just as catastrophic as its Western counterpart has been. The question isn’t whether the losses happen but whether the system that generates them also generates the productive residue — the cheap solar panels, the high-speed rail network, the battery supply chain — that justifies the waste ex post. That too is still an open question.

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I recently shared my initial impressions about economic growth and surveillance in China. Instead of being cowed by surveillance, I found people energized by a decade of material upgrades that make the American Acela corridor look like a relic of the steam age. Here are some additional observations based on three weeks of travel in Guangzhou and Yunnan.

I have divided these observations into five parts: world-class China, conservative China, weird China, things you rarely see, and things that are just plain broken.1 Also, because it’s a stunning country that I want you to visit, I appended some travel tips learned the hard way.

World Class China

China now leads the world in several key areas. This is hard to believe until you see it.

• Transportation. Chinese trains, train stations, airlines, airports, cars, freeways, bridges, and tunnels have all surpassed those in the US. Chinese people seem aware of this, and it is a source of popular support for local, provincial, and national governments. China builds infrastructure at world-leading quality and scale.

• Home ownership. 90% of Chinese families own their own homes. This is a massive accomplishment, even if the state overbuilt, especially in central and northern China. As a result, homes are depreciating assets, which are always politically explosive. And the banking system has indigestion as a result. But this is an incomparably better problem than the under-built cities of the U.S. and the shameful blight of homelessness that has resulted.

• Green Energy. China reached a fascinating milestone in 2026. It now operates the world’s largest renewable energy system, yet it remains the global heavyweight in coal consumption. This “dual-track” strategy allows China to lead the green transition while maintaining strict energy security for its massive industrial base. China’s combined installed capacity of wind and solar (approx. 1,840 GW) has now surpassed its coal capacity. In 2025, it generated roughly 4 trillion kWh of renewable energy. This exceeds the European Union's total electricity consumption. Clean energy is now over 11% of China’s total GDP. But coal still accounts for about 60% of total electricity production.

  Yunnan province is the crown jewel of China’s renewable efforts, specifically through its massive hydropower resources. It serves as a primary source for the “West-to-East Power Transmission” project, supplying clean energy to industrial hubs such as Guangdong.

  Yunnan is currently pioneering a multi-energy complementary system. Because hydropower can be adjusted quickly, it is used to “smooth out” the volatility of the newer, massive wind farms being built in Huize County and solar parks in the Yunnan mountains. When the wind drops, the dams release more water; when the wind is strong, the dams hold water back, effectively acting as a giant physical battery.

• Research. During the early 2000s, I visited perhaps a dozen Chinese research publications. At the time, research focused on sheer volume, and the quality was forgettable. The situation is entirely different now. A year-long study by the Australian Strategic Policy Institute (ASPI) showed that China has a “stunning lead” in 37 out of 44 critical and emerging technologies. In some fields, like Materials Science, all of the world’s top 10 research institutions are based in China. China faces real headwinds in aviation engineering, biotechnology, and the culture of foundational innovation, but I see no reason that they will not close most of the remaining gaps. Especially when the U.S., its main rival, is so determined to reduce investment in scientific research and development that 75% of American research scientists are considering leaving the country.

• Food. The diversity of protein and produce in Yunnan is phenomenal. Cantonese is the baseline, but the regional flavors are legendary and, crucially, cheap. Chinese access to fresh, healthy, and often delicious food is phenomenal. Protein, fruits, and vegetables are diverse, and the flavors are legendary.

• Architecture. Not long ago, China produced mostly bland, uninteresting buildings. They still do a lot of that, of course, but in Yunnan, the 'bland' era is over. New builds now blend ethnic Bai or Naxi traditions with hyper-modern glass and steel—a sophisticated regionalism likely born from two decades of Western firms like Gensler training local talent. They also produce outstanding modern and classical buildings that honor the ethnic traditions of the regions, at least in Yunnan. The interiors of many Chinese buildings are also now very attractive and well-designed. This was not always true.

• Public Safety. There is little public disorder or crime in China. Public order isn't just a byproduct of the police state; it’s a cultural refusal to tolerate the 'urban decay' aesthetic—piss-scented subways and open-air drug use—that many American cities have seemingly accepted as the price of liberty. Most actual cops here are helpful, not the jackbooted authoritarian thugs I witnessed in sixties East Germany, the seventies Spain under Franco, or the terrified population I met at the end of Mao’s Cultural Revolution.

  Nobody here takes the law lightly. The state, its cameras, and state security are never far from sight. Stops to inspect seat belt use, car registration, and breathalyzer testing are common. Everyone knows that they are monitored in public – and for the most part, they are OK with that.

Conservative China

Those with privileges in China are very good at preserving them. Of course, China is not and never has been a classless country. But Chinese income inequality, measured by Gini coefficients, is now about the same as in the U.S. As a result, some things in China work very well for privileged groups and poorly for others. If you are Han Chinese, registered in a Shanghai household, and have high national test scores, your life will be very good indeed. If you are a peasant kid in the boondocks who has just been handed the business end of a hoe at age eight, not so much. Here is how privileged Chinese preserve their status.

• Limits to economic mobility. China’s richest provinces are more than four times richer than its poorest ones. For comparison, New York, the richest US state, has about twice the per capita income of Mississippi, our poorest. Importantly, people can move from poor states to rich ones in the US, but the hukou system prevents poor people from relocating within China. More on this below.

• Limits to educational opportunity. To start with, lots of Chinese have no education at all. To quote the indispensable China Talk substack:

“According to China’s 2020 census, only 30.6% of the population has ever attended high school (including non-academic vocational secondary school), which Stanford professor Scott Rozelle notes, “is lower than South Africa, lower than Turkey and lower than Mexico.” In 2022, roughly 40% of China’s middle school graduates didn’t go on to attend high school of any kind, and among the students that do continue their education, national policy stipulates that roughly half (“五五分流”) are funneled into non-academic vocational high schools with no path to enter college.”

Chinese 18-year-olds who are still in high school take the grueling gaokao exam each June. Your score determines your college and your future, so the pressure from families on Chinese teens is famously intense. You hear of 18-hour study days, seven days a week. Top students attend China’s top universities and can secure top jobs. Mediocre students become schoolteachers. One person who recognized the paradox of weak students becoming teachers cynically described it as a “devil to devil” career path. Rural students attend inferior schools, which creates strong incentives for parents to send their kids to boarding schools, where research suggests they often become isolated and depressed.

• Stratified health care. Universal access to decent healthcare is a cornerstone of Chinese communism. During the 1970s, barefoot doctors were romanticized in books like Norman Bethune’s “Away With All Pests”. Today, the healthcare landscape in China is divided between a truly massive public infrastructure and a rapidly growing, high-end private sector. Public hospitals handle about 90% of patient volume in China and are organized into three tiers. Tier 3 hospitals are large, well-equipped urban hospitals with the most experienced doctors. These can be quite crowded. Tier 1 and 2 hospitals are smaller community health centers or district hospitals for basic care and referrals.

  Many top public hospitals now have “International” or “VIP” departments. These offer shorter wait times, English-speaking staff, and private rooms at a higher price—often a middle ground between public care and private clinics. Major cities like Shanghai, Beijing, Guangzhou, and Shenzhen have seen an explosion in private healthcare by providers that cater almost exclusively to expats and wealthy locals. These facilities mirror Western hospitals, with English-speaking doctors, direct billing for international insurance, and luxury amenities.

  China has now heavily integrated AI into its healthcare delivery to address rural-urban gaps. You can consult with doctors via apps like WeChat or Alipay, receive a digital prescription, and have medication delivered to your door within hours. Many Tier 3 hospitals now use AI for preliminary screening of CT or MRI scans and skin conditions to speed up the triage process.

• “Hanification”. The Han majority in China officially recognizes 55 ethnic minority groups that make up about 9% of the population. Chinese policy towards its ethnic and religious minorities comes in two flavors: those for interior minorities and those for minorities on China’s borders.

  • Interior minorities. Yunnan is central casting for interior minorities. Bai, Yi, Naxi, Hui (Muslims), and Yunnanese Tibetans are seen as adding “local flavor”. Many are very successful in business. They receive extra points on their gaokao tests, making it easier for them to enter major universities. All speak Chinese, and many intermarry. These groups are Exhibit A in China’s effort to assimilate (and in many cases “Hanify”) its ethnic minorities.

  • Frontier minorities are Tibetans and Uyghurs (and to a lesser extent, Mongolians). These groups control large territories on China’s frontier and have often spawned separatist movements. They have organized religions that the CCP often sees as a rival to its authority. They have resisted adopting Mandarin. For these reasons, the CCP often views Tibetans or Uighurs as a threat to national unity. In Xinjiang and Tibet, the Chinese state sees ethnic identity through the lens of counter-terrorism or anti-separatism, not a happy melting pot as in Yunnan. The result is “hard” assimilationist policies: mass surveillance and detention, “re-education” centers, and boarding schools designed to prioritize Mandarin over mother tongues.

Head Scratchers: Strange Things About China

Some things always strike a foreign visitor as odd. That’s part of why we travel overseas.

• Scooter Swarms. In the 1970s, cars were reserved for senior communist officials. Everyone else rode black 50-pound Flying Pigeon bikes. As China advanced, cars became common, then ubiquitous, then electric. Shared bikes were invented here, and after some false starts, became widely available and cheap. On college campuses, they still are.

  But electric motor scooters (called “e-bikes” here, but they have no pedals) are rapidly displacing bicycles. They are very cheap (the low-end models cost about the same as a cell phone) and you can rent them quickly everywhere. As with the now hard-to-find bikes, you just scan a barcode and take off. You pay 10 yuan per hour ($1.30 at current exchange rates, roughly double that if you convert based on purchasing power) via WeChat or AliPay.

  Every road has hundreds of these scooters, which are both incredibly useful and super annoying. They increase road capacity and solve the last-mile problem, but they are a silent menace to anyone on foot or on a bike. These scooters are the backbone of China’s massive gig-based instant delivery services, a topic I plan to write about in more detail soon.

• Clueless Use of American Brands. I would not think of wearing a T-shirt with Chinese writing on it that might say “kick me, I’m stupid”. Here, lots of people wear brands out of context. Yankees hats are common, as are T-shirts that say simply “Colorado”. I sat next to a guy on a bus wearing a MAGA hat who had no idea what it stood for. An old guy wore a hat saying “PwrGrls,” a well-known women’s gym in Los Angeles. Another had a corporate shirt from Sig Sauer, a famous handgun maker.

• “Trumpchi” cars. The Guangzhou Automobile Group makes a car that sounds like a portmanteau of two world leaders: Trump and Xi. It’s a coincidence, but a funny one. GAC adopted the name, which translates roughly as “spreading good fortune,” long before Trump entered politics. It uses the GAC brand overseas because they found that “Trumpchi” does not sit well with many customers.

• Commodified Ethnicity. The state encourages ethnic identity as an aesthetic while strictly controlling it as a political force. Nowhere is this clearer than in the peculiar fad of ethno-phototourism.

  Throughout Yunnan, hundreds of young people rent the costumes of local tribal minorities and pay for a 2+ hour makeup session to prepare them for greatness on Chinese Instagram.2 They hire a professional photographer, often skanky guys with iPads around their necks who promise to improve the results digitally in case make-up doesn’t do the trick. They charge for two hours of fashion photos at iconic locations.

  Imagine thousands of young people in rented Navajo dress, complete with professionally applied warpaint, posing in front of the Grand Canyon for gig photographers carrying the latest Canon cameras and digital enhancement tools.

  This is not a minor fad. There are hundreds of these folks at every park, temple, or picturesque site in Yunnan – and Yunnan is stunningly picturesque. Ethno-tourism is a multi-billion-dollar industry that gives cultural appropriation a bad name. Worse, nobody seems to enjoy it very much.

What’s Broken

Some things in China just suck — to me anyway. Some may improve; others I am less confident.

• The Household Registration System. The hukou is China’s household registration mechanism that functions like an internal passport to restrict geographic mobility. It has been the bedrock of CCP social control and the preservation of privilege for decades. Although it should have been abolished with prejudice long ago, it is currently undergoing the most significant overhaul in its history. Here is how it works.

  • At birth, every Chinese citizen is assigned a hukou based on their parents’ registration that categorizes them as either rural or urban and identifies their city or village. Your hukou is the key to your social benefits and opportunities for economic mobility. If you live and work in a city where you don’t hold a hukou (e.g., a migrant worker in Shenzhen with a rural hukou from Sichuan), you often cannot access local public schools for your children, subsidized healthcare, or affordable housing.

  • The system is a NIMBY dream. It locks in the privileges of residents of super-cities like Beijing and Shanghai by guaranteeing them access to the country’s best hospitals and most elite schools. Their children face lower entry requirements for top universities. It protects their housing values and social prestige by strictly limiting the influx of poor people.

  • The state loves it. The hukou system provides a mechanism to control migration flows and prevent the formation of urban slums that often plague other rapidly developing nations, as poor people seek out opportunities only cities can offer.

  • Slowly, the hukou system is changing. With collapsing birth rates, China abandoned its ill-considered one-child policy. With overbuilt cities desperate to fill “ghost housing”, the CCP is finally loosening the hukou. As of this year, restrictions on obtaining an urban hukou have been almost entirely abolished in cities with fewer than 3 million people. In many cases, you simply need to live and work in a place for six months to qualify. Also, social insurance is increasingly decoupled from household registration. Workers can enroll in pension and health insurance plans in the city where they work, regardless of where their hukou is registered. Importantly, this only applies to small cities – Beijing and Shanghai still use a strict “Points System” based on education, tax contributions, and professional skills to limit entry.

• Smoking. Almost half of all Chinese men smoke, but fewer than 2% of women do. Even though state-owned tobacco companies see this as a “market opportunity”, female smoking is not a sign of independence in China like it was in the U.S. during the 1950s. Cigarettes remain high-status business gifts. And the state is hooked on tobacco: 30% of Yunnan’s public revenue comes from tobacco. This makes the province’s aspiration to transition from “brown” industries (tobacco and mining) to “green” ones (exporting hydroelectricity and tourism) much tougher. The state has a financial interest in addicting people, although in fairness, the use of nonsmoking areas in restaurants, hotels, and airlines has grown a lot.

• Political debate and independent journalism. There isn’t any. China’s future is decided by a small cadre of self-selected bureaucrats — and China is vastly poorer as a result.

• Privacy and digital security. I described this earlier. Cameras are everywhere. Americans traveling in China are subject to government surveillance, malware installation on devices left in hotel rooms, phishing attacks, and the monitoring of online activity, especially via public Wi-Fi or local apps. Your phone is monitored, your passport is checked frequently, and your activities are reported to the State Security Bureau. You must use WeChat or AliPay to communicate or pay for anything – and it’s monitored. Some of the travel tips below will help reduce your personal risk, but you cannot eliminate it completely.

Things You Rarely See in China

These are hard things to capture because it’s tough to spot what’s not here.

• Overhead electrical wiring. Once you notice this, it blows your mind — China has undergrounded almost all residential and commercial electric lines. In a few places, this process is not fully completed, but removing “spider webs” was a central part of China’s transformation of its electrical grid during its rapid urbanization between 1990 and 2015. This happened differently in different regions: big cities invested in IUTs, large integrated utility tunnels that carried water, electric power, gas, and sewage. Newly built areas or cities undergrounded utilities from day one. Smaller towns have gone house to house. The effect is impressive, especially in contrast to the 20+ year wait to get underground electrical wires installed on a single residential block in the Bay Area.

• Americans. We have visited plenty of tourist spots, but have only encountered two Americans — and then only for about ten seconds. We have met Russians, several Europeans, lots of Hong Kong-based Brits — but few Americans. This is nuts — Yunnan is rightfully a major tourist destination for Chinese travelers, who visit in the tens of millions. It’s amazing, and if you travel, you should come see it, even if Chinese visas and digital security make it harder than it should be.

• Litter or trash. If you work at it, you can find litter here – on obscure cul-de-sacs in the far end of nowhere — but it is really unusual. Recycling bins are everywhere. Some people still hand-sweep the streets at 5:00 AM, but there are also standard automated street sweepers.3 China is very clean.

• Rebellion. In every country, the young and congenitally dissident play a valuable role by challenging conservative mainstream norms. They may promote punk rock, heavy metal, or other angry music. They may dye their hair blue, get tattoos designed to offend, or wear preposterous clothing. Or they may write novels or create art that challenges mainstream sensibilities. Where homosexuality is suppressed, it often fuels the fires of rebellion (that it seldom does so anymore in the U.S. is surely a sign of progress). I walked past a dozen bars with live pop or rock groups in Linjiang tonight, and they all seemed listless. No blue hair in sight. I am sure that young people find ways to rebel in China, but most of it is hidden from my Western eyes.

• Bitcoin. It’s illegal here (though it’s widespread in Hong Kong). This is fine by me. Except that when my wife earned some RMB that we needed to transfer to a US bank account, Bitcoin would have let me evade China’s onerous capital controls. Which is precisely why they ban it, and we should as well — most of the use cases for crypto are to help people break the law.

Summary

Despite its problems, China is a justifiably and enviably optimistic place. People have seen massive, sustained improvements in their daily lives. Most are vastly better off than they had ever hoped to be.

One way to see this is to listen to how most Chinese view AI, which serves today as our global Rorschach test. Even in a terrible job market for college grads, the students and professionals we spoke with were surprisingly optimistic. They imagine that AI will be the best thing ever, not the worst. Americans are much more pessimistic; we worry about unintended consequences.

Try to visit China. It is a beautiful, wildly diverse country that is changing rapidly. Like the New York Times, I specifically recommend Yunnan, which has also become very popular with Chinese tourists. I was inspired to visit after listening to Dan Wang’s Conversation with Tyler. (I strongly recommend Dan’s essays, his excellent and widely acclaimed book, and his talk with the irrepressible Tyler Cowen.)

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I have come to China on and off for five decades and it never ceases to surprise me. I spent the past week in Southern China. Here are some notes.

Economic Growth

Rapid economic growth is a miracle, especially in a desperately poor country. Growth does not address every social problem and it always creates a few — but it solves the important ones and gives a country a shot at figuring out the others. Nothing else does this.

The China I saw in 1974 was a miserable place. 90% of China lived in grinding poverty under a political system that had become psychotic during Mao’s Cultural Revolution. They aspired to someday own a bicycle, a radio, and a crappy refrigerator.

With the death of Mao in 1976, China began its historic transformation. They moved from collective farming to the Household Responsibility System, which allowed farmers to sell surplus crops for profit. They created state investment planning and state-controlled banks and capital markets to finance rapid, long-term growth. This produced the usual politicized investment decisions that lead to housing crashes and massive overproduction in some sectors, including EVs. But in China’s case, it also produced astonishing economic growth.

China tested markets and entrepreneurship by establishing four Special Economic Zones in 1980. Three of these laboratories of capitalism thrived, but the one outside of Guangzhou absolutely exploded. A fishing village called Shenzhen grew from 30,000 people to a global tech hub of over 17 million today. It’s a city with self-driving cars, drone delivery, and the largest network of electronics suppliers on the planet. Standing in a gleaming showroom for Xiaomi cars, I realized that Shenzhen helps China build some of the best cars in the world. For anyone who saw Canton in 1974, it’s gobsmacking.

As labor costs rose, China pivoted from cheap manufacturing to high-end technology and massive infrastructure projects. When I visited in 2008, China had not a single high-speed train. Today it has more than the rest of the world combined. In 2008, nobody used credit cards — and they still don’t. As the West moved from cash to credit cards, China leapfrogged directly to mobile payments, creating a cashless society in less than a decade. When my wife pulled out some cash at a student cafeteria (where a camera had scanned the various dishes on our trays and instantly computed the charge), the cashier laughed. She had no cash register.

China today is navigating a classic middle income trap. The population is aging, so the college campus hosting us has trouble recruiting enough students. A heavy reliance on commercial and residential construction has led developers and local governments to overbuild. They have loans they cannot repay, but state-owned banks are reluctant to acknowledge this. Rapid industrialization made China the world’s largest carbon emitter — and the world’s largest investor in green energy. Chinese income inequality is now comparable to the US.

China today faces high-class problems compared to the ones it faced in the 1970s. To see a country that has lifted over 800 million people out of poverty is to witness an achievement unparalleled in modern history. To see it build beautiful cities with extensive lakes, parks, and greenways simply takes your breath away (even if some of the gleaming skyscrapers are half empty). To hear citizens of Shenzhen brag that their city measures the time it takes to repair a reported cracked sidewalk tile not in weeks or days, but in hours, makes me jealous. It gives new meaning to “state capacity”.

Surveillance

The Chinese government knows where you are at all times. Generally, they don’t care much — but they can find you quickly if they wish to. Historically, this meant plain clothes cops who watched over tourists and made little effort to disguise themselves.

Now uniformed cops are still abundant, but they have technology helpers. Outdoor video cameras are everywhere. Even on a wooded path on a remote college campus, there is an eye in the sky. The cameras are backed by an extensive system of facial recognition that worked even during Covid when faces were masked. On top of that, every cell phone and every car is registered, tracked, and tied to your national identity. You board trains using your national ID card — or passport if you are foreign. Misbehave, and your inability to board trains is the least of your worries.

Managing hundreds of millions of cameras requires a sophisticated, multi-layered architecture to handle the sheer volume of data. It requires advanced facial recognition, and AI software to interpret it. This in turn requires staggeringly large computing clusters and a “National Team” of AI companies to develop standardized protocols so that a camera in Zhuhai can talk to a database in Beijing. This national Panopticon was built by a government that keeps an very watchful eye on its citizens.

The system may be the result of a low-trust regime, but the paradoxical result may be that citizens trust each other more. There is no fear of crime. On a campus, students leave bags with MacBooks exposed unattended on benches. Women walk alone in the dark. When I ask people about whether they find the cameras intrusive, the answer has twice started with “we have a different view of this. In our experience, everyone behaves better when they are on camera”.

Personally, the system gives me the creeps — but the benefits are hard to dismiss.

Future Cars

China today is consolidating car companies the way the the United States did in 1921. At the time, we had 88 car companies and thousands of suppliers. Long before Silicon Valley, the San Francisco Bay Area was considered “the Detroit of the West”. Durant Motors of Oakland, and San Francisco’s California Automobile Company, are long gone. As is Kleiber Motor Company, which built passenger cars at 10th and Folsom in San Francisco. Or Emeryville-based Doble Steam Car Motors. Or luxury carmaker Fageol from Oakland.

It took two decades for the US car industry to consolidate down to the Big Three (GM, Ford, and Chrysler). Like everything else, it’s happening faster in China. China ended up with too many car companies thanks to a massive influx of government-subsidized electric vehicle (EV) startups. About 500 companies in 2019 have combined down to about 100 today.

More consolidation is coming. Analysts predict the great automotive company die-off will end with perhaps 8–12 major players by 2028. The top three companies already control nearly 47% of the market.

The consolidation is political as well as economic because China has built “Local Champions”. These are State-Owned Enterprises (SEOs) backed by provincial or municipal governments. EV SEOs benefit from local tax breaks, land grants, and government procurement. It feels like soccer teams: Shanghai has SAIC, Guangzhou has GAC, and Beijing has BAIC. They should issue jerseys.

Increasingly, you see two kinds of automobiles in China: future cars and past ones. Past cars are either obscure brands — the Durant Motors of China — or they have combustion engines and sport blue license plates. Many of them are familiar Japanese nameplates. Japan looks to have missed the transition to EVs and seems likely to die off here along with the dozens of oddball EV brands.

Future cars are easy to spot. They are EVs with green license plates and recognizable brands. This includes all taxis. Future cars include:

• Tesla. The Model Y and Model 3 are made in Shanghai and are popular here. There are as many Teslas in the Bay Area of South China as in the California Bay Area, but nobody worries about Elon’s politics.

• BYD, the EV giant whose cars are aggressively priced and high-quality. I’m still not sure why putting “Build Your Dreams” in English helps sell cars in China, but it seems to work.1

  

• SEOs like SAIC (which has powerful joint ventures with VW and GM), and Changan Automotive.

• Geely (which owns Volvo, Polestar, and Lotus. So yes, you can buy a Chinese EV in the US).

• Luxury carmakers. Xiaomi, which began as a cell-phone maker, but now sells kitchen appliances, home tech, and killer cars. See a great MKBHD review of the Xiaomi SU7 here.

• Tech-forward brands. I am not sure whether brands that focus heavily on software, user experience, and cutting-edge features will survive, since these advances are quickly copied by larger companies. (You want in-car karaoke? The one I tried failed to improve my singing.) These include Li Auto (maker of high end SUVs), NIO Auto (the “Tesla of China” famous for its battery-swapping stations), and XiaoPeng, which positions itself as the leader in autonomous driving and smart cockpit technology.

The Last Grownup

It’s odd to be an American in China as our mad king president beclowns himself before the world. In just four weeks, Trump has provoked the largest energy disruption in history, enriched Russia, threatened to starve poor countries, and further squandered American resources and reputation. He has handed China an extraordinary opportunity to enhance its global reputation — although they may not have the confidence to take advantage of it.

Many world leaders now regard China as the last grown-up in the room. While Beijing faces significant economic risks due to its energy dependence, but the long-term geopolitical benefits that the crisis offers China may outweigh the short-term costs for several reasons:

• The US is now fully distracted. American military, financial, and political capital is rapidly dwindling away from the Pacific theater. A war in the Middle East forces the U.S. to redeploy carrier strike groups, high-end interceptors, and precision munitions that were intended to deter China in the South China Sea or Taiwan Strait. Beijing may perceive a “window of opportunity” where the U.S. lacks the domestic will or military bandwidth to protect Taiwan.

• China has a learning opportunity. China is using the conflict as a live laboratory to study American military capabilities. By observing U.S. and Israeli strikes, Chinese intelligence can analyze the performance of U.S. Aegis and Patriot missile defenses and electronic warfare tactics.

• The war may accelerate China’s energy independence. China is the world’s largest oil importer and has also prepared massive reserves. While the war causes some immediate pain, it may also serve as a catalyst for China’s long-term goals. The volatility of the Strait of Hormuz will likely accelerate China’s transition to renewables and its push for land-based energy pipelines from Russia and Central Asia. China may use the crisis to push for oil trades to be settled in Yuan, further challenging the dominance of the U.S. dollar in global energy markets.

• China can seize the diplomatic and moral high ground. Beijing positioned itself as a neutral mediator in the 2023 Saudi-Iran deal, while portraying the U.S. as an agent of chaos. This resonates with many “Global South” nations who are wary of Trump and U.S. military intervention. If the U.S. focuses solely on military action, China can deepen its economic and diplomatic ties with other Gulf states like Saudi Arabia and the UAE. They can offer to invest in infrastructure without the baggage of a military alliance. They can offer to backstop poor countries facing issues financing energy that is suddenly much more expensive. China’s trade surplus gives it a pile of dollars to lend.

Writing in the Financial Times, Adam Tooze suggests that China could build alliances by sharing its privileged status in the Strait of Hormuz. He notes that “It is not by accident that tankers are rumoured to have been rebadging themselves as Chinese.” He suggests that Beijing could also offer to contribute to a global oil reserve or join with other countries to create a global push for alternative energy.

China might even emerge as a peace broker, potentially wielding not only global credibility, but serious power if they decide to pressure combatants to reconcile by curtailing access to rare earths or other critical war materials .

Will China rise to the moment? It’s in a tough spot because it imports nearly half of its oil through the Strait of Hormuz. If Hormuz remains blocked, China’s manufacturing sector and domestic finances would be at risk. A global recession triggered by $150+ oil prices would devastate China’s export-heavy economy.

But China really is the last adult standing. Even though I regard it as our geopolitical rival, I would love to see it shed its traditional defensiveness and paranoia and assume its rightful place on the world stage.

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Progressive schadenfreude — the secret pleasure that many Democrats take in Trump’s self-inflicted blunders — is a dangerous emotion. It leads Dems to imagine that a blue wave this November is all but inevitable. It is not.

Trump is profoundly unserious and at times dangerous, but Democrats cannot build an opposition movement merely by laughing at the clown. The working-class voters who once formed the party’s backbone won’t return simply because Democrats mock Trump. Too often, what those voters hear is not solidarity but the condescending laughter of the elite professionals who drove them from the party in the first place.

And even if the schadenfreude were justified, there is the problem of the map.

It’s Hard to See a Blue Wave From Here

Even if Trump’s ratings collapse as oil prices skyrocket, there is an upper limit to how many seats Congressional Democrats can actually win. The gold-standard Cook Political Report assigns every US Congressional district to one of seven buckets: Solid, Likely, and Lean either Democrat or Republican, and a “Toss Up” bucket for races that are too close to predict. They work hard at these classifications, and they have a very impressive record.1

Their latest House Race Ratings show that Republicans are unlikely to retain their majority — but they are hardly facing a wipeout. Cook sees only 17 GOP seats in the “Toss Up or worse for Republicans” category. Assume that Democrats win every one. Then add the next tier — seats that “lean Republican” — and you still only reach 20 competitive races. That’s well below the post–World War II average midterm loss of 26 seats for the president’s party.

Even if you give Democrats all 15 seats Cook rates “Likely Republican,” you would still only reach 35 potentially vulnerable seats. Democrats may win a few of these, but they cannot win most of them.

In short, Democrats could have a great election and still fall short of what they achieved in the genuine blue waves of 2006 and 2018. Other respected forecasters — Inside Elections with Nathan L. Gonzales and Larry Sabato’s Crystal Ball — reach similar conclusions. Despite Trump’s appalling ratings, the map simply does not foretell a historic Democratic rout.

The reasons are structural, and they start with the 185 “Solid Republican” districts.

• The Trump floor. Most Republicans in Congress sit in deep-red districts where Trump’s overall approval among Republicans is still in the low 60s. With oil prices rising daily and questions about Trump’s mental acuity, authoritarianism, and ethics becoming widespread, that floor could crack — but it would crack from a very high base.

• Vulnerable Republicans are already gone. The GOP is down to just 218 seats. Compare that to the 241 they held before losing 41 in 2018, or the 256 seats Democrats held before Obama’s catastrophic 2010 midterm. Today, only three Republican House members represent districts that Kamala Harris won in 2024. The low-hanging fruit has been picked.

• Purple voters are gerrymandered out. Among independents, Trump’s numbers are dismal — approval in the high 20s and low 30s — but gerrymandering and political self-sorting have reduced the number of truly competitive districts to the point where those independents don’t have enough leverage to swing many races. Only 8% of Congressional Districts “Lean” red or blue, or are rated “Toss Up.” The vast majority of Americans are independents, but they vote in Congressional Districts gerrymandered to favor one of the two major parties.

So what does all this mean for Democrats? It means that antipathy toward Trump is necessary but insufficient. They need voters to actually want to vote for them. And that requires confronting an uncomfortable truth about why so many voters find the party hard to like.

A Party That Lost Its Base

The Democrats’ likability gap is both a cause and a consequence of a demographic earthquake that reshaped the Democratic coalition over the past three decades.

• Non-college voters walked away. In 1992, white voters without a college degree made up roughly half of the Democratic vote. Machinist union members in Ohio, waitresses in Pennsylvania diners, construction workers in Michigan — they had voted blue since their grandparents pulled the lever for FDR. By 2020, that share had been cut in half, to around 25 percent. In a single generation, the Democratic Party’s center of gravity shifted from the shop floor to the corner office.

This is the “diploma divide” at work, and its consequences are everywhere. In 1996, Bill Clinton was the last Democratic presidential nominee to win a majority of white voters without a college degree. By 2020 and 2024, Biden and Harris were winning roughly 60 percent of college-educated voters while Trump was capturing about 66 percent of white non-college voters. Education, which was once a weak predictor of voter choice, slightly favoring Republicans, is now one of the most powerful sorting mechanisms in American politics.

Research published by the National Academy of Sciences in 2024 confirms the pattern: voters in the top 10 percent of household income, those with advanced degrees, and those in professional white-collar occupations have moved steadily leftward over the past 40 years. Accusing the Democratic party of being led by and optimized for elites may sound like a Republican talking point. It is also a painful demographic fact.

A seeming counterpoint: Democrats did not lose union members, who still vote Democratic roughly 59 to 39 percent. But today’s union members are more likely to have a college degree than nonunion workers.2 “Union member” now means teacher, government employee, and healthcare manager — not the private-sector industrial worker who anchored the New Deal coalition. The curriculum coordinator and the registered nurse have more political influence in the party than the autoworker, the coal miner, or the steelworker.

• Democrats lost rural voters. The diploma divide has a geographic mirror. Professional-class Democrats are increasingly clustered in knowledge hubs — the Bay Area, Austin, the Research Triangle, the Northeast corridor — creating an urban-rural split that maps almost perfectly onto the professional-manual labor divide. Democrats are strongest where the knowledge economy thrives and weakest where people work with their hands.

• Democrats lost men. The diploma divide also tracks a gender divide. Since 1982, more women than men have earned four-year college degrees; since 1987, more women have earned master’s degrees; since 2006, more women have earned PhDs. Over this same period, the Democratic party moved from a relatively balanced (or even male-majority) industrial-era coalition to a predominantly female-majority one. Women have favored Democratic candidates since the early 1980s, but the compositional flip — where women became the overwhelmingly dominant share of the party’s voters — accelerated in the late 2000s.3

These three losses — non-college voters, rural voters, men — are not separate crises. They are the same crisis, viewed from different angles. And they would be manageable if the shift were simply a matter of coalition arithmetic. Parties evolve. But the diploma divide hasn’t just changed who votes Democratic. It has changed how the party talks, what it prioritizes, and how it makes people feel.

Why This Makes Democrats Unlikable

Analytic messaging. A party dominated by professionals tends to communicate like professionals. It favors complexity over simplicity, frameworks over feelings, white papers over bumper stickers. For all their internal contradictions, Republicans communicate clearly: “Drill, baby, drill.” “Build the wall.” “Make America Great Again.” You can disagree with every one of those slogans and still admit they communicate something immediate and visceral. What is the Democratic equivalent? “Build Back Better” fell flat. “No Kings” and “Democracy is on the ballot” resonate with the base but sound abstract to a swing voter worried about grocery prices.

Elitist messaging. Status-conscious professionals can be condescending — and too many Democrats with graduate degrees who live in a handful of prosperous metro areas treat disagreement as ignorance. Even when they are right on the merits, phrases like “science says” and “experts agree” communicate an unmistakable subtext: we know better than you do. For a voter working for a living in a town that the knowledge-economy boom passed by, that message lands like a slap.

This is the likability gap at its most corrosive. The policies are often not the problem. Majorities support the party’s positions on healthcare, Social Security, and prescription drug prices. The problem is that the messenger class has become so socially and economically distant from the persuadable voter that the message consistently misses the mark. Customers will walk away from the best product in the world if the salesperson makes them feel stupid.

Relatability, Clarity, and Generosity of Spirit

When I say Democrats need to become more likable, I don’t mean they need to smile more or crack better jokes at town halls (although that never hurts). I mean that they need to fundamentally rethink how they present themselves to voters who aren’t already in the coalition — and, crucially, to voters who were in it but walked away.

Likability in politics comes down to three things: relatability, clarity, and generosity of spirit.

• Relatability means talking about kitchen-table issues in language that doesn’t sound like it was drafted by a policy shop. It means acknowledging that people’s frustrations with government are often legitimate — even when those frustrations don’t map neatly onto the party platform. It means more beer and less whine.

• Clarity means having a message simple enough to repeat. Democrats are often so afraid of oversimplifying that they end up saying nothing memorable at all. The party needs an economic message that a worker on a break can repeat to a coworker. “Your grocery bill should not win the race with your paycheck” makes rising costs personal without mentioning “inflation.” “They cut their taxes and your healthcare” is simple, adversarial, and points at a specific policy choice rather than a vague villain.

• Generosity of spirit is the hardest — and the one Democrats most urgently need. It means not treating every disagreement as a moral failing. It means making room in the coalition for people who might vote with you on economics but disagree with you on immigration enforcement or cultural questions. It means retiring the instinct to call people bigots for holding views that were mainstream Democratic positions ten years ago. A professional-class party tends to enforce ideological conformity the way professional-class institutions do — through social sanctions, HR-speak, and the implication that dissent reveals a character defect. Sanctimony is poison in a party that needs to win in Scranton as well as San Francisco.

Follow the Leaders

Fortunately, Democrats already have a proof of concept. The candidates who win tough districts despite a toxic national brand tend to share certain traits: they run on local issues, they don’t sound like Twitter, they project warmth rather than righteousness, and they treat voters as adults capable of holding complex views.

• Jared Golden represents a rural, working-class Maine district that Trump won by 10 points in 2024. Golden consistently breaks with his party on gun control and spending, maintaining a credibly independent profile. (Regrettably, he is retiring.)

• Marcy Kaptur, the longest-serving woman in House history, represents a manufacturing-heavy district in Northern Ohio that has trended significantly Republican. Her relentless focus on trade, labor, and bread-and-butter economics has allowed her to survive even as the surrounding region shifted.

• Vicente Gonzalez and Henry Cuellar both represent South Texas districts that saw massive Republican gains in 2024. Despite Trump winning their districts, both won re-election by taking border security and local energy and agriculture interests seriously.

If Democrats want to flip those 20 competitive Republican seats and hold their own vulnerable ones, they need more candidates like these — and fewer candidates who sound like they’re running for the editorial board of a prestige magazine. The impulse to nationalize every race around Trump is understandable but self-defeating. In the districts that actually matter, voters already know how they feel about Trump. What they don’t know is why they should trust the Democrat on the ballot.

This also means the national party needs to give local candidates breathing room. Let the candidate in a Central Valley swing district talk about water policy without having to answer for every progressive position that polls well in Brooklyn. Let the suburban mom running in a Virginia exurb emphasize fiscal responsibility and public safety without being accused of betraying the cause. A party that disciplines its moderates into silence is a party that cannot grow.

The Stakes of Getting This Wrong

The Cook data makes one thing brutally clear: the ceiling on Democratic gains is lower than the base wants to believe, and the floor on Republican losses is higher than it should be given Trump’s pathetic incompetence and growing unpopularity. Democrats could win back the House with a net gain of as few as four seats. But they could also fall short — not because voters approve of what Republicans are doing, but because they don’t find the alternative compelling enough to show up.

Trump’s die-hard MAGA base is deeply committed, but it is shrinking. At the start of this year, his approval among Republicans was locked in the 80s. The ICE shootings, the Epstein files, and the attacks on Venezuela and Iran have eroded it significantly — though he remains above 50% with Republicans. More important than the base’s erosion, however, is what it reveals: an enlarging middle of the electorate, reachable by Democratic candidates who stop treating persuasion as beneath them.

Those candidates need to meet people where they are, not where the party’s professional class thinks they should be. They will need to project competence and warmth instead of credentialism and superiority.

The Democratic party spent the past 30 years trading blue collars for blue checks. That transformation brought real strengths — fundraising, institutional power, cultural influence. But it created a party that millions of working Americans no longer recognize as their own. Reversing that perception doesn’t require abandoning the college-educated voters who now anchor the coalition. It requires remembering that a winning party has to feel like home to more than one kind of American — and that nobody likes the HR Department, or a party that sounds like one.

Democrats don’t need a wave. They need a reason for people to join them rather than to avoid the other side. The voters are there for the winning. The question is whether Democrats are willing to do the harder, humbler work of earning their support.

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Modern Times will slow down a bit during the next month as your scribe heads to China.

ICYMI

• Matt Yglesias on detoxing the Democratic brand.

• Richard Haass: Open Hormuz for everyone — or close it to everyone. Smart.

• Cass Sunstein on the death of Jurgen Habermas, a postwar intellectual titan.

• Why do we eat popcorn in movie theaters?

• As idiot teens, my wife and I both chose our colleges in part because the weather was nice on the day we visited. Turns out lots of people do.

• Singapore has built cyborg cockroaches to rescue people from earthquake rubble and test old sewer lines. Seems to work.

During the Korean War, U.S. Air Force Colonel John Boyd sought to understand why American F-86 pilots achieved such a lopsided kill ratio against technically superior MiG-15s. He formalized a theory of competitive decision-making that would reshape American military doctrine for a generation. He called it the OODA loop: Observe, Orient, Decide, Act.

His core insight was deceptively simple. Victory doesn’t go to the side with more firepower. It goes to the side that cycles through the decision loop faster — the side that can observe what’s changing, orient on its meaning, decide what to do, and act before the adversary has finished reorienting. Get inside your opponent’s loop, and you don’t just outpace him. You break his ability to form a coherent picture of the war he’s fighting. His framework applied to pilots in a dogfight – and to their commanders.

Two weeks into the U.S.-Iran war, the evidence is mounting that Iran has gotten inside Trump’s OODA loop. Not because Iran is stronger — it manifestly is not — but because Tehran has imposed a tempo and a logic on this conflict that Washington cannot match with the tools it is willing to use.

Reaction Replaces Initiative

The clearest sign that an adversary is inside your OODA loop is that you stop acting and start reacting. Every move you make is a response to something they just did, rather than an execution of your own plan. Your decisions are always one beat behind. By the time you’ve oriented and decided, the situation has already shifted again.

Look at the sequence of events. The U.S. launched strikes expecting to shatter Iran’s capacity and will. Iran responded not by absorbing the punishment and suing for peace, but by widening the war horizontally — attacking tankers in the Strait of Hormuz, launching drones and missiles at Gulf state infrastructure, hitting Amazon data centers, and squeezing other chokepoints that the global economy depends on. As University of Chicago political scientist Robert Pape observes, this is a textbook strategy of horizontal escalation: a weaker combatant transforming the stakes of a conflict by widening its scope.

And what has Washington done in response? Released 172 million barrels from the Strategic Petroleum Reserve. Tried to solve what it initially misdiagnosed as an insurance problem for tankers. Watched the IEA announce the largest reserve release since its founding in 1973. Each of these is a reactive measure — an attempt to manage consequences that Iran is generating faster than Washington can contain them.

The Orientation Crisis

Boyd considered orientation the most critical phase of the loop — the mental model through which you interpret reality, the framework for making sense of what you observe. When an adversary gets inside your loop, orientation is the first thing that breaks. You can no longer build an accurate picture of what’s happening because it keeps changing before you finish assembling it.

The U.S. has a severe orientation problem in this war. The administration appears to have oriented on a model in which overwhelming airpower would either compel Iranian capitulation or trigger regime change. Neither has happened. As Pape notes, the regime is doing exactly what regimes do when they survive decapitation strikes: demonstrating resilience by widening the conflict. Yesterday in Dubai:

Meanwhile, the administration’s economic orientation is equally scrambled. Trump publicly blustered that America benefits from high oil prices — a statement that reveals a fundamental misperception of the nature of the threat. As Javier Blas notes at Bloomberg, the oil market can be as savage as the bond market in twisting a politician’s arm. West Texas Intermediate is pushing toward $100 a barrel, and Brent has already breached that level. Every day the war continues adds an estimated $3 to $6 per barrel.

The White House’s breathing room is measured in days, not weeks. At $200/barrel oil prices, $8 gas, and renewed inflation, the U.S. will lead the world into a serious recession. Trump will face nightmarish midterm elections that will cost him the House and very possibly the Senate. Once his popularity hits new lows and he is a true lame duck, even impeachment could move within reach.

In any battle, orientation requires a leader to coldly assess a rapidly evolving situation. When a leader makes public statements that contradict the pressures they’re actually facing, it’s a clear sign that their orientation is broken.

The Narrowing of U.S. Options

A broken orientation doesn’t just produce bad analysis. It collapses the decision space. Instead of choosing among several good courses of action, you find yourself forced into an increasingly constrained set of increasingly bad ones.

Consider the menu of choices that Trump has now dealt himself:

• Bomb more. He can continue the air campaign, but as Richard Haass argues, continued strikes will further degrade Iranian capabilities without eliminating them, while Iran continues to make the Strait of Hormuz unusable and attacks Gulf neighbors. The cost-benefit ratio continues to shift further against the U.S. with each passing day.

• Hope for a new regime. Trump can hope for regime change — what some are now euphemistically calling “regime alteration.” But as Haass bluntly puts it, this qualifies as hope, not a strategy. There is no feasible military operation to bring it about; the current regime believes it is in an existential fight; and there is no organized opposition to challenge the clerics and their Republican Guard.

• Declare “mission accomplished” and walk away. Trump is no doubt tempted. But this would simply mean that the war and economic turmoil continue. Shipping would never resume, and investment in the Gulf would effectively come to a halt. Trump’s problem is that although Iran had no say in how this war began, it gets a vote on how it ends.

• Negotiate. Or Trump can sit down at the same diplomatic table he could have sat at before the war, only now with less leverage, a more determined adversary, and allies who are furious at the damage he has allowed Iran to inflict.

Every one of these options is worse than what Trump had available two weeks ago.

Iran’s Tempo Advantage

How has a country with a fraction of America’s military power managed to get inside the OODA loop of the world’s most powerful military? By choosing to fight an asymmetric war on a battlefield where its cycle speed is inherently faster.

In his new book, Johns Hopkins political scientist Vali Nasr makes this point incisively. Iran’s leaders are veterans of asymmetric wars in Iraq and Syria, and they are applying the same logic to a new domain. Inexpensive drones, short-range missiles, and mines setting tankers can have the same effect that IEDs had in Iraq — only with far greater strategic impact, because they disrupt global supply chains rather than just local patrol routes.

The asymmetry is critical. Iran can sustain this counteroffensive more easily and for far longer than the U.S. can sustain the economic damage. An Iranian Shahed drone made of styrofoam and powered by a motorcycle engine costs orders of magnitude less than the precision missiles sent to intercept it or the economic havoc it causes when it ignites a tanker, data center, or desalination plant. And as Blas reports, the desalination vulnerability is existential for Gulf states: Riyadh would have to evacuate within a week if the Jubail plant or its pipeline were destroyed. Iran doesn’t need to destroy it. It just needs to make the threat credible enough to keep the pressure on.

Iran doesn’t need to match American firepower. It needs to generate a tempo of consequences — economic, political, humanitarian — that outruns Washington’s ability to orient, decide, and act.

The Sunk-Cost Trap

There is a darker dimension to this OODA loop failure, and it concerns what happens next. Eurointelligence raises the troubling possibility that rather than recognizing it has fallen behind the decision cycle and recalibrating, the administration may double down — not because escalation serves strategic objectives, but because of the sunk-cost fallacy. Having incurred enormous costs, walking away means doing it all for nothing.

Boyd would have recognized this immediately. One of the pathologies of a broken OODA loop is that the decision-maker, unable to form a coherent picture of the battlefield, escalates not because the situation calls for it, but because retreating is psychologically unbearable. The loop doesn’t just slow down; it ceases to function as a rational decision-making process altogether.

The consequences ripple outward. Eurointelligence documents how the war has already shifted the Russia-Ukraine power balance, with Russian oil revenues potentially doubling and U.S. weapons stocks depleted. The longer Trump’s OODA loop stays broken, the more that second-order effects no one planned for accumulate and cascade.

Getting Back Inside Iran’s Decision Loop

Boyd’s framework isn’t just diagnostic. It’s prescriptive. The way to recover when an adversary is inside your loop is to do something they don’t expect — to break their orientation rather than continuing to feed it. Predictable escalation is exactly what Iran has planned for. Tehran wants the U.S. to keep bombing while it keeps squeezing the strait, because every day that cycle continues, the economic and political pressure builds on Washington, not on Tehran.1

Richard Haass sketches one approach to breaking the cycle: an initial standdown followed by a negotiated accord addressing nuclear materials, missile production, and proxy support, with sanctions relief as the incentive. It is, he acknowledges, imperfect. But it has the virtue of being a move that breaks Iran’s current orientation — because Tehran’s entire strategy is predicated on the assumption that Washington will keep fighting until the economic pain forces it to stop on Iran’s terms. A decision to negotiate now, from a position of demonstrated military capability rather than exhaustion, would force Iran to cycle through its own OODA loop — to observe a changed situation, reorient, and decide how to respond to an adversary that just did something unpredictable.

But here is where Boyd’s clean geometry collides with the wreckage of recent history. Iran’s new Supreme Leader, Mojtaba Khamenei, has little reason to trust any bargain with Trump, who has now burned Iran three times.

• First, Trump ripped up the JCPOA — the deal Obama painstakingly negotiated with Khamenei’s father in 2018 on inspections and enrichment limits.

• Then Trump bombed Iran’s nuclear facilities in the middle of negotiations last year.

• This year, he attacked again – and made it personal. The younger Khamenei narrowly escaped the February 28 attack that killed his father, wife, daughter, son, and several members of his extended family. As a source in Tehran told The Atlantic‘s Karim Sadjadpour: “He’s bloodthirsty now.”

The OODA framework says the U.S. needs to do something unexpected to regain the initiative. The diplomatic record indicates that Iran has no reason to believe any American offer is genuine. Suddenly, the rational moves and the credible ones diverge. Boyd’s loop demands creative reorientation, but three rounds of broken faith have made creativity look indistinguishable from the next betrayal.

Boyd would say the first step is the hardest — admitting that your adversary, smaller, weaker, and outgunned, is winning the decision cycle. John Boyd was a fighter pilot for whom delusions were fatal. He assumed that once you recognized the problem, you had the character and credibility to reorient and act on the solution.

But political problems are not like that. Trump can remain deluded for a long time without admitting that his efforts to produce another compliant Delcy Rodriguez may leave us instead with an Iranian Kim Jong Un.

George Orwell saw this coming. In an essay called “In Front of Your Nose”, he observed,

“...we are all capable of believing things which we know to be untrue, and then, when we are finally proved wrong, impudently twisting the facts so as to show that we were right. Intellectually, it is possible to carry on this process for an indefinite time: the only check on it is that sooner or later a false belief bumps up against solid reality, usually on a battlefield.”2

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ICMYI

• Adults with fewer kids are buying many more children’s toys for themselves.

• Americans hate food delivery robots. They crowd sidewalks, and their food is easily stolen.

• Where do AI agents go to chat with each other? Moltbook, of course.

• The rise of ATMs did not kill off bank tellers. But the rise of iPhones did.

• Good news: initial evidence suggests that AI is better at cyber defense than offense.

In yesterday’s post, I discussed the problems that have killed annual wealth taxes in many rich countries that have tried them: complex valuations, liquidity issues for private company founders, and capital flight.1 I outlined the practices of nations like Japan that successfully impose substantial taxes on inherited wealth and argued that California’s billionaire tax initiative ignores these lessons while committing rookie legal and financial errors. The state ballot initiative cannot address the massive “buy, borrow, die” loophole that allows the ultra-wealthy to live off untaxed borrowing until death erases their capital gains entirely.

I suggested closing this loophole and folding all gifts and trusts into inheritance tax calculations. Even leaving the current $15 million individual exemption in place, this would generate $200–$300 billion annually. This is real money. It would cut 12–16% of our annual deficit or fund Universal Pre-K and completely close the Social Security funding gap.

But inheritance taxes are not the only way to tax wealth. This post proposes a structural pivot. Instead of just chasing individuals—who can hire lawyers, create trusts, and move to Austin—we would also tax the engines of wealth themselves and put some of this money to work alongside our most skilled investors.

The Corporate Equity Levy

Every company with a market capitalization above $1 billion would owe an annual levy equal to 0.5% of its equity value, payable by issuing non-voting shares to the American Commons Fund.

This is straightforward. A company worth $100 billion would issue $500 million in new shares each year to a newly-created sovereign wealth fund, here referred to as the American Commons Fund (ACF). No cash would change hands. The company remains whole. The founder still drives, but the public gets a seat in the back of the limo.

— Benefits

This approach avoids the trifecta of complex valuations, liquidity challenges, and capital flight that plague most wealth taxes.

• Easy valuation. The “army of appraisers” problem vanishes. Public companies have ticker symbols and real-time prices. Private unicorns are already valued during funding rounds and for Section 409A compliance.2 We are not guessing the value of a Picasso; we are reading a Bloomberg terminal.

• No liquidity crisis. This is the gentle tax. When California’s poorly designed initiative threatened to force DoorDash co-founder Tony Xu to sell an estimated 173% of his net worth just to cover a tax bill, it highlighted a fatal design flaw: you cannot eat paper gains. Under this model, the market absorbs the cost through dilution. The company stays intact. The founder stays put.

• No capital flight. You can move your home to Texas, but you cannot easily move a multibillion-dollar stock listing to the Cayman Islands. The tax attaches to the listing, not to the person. While companies could theoretically redomicile, the cost of losing access to the world’s deepest and most liquid capital markets is a price few boards would be willing to pay.

— Costs

There is no such thing as a free tax. This one imposes three financial costs:

• The dilution drag. Issuing 0.5% of equity annually is a permanent tax on the future. Over a decade, it compounds to roughly 4.9% dilution. Over twenty years, about 9.5%. How bad is that? Silicon Valley companies routinely dilute shareholders by 2–5% per year just to compensate their engineers. But voluntary dilution for talent is a choice; statutory dilution is a financial drag. All taxes are.

• The announcement hit. Markets are forward-looking. The moment this becomes law, investors price in the perpetual dilution stream. If you discount a 0.5% annual dilution at a 5% real required return, share prices drop by roughly 9–10% overnight. Call it a one-time cardiac event for the S&P 500—painful, but over quickly. The market adjusts. It always does.

• The threshold distortion. A cliff at $1 billion creates an incentive for companies to stay private longer or engage in financial engineering to hover just below $ 1 billion. The fix is straightforward: apply the tax only to the marginal value above $1 billion, creating a smooth phase-in rather than a punitive notch.

The Venture Option

The American Commons Fund would have the option to purchase up to 10% of any privately issued stock in a company raising $50 million or more, under the same terms as the lead investor.

ACF shares would be non-voting with negotiated information rights. If the company does not go public within ten years, it would have a right to repurchase the fund’s shares from ACF at fair market value.

— Benefits

One of the most significant sources of wealth concentration in recent decades is that private investors capture the highest returns before companies go public. In the 1990s, Microsoft and Amazon went public relatively early, allowing ordinary investors to participate in the upside. Today, companies stay private far longer. Stripe and SpaceX are worth tens of billions, and no public investor can participate. The venture option gives the public a way in.

The American Commons Fund would need to be selective. There are thousands of private financings each year; blindly exercising the option on all of them would produce mediocre returns. In practice, the fund would exercise the option on rounds led by top-tier investors or in sectors aligned with national strategic priorities.

Once you have established a sovereign wealth fund, this approach has some strengths.

• It solves adverse selection. The classic problem with government investment in private companies is that the government funds Solyndra, not SpaceX. But this mechanism sidesteps this problem. The ACF does not choose companies; it drafts behind investors who do. If Sequoia has done the diligence, negotiated the terms, and committed its own capital, the ACF is free-riding on some of the most sophisticated investment judgment in the world. The logic is the same one that makes index funds work: you do not need to be smart if you can attach yourself to investors who are.

• The terms are pre-negotiated. The American Commons Fund does not need a deal team, does not haggle over valuation, and does not negotiate protective provisions. It takes what the lead investor gets. This keeps operating costs extraordinarily low—you need analysts to decide which options to exercise, lawyers to process the paperwork, and a back office, but not the full infrastructure of a venture fund.

• It democratizes access to private-market returns. The ACF captures pre-IPO appreciation on behalf of the public. In practice, it operates as a silent limited partner riding alongside whoever priced the deal. If the fund’s returns flow back to households through dividends, Social Security support, or tax relief, this is a direct mechanism for sharing wealth creation that currently accrues almost exclusively to accredited investors and institutions large enough to access top-tier venture capital.

• It is non-distortionary. The company gets the same amount of capital it would have raised anyway. Operations, governance, and strategy are unaffected because the shares do not vote. The lead investor’s incentives are unchanged. The pricing is unchanged. The ACF skims a thin layer of return off the top of private markets without altering how those markets function. And the ten-year buyback provision prevents the fund from becoming a permanent, unwanted guest on the cap tables of companies that choose to remain private indefinitely.

• It creates a natural pipeline into the public company levy. The two programs are architecturally complementary. Companies that succeed and eventually cross the $1 billion market cap threshold transition from the voluntary co-investment regime to the compulsory equity levy. The ACF’s early private-market stake converts into a public-market holding, subject to the dilution of the .5% levy outlined above.

— Costs

Venture and private equity investors are unlikely to give this idea a standing ovation, as it amounts to a tax on their capital.

• Syndicate resistance. Venture rounds involve tight syndicates where relationships, reputation, and follow-on commitment matter. A lead investor allocates shares to co-investors partly based on the value those co-investors bring—introductions, expertise, future capital. Aside from committing to future rounds and introductions to federal buyers, the American Commons Fund is a dead weight on the cap table. If the ACF’s 10% displaces a strategic co-investor who would have provided real operational value, the company is worse off. Founders and lead investors would resent this, and you would sometimes see creative structuring to minimize ACF participation—side letters, unusual share classes, restructured rounds, and a surprising number of financings for $49.9 million. VCs are very good at this.

• The information-rights tension. At best, the American Commons Fund would negotiate the same information rights as other preferred shareholders—board observer seats, quarterly financials, cap table access, and material event notifications. This means the federal government, through the ACF, could have detailed financial visibility into thousands of private companies, including those in defense, sensitive technology, or politically charged sectors. Even with strict information barriers, the perception that the government has a window into a company’s private books could chill certain kinds of entrepreneurship. Foreign-founded companies raising money from U.S. investors would be particularly wary.

• Blind spots. Venture returns follow a brutal power law. The top 10–20% of deals generate virtually all of the returns; the rest return little or nothing. The ACF will need to exercise judgment about which rounds to join — and this partially recreates the deal selection problem it was designed to avoid. Moreover, venture deals contain subtle traps: bridge rounds disguised as growth rounds, leads investing defensively to protect existing positions, and side provisions that make headline valuations misleading. Sophisticated venture investors navigate these with deep relationship networks. A government fund would operate with less context.

Political capture is the greatest risk to any sovereign wealth fund, regardless of its funding source. Once the ACF holds meaningful stakes in thousands of companies, political pressure to use that position for non-financial objectives will become intense.

It is easy to imagine a senator proposing legislation to give the American Commons Fund voting rights on climate resolutions. Or that pressures the ACF to divest from firearms manufacturers, fossil fuel companies, or firms operating in disfavored countries. Or that require companies to sign labor agreements. Norway’s massive sovereign wealth fund, the world’s largest private investor, faces exactly these pressures. In early 2026, the U.S. State Department publicly criticized the fund for divesting from Caterpillar on ethical grounds related to the war in Gaza.3 The non-voting provision helps. But political gravity is relentless.

Insulating the American Commons Fund from political pressure will be an important part of its design, just as it was for the Federal Reserve Board. Among other provisions, the legislation should give companies and investors a statutory right to sue ACF for damages if it violates the terms under which it provides public capital.

The American Commons Fund: A National 401(k)?

The total market capitalization of U.S. public companies is roughly $69 trillion. A 0.5% levy would seed the ACF with approximately $345 billion in equity value in its first year alone.

At this scale, the non-voting structure is essential. Norway’s Government Pension Fund Global holds roughly 1.5% of all listed companies worldwide—and it votes its shares. That gives a single fund from a tiny country real influence over the governance of global corporations. To avoid the specter of “creeping socialism,” the American fund must be strictly non-voting. Neither Joe Biden nor Donald Trump should decide who sits on Apple’s board.

So what do you do with a fund that could eventually own 10% of corporate America? It might do any of several things (importantly, it cannot do them all).

• Improve fiscal sustainability. The ACF can use dividends and share sales to reduce the $34 trillion national debt without raising household taxes. The fund’s revenue stream would be less cyclical than corporate income tax revenue because market caps fall less in recessions than profits do. This provides a stabilizing buffer during economic contractions.

• Invest in critical sectors. Following the CHIPS Act model, the American Commons Fund can take stakes in critical infrastructure, rare earth processing, or domestic semiconductor manufacturing—channeling investment where strategic interests demand it.

• Provide citizens with a social royalty. The Alaska Permanent Fund has distributed between $1,000 and $2,000 annually to every Alaskan resident since 1982, funded by oil revenues that Alaskans decided belonged to the public.4 A seven-trillion-dollar ACF paying out 5% of its capital per year would send roughly $1,100 to every man, woman, and child in the United States. For a family of four, that is $4,400—not life-changing, but real money, and a tangible stake in the nation’s productive capacity.

Critics will call the state’s demand for a permanent equity stake in private success “nationalization by a thousand cuts.”

The response writes itself: “your success was built on a public ecosystem of laws, courts, and decades of investment in science, education, and defense. Paying forward your share so that others can succeed is not expropriation. It’s rent.”

I have serious practical concerns about the workability of wealth taxes. This has not prevented me from outlining three such taxes in two days.

• An estate tax that includes all gifts and trusts and removes any revaluing of assets at death. I would advocate a high exemption, perhaps the current $15 million, and a progressive tax on the balance ranging from 50-75%.

• A levy on the equity of large companies, payable annually in nonvoting shares held by the American Commons Fund.

• A portfolio of private nonvoting shares held by venture and private equity-backed companies. These shares are purchased at prices established by lead investors, not levied, but the right to the purchase will be viewed as a tax by the investors who need to make room for passive public financing.

Compare this to our current system: a messy, loophole-ridden income tax that largely leaves the more than $100 trillion in U.S. household wealth sitting beyond its reach.

We need to debate whether 0.5% is the right rate for a more stable union and how to structure an American sovereign wealth fund that can resist political capture. This would be vastly more productive than a spiteful ballot proposition that targets 200 wealthy Californians and hopes they don’t move to Texas.

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ICYMI

• The Trump administration will take a $10 billion fee for brokering the TikTok deal. TikTok is pivoting hard to become an AI company.

• The creators of 1960s sensations Barbie and Hot Wheels were husband and wife.

• “How We Hacked McKinsey’s AI Platform”. Unbelievable.

• Tesla is now shipping its Cybercab, a self-driving car with no steering wheel.

• Scientists send information invisibly, using “negative light”.

• China is crushing U.S. battery companies.

• Russia is recruiting Africans to fight its war in Ukraine.

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“Don’t tax you,
Don’t tax me,
Tax that fellow behind the tree.”

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-- Senator Russell B. Long, Chair of the Senate Finance Committee, 1973

Those concerned about income inequality in the United States often overlook how much starker the concentration of wealth has become. The richest 1% of American households now hold roughly $55 trillion — about as much as the bottom 90% combined. Not since the Gilded Age has so much been held by so few.

California is the headquarters for billionaires. By one count, we have 199 billionaires, compared to New York’s 135. The San Francisco Bay Area hosts 82 billionaires, compared with New York City’s 66. This level of concentrated wealth brings with it a long list of social pathologies, so it is not surprising that Californians are contemplating a special tax on billionaires.

The logic for this initiative is pure Willie Sutton. The famous thief explained that he robbed banks because “that’s where the money is.” On the other hand, we might want to think twice before building our tax policy on a guy who spent half his adult life in prison.

Although some progressives find wealth taxes emotionally gratifying, their actual track record is mixed at best. Most schemes fail to raise money, and many fail to tax wealth. On the other hand, a handful of wealth taxes work consistently well. Those who want to tax holdings rather than earnings need to examine the subject seriously to understand why the California ballot initiative fails almost every lesson on how to tax wealth effectively.

Let’s start with hard-earned lessons from failed wealth taxes.

Why Wealth Taxes Fail

A wealth tax is a tax on the returns to savings. If poorly designed, the tax can be extraordinarily high — especially when interest rates are low. A 2% wealth tax when real returns are 3% consumes two-thirds of the return. Critics argue this distorts the incentive to save and invest, reducing capital formation over time.

The practical problems are even more serious.

• Valuation. Wealth taxes require the assessment of assets that lack liquid market prices, such as private businesses, art, real estate, intellectual property, and complex financial instruments. This is administratively expensive, generates endless disputes, and creates ripe opportunities for manipulation.

• Liquidity. People who are “asset rich but cash poor” are forced to sell stakes in businesses or farms to pay a tax on unrealized value. This dynamic famously led Californians to revolt against their main wealth tax — the property tax — when we passed Proposition 13 in 1978 with 65% of the vote. Prop 13 slashed property tax rates and capped annual tax increases. Nearly half a century later, that revolt still shapes California’s fiscal architecture.

• Capital flight. Wealthy individuals are mobile, and so is their money. When France operated its impôt de solidarité sur la fortune, an estimated 10,000–12,000 wealthy households left the country. Research indicates that revenue lost through emigration and avoidance more than offset the tax collected. Sweden, the Netherlands, Austria, Denmark, Germany, Finland, Iceland, and Luxembourg all experimented with wealth taxes. Most repealed them between the 1990s and 2010s. By the time France scrapped its wealth tax in 2017, only a handful of OECD countries still had one. The recurring pattern was the same everywhere: high administrative costs, aggressive avoidance through trusts and corporate structures, creative asset reclassification, capital flight, and disappointing revenue.

• Legality. There is also a constitutional concern. The Sixteenth Amendment authorizes Congress to tax “incomes.” Whether unrealized appreciation qualifies as “income” is genuinely contested. Several countries have run into constitutional limits on the effective combined rate of income and wealth taxation.

Tax Wealth at Death

Shifting the focus to inheritance taxes sidesteps several of these problems, though not all of them. As incentives go, even libertarian-leaning economists like Milton Friedman expressed some sympathy for inheritance taxation on meritocratic grounds, though he worried about practical design.

Taxing death creates fewer distortionary incentives. (Not that most of us need a financial incentive to keep living.) You want to avoid death taxes? Don’t die.

• Better timing. You only die once. Eliminating annual taxation eliminates the compounding effective-rate problem — you’re not eroding the return to capital year after year; you’re taking a share at a single transfer point. It also dramatically reduces the administrative burden, since you only need to value the estate once, and the deceased’s full financial picture tends to come into focus at probate in a way it never does during life.

• Fewer liquidity problems. Heirs can typically settle estates over months or years. They can sell assets and use insurance or installment arrangements to smooth the payment. You’re not asking a living person to liquidate an ongoing business to pay an annual bill.

• More efficient. Most economists, across the political spectrum, regard inheritance taxes as less distortionary than wealth taxes. The person who earned and accumulated the wealth is dead; the tax falls on a windfall received by heirs.

• Politically smarter. You are not taxing successful entrepreneurs; you are taxing their kids. Even so, death taxes don’t fully escape the wealth-tax critique. They still require valuation of illiquid assets (though only once). They still create incentives for avoidance — lifetime giving, trusts, emigration before death. And they can threaten the continuity of family businesses, which is politically sensitive almost everywhere.

What Has Actually Worked

No country has a perfect inheritance tax, but some approaches work better than others. The better-functioning systems share several design features.

• They tax broadly and limit exemptions. Every carve-out--for agricultural land, for family businesses, for particular asset classes--becomes an avoidance superhighway. The UK’s inheritance tax illustrates the problem well. The headline rate of 40% looks steep. Still, generous reliefs for agricultural and business property, combined with the ability to make gifts that fall out of the estate after seven years, mean that the wealthiest estates often pay effective rates far below 40%. The tax raises modest revenue and is widely regarded as voluntary for anyone with good advisors.

• They tax the recipient, not the estate. Ireland’s Capital Acquisitions Tax works this way — it taxes what each beneficiary receives above a lifetime threshold, rather than what the deceased leaves. This makes it harder to avoid the tax by splitting an estate among many small gifts, and it captures lifetime gifts and bequests in a single cumulative framework. Belgium (particularly the Flemish and Brussels regions) also uses a recipient-based approach with relatively low rates but broad coverage.

• They tax gifts. Integrating lifetime gifts into the inheritance tax base is critical. Without this, the tax is trivially avoidable by giving assets away before death. Most well-designed systems treat gifts made within a lookback period (typically three to seven years before death) as part of the taxable estate. Some go further: Japan’s 2023 reform extended its gift-integration period and introduced a “cumulative taxation” option that effectively brings all gifts above an annual exclusion into the inheritance tax calculation. Japan has one of the highest top inheritance tax rates in the world (55%) and, partly because of this tight integration, actually collects meaningful revenue — inheritance and gift taxes account for a larger share of Japanese tax revenue than in most OECD countries.

• They limit relief for businesses. Germany provides a good example of trying — and struggling — with this. Its inheritance tax offers substantial relief for business assets, but the Constitutional Court has repeatedly forced reforms to narrow loopholes, most recently in 2016. The current system conditions relief on maintaining employment levels and continuing the business for several years, tying the exemption to a policy purpose rather than offering a blanket carve-out. South Korea takes a stricter approach, with a high top rate (50%) and comparatively limited exemptions, and is notable for actually enforcing the tax against prominent business families. The heirs of Samsung’s Lee Kun-hee paid roughly $11 billion in inheritance tax, one of the largest such payments in history.

• They build an anti-avoidance infrastructure. This matters at least as much as rate-setting. Beneficial ownership registries help identify assets hidden in opaque corporate structures. The OECD’s Common Reporting Standard has been transformative for the automatic exchange of financial information between countries. General anti-avoidance rules allow tax authorities to look through artificial arrangements. Countries that invest in enforcement capacity--not just writing rules but actually auditing large estates--get markedly better results.

Some countries do this well. Japan and South Korea stand out for combining high rates with relatively effective collection. Both apply taxes based on nationality or long-term residence, not just domicile, so you cannot escape by simply moving. Ireland’s recipient-based system is well-designed in principle, though rates and thresholds have been politically volatile. Belgium’s regional systems are interesting because they apply relatively low rates to a broad base, reducing avoidance incentives.

The countries that do best tend to combine a few features: recipient-based taxation with lifetime cumulation of gifts, a reasonably broad base without giant exemptions, nationality- or residence-based jurisdiction that is hard to escape by relocating, and serious enforcement infrastructure.

Putting an End to “Buy, Borrow, Die”

In the United States, the ultra-wealthy have mastered a form of financial escapology. They fund lavish lifestyles not through the “income” found on a W-2, but by borrowing heavily against their own massive holdings. For founders of tech giants who expect their shares to appreciate forever, selling is for suckers. Instead, they rely on a strategy that tax wonks have morbidly dubbed: “Buy, Borrow, Die.”

Here is how it works. You start a company that becomes a unicorn, or you buy real estate that quintuples in value. Instead of selling those assets to buy a yacht or a vineyard—which would trigger a 20% federal capital gains tax—you simply pledge them as collateral for a bank loan. Under U.S. tax law, a loan isn’t income. You receive $100 million in crisp, spendable cash, but because you have an offsetting $100 million liability, the IRS views your net worth as unchanged. The cash is real. The tax bill is zero.

Then you die.

Under Section 1014 of the Internal Revenue Code, your assets receive a “step-up” in basis to their current market value. This erases a lifetime of capital gains. Your heirs can sell the stock the next morning, pay off the bank loan with interest that was likely tax-deductible anyway, and pocket the rest without the government ever collecting a dime on the original appreciation. This isn’t an obscure loophole; it’s the engine of the American plutocracy.

ProPublica’s landmark reporting on the “Secret IRS Files” confirmed that the world’s richest men, from Elon Musk to Larry Ellison, have used securities-backed lending to report minimal taxable income while their fortunes grew by billions.¹

Why not tax the borrowing itself? If you borrow $500 million against a stock with a near-zero cost basis, you have “monetized” your gain just as surely as if you’d hit the ‘sell’ button on E*TRADE. Economically, the transactions are twins. One just happens to be invisible to the tax man.

Treating these loans as a “constructive realization”—essentially saying that if you spend the value, you’ve realized the gain—would align our tax code with economic reality.1

I love the idea, but the practical hurdles are high. A farmer borrows against her land to buy seed. A small business owner borrows against equipment. Drawing a line between “borrowing to avoid realizing gains” and “ordinary secured lending” is genuinely hard.

Moreover, wealthy individuals don’t just borrow once. They borrow, invest, then borrow again against the new assets. Tracking which borrowings correspond to which unrealized gains in a complex portfolio is an administrative nightmare. And if you tax the borrowing as a realization event, do you then adjust the basis of the underlying asset? If so, you have created an enormously complex basis-tracking regime. And complexity is the tax dodger’s best friend.

Instead of attacking the “borrow” part, it is far more promising to kill the “die” part.

If we eliminate the stepped-up basis at death, the “Buy, Borrow, Die” strategy collapses. The loan still has to be repaid, and if the heirs can’t wipe out the gain through a deathbed reset, the taxman eventually gets his due. Canada has operated this way for decades via a deemed disposition at death. It’s clean, it’s proven, and it doesn’t require a squad of forensic accountants to track every bank loan a billionaire takes out in their thirties.

The current system is broken, allowing unlimited deferral followed by a total tax amnesty at the cemetery gates. We don’t need a new, retroactive wealth tax to fix this; we just need to stop pretending that death is a tax shelter.

The California Initiative Ignores All of These Lessons

The Service Employees International Union is a political powerhouse in California. I like them and once worked for them. But their “2026 Billionaire Tax Act” is a masterclass in unintended consequences. The initiative aims to slap a one-time 5% excise tax on anyone with a net worth over $1 billion. Proponents look at the Forbes list, see $2.1 trillion in California wealth, and imagine a $100 billion windfall for healthcare and schools.

The math is simple. The reality is a wreck.

• It relies on crude valuations. By trying to squeeze a decade’s worth of revenue out of a single afternoon’s vote, the initiative creates a valuation nightmare that makes ordinary property taxes look like a game of checkers.

  Consider how they value a business. The initiative uses a crude formula: book value plus 7.5 times annual profits. This wildly overstates the value of a stable, boring company. But California isn’t a land of stable, boring companies. We are the land of the hockey-stick growth curve. It dramatically understates the value of tech startups. These companies often operate at a loss and derive value primarily from future earnings potential, intellectual property, and brand recognition, which book value calculations ignore.

  Take Tony Xu, the co-founder of DoorDash. Because the initiative’s formula uses a multiplier that ignores the actual market price of his shares, the “assessed value” of his wealth could skyrocket past his actual net worth. The Tax Foundation crunched the numbers: to pay the tax on his DoorDash holdings, Xu might owe $4.17 billion -- 173% of his total wealth.

  You cannot tax wealth that does not exist. You certainly cannot tax more wealth than exists.

• It triggers a “Liquidity Trap”. While a well-designed inheritance tax gives heirs years to settle an estate, this initiative demands the cash almost immediately.2 If a founder needs to pay, they have to sell. If they sell a massive block of stock all at once, the price craters. When the price crashes, it isn’t just the billionaire who loses; it’s the teacher in Fresno and the nurse in San Diego whose 401(k) is filled with those same shares. A tax aimed at 200 people becomes a tax on everyone with a retirement account.

• It ignores the experience of Europe. California policymakers often talk as if our state is a walled garden. It isn’t. It’s an open field. The European experience is a warning: when France implemented its wealth tax, it lost 12,000 millionaires in a single year. We are already seeing the local version. The proposed tax has motivated wealthy individuals with a combined estimated net worth of $1 trillion to relocate out of state. Peter Thiel is gone. David Sacks’s firm is planting flags in Austin. Not only that, but some good people have left as well.

• It rests on legal quicksand. The initiative contains a “retroactive” residency date of January 1, 2026. It’s a bold legal move. It’s also legal suicide. The legal vulnerabilities are extraordinary — far more serious than the typical policy debate over wealth taxes.

  By taxing people based on where they lived before the law was even passed, the initiative invites a barrage of legal challenges. The initiative faces potential challenges under the Dormant Commerce Clause (taxing worldwide assets), the Due Process Clause (retroactive application of a wholly new tax type), the Bill of Attainder Clause (targeting roughly 200 identifiable individuals without trial), the Equal Protection Clause, and California’s own Uniformity Clause. There is even a potential right-to-travel challenge, since the tax effectively penalizes interstate movement after the residency date. Any one of these could topple the whole structure in court.

• It preserves “Buy, Borrow, Die”. Worst of all, it leaves the machinery of “Buy, Borrow, Die” completely untouched. It’s a one-time hit on 200 people that causes massive economic tremors but fixes zero structural problems. Once the dust settles and the lawyers are paid, the billionaires who stayed will go right back to borrowing against their shares and wiping out their gains at death.

SEIU is absolutely right in its underlying concern. Billionaires paid only about 24% of their true economic income in taxes at all levels of government in 2018–2020, compared to about 30% for the average American. The undertaxation is real. But this initiative is a poor vehicle for addressing it, for all the reasons the comparative experience with wealth taxes would predict.

It would be far more effective to push for federal reforms — eliminating stepped-up basis at death, adopting deemed disposition on the Canadian model, or treating loans against appreciated assets as constructive realizations. These approaches would raise more revenue, create fewer distortions, and would not be subject to the interstate-competition dynamics that make state-level wealth taxes so self-defeating.

If Democrats want to make billionaires pay more, we should change the rules of the game—not just flip the table once and hope for the best. In my next post, I will outline a radically different approach to taxing wealth.

ICYMI

• A Chinese AI startup is publishing high-resolution satellite imagery of every U.S. military base, every carrier strike group, every F-22 deployment, every THAAD battery, and every Patriot missile position in the Middle East.

• Smart Girl Scouts set up cookie sales outside the local weed dispensary.

• We will need more than 300,000 new electricians to meet AI-driven demand over the next decade, plus 200,000 more to replace those expected to retire during the same period.

• U.S. decline is one thing, but Italy beat the U.S. baseball team?

• Gas prices are not coming down soon: Iran is using simple sea mines to shut down the Strait of Hormuz. Is it good or bad that cheap drones, missles, and mines now have expensive consequences?

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You wouldn’t know it from the apologetic bumper stickers that liberals paste on their Teslas, but Elon Musk is the most consequential industrialist of the 21st century. He is also, for good reason, one of the most despised.

Blue America fixates on his paleolithic politics and abrasive persona. Beijing is taking notes. To Chinese policymakers, Tesla, SpaceX, and Starlink aren’t just companies; they are strategic masterclasses in high-technology manufacturing at scale. If you want to know which industries China intends to dominate next, look at what Musk is building today. Not long ago, China outran him in the race to build the “electric stack” — solar panels, batteries, and EVs. Now it is obsessing over his reusable rockets and his 10,000 orbiting satellites.1 Soon it will be deconstructing “Heart of the Galaxy,” his plan for a million-satellite orbital data center designed to power space-based AI and bypass the terrestrial grid entirely.

In an era when most entrepreneurs settle for the safety of software, Musk is the only American building leading-edge hardware at a world-shifting scale. His Austin Gigafactory — 72 football fields of floor space — represents a feat usually reserved for the Chinese state: the ability to conjure massive physical industries from nothing, and then do it again. He has now scaled such businesses twice. By merging these interests with X, he is positioned to forge a behemoth of AI, autonomous transit, and satellite data. He will almost certainly become history’s first trillionaire.

But his true legacy isn’t the money.

The Dark Side of the Force

Musk is an asshole. But he is not an anomaly.

He is the latest iteration of a familiar American icon: the systems-building visionary who pairs technological brilliance with political paranoia, autocratic management, and a profound indifference to social norms. He is the direct descendant of Thomas Edison and Henry Ford — the resurrection of the autocratic, reactionary industrial titan.

Like Musk, Edison and Ford built not just products but systems. Edison’s “Invention Factory” created the modern electrical grid, and along with it, the modern R&D lab. Ford’s massive plant at River Rouge created the automobile industry, and along with it, mass production. Musk is building the space-internet-autonomy system, with scrupulous attention to the industrial design process, which is a big reason China follows his work so closely.

These men didn’t just shape American progress. They shared a cluster of specific traits — and a nearly identical dark side.

They were pioneering technologists. Edison oversaw the creation of the phonograph, practical incandescent lighting, and the first commercially viable motion picture camera. Ford’s Model T revolutionized transportation not just as a vehicle but as a production system; by 1921, Ford produced over half of all automobiles in the world. Musk’s Falcon 9, the first orbital-class rocket capable of reusable flight, has now flown more than 300 missions, launching over 9,000 satellites.

They were systems thinkers. Edison didn’t just invent a lightbulb — he built the entire electrical grid, starting with the Pearl Street Station in Manhattan. Ford didn’t just build a car — he invented the moving assembly line and practiced radical vertical integration, controlling everything from rubber plantations in Brazil to iron mines in Michigan.2 Musk mirrors this approach with the Tesla Supercharger network and the Starlink constellation, which provides the high-bandwidth backbone for a global, space-based internet.

They were serial founders. All three viewed corporations as vehicles for their visions, not ends in themselves. Edison founded dozens of companies, including the ancestors of General Electric and Consolidated Edison. Ford actually failed with two automotive ventures — the Detroit Automobile Company (which became Cadillac) and the Henry Ford Company — before finding success with Ford Motor. Musk achieved the rare feat of scaling high-tech manufacturing twice, with Tesla and SpaceX, even though both companies nearly died in 2008.

They were probably neurodivergent. Musk has publicly described himself as being on the autism spectrum. Historians can’t retroactively diagnose Ford or Edison. Still, both exhibited traits commonly associated with extreme “systemizing” personalities: obsessive focus, indifference to social cues, and a ferocious capacity for sustained concentration on technical problems. Steve Jobs, no stranger to neurodiversity himself, slyly nodded to these qualities as he narrated his most famous ad campaign: “Think different.”

They were obsessed with controlling the narrative. Ford purchased The Dearborn Independent to bypass mainstream media and broadcast his antisemitic worldview directly to the public. Edison was a master of the press conference and of vaporware, using the media to sell a future that didn’t yet exist and freeze out competitors. Musk’s acquisition of Twitter is the 21st-century version of the same impulse — a tool for manipulating public discourse in real time.

They radicalized over time. Success bred a “Great Man” isolation that, in each case, curdled into paranoia. Ford became convinced of global Jewish conspiracies and used his newspaper to promote the thoroughly debunked “Protocols of the Elders of Zion”. Edison waged the brutal “War of Currents”, even filming the public electrocution of animals to smear his rival’s AC technology. Musk led DOGE, the shambolic effort to take a chainsaw to government payrolls, expressed support for the ultra-right AfD in Germany, and pivoted toward “anti-woke” narratives, warning of “population collapse” and “mind viruses” as existential threats.

They were viciously anti-union. And in each case, the relationship with their workforce was paradoxical: they simultaneously shaped the modern workplace and routinely violated their workers’ rights. Ford’s “Service Department” brutally beat union organizers in the 1937 Battle of the Overpass. Edison used strikes as an excuse to relocate factories to anti-union locations. After firing eight pro-union engineers, Musk successfully challenged the NLRB’s jurisdiction over SpaceX, winning court rulings that the agency’s structure was unconstitutional.

Are Autocrats Better at Disruptive Innovation?

This recurring pattern raises an uncomfortable question. Are the traits that make certain people capable of building world-changing systems — the obsession, the intolerance for dissent, the conviction that they alone see the future — also the traits that make them dangerous? China’s astonishingly rapid industrialization gives this question new urgency.

Researchers have clustered around three positions.

The system builder thesis. In American Genesis, Thomas Hughes argues that figures like Edison and Ford were more than inventors—they were “system builders” who needed to control the entire environment of their inventions, including labor, raw materials, and public perception. A singular vision, Hughes suggests, cannot survive the friction of democratic consensus. Autocracy isn’t a bug. It’s the operating system.

The Great Man psychology. Walter Isaacson, biographer of Jobs, da Vinci, and Musk, frequently advances a “two sides of the coin” argument. The obsessive-compulsive streaks, the lack of empathy, the siege mentality — these are demons, yes, but demons that power the work. In his biography of Musk, Isaacson frames the “dark side” not as a flaw but as the engine that enables Musk to force a new reality into existence — what associates of Steve Jobs called his “reality distortion field.” Historian Vaclav Smil makes a parallel case: large-scale industrial innovation benefits from a level of command-and-control that is inherently at odds with liberal sensibilities.

The collective innovation counterargument. Against the Great Man narrative stands a substantial body of work arguing that revolutionary technologies — the internet, GPS, mRNA vaccines — emerge from massive public and collective investment, not lone visionaries. Economist Mariana Mazzucato contends that figures like Musk and Jobs are “value extractors” who build on the public sector’s foundational risk-taking. Historian David Edgerton adds that the most transformative inventions are often mundane — the bicycle, the shipping container — developed incrementally by many hands, not forced into being by a singular will.

Proponents of this view point to specific figures who achieved transformative impact through collaboration rather than control. Jonas Salk developed the polio vaccine and refused to patent it. Grace Hopper invented the first compiler and COBOL, but emphasized teaching and collective standards over personal branding. Tim Berners-Lee created the World Wide Web and released the code for free, deliberately refusing to form a company around it.

The Uncomfortable Truth

All technological progress is collective in some sense — every breakthrough builds on the work of many people. But history suggests something harder to accept: that building entire technological systems from scratch — railroads, electrical grids, rockets, AI — often favors leaders with obsessive, combative, uncompromising personalities. Leaders willing to bend institutions to their will – who believe they alone understand the future.

Edison, Ford, and Musk are extreme instances of a general phenomenon. Not every great innovator is autocratic, reactionary, or neurodivergent. But the pattern recurs often enough that we ought to stop treating it as a coincidence — and start asking what it costs us.

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ICYMI

• For International Women’s Day: What People Get Wrong About Women’s Rights around the world.

• Two weeks into the war with Iran, 12 nations are now involved. One has emerged as a clear winner: Russia. And possibly a clear loser: China.

• Anthropic lost the battle with the Defense Department, but may win the crucial war for AI talent.

• When will we finally get flying cars? This summer.

• Why has the Chinese Communist Party embraced Greek and Latin?

• Why does Donald Trump give this pair of shoes to all of his friends?

Even his supporters have decided that Donald Trump is starting to wear thin. Some MAGA fans object to his promiscuous corruption and dishonesty about the Epstein files. Others are annoyed by his autocratic wars and tariffs. Resurgent measles, spiking oil prices, and the killing of Americans by masked ICE agents have proven unpopular. Most voters (56%) now disapprove of Trump’s performance.

At this stage, low approval ratings do not predict presidential election results. Those who wish to elect U.S. Senate and House members who can slow Trump down a notch need to surface leaders who can win elections the hard way. They need to earn the votes of people who hate Democrats.1

Voters dislike Democrats at least as much as they dislike Trump. In polls taken last summer, voters gave Democrats a disapproval rating of over 60% – the highest in 35 years. Even if Democrats’ awful reputation has improved a notch since then, the party has paid a fearsome price for its sustained political malpractice that began during the second half of the Biden administration and continues in many quarters today.

Most Voters are Now Independent

Who are “independents” and why do they matter? In 1950, Gallup found that 45% of voters identified as Democrats, a third as Republicans, and 22% as independents. Today, those numbers have inverted: 46% of voters identify as independents, who now make up a large plurality of American voters.2

Why the big change? Voters have many reasons for identifying as independent, but three matter most.

• Views. Roughly 25% of Americans say neither major party represents their interests even “somewhat well.” Some independents are libertarian. Others hold views that are to the right of the Republican party or to the left of the Democrats. Others fled as parties became more ideologically pure. Ryan/Romney Republicans feel as homeless as many globalist Clinton Democrats.

• A social shield. As political conversations have become more stressful, more than 60% of Americans now find talking politics with those they disagree with to be “frustrating.” Many identify as Independent to opt out of the perceived toxicity of the two-party system.

• Youth. The Independent label is very popular among younger voters. A staggering 56% of Gen Z voters identify as Independent, compared to only 33% of Baby Boomers.

These classifications have many important limitations. On election day, very few voters are “pure” independents who oscillate between the established parties. Most “lean” toward one side, which is why the electorate ends up sorted into roughly equal camps. Gallup finds that when you include “leaners”, approximately 47% of voters identify as or lean Democratic, compared to 42% who identify as or lean Republican.

Why Have Independents Fled the Democratic Party?

Look again at the above chart. In the past 75 years, Republicans lost 6% of their electoral “market share”, but Democrats lost three times that. It is easy to imagine that unpopular Democratic policies drove political independents away. This is only part of the story – and may not be the main problem. With many voters, trust, competence, and cultural resonance matter more than specific policy views.

• The Competence and Trust Gap. Post-election analyses from groups like Third Way and the Center for Working-Class Politics find that many independents have lost trust in Democrats’ ability to govern effectively. In much of the Rust Belt, for example, research finds that voters have little confidence that Democrats will actually deliver on their promises once in power. In contrast, when “Big Gretch” Whitmer promised to “Fix the Damn Roads,” voters elected her governor of Michigan. When she actually fixed them, they re-elected her.

  Many independent and working-class voters have concluded that Democrats prioritize symbolic progress over bread-and-butter economic relief and effective government services. The high cost of housing and groceries remains a primary grievance for many voters, who do not see tangible results from Democrats.

• Strange Cultural Orthodoxies. A significant segment of independent voters perceives the Democratic party as “captured” by its most progressive wing, which expresses attitudes that alienate them. Some of this reflects a growing fatigue with race- and group-based identity politics, which many independent voters perceive as either divisive or as the obsessions of highly educated, college elites that ignore more immediate middle-class concerns.

  The tendency of some progressives to “name and shame” those who do not embrace the novel use of pronouns, land acknowledgements, or affirmative action is especially off-putting. The use of a parallel language containing words like “gender fluid,” “microaggression,” “BIPOC,” “Latinx, and “LGBTQQIP2SAA+” repels more voters than it attracts.3 It especially offends young men, who are inclined to view the Democratic party as overly scripted and cautious, in contrast to Republicans, who are seen as confident, strong, and unafraid to offend.

• Feminization. Democrats have lost men, especially young men. In 2020, young men (18–29) backed the Democratic candidate by roughly +15 points. In 2024, they backed Republican candidates by roughly +2 points – a 17-point swing in just four years. No group in the history of U.S. polling has swung that far in four years.

  Astonishingly, young women favored Democratic candidates by 24 points – a 26-point gender gap.4 Again, there is simply no precedent for this in U.S. political history. Until 1980, there was rarely a discernible difference between men’s and women’s party preferences.

• Policy Disagreements. On a handful of high-salience issues, independents express a marked preference for either the conservative or the “neither” option. Democratic tolerance of inflation, border insecurity, and crime has caused some moderate voters to become independents. Instead of inspiring a return to liberal or democratic principles, anti-Trump “resistance” rhetoric has often confirmed many of these voters’ views that Democrats have nothing constructive to offer.

Some Democrats Excel at Reaching Independent and Republican Voters

Importantly, not every Democrat is unpopular. Some Democratic leaders have demonstrated the ability to avoid the elitist attitudes, tone-deaf cultural progressivism, and loopy policies that drive away mainstream independents essential to defeating Trump and his successors. They focus on winning independent and moderate Republican voters instead of counting on Trump to self-destruct.

These leaders are not always the largest vote-getters. As an example, picture two successful Democratic governors. One carried his state by five points, the other by 18 points. Many voters might conclude that the second governor would make a stronger presidential candidate. But the first governor overperformed in a deep-red state; the second underperformed in a deep-blue one. How effectively a candidate recruits independent voters is a much stronger indicator of national electoral potential than raw vote totals.

The governor who won by five points is Andy Beshear, who was elected governor of deep-red Kentucky in 2023. A year later, Donald Trump carried the state by 31 points. Beshear outperformed partisan expectations by 36 points by isolating his personal brand from the national Democratic party. In 2022, Josh Shapiro did the same thing in Pennsylvania, where he won by 15 points in a state Trump narrowly carried.

The governor who won by 18 points is Gavin Newsom, who in 2022 was elected governor of a state that Joe Biden carried by 29 points two years later. Given how blue California is, Newsom arguably underperformed by 11 points. Likewise, JB Pritzker won the Illinois governorship by 12.5 points in 2022. This is a strong victory in any context, but he trailed Biden’s 2020 margin by roughly 4.4 points.

Among political analysts, comparing a candidate’s performance to the state or district’s partisan baseline is sometimes called a “Wins Above Replacement” analysis – a reference to a Moneyball metric used in baseball. A WAR analysis shows which candidates outperform either the national ticket or the partisan baseline voter registration in their states.5

To win nationally, Democrats should field their most electable candidates – those best able to reach independent and opposition voters despite the ideological headwinds in their state or district. The following chart shows a WAR analysis of how different Democratic candidates performed not against Biden, but against the share of registered Democratic votes in their state or district after accounting for incumbency effects. This is a measure of broad electability.

These rankings make it immediately obvious that Democrats are not prioritizing candidates with a proven ability to attract independent and opposition voters. Instead, they are boosting those at the very bottom (or fourth from the bottom). But politicians from deep blue states are never forced to reach independent and Republican voters.

The main problem with the two Democrats that Trump beat was not that they were women — it was that they hailed from deep-blue states and had no experience or instinct for reaching independent voters. For this reason, I’d prefer all Democrats from California and New York to stay out of the 2028 presidential contest.

Mobilize the Democratic Base – Then Ignore Its Advice

Democrats from red or purple states who consistently win independent and moderate Republican votes have several things in common. They uphold core Democratic values, but rebrand their progressivism less around policy details and more around competence, caring, and common sense.6

• They emphasize speed and deep competence in getting things done, even if it upsets the bureaucracy or its public-sector unions.

• They uphold health care, education, and housing as human necessities that cannot be left entirely to private markets. They listen to and speak for men – especially young men.

• They repudiate cultural views and elitist attitudes that have made the Democrat brand toxic to many independent and male voters, even when it alienates the dozens of well-funded groups built to promote specific identities or causes.

These purple or red state candidates recognize that their party base can be their worst enemy if it lures or browbeats them into taking positions that are untenable with independent voters. They have demonstrated the skills and charisma to both win primary contests and reach independent voters in a general election. These skills are not always compatible – but Bill Clinton and Barack Obama each found a way.

Democratic leaders such as Beshear, Klobuchar, Shapiro, and Gallego, and dozens of local counterparts, have demonstrated an ability to reach independent voters. They represent the Democrats’ strongest hope for a national movement to remove the stain of Trumpism from American life.

ICYMI

• The always-worthwhile Martin Wolf argues that we are overthinking the fertility crisis.

• It was the most graceful and most Oaklandish performance at the Milan Winter Olympics. My neighborhood already has its first Alysa Liu street art. Our hero returned home today, and the Town is abuzz.

• Working with AI, she published more than 200 romance novels last year.

• Brains, brawn, and batteries: the market for humanoid robots explodes.

• Congress restored most of Trump’s budget cuts.

— Winston Churchill

Derek Thompson recently argued that “nobody knows anything” about AI. He could just as well be discussing the US attack on Iran. Consider two surprising views that have emerged since the war began three days ago.

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China?

Journalist Haviv Rettig Gur argues that the US attack on Iran is really about China, which buys 90% of Iran’s oil and was preparing to provide Iran with hypersonic missiles capable of sinking American naval vessels. Specifically

“Reports emerged in late February of a near-finalized deal to supply Iran with supersonic anti-ship cruise missiles capable of speeds exceeding Mach 3 and engineered to evade the Aegis defense systems deployed on American carrier strike groups. China was replacing Iranian government and military software with closed Chinese systems, hardening Iran against CIA and Mossad cyber operations. Joint naval exercises between China, Russia, and Iran in the Straits of Hormuz were becoming regular events, building real-time operational familiarity between the three navies. Iran had switched from the GPS system to the Chinese BeiDou system. And Iran was providing China with the port at Jask, as part of China’s “string of pearls” base system in the Indian Ocean.”

I didn’t see that coming. Is this the partisan analysis of an Israeli journalist, is someone in the CIA thinking three steps ahead, or is this just noise?

Water

Then, writing in Bloomberg, Javier Blas reminds us that 100 million people in the Gulf States are now completely dependent on 450 desalination plants for water. He observes that:

“The risk is enormous. Take the Jubail desalination plant, located on the Persian Gulf coast of Saudi Arabia. It supplies Riyadh, via a roughly 500-kilometer-long pipeline system, with more than 90% of its drinking water. “Riyadh would have to evacuate within a week if the plant, its pipelines, or associated power infrastructure were seriously damaged or destroyed,” according to a 2008 memo from the US embassy in the kingdom released by Wikileaks. “The current structure of the Saudi government could not exist without the Jubail desalination plant,” the memo stated.”

I didn’t see that coming. Is this fear-mongering, or will Geneva Convention prohibitions against attacks on water infrastructure restrain Iran? Iran has already attacked a power station in the UAE that keeps a desalination plant running. Targeting these plants could put Persian Gulf countries in an impossible situation and make water potentially a bigger geopolitical commodity in the conflict than oil.

During the coming weeks, we will see some predictable results of a feckless war. Oil prices will rise. Democrats will complain about the process. Innocent people, especially vulnerable ones, will suffer and die. Migrants will flee to Europe and trigger the usual backlash.

But even more things will happen that most of us cannot anticipate. Or as Clement Attlee, who followed Churchill into Number 10 Downing, put it, “No one can say that he has the slightest idea what the consequences of a war will be. It is like a great building that is being pulled down. You don’t know where the pieces will fall.”

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ICYMI

• As Cheap Chinese EVs come to Canada, the Big Three are writing off more than $50 billion in EV investments -- a third of their combined market cap. The NYT thinks they may end up niche suppliers of gas engines.

• Which Democrat has the most electable track record? Hint: Not Gavin Newsom.

• The economic case for free buses paid for by taxes on parking.

• The late Jessie Jackson does a very effective parody of himself on SNL.

Artificial Intelligence is giving the internet a collective panic attack. If you believe the viral headlines, we are back in February 2020, watching an economic ‘virus’ prepare to wipe out half the global workforce. The prophets of doom – some of whom actually help build the technology – warn that cognitive labor is about to hit its ‘End of History.’

They aren’t entirely wrong about the power or the risks of AI tools, but they are fundamentally wrong about the velocity of change. Unlike the Covid-19 virus, AI is not doubling every 2.5 days. Although AI is indeed a ‘superpower,’ the revolution is running behind schedule because the real world is far stickier, messier, and more human than a Silicon Valley white paper suggests.

There are two groups of AI doomers, and they play off each other stereophonically. The first group worries about a technology avalanche. They believe we are no longer dealing with a better search engine, but with systems that are developing the ability to set their own goals and manipulate their environment to achieve them.1

The second group argues that we are on the precipice of an economic avalanche. HyperWrite CEO Matt Shumer’s (“Something Big is Happening”) post is typical. Shumer and writers like him see the capabilities of Claude 4 and GPT-5 and warn of an economic apocalypse. But they don’t consider several real-world complexities.2 Specifically, they ignore:

• Bottlenecks that slow the deployment of any general-purpose technology. The real world is sticky, political, and messy.

• New work that emerges to fill unanticipated and infinite human desires. These desires create demand for new services. We rarely see this coming.

• Elastic demand. As costs decline and prices fall, we sometimes purchase more. The result is more work, not less.

• Complement or substitute? Technology can give you superpowers. Or it can take your job. It often does both. Predicting this in advance is difficult, and it is less subject to planning and intervention than many researchers think.

• Comparative advantage. This idea is deeply counterintuitive and confuses everyone: humans have a comparative advantage over any technology, even when the technology has an absolute advantage.

Big changes are afoot, but most of those waiting for an avalanche are looking up the wrong mountain. AI could easily worsen economic inequality and social isolation. It can facilitate bioterrorism, compromise cybersecurity, and enable large-scale theft. It could waste a lot of money and crash markets. It will reshape wages in ways that are impossible to foretell. But Artificial intelligence is not going to lead to widespread, long-term structural unemployment.

Solonomics

Surely, everyone needs a favorite economist. Mine is the late Bob Solow, who could cut through the fog like San Francisco sunshine. Solow won the Nobel Prize in 1987 for his groundbreaking work on economic growth, and four of his students also won Nobel Prizes.3 Solow cared deeply about labor markets, and for good reasons. Plus, he could be very funny.

Shortly after Solow won his prize, he observed that productivity growth in the United States remained stagnant despite huge investment in computers and IT during the 1970s and 1980s. In what became known as the “Solow paradox”, he wrote that “You can see the computer age everywhere but in the productivity statistics”.

Solow knew it took time for a General Purpose Technology (GPT) to transform work. A GPT is an innovation like the steam engine, the microprocessor, or electricity that eventually drives widespread economic growth. GPTs transform work, they alter social structures, and they reshape multiple industrial sectors. As adoption spreads, they improve steadily and spawn additional innovations. Eventually, they are pervasive, like power outlets, chips, or the internet. There is little doubt that AI is a GPT.4

Solow was not the first to highlight the time lag between the introduction of new technology and its actual impact on economic output. He had studied under Wassily Leontief, who received the 1973 Nobel Prize in Economics for explaining the time lags between innovation, adoption, and social impact.

Leontief became famous for observing the obsolescence of horses. He noted that for many years, tractors and horses worked side-by-side. As tractors began to replace horses, horse “productivity” rose because the animals were used only for a small set of essential tasks. Eventually, however, horse productivity went to zero as horses lost their economic function entirely. His observation led Leontief to argue that the slow initial impact of automation should not fool us. Involuntary unemployment arrives only after the structural adjustment period is over. What Leontief emphasized less is that, unlike horses, humans generate the demand that keeps us relevant.5

“It’s Not an IQ Contest Out There”

Historically, GPTs follow a specific path: their capabilities “wow” us initially, but productivity statistics don’t improve for decades, as organizations take years to restructure and fully utilize the new technology. The canonical example is the shift from factories powered by a large central steam engine to those powered by electricity running individual machines. While electricity was available starting in the 1880s, it was not until the 1920s that a majority of manufacturers reconfigured their factories from centralized steam-driven line shafts with miles of belts and hundreds of pulleys to decentralized electric motors plugged into the power grid.

ChatGPT has been able to pass the bar exam for several years, but we are not seeing a mass layoff of junior associates at law firms. Many AI tools are better at customer service than people are, but adoption is slow at present.

The reason is bottlenecks. Like a solid rocket booster on the space shuttle brought down by faulty O-rings, the failure or slowness of a single component can hold up or destroy an entire system. Even as AI solves the “intelligence” bottleneck, it will highlight several others:

• Institutional Inertia: Most companies are not high-trust, high-velocity startups. They are governed by irritable humans who dislike change.

• The “Last Mile” Problem: AI can draft a contract, but it cannot (yet) navigate the office politics of a merger or the emotional volatility of a courtroom.

• Regulatory Sludge: In 2024, the Bureau of Labor Statistics reported that the most AI-vulnerable sectors (legal, software, finance) experienced increased employment. Why? Because complexity grew faster than automation.

In every organization, as the cost of intelligence drops to near zero, the value of the remaining non-automated bottlenecks—trust, physical presence, and human accountability—soars. Or as a wise union leader trying to advise his young, overconfident hotshot once told me: “Marty, it’s not an IQ contest out there.”

The Invention of New “Work”

We constantly invent new categories of labor. Not long ago, “professional YouTuber” or “Yoga Influencer” would have sounded like a mental illness. Today, these careers are made possible by the massive surplus generated by our agricultural and industrial efficiency. As AI generates more surplus, we will shift labor into new areas.

• High-Touch Services. Some of this will be teaching, counseling, coaching, or other emotional labor that AI tools may supplement. Likewise, niche artisanal crafts. To the extent these are in-person services not shaped by AI or other information technologies, they may be less efficient. As a result, they pay poorly. As Paul Krugman memorably put it, “Productivity isn’t everything, but in the long run it is almost everything.”

• Status Games: We may see more jobs that exist primarily to signal prestige or human effort. In many industries, we spend extra on handmade crafts. Many artists command premiums, as do many online influencers. Today, between 8 and 12 million people earn more than $100,000/year as online influencers. It’s only 15% of all influencers, but it’s more than the number of accountants making six-figure incomes worldwide and about the same as the number of software engineers.

• Management or orchestration. Almost everyone doing knowledge work will likely manage a team of AI agents. My physician estimates that he currently manages three agents. One of them listens to every patient conversation he has and writes summaries for him to review and approve. He loves it - and so do I. Managing a fleet of agents will likely be a part of every job and will confer what today looks like superpowers.

• Research, invention, and prototyping. Fifty percent of Gen Z adults say in surveys that they plan to start a new business or side hustle in 2026, compared with 44% of millennials and 31% of Gen X. Most won’t, and many others will simply try to become social media influencers. But as AI grows in capability, some scientific research, product engineering, and product prototyping may move outside of large enterprises and become cottage businesses.

AI is already giving younger, less experienced workers basic competence across a range of skills needed to launch a business (coding, writing, marketing, etc.). Ideas have become easier to test, and startups easier to launch. For this reason, and because Y Combinator is pivoting to incubating nerds again, the median age of a YC founder is 24, down from 30 in 2022.

Complements or substitutes?

Some things can be known ex ante, meaning “before the event”, based on the information available at the time. I can know in advance when the men’s Olympic biathlon finals will take place. Other things are only knowable ex post, meaning “after the fact.” We do not know ex ante who will win the gold medal; we can only learn this ex post.

Even though our current (and extraordinary) Nobel laureate in economics argues otherwise, it is very hard to know ex ante which tools enhance human skills and which replace them. Technology that simplifies a task today may help to eliminate it tomorrow. Travel agents were excited about the internet ex ante because it empowered them to discover new destinations. Looking back ex post a decade later, they realized it had enabled consumers to book travel directly, and 70% of their jobs had disappeared. But more recently, travel agent jobs have recovered, in part thanks to creative AI tools that enable agents to specialize in high-complexity, high-trust, high-stakes travel (e.g., luxury safaris, corporate logistics) that are less easily automated. But would you bet today, ex ante, that we will have many travel agents in five years? I wouldn’t – but I could well be wrong. These patterns—initial complementarity, followed by obsolescence—make technological forecasting a treacherous endeavor.

Even though we cannot usually tell ex ante which technologies will make our jobs easier and which will undermine them, an individual professional should embrace any new GPT and try to learn to use it. It is especially valuable to learn to use AI tools, since we can be confident they will reshape work, even if we are uncertain how.

In 1979, the first widely available spreadsheet came out. VisiCalc helped make the Apple II really popular. It was kind of magic, and an accountant friend learned to use it immediately. He liked to surf and soon found that VisiCalc let him get a week’s worth of work done in about 12 hours. So for a few years, he surfed a lot, while the rest of the world caught up. He could have produced more, of course. He could have started an accounting firm, trained his team to use spreadsheets, and made some money. But he preferred to surf.

He often predicted that spreadsheets would destroy the market for accountants, but spreadsheets did not destroy the market for anything. His prediction made sense ex ante, but it was wrong ex post.

Trying to predict how a specific technology will affect specific jobs is mostly a mug’s game. A massive survey of CEOs and employees, published this week, reflects how utterly confused most opinions are.

Elastic demand

Will we run out of work? Only if demand for human output is fixed or “inelastic”. But history suggests the opposite. Often, as a resource becomes more efficient to use, we don’t use less of it; we use vastly more.

Technology raises our standard of living by making goods and services cheaper. When things become cheaper, we sometimes spend less and pocket the savings. Food was this way. As agriculture modernized and made food cheaper, we did not eat much more because demand for food was fairly inelastic. So we needed fewer farmers.

Other times, however, we want to buy more of whatever just became cheaper. There are many examples of demand that rises as costs fall. As lighting became cheaper, we bought more lights. As cars became more fuel-efficient, we didn’t spend less on fuel; we drove more. As AI makes coding cheaper, the world doesn’t decide it has “enough” software. Instead, every small business suddenly wants a custom app, every legacy database needs an AI overhaul, and the total “surface area” of the digital economy expands.6

Elastic demand is one reason a cost-reducing technology does not always eliminate jobs. This is very tough to predict ex ante.

Comparative vs. Absolute Advantage

The most common error in AI discourse is confusing absolute advantage with comparative advantage. Even if AI becomes better than a human at every single task (absolute advantage), we are not entitled to conclude that it will remove all human work.

In a world of finite resources (specifically, finite compute and energy), AI will be deployed where its marginal utility is highest. As long as a human can contribute anything to a process—even just as a “final checker” or a “preference setter”—and as long as that human’s opportunity cost is lower than the cost of more GPUs, the human remains employed.

We see this in software engineering. Tools like Claude Code have led engineers to believe they are twice or ten times more productive. Yet, according to data from Indeed and JOLTS, job postings for specialized developers haven’t cratered; they’ve shifted. At the moment, anyway, cyborg programmers (humans plus AI) are the most efficient unit of production in the global economy. Will this change? Yep. Everything will change.7

The idea of comparative advantage is not intuitive. Competitive advantage (aka absolute advantage) is easy to understand. It means being the most efficient or highest-quality producer of a good or service. If an AI can write code faster, with fewer bugs, and at a lower cost than a human programmer, the AI has a competitive advantage in coding.

In a world of pure “competitive” thinking, being better at a task means winning 100% of that task. If AI is “better” than humans at medicine, law, and plumbing, a competitive-advantage mindset suggests humans will be unemployed in all three fields. But this ignores the reality of scarce resources.

Comparative advantage is not about who is the best at a task, but about what each person (or machine) is best at doing relative to everything else they could be doing. It relates closely to the concept of opportunity cost – the forgone value of the next best alternative.

As a presidential candidate, Barack Obama understood comparative advantage. He used to say to his campaign team, “I am better than you at your job. I am a better organizer, a better speechwriter, a better speechmaker, a better fundraiser, a better political analyst, and a better policy analyst.” And he was right – he actually was better at all of these things. But he could not possibly do all of these things, and he knew it. He had a competitive advantage in every task, but his comparative advantage was running for president. Even though he was better at a range of tasks, the opportunity cost of doing that work was high, whereas the opportunity cost for most of his staff was much lower. Every hour he spent knocking on doors, drafting press releases, analyzing Congressional Districts, or working out policy details was an hour he was not spending meeting with large numbers of people to win a presidential election. Obama was vastly better off hiring people to do work that he could do better and focusing on his comparative advantage – being the candidate.

We need to apply comparative advantage to AI. Even if AI becomes better than humans at everything, it still faces constraints. Compute, electricity, and time are all finite. If a super-intelligent AI can either solve nuclear fusion or write a marketing jingle, the world will want it to solve fusion.

We may never get “God-like” AI, but if we do, the opportunity cost of using it to do mundane tasks like nursing, teaching, or plumbing is the high-value breakthroughs it could have been working on instead. Like the Obama campaign, even if AI is “better” at plumbing than a human, the human retains a comparative advantage in plumbing because the human isn’t capable of solving nuclear fusion. Our time is “cheaper” to use for those tasks.

This distinction is vital: competitive advantage is a race to be the most efficient. Comparative advantage is about what trade-offs people with specialized skills make every day. So long as AI resources are not infinite, there will always be tasks where the opportunity cost of using AI is too high. Humans will not only perform those tasks, but in a world made hyper-wealthy by AI, they will likely find themselves highly compensated for the tasks that only they are “cheap” enough to do.

Embrace Your AI Exoskeleton

To be clear: AI will force us to rebuild our world. But we are not in a race against the machine; we are in a race to see who can best wear the machine as an exoskeleton.

The ‘Solow Paradox’ tells us that the economy takes decades to rewire itself, but it doesn’t promise that you have decades to wait. AI confers professional superpowers—the ability to orchestrate agents, to prototype at lightspeed, and to solve the ‘last mile’ problems that remain.

The danger isn’t that a robot will walk into your office and take your chair tomorrow. The danger is that you will neglect to develop these superpowers while your competitors and your colleagues embrace them. In a world of ‘human-plus’ labor, standing still is the only true existential threat. The revolution is running late, but it is still coming. Don’t let it find you unarmed.

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ICYMI

• A theory about why men and lesbians dominate comedy

• I’d rather candidates from California and New York sit out the 2028 presidential election, but The New Yorker did a solid profile on Gavin Newsom anyway.

• A guy who can really write describes a guy who can really talk: Remnick on Rogan.

• The slogan for a new academic journal devoted to papers written by AI is “Taking ideas seriously, not ourselves.”

• The excellent Connor Dougherty on whether America can create new cities by copying Irvine, California. Answer: probably not.

• T-Mobile is offering to translate your phone calls into another language in real time.

“Data released this week offers a striking corrective to the narrative that AI has yet to have an impact on the US economy as a whole. While initial reports suggested a year of steady labour expansion in the US, the new figures reveal that total payroll growth was revised downward by approximately 403,000 jobs. Crucially, this downward revision occurred while real GDP remained robust, including a 3.7 per cent growth rate in the fourth quarter. This decoupling — maintaining high output with significantly lower labour input — is the hallmark of productivity growth.”

Washington has moved past refereeing markets to actively engineering them. The United States now subsidizes the construction of semiconductor fabs, battery plants, and critical minerals. For the first time in decades, “industrial policy” is more than an academic theory; it’s become a national mission.

But there is a tension at the heart of this revival that we ignore at our peril.

The high-minded goal of industrial policy is to rebuild the middle class through high-productivity, high-wage careers. Unfortunately, the political incentives default to a much cruder metric: the body count of new jobs. In the theater of the campaign trail, a ribbon-cutting for 5,000 “new jobs” is a guaranteed win, but a 4% increase in inflation-adjusted manufacturing wages is an invisible footnote. We see this in the reflexive branding of both administrations: Biden’s “16 million jobs” victory lap and Trump’s “Jobs, Jobs, Jobs!” mantra.

The trade-off between maximizing the number of workers and maximizing the value of their work is the dilemma at the heart of industrial policy. When the political “win” is tied to the number of new jobs, we risk turning industrial policy into a mechanism for making employment a higher priority than economic vitality. The more democratic the country, the more irresistible this “quantity trap” becomes.

Until we confront the trade-off between “Jobs” and “Wages,” we can’t build a powerhouse economy, and we’re at risk of just subsidizing a busy one.

Manufacturing Nostalgia

A lot of the emotional energy behind industrial policy comes from nostalgia for mid-20th-century manufacturing. In 1950, manufacturing accounted for roughly a third of U.S. nonfarm employment. Today it’s about 8–9%. For many communities and blue-collar men, this decline represents a loss of status, identity, and middle-class security.

Has the U.S. hollowed out its manufacturing capability? We made a colossal error in training a geopolitical adversary to take over entire strategic industries such as batteries, solar, pharmaceuticals, EVs, and drones. Nonetheless, real manufacturing output in the U.S. is near historic highs. The decline in manufacturing employment is largely attributable to productivity growth, meaning automation, greater capital intensity, and process innovation.

This is success, not failure. In many sectors, the U.S. didn’t “stop making things.” It learned to make things with far fewer workers. A graph of manufacturing output per worker clearly shows this (if anything, it indicates a troubling lack of productivity gains in manufacturing after 2012).

Manufacturing productivity has grown everywhere, just as it did in agriculture. The share of U.S. manufacturing jobs peaked in 1953. It peaked in Germany and Japan in the 1970s and in Korea in the 2010s. The World Bank estimates that it peaked in China more than 10 years ago (although its share of manufacturing jobs has declined more slowly than in other countries). Advanced economies tend to converge toward service-heavy employment structures as productivity in goods production rises. As economist Dani Rodrik demonstrates in an important new book, an industrial policy that seeks to recreate an employment structure from the 1960s is fighting arithmetic.

The central question for industrial policy must be “How do we ensure that the jobs we create in manufacturing and services are highly productive and well paid?” not “How do we get more factory jobs?” These are very different goals.

The Siren Call of “Job-Count Populism”

A joke surfaced in 1901 that mocked Irish immigrant workers in the U.S. It evolved, as jokes do, until conservative economist Milton Friedman offered a modern version. He claimed that while touring a massive overseas canal-digging project, he was shocked to see workers using shovels instead of modern earth-moving machinery. When he asked his government host why they weren’t using more efficient equipment, the official explained, “You don’t understand. This is a jobs program.”

Friedman responded, “Oh, I thought you were trying to build a canal. If it’s jobs you want, remove the shovels and give these workers spoons!”

“Job-count populism” is not always so easily lampooned. Not only are jobs countable, tangible, and politically legible, they’re also geographically concentrated. This makes for great headlines: “2,000 new jobs in Ohio.” “10,000 jobs coming to Arizona.” Elected officials can show up at a plant opening, cut a ribbon, and smile for the cameras. They do it for public-sector projects all the time.

In democratic countries, industrial policy is subject to a gravitational pull toward job-count populism because of the relentless politics of geography and job-count visibility. To pass a bill, Congress distributes subsidies and investments across states. Legislators want projects in their districts. “Place-based” development becomes a goal in itself.

Politicians rarely receive credit for higher wages, which are less visible than jobs. If wages rise because of productivity growth, a new labor agreement, or tighter labor markets, it’s hard to attribute that to a single policy. So politicians naturally optimize for what’s visible. They embrace job-count populism.

Worse, elected officials want local jobs, not jobs in the next district or state. But many high-productivity industries cluster in specific regions. Silicon Valley exists for a reason. (My wife, scholar AnnaLee Saxenian, documented its dense network of firms, specialists, and institutions that drive innovation and productivity.) Industrial policies that seek to distribute advanced industries evenly across politically strategic states dilute those agglomeration benefits. The result can easily be lower overall productivity.

Job-count populism creates incentives for elected officials to create low-wage jobs. Policymakers (including labor unions, who value a growing membership) often equate “industrial revival” with “large numbers of factory jobs”. They often prefer to subsidize labor-intensive production methods or to resist automation to preserve jobs. That might raise job counts in the short term, but it can come at the cost of long-run productivity growth, competitiveness, and higher wages. You can protect jobs by lowering productivity. Just replace shovels with spoons. But you cannot sustainably raise wages that way.

If a politician wants a headline with a big number, they will resort to job-count populism and support labor-intensive industries. But labor-intensive industries are, by definition, those that have failed to achieve the productivity gains necessary to pay high wages. By focusing on the “body count,” Washington is effectively subsidizing the least efficient parts of the economy.

Job-count populism isn’t new. For many decades, state-level economic development policy has offered tax incentives to attract new factories and corporate offices. These subsidies often cost hundreds of thousands of dollars per job created. Worse, many of the subsidized projects would have happened anyway.1 The spillovers are minimal, but the jobs get counted.

Job-count populism drives traditional economic development (e.g., a city subsidizing the cost of a new warehouse or a call center). The traditional “rule of thumb” was to create $35,000 to $50,000 in total incentives per job. If the cost exceeded the first year’s salary, it was often viewed as a “bad deal” for taxpayers. At $1.4 million per job for the Samsung plant in Taylor, it would take nearly 19 years of a $75k salary just to break even on the subsidy. By that standard, the math is indefensible.

Of course, these subsidies aren’t actually “buying jobs” and should not be. They are paying for the physical presence of a leading-edge logic fab on U.S. soil to mitigate the risk of a conflict over Taiwan. We are paying for the “ecosystem” effect—the engineers, researchers, and graduate students who will gravitate to Texas or Arizona. We are placing capital-intensive bets on the future of AI and compute.

The absurdity of the ‘$1.4 million per job’ metric isn’t just the price tag; it’s that we are using a job-count populism yardstick to measure a capital-intensive moonshot. If we justify a $6 billion grant by the 4,500 people walking through the gate, we’ve already lost the argument. We shouldn’t be asking ‘how much is a job worth?’; we should be asking ‘how much is American leadership in the silicon frontier worth?’ and then demanding that the productivity gains from that leadership actually reach the rest of the workforce.

Making Productivity Pay

Increasing productivity has a bad reputation in progressive circles, and for good reason: increasing productivity does not always increase pay. Productivity is necessary for wage growth, but it is not sufficient — labor market conditions and workers’ bargaining power also matter. Anyone wishing to rebuild a middle class with higher wages must consider not only how technology, capital deepening, firm dynamism, knowledge spillovers, and competitive pressure can increase productivity, but also how wage bargaining and competition policy can ensure that these gains are equitably shared.

There is no God-given guarantee that pay will increase if workers produce more value. Indeed, strong evidence suggests that pay has not kept up with productivity for the past fifty years. Over the past few decades, the labor share of income in many advanced economies has drifted downward. Market concentration, declining unionization, global supply chains, and superstar firm dynamics have all contributed.2

As a result, a strategy focused solely on upgrading key sectors may increase profits more than wages. If industrial policy is going to deliver “good jobs,” it can’t ignore labor market institutions. The postwar manufacturing era wasn’t just about factories. It was about unions, collective bargaining, and norms that linked productivity gains to wage gains.

Restoring our weakened labor market institutions is a complex problem. I have argued that American labor law marginalizes private-sector unions and that sectoral bargains should be a central part of any national industrial policy. This is a substantial political challenge at the moment, but without it, even successful national industrial policies may not translate into higher living standards.

Embrace Technology

Historically, the sectors that pay the highest wages have been technologically advanced and globally competitive – not sectors that maximize headcount. A dangerous temptation is to treat automation as a threat to industrial employment. Artificial Intelligence poses a specific example of this threat – a topic I will turn to in the next Modern Times post.

Although automation reduces labor demand for specific tasks, it also lowers costs and can expand output in ways that enable higher wages (and in some cases, higher employment). In many energy-intensive industries, for example, lower energy costs have led to higher employment, even though fossil fuels have shed workers due to lower demand growth and automation.

Industrial policies designed to protect labor-intensive methods or obsolete technologies, such as internal combustion engines, may preserve jobs in the short term but can lock the country into lower productivity and lower standards of living. Our goal should be to create fewer but better jobs in certain sectors and to ensure that displaced workers have pathways to high-productivity employment. That requires complementary policies: education, mobility, social insurance, and dynamic labor markets. Industrial policy alone can’t do that.

If industrial policy wants to achieve higher wages through productivity growth while avoiding job-count populism, it needs guardrails.

• Measure success by productivity and wage growth, not employment. Public reporting should emphasize value added per worker, export performance, and wage levels.

• Preserve competitive discipline. Subsidies should be conditional and time-limited. Firms should face international competition. No company gets permanent life support.

• Lean into agglomeration. Accept that some regions will specialize. Don’t spread projects so thin that clusters never form.

• Integrate labor policy thoughtfully. Encourage worker voice, sector bargains, and training systems that enhance productivity, not “everything bagel liberalism” provisions that increase costs much faster than social value.3

• Support mobility and adjustment. Not every region can host a semiconductor fab. National policy should help workers move to opportunity rather than freeze economic geography in place.

The Deeper Tradeoff

The tension between jobs and wages reflects two differing visions of economic justice. One concerns the importance of work as a form of belonging. It emphasizes the preservation of stable employment in industries that anchor communities. Oren Cass and his team at American Compass articulate this vision very effectively. The other concerns work and productivity: dynamic sectors that push the technological frontier and generate rising incomes.

In the 20th century, for a few decades, those visions overlapped. High-productivity manufacturing was also labor-intensive enough to employ millions. That era was unusual and shows no signs of returning.

In the 21st century, frontier industries are capital-intensive and automated. They can generate enormous value with relatively few workers. Especially as AI advances, trying to force them to become mass employers is likely to undermine what makes them productive in the first place.

Those wishing to modernize U.S. industry face a political challenge. Voters often measure success by the headcount at a factory gate, but the economic imperative is to organize, equip, and train workers to maximize their output. If we treat industrial policy as a job-creation program, we risk building a museum of 20th-century labor instead of an engine of 21st-century growth. Ask Europe how that works out.

Productivity gains drive national prosperity, but they don’t always win elections. If we prefer a competitive future to a comfortable past, we need an industrial policy that can withstand the politics of fewer, better jobs rather than a large number of inefficient ones.

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ICYMI

I am replacing the Musical Coda with ICYMI (in case you missed it), which will display brief links that I find important, surprising, or amusing.

• Denmark is eliminating its post office.

• Nonfiction book sales have dropped by almost 25% in five years

• We live much longer than our ancestors, and this is not primarily due to reduced child mortality.

• Prefer to work from home? Find a company with a younger CEO.

• Don’t deport customers. Around the U.S., increasing the deportation of immigrants briefly increased the wages of native-born workers. Then wages fell by twice as much as they had briefly risen. (Why? At first, there is less competition for the tools and machines already in place. Soon, however, businesses stop investing because there are fewer people to buy products and perform the work. In the end, the whole economy shrinks, and native workers’ paychecks fall. )

Notes

Two things struck me when I arrived in Costa Rica last week. The first was “pura vida” — the country’s iconic national phrase that can sound like a collective speech tic. It translates to “pure life” (something like “all good”), but serves as a catch-all greeting, farewell, and expression of gratitude. “Pura vida” is a laid-back reminder to appreciate life’s simple joys, stay optimistic, and prioritize family, nature, pacifism, and well-being. You hear it everywhere from everybody.

The second surprise was the pervasiveness of the campaign by a young woman named Laura Fernández, whom voters elected the next President of Costa Rica shortly after we arrived. Her bright turquoise-colored signs were on T-shirts, cars, and small-town billboards. Fernández ended up with almost half the vote in a field of 20 candidates. Since 40% wins the Presidency in Costa Rica, she won on the first ballot.

Fernández campaigned on “mano dura” (iron fist), not “pura vida”. She pledged to continue the policies of her current boss, the popular President Rodrigo Chaves, who was ineligible to run again. Fernández and Chaves are right-wing populists whose rise is due less to illegal immigration and more to surging murder rates brought to Costa Rica by drug cartels.

Things Go Worse With Coke

Murderous gun thugs sit especially poorly with Costa Ricans, who pride themselves on not being Guatemaltecos, Nicas (Nicaraguan), Salvadoreños, or Catrachos (Honduran). The country abolished its army in 1948, invested massively in schools, and embraced eco-tourism with a boost from four American Quaker pacifist families who objected to the Korean War. (They founded the cloud forest town of Monteverde and pioneered the use of private land trusts to create biological reserves.) Costa Rica has a strong middle class. It sees itself as richer, greener, more modern, and just plain cooler than the rest of the region. It struggles to reconcile pura vida with being just another center for narcotics-driven murder and mayhem.

Nonetheless, murder rates in Costa Rica have risen sharply. Homicides jumped from 6.3 per 100,000 people in 2000 to almost 17 last year. This is nearly three times the U.S. rate, which ranges from 6 to 7 per 100,000.

Voters elected Fernández to not only continue the policies of the Chaves administration, but at least in part to imitate El Salvador’s Nayib Bukele, who has resorted to authoritarian tactics to smash criminal gangs and drug cartels. He jailed many men for sporting gang-related tattoos. Crime plummeted. Chaves liked the results and launched construction of a mega-prison modeled on the notorious CECOT in El Salvador. Fernández, who says she will keep Chaves in her administration, has promised to complete and quickly fill the prison.1

Costa Rica has become the latest Latin American country, after Argentina, Chile, and El Salvador, to elect an anti-establishment conservative sympathetic to Donald Trump. Up next are Peru and Colombia. But for a shambolic opposition, Brazil would follow suit. And although Trump has removed the pathetic Nicolás Maduro from Venezuela, its democratic future remains in doubt.

How to Supply Drugs to the U.S.

A drug cartel depends on three things: weak or corrupt political leadership in the places it produces and distributes drugs, well-embedded supply chains, and a market that cannot effectively control demand for narcotics. Happily for the cartels, Central America provides the first two, and the United States furnishes the third.

Weak and Corrupt Leadership. Central America has more than 50 million people spread across seven countries. Guatemala is the largest, roughly the size of the New York City metropolitan area. Belize is the smallest – think Omaha. In between are Honduras (~Florida), Nicaragua (~Massachusetts), El Salvador (~Indiana), Costa Rica (~Philadelphia), and Panama (~Miami).

As a single federated, Spanish-speaking, Catholic nation, Central America would be a mid-sized country comparable in population to South Korea or Colombia. Two centuries ago, the region attempted to unite. In 1823, Guatemala, Honduras, El Salvador, Nicaragua, Costa Rica, and a bit of Southern Mexico formed the United Provinces of Central America. Inspired by liberal ideas and the U.S. example, they adopted a federal constitution in 1824.

The project failed almost immediately. Much like the Articles of Confederation in the U.S., the federation lacked stable revenue, a strong executive, and a shared vision for nation-building that could overcome local loyalties. Local caudillos defended their provincial interests instead of building a fiscally and militarily strong central state. Soon enough, states wrote their own constitutions and regional strongmen built local power bases. The result was repeated civil wars in the late 1820s and again from 1838 to 1840, driven as much by rural-urban and indigenous-elite conflict as by disputes over federalism. By 1838–39, the federation collapsed, and each state declared its sovereignty.

The legacy of fragmentation that began two centuries ago continues to shape regional security arrangements. The mechanisms that Central American countries use to coordinate their fight against cartels are weak and primarily defensive. The Central American Integration System (SICA) tries to establish common priorities, coordinate training, and share intelligence on traffickers. But it does not command joint forces, run operations, or enforce common standards. Uneven police capacity and pervasive corruption limit cross-border efforts.

Cartels naturally exploit the weakest link—and most links are weak. Many states, especially pacifist Costa Rica, lack the naval or coast guard capacity to defend their coasts and ports. Governments have learned that pushing too hard can trigger prison riots, municipal assassinations, or port shutdowns, so many try to contain cartels instead of defeating them.

Embedding Narcotics Supply Chains. As drug cartels came under pressure in Mexico and the Caribbean, they turned to Costa Rica for several reasons.

• Geography. Costa Rica sits at a perfect mid-point between Colombia, Peru, and Bolivia, which produce cocaine, and the U.S. and Canada, which consume it. It has both Pacific and Caribbean ports, which give traffickers routing flexibility to make short hops by fast boats, fishing vessels, or semi-submersibles from Colombia to Costa Rican waters.

• Legitimate trade creates camouflage. Costa Rica exports containers full of bananas, pineapples, coffee, and medical devices to the U.S. and Europe. Because this cargo is often perishable, attempting to scan even a small fraction of it thoroughly would paralyze trade. Drugs are a small illegal needle in a large and legitimate haystack.

• Strict rule of law — but limited hard power. Costa Rica abolished its army in 1948. That’s central to its identity—and its vulnerability. Its policing is civilian and comparatively professional, but it has no navy or coast guard and minimal maritime interdiction capability.

• A stable institutional environment. Traffickers prefer predictable institutions. They like functional courts, enforceable contracts, and well-developed banking and real estate systems. Costa Rica offered this and historically offered low murder rates and political stability, making it a good place to store, repackage, and finance narcotics.

Homicide in Costa Rica rose after 2008 because changing transshipment dynamics and the country’s poor preparedness pulled it into the drug economy.

• Costa Rica became a warehouse, not just a transhipment corridor. The amount of time that narcotics spend in a country is a powerful predictor of drug-related violence. Before 2008, drugs moved through Costa Rica quickly, with minimal local handling and very little violence. By 2015, Costa Rica had become a storage, consolidation, and redistribution point. Cocaine sat longer on Costa Rican soil, involving more people and places and giving rise to more disputes.

• Payment shifted from cash to cocaine. Changing from cash to drug payments has huge downstream effects. Not only did traffickers need to pay local collaborators to store, repackage, and trans-ship drugs, but they began to pay them in product, not money. To turn that cocaine into cash, local groups had to sell it or trade it onward. Local gangs with inventory meant expanded retail markets and the inevitable territorial violence that followed.

• Cartels remained fragmented. Costa Rica didn’t get one dominant cartel; it got many small, unstable ones with weak hierarchies and constant competition over corners, ports, and stash houses. Paradoxically, big cartels stabilize violence, whereas fragmented ones cause it to explode.

• Supply chains bred violence. Ports, especially on the Caribbean side, became choke points for violence as gangs realized that perishable export containers of bananas and pineapples were ideal for drug concealment. Murders clustered around port cities, logistical workers, and transport routes. Costa Rica is fighting supply-chain violence, not random urban crime.

• “Pura Vida” is a lousy security model. Costa Rica had long assumed low homicide, limited organized crime, and few violent disputes. After all, the country had no standing army, limited maritime patrols, and limited capacity to investigate or prevent homicides. It can barely protect its fisheries from poachers.

• Feedback loops. Once homicide rose past a threshold, feedback kicked in. As guns became more common, demand for weapons rose. Gangs recruited young people, and gang membership became cool. As states sent more young men to prison, prison gangs became stronger. As gangs grew, witness cooperation collapsed — and with it, effective prosecution. As corruption became more common, many officials felt both stupid and frightened if they did not cooperate with local drug gangs. Soon, homicide became a self-reinforcing part of the culture, even if the original cause was external.

Costa Rica does not suffer from mass unemployment. It is not facing political collapse or a massive cultural change. Costa Ricans did not suddenly become violent. The homicide spike after 2008 came from a structural shift in global cocaine logistics as the country went from being a drug corridor to a drug warehouse, from a cash-based drug trade to a cocaine-based one, and from one with few truckers to a terrain contested by many fragmented groups fighting to control key ports.

U.S. Demand for Cocaine. The demand for cocaine in the United States drives much of the Central American drug trade and the associated violence and political blowback. The CIA dryly characterizes the U.S. as the

“world’s largest consumer of cocaine (shipped from Colombia through Mexico and the Caribbean), Colombian heroin, and Mexican heroin and marijuana; major consumer of ecstasy and Mexican methamphetamine; minor consumer of high-quality Southeast Asian heroin; illicit producer of cannabis, marijuana, depressants, stimulants, hallucinogens, and methamphetamine; (and the world’s leading) money-laundering center”

Unfortunately, since Richard Nixon first declared a “war on drugs” in 1971, the U.S. has treated drug demand as a morality play. Nancy Reagan summarized the prevailing view with her “Just Say No” campaign. We imprison our junkies victims of opioid use disorder, which almost everyone involved quietly acknowledges does not work.

In contrast, countries that have successfully reduced demand for drugs treat it as a fairly pedestrian health, price, and availability problem. Their goal is to have fewer compulsive users, fewer overdoses, and fewer people trapped in drug-centered lives. They treat drugs like a chronic public-health risk — more like diabetes than crime. It’s a social problem, not a police problem — much less a populist rallying cry.2

Specifically, these countries:

• Make treatment easy, fast, and routine. Countries that normalize treatment access see lower heavy use and far fewer deaths. Switzerland, Portugal, and France integrate treatment into primary care, often offering same-day access to opioid substitution therapy (methadone, buprenorphine), with no abstinence preconditions. They design treatment to lower compulsive demand—the part that drives overdoses, street dealing, and violence.

• Keep prices high by focusing on distribution, not users. Since demand for drugs is relatively “inelastic” (not price-sensitive), it is tempting to ignore drug prices. But prices matter because stable, predictable pricing strongly correlates with fewer deaths. Effective policies try to reduce the volatility of drug purity (which causes overdoses) by keeping prices high and stable. These policies do not try to “win the war”; they try to prevent supply shocks that lead to a surge of cheap, potent, lethal narcotics.

• Criminalize exploitation, not use. Countries such as Portugal, Germany, and the Netherlands that experience less drug violence and fewer overdoses do not impose criminal penalties or jail users for possession or use of banned substances. But they impose extreme penalties for coercive dealing, trafficking near schools, or any form of organized distribution. These countries have found that sending users to prison increases future drug use by destroying employment prospects and increasing social isolation. In their experience, punishing users increases demand; punishing exploiters reduces it.

• Recognize that housing-first beats rehab-first. Countries like Finland and Canada have found that stable housing consistently reduces heavy drug use. They find it far cheaper to provide unconditional housing for high-risk users alongside on-site health and addiction services. The finding that housing lowers use even when abstinence is not required is one of the most widely replicated in social policy. Addiction thrives on instability.

• Treat drugs as a mental-health problem. Countries like Norway or Denmark offer robust mental-health systems: early treatment of depression, trauma, and schizophrenia, and access to counseling without stigma for young people. These countries work to treat the underlying condition. They lead with crisis intervention and a robust mental health care system. They still have criminal penalties and coercive psychiatric intervention, but jail is a last resort.

• Regulate intelligently. Overall, the evidence on drug legalization is at best mixed, depending on how markets are designed and regulated. To mitigate harm, governments need to heavily control advertising, product potency, retail density, and pricing. In some settings, cannabis availability may modestly displace alcohol or opioid use, but results are still not definitive and seem to vary across populations and time.

• Avoid obvious mistakes. In a half-century of fighting to reduce demand for illegal drugs, some things fail consistently. Advanced countries agree on this more than they admit. Mass incarceration fails, as does zero-tolerance policing. Militarizing local police to step up enforcement does not reduce drug use, nor do long prison sentences for possession. These steps tend to raise overdose risk and increase long-run demand.

Europe is not “soft” on drugs. It combines broad access to treatment, including medications for opioid use disorder with harm reduction (naloxone, syringe services), and far less criminalization of users relative to the U.S. This not only achieves vastly better outcomes, but it costs much less money.3

Mano Dura o Pura Vida?

Costa Rica seems likely to compromise civil rights and theatrically imprison drug dealers and gang members. Doing this will likely be as popular as the extreme measures taken in El Salvador have been.

Progressives and independents who value human and civil rights risk ceding the political field to authoritarian leaders unless they respond effectively to the scourge of drug cartels and drug-related violence. Just as progressives in North America and Europe need to embrace realistic policies to confront illegal immigration, those in Central and South America need to commit to destroying drug cartels. But mopping the floor is pointless if the sink is still overflowing. Those who care about the political stability of Central and South America need to insist that the United States reduce its spiraling consumption of cocaine by learning from countries that have reduced their demand for illegal drugs.

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Musical Coda

“The accumulation of all powers, legislative, executive, and judiciary, in the same hands…may justly be pronounced the very definition of tyranny.”

— James Madison, The Federalist Papers: No. 47

The founders expected the president to overreach. They designed the branches of government to compete with one another. Laws that enabled the branches to check each other’s power were a feature, not a bug. The very first provision in the new constitution vested Congress with broad authority to combat the tendency for a president to accumulate tyrannical power.

The skeptics who framed the Constitution saw Donald Trump coming — and said so at the time.

A century from now, historians will try to explain the Trump era. Students of the presidency will focus on his alarming mental decline, his impulsive use of domestic and military force, and his seemingly bottomless personal corruption. Foreign policy experts will document how his deliberate weakening of American alliances strengthened Russia and China. Judicial scholars will discuss the Supreme Court’s expanded use of the shadow docket to justify Trump’s unprecedented use of executive orders.

Historians seeking to understand the conditions that enabled Trump to rule as an authoritarian president are likely to describe how the decline of Congress greased the expansion of presidential power. They will note that, although Congress has been quietly dissolving itself for decades, Trump took greater advantage of its enfeebled condition than any other president.

A key question facing our wobbling Republic is whether this Congress, or the one we elect later this year, will recognize that a constitutional system built on three legs cannot stand upright when one leg collapses. America depends on Congress reasserting itself as a coequal federal branch.

Many Democrats offer a partisan explanation of how Congress was neutered: Trump ran over the hapless Biden/Harris regime, quiescent Congressional Republicans saluted, and the courts shrugged. There’s some truth to that story. But it misses a deeper, less comforting reality: Congress has been willingly and even gratefully giving up its authority for many years. Today, it finds itself buried in powerful political, cultural, and financial incentives to subordinate itself to the White House.

The Broken Branch

When Congress fails to legislate, presidents will attempt to fill the resulting vacuum, not necessarily because they crave power (though some obviously do), but because modern governance requires action. In the absence of an effective Congress, presidents rely on regulatory rulemaking and executive orders. Clinton did it to advance environmental and civil rights. Obama ran an end-run around a gridlocked Congress when he created DACA (Deferred Action for Childhood Arrivals) by executive action, allowing certain undocumented immigrants to stay in the U.S. despite the absence of legislative reform. Unable to get student loan relief through Congress, Biden twice attempted to use executive action to cancel student debt.

Except for occasionally menacing them, Donald Trump does not bother with Congress. Even by the standards of his predecessors, he has taken extravagant advantage of executive orders during the past twelve months. This turns constitutional design on its head.

Congressional hibernation has made Trump’s job easy. Congressional legislative output has plummeted.1 According to GovTrack, the 118th Congress passed just 274 bills—the fewest of any Congress in modern history. The current Congress, halfway through its term, has passed fewer than 75 laws, putting it on track to be even less productive. For comparison, Congress passed 700–800 bills per session as recently as the early 1990s.

Partisanship is part of the problem. Unlike European parliamentary systems, the U.S. Constitution is not built to withstand deep partisanship (the founders did not even provide for the rise of political parties, which they termed “factions”). In a system with separate branches, divided government, many veto points, and hard-to-pass legislation, parties can face a strong incentive to engage in parliamentary-style “us vs. them” behavior and to deliberately obstruct lawmaking.

In a system full of choke points, if one party decides to maximize confrontation and “stop the other side at any cost”, they can lock up the government and undermine democracy. An extreme party can punish moderates by rewarding “asymmetric polarization”, the term political scientists coined to describe the decision by one party to treat compromise as illegitimate. The result is a Congress that can’t do basic bargaining, budgeting, or problem-solving. This further erodes public legitimacy and worsens the problem. 

Not long ago, Congress seated both liberal Republicans and conservative Democrats. It routinely passed major legislation with overwhelming bipartisan support. The 1982 Voting Rights Act extension passed the House 389–24 and the Senate 85–8. Likewise, immigration reform was passed by comfortable margins in both chambers in 1986. Those margins signaled legitimacy and constrained executive overreach.

Today, party distinctions are tribal. States not only send vastly more partisan legislators to Congress, but in an evenly divided legislature, power shifts constantly. The House has had five speakers in the past ten years. Frequent shifts in political control create bad incentives for lawmakers. Especially those from safe seats are tempted to ask, “Why compromise today if we might control the chamber next year?” The resulting surrender of legislative responsibility helps transfer power to the executive.

Five examples of Congressional abdication loom especially large.

• The Budget. The single most basic job of Congress is to fund the government, but Congress has not passed all appropriations bills on time since 1997. Absent these bills, lawmakers rely on massive continuing resolutions—vague, last-minute funding packages that cede to executive agencies enormous discretion usually retained by the legislature.

  This isn’t just sloppy governance; it’s a transfer of power. When Congress refuses to specify how money should be spent, the executive branch decides instead.

• War Authorization. A terrified Congress forfeited enormous power to the executive following the September 11 attacks. Congress hasn’t passed a meaningful war authorization since. Presidents of both parties have used the post-9/11 Authorizations for the Use of Military Force and the Patriot Act to justify more than two dozen military operations across multiple continents, often decades removed from the original Congressional intent.

  Too many Senators and Representatives have no interest in a controversial vote to authorize military force. Why take a potentially divisive vote when the president is willing to act alone? Again, the Constitution is upended: the executive acts unilaterally and reduces Congress to complaining.

• Immigration reform. Americans strongly agree on the need to reform immigration laws to enable pathways to citizenship for long-term residents who have obeyed the law, paid taxes, and contributed to their communities. Congress last passed a comprehensive immigration reform bill in 1986. Since then, demographic change, globalization, and humanitarian crises have radically altered migration patterns—but Congress has remained frozen. Failed reform attempts in 2006, 2007, and 2013 all collapsed under partisan pressure – most recently from Trump, who wished to campaign for president on a broken immigration system.

  Presidents of both parties have filled that vacuum through executive orders, emergency declarations, and discretionary enforcement. Trump enthusiastically makes immigration policy from the Oval Office. He has no interest in reforming immigration laws, preferring instead to build a massive deportation enforcement apparatus and to deploy it against cities and states that have historically voted against him. But Trump is only able to deport people with well-established, productive lives who work, pay taxes, and would happily become American citizens because Congress abandoned its responsibility to reform immigration law.

• Tariffs. Congress does not always retreat from its authority – sometimes it simply abdicates altogether. In recent decades, lawmakers have passed statutes granting presidents unilateral jurisdiction over trade, national emergencies, and foreign commerce. There are at least five laws that allow presidents to impose tariffs without congressional approval. Trump uses them all enthusiastically.2

• Abortion. The U.S. national consensus on abortion is not terribly different than the one that prevails in Europe: permit abortions on demand in the first trimester and permit them later only for specific reasons (serious risks to the woman’s health, fatal fetal anomalies, rape, or incest). It is much more like the modal European framework than either a total nationwide ban (which only 13% of Americans support) or fully on‑demand access until birth (which 30% support).

  For decades, Congress refused to enshrine Roe v. Wade in legislation, thus effectively outsourcing policymaking to the courts. When the political balance on the Supreme Court changed, there was no legislation to rule on, so it was trivially easy for the Court to radically restrict women’s reproductive rights.

The Path Back

Today, Congress is a self-reinforcing ecosystem of partisan district design, permanent and often negative campaigns, perpetual fundraising, restrictive legislative rules, and a media environment that often rewards maximalism and punishes compromise. No single reform can fix all of it. Still, several reforms can help Congress regain the standing the Constitution demands and recover the lost respect of the American people.

• Enlarge the House. I have argued elsewhere that America still has the same 435 seats it had during the Gilded Age. This distorts representation, magnifies the Electoral College’s small-state bias, and leaves many voters functionally voiceless. Expanding the House is the most straightforward way to build a legislature that is less straitjacketed by partisanship.

  When Representatives have fewer people to serve, they can plausibly know more of them. Smaller districts reward grassroots campaigns. Door-knocking and town halls become feasible once again. Additional seats would also allow minority communities or distinct regions to elect someone of their choice, rather than being subsumed into a single mega-district.

• Design less partisan, multi-member districts and use rank-choice voting. Instead of 12 single-member districts in a state like Massachusetts, you might have 3 districts that each elect 4 members. Ideally, a judicial commission would draw the district lines. Voters would rank candidates in order of preference. Many states and cities have adopted rank-choice voting (also known as “instant runoff”). It works well.

  Seats would be allocated proportionally: roughly every 20–25 percent of the vote in a 4-member district should translate into one seat. The result? A 60% Democratic state like Massachusetts would be far more likely to elect 8 Democrats and 4 Republicans than 12 Democrats. All would tend to be more moderate than they are in a winner-take-all by district structure. This reform does not require a constitutional amendment.

• End the filibuster. Restoring majority rule is especially important in the Senate, where a tiny state like Wyoming, Vermont, or Delaware can outvote states like Texas and California that are 40-50 times larger. Allowing 41 senators—who can represent less than 18% of the U.S. population—to block bills supported by a majority of both chambers and the president undermines electoral accountability and democratic responsiveness.

  The filibuster imposes a routine supermajority requirement that can stop most legislation. By encouraging minorities to block legislation rather than negotiate, the filibuster promotes obstruction rather than deliberation and halts even popular, relatively modest measures. It pushes policy to the courts and the executive branch. Filibusters are an extra-constitutional veto point created by Senate rules, not the framers’ design. It has long been a favorite tactic to block civil and voting rights legislation. Removing it (or carving out additional exceptions) would promote federal laws that align with public opinion on high-salience issues and reduce the incentive for presidents to govern by unilateral executive action.

• Fund campaigns confidentially and with vouchers. Secret ballots curbed vote-buying by making it impossible to verify how an individual voted. We can likewise weaken the “market for politicians” by anonymizing contributions through a federal blind trust. Citizens, companies, PACs, and others could donate freely (including government-provided vouchers, or “Patriot Dollars”, to encourage small contributions), but candidates would receive funds without knowing the sources. It would eliminate repayable favors. It would also empower voters outside swing states by creating an incentive for candidates to compete for Patriot Dollars.

There are flickers of change. Congressional appropriators recently issued what one observer called a “near-total rebuke” of the administration’s attempt to reshape the National Institutes of Health. Some Republicans publicly objected when the Justice Department challenged the Federal Reserve’s independence. Others have spoken out against seizing Greenland or cutting health care subsidies. Trump may even pay a price for ICE overreach in the coming budget battle.

These are small but hopeful steps that point towards the possibility that Congress might remember how power works—not as a stage for public theater, but as a lawmaking institution.

The question facing the Republic in 2026 is not whether the Supreme Court will check presidential power, but whether Congress will. The Constitution provides our legislature with powerful tools for controlling an autocratic executive. We need a Congress that will use them.

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Musical Coda

Global capital markets are unfathomably large – on the order of $250-$300 trillion by most measures. These markets for equity (stock or investments) and fixed income (bonds or loans) fund most businesses. They shape the cost of rents and mortgages, the value of retirement savings, the quality of companies, and the jobs they create. Most Americans don’t think about Wall St. and don’t much like it when they do – but the capital markets directly affect their savings, jobs, and purchasing power.

Investors have struggled to profit from season two of The Donald Trump Show. Markets routinely spike, wobble, then snap back. Plainly, they have “priced in” the so-called TACO trades (“Trump Always Chickens Out”). TACO is now the base case, an embedded assumption conditioned by Trump’s reversals and walk-backs. Markets treat political shocks as temporary volatility rather than structural change. And so far, that’s been right -- for investors.

Even though markets have returned to square one, the world has not. Canadian Prime Minister Mark Carney described the current moment as a “rupture” in the global order. When the sober, analytic, former head of the Bank of England uses language like that, traders would be wise to treat it as more than a passing headline.

From TACO to TOFU

Markets need to move from the certainty that Trump will chicken out to the realization that he is causing sustained, long-lasting damage to vital domestic and international institutions. They need to recalibrate from TACO to TOFU – Trump Often Fucks Up.

The past week is a clear example. Talk of U.S. military action against Greenland briefly entered the conversation, then receded just as quickly. Markets sold off—the S&P 500 dropped roughly 2 percent in its worst day since October—and then recovered to end the week almost exactly where they began. For short-term investors, the right move was simple: do nothing.

But political systems don’t always resolve according to market timelines. Sometimes the noise is the signal—not because every threat is real, but because the guardrails that once filtered them are eroding. The paradox remains: investors and businesses benefit from complacency in the short run, even as long-run risks quietly compound.

Markets have been known to outsmart themselves. This shows up in technical measurements of the TACO trade on market performance.

• Markets fail to fully price in a Trump risk premium. If investors believed tariff threats, debt-limit brinkmanship, or executive overreach were likely to persist or escalate, they would charge for the added risk. Term premia, equity risk premia, and foreign exchange (FX) volatility would increase. Instead, long rates have remained anchored, equities have shrugged off headline risk, and implied volatility has spiked briefly, then collapsed. This is classic “headline discounting.” Markets price the announcement, then discount it because the expected policy path hasn’t changed.

• Investors expect Trump-induced volatility to be temporary. Every major Trump-era scare—tariffs, shutdown threats, NATO posturing—has followed the same arc: a short-lived volatility pop followed by rapid mean reversion. Traders expect the confrontation to be walked back, delayed, or diluted. They bet on TACO.

• Multiple assets remain unstressed. In a durable break, prices across multiple assets would fall. But fiscal chaos and inflationary tariffs do not cause rates to rise. Credit spreads remain tight, suggesting the market is not pricing in policy-induced recession risk. The dollar doesn’t weaken structurally on trade-war fears. Indeed, it often strengthens, implying global investors expect continuity, not rupture. Cyclical and multinational stocks recover quickly after tariff headlines, which only makes sense if markets assume that Trump will issue exemptions to supplicant CEOs, delay implementation, or negotiate an exit from the tariff schedule.

In short, TACO has provided good short-term guidance. If the market expected Trump to follow through, stock prices would reflect higher expected inflation from tariffs, weaker global growth, and greater long-term volatility. We don’t see those. What we see is skepticism embedded everywhere.

Are Silver and Gold TOFU Trades?

Under Trump, precious metals, led by silver and gold, have experienced a massive, record-setting rally. Silver prices surged past $100 per ounce for the first time in history, reflecting an annual gain exceeding 200%. Gold has also hit record highs, approaching $5,000 per ounce, with gains of over 60% in 2025 and continued, rapid increases so far this year.

Gold and silver prices answer different questions than equities or credit. Stock markets price earnings, liquidity, growth, and reactions to near-term policy changes. Gold and silver are priced on trust, regime risk, and the long-run reliability of the system in which those earnings sit.

Equity prices reflect what investors expect to happen next. Precious metals are pricing what kind of system this is becoming. The S&P 500 is asking: Will this affect next quarter’s earnings? Gold is asking: What happens if the rules become less predictable over the next decade?

Investors can fully believe in the TACO trade—that every specific escalation will be delayed, diluted, or reversed—and still believe that the process of constant threat and retreat corrodes credibility over time. Gold prices reflect that erosion, which is why gold prices shot up when Jerome Powell denounced Trump’s appalling decision to prosecute him. It’s not reacting to whether a tariff sticks; it’s responding to the growing sense that constraints are weakening. It reflects TOFU.

That’s why gold can rally even as equity volatility collapses. One market is saying TACO: “The bridge will hold today”. The other is saying TOFU: “the system is becoming less trustworthy and the bridge might not be here in ten years.” A large share of recent gold demand comes from central banks, especially in countries that are not U.S. allies and do not want their dollar exposure weaponized. They’re not trading week-to-week volatility; they’re reallocating reserves away from dollars because they know that TOFU.

TOFU Reflects the Long-Term Damage That Trump is Inflicting

Equity investors need to recognize the long-term damage Trump is causing to the institutions they rely on. Investors don’t expect politicians to be calm – but they do count on the machinery that politicians operate being stable: credible data, predictable rules, independent referees, and a bureaucracy that can execute policy without fear. Trump is steadily weakening that machinery.

• He threatens an independent Federal Reserve. When markets believe the central bank can be leaned on to cut rates for political reasons, investors bake in a higher “institutional risk premium” into interest rates and FX. That’s a tax on every American.

• He undermines credible government statistics. Investors use payrolls, inflation, and GDP to measure valuation, risk, and Fed policy. The firing of the Bureau of Labor Statistics commissioner after a weak jobs report, and broader moves affecting statistical capacity/advisory infrastructure, have eroded trust in core data that markets rely on.

• He neutered strong oversight and watchdogs. Inspectors general exist to deter waste, fraud, and abuse—and to make government contracts and procurement less corrupt and more legible. Large-scale removal of inspectors general is widely framed as reducing accountability and raising governance risk. 

• He degrades reliable state capacity. If agencies are hollowed out or staffed on loyalty lines, you don’t just get “smaller government”—you get less reliable government: slower permitting, weaker enforcement consistency, noisier contracting, more litigation, and more policy whiplash. Analyses of personnel cuts and fear of retaliation inside oversight functions point to that capacity loss. 

• His trade policy is chaotic. Even when the TACO-trained market learns to fade it, tariff brinkmanship still does damage: it raises the option value of waiting on investment, complicates supply chains, and injects event risk into FX and equities. Reuters and others have documented volatility spikes tied to tariff threats and reversals, even when the end state is a walkback. 

• He has no use for the rule of law. Investors can live with partisan policy. What they can’t price cleanly is a world where investigations, enforcement, and regulatory pressure are perceived (fairly or not) as tools of political retribution—because that raises the tail risk of arbitrary outcomes for firms, financiers, and individuals.

Even if markets often trade Trump’s outbursts as transient (TACO), the long-run effect is to make the U.S. feel less like a rules-based system and more like a personality-driven one. Investors need to price this risk. They need to move from TACO, which has become a consensus trade rather than a contrarian one, to TOFU.

TOFU reflects the real risk to markets: not that Trump often backs down, but that his erratic, autocratic, and narcissistic style is continually eroding market foundations. A TOFU trade recognizes that the current complacent consensus is making our long-term risks more dangerous, not less.

Musical Coda

When the President of the United States proposes something completely insane and then backs down, it is helpful to ask what happened. How important were the reactions of capital markets, his supporters, and his adversaries to his decision to reverse course?

An increasingly demented Trump repeatedly and seriously proposed to seize Greenland from Denmark and to impose tariffs on any country that stood in his way. This idea qualifies as insane because:

• We already get everything we want from Greenland, a massive island covered with tundra a mile thick that supports fewer people than the city of Kalamazoo, Michigan. Why steal the cow when we already get the milk for free?

• Denmark, a staunch NATO ally that sacrificed more men per capita in Afghanistan than the U.S. did, does not want to give it up.

• Taking Greenland by force would destroy NATO, which needs a proper scrubbing, not a neutron bomb. (Pro tip: when Putin’s henchmen assure you that by proposing to seize Greenland, you will “undoubtedly go down in the history books, and not only in the history of the United States, but in world history,” it’s time to pause and reflect.)

Trump’s plan was comically ill-considered. He told the New York Times that he felt owning Greenland was “a psychological necessity”. He then explained to the Prime Minister of Norway that he wanted Greenland because the Nobel Committee had not awarded him its Peace Prize.

The Reactions

This led to an interesting week.

• Market Reaction. On Monday, Trump threatened to impose tariffs on European allies and use force to seize Greenland. On Tuesday, markets suffered their biggest losses since October. The S&P 500 dropped around 2.1%, wiping out $1.2 trillion in value and all of the 2026 gains to date. The Nasdaq Composite plunged more than 2.4%, so it’s down more than 1% so far in 2026. On Wednesday, Trump backed down. He ruled out military force, suspended his tariffs scheduled for February 1, and announced a vague “framework of a future deal”. Wall Street rallied immediately.

• Republican Reaction. GOP leaders nominally allied with Trump stood up to him to an unusual degree. Sen. Mitch McConnell warned of “catastrophic strategic self-harm”, asserting that seizing sovereign territory would “shatter the trust of allies.” At the same time, Sen. Roger Wicker, ranking member of the Armed Services Committee, stated the topic “should be dropped” entirely. With any Greenland treaty requiring a two-thirds vote in the Senate, Trump faced a wall of opposition from his own party, making the formal acquisition of Greenland legally impossible.

• Allied Reaction. Rather than scrambling to make individual deals, EU leaders promised an “unflinching, united and proportional” response to any U.S. tariffs. NATO Secretary General Mark Rutte intervened directly. He brokered the obviously face-saving “framework” at NATO meetings in Davos by shifting the conversation from a bilateral hostile takeover to a multilateral security discussion.

  Canadian Prime Minister Mark Carney gave an outstanding speech at Davos that captured this sentiment magnificently. He described the end of the era underpinned by United States hegemony as “a rupture.” He outlined options for “middle countries” like Canada and EU members that are democratic and wealthy but not hegemonic. At the end of his speech, business and political leaders from around the world rose to give him a prolonged standing ovation, which is unheard of at Davos. It may prove to be a historic speech. I strongly recommend reading it.

The Third Bazooka

When Trump says he wants negotiations “immediately,” or claims to have reached some “framework” with NATO, European audiences are not reassured. They hear a willingness to normalize territorial bargaining backed by asymmetric power. They recall Churchill’s warning to Neville Chamberlain after he signed the disastrous Munich agreement with Hitler in 1938: “You were given the choice between war and dishonor. You chose dishonor, and you will have war.” It sets off massive alarms in countries whose entire security architecture is built on rejecting that logic.

Some European leaders even fantasized about a European “bazooka” — dumping U.S. Treasury bonds in retaliation. That particular bazooka would backfire.1

Others talk about a “second bazooka” – penalizing U.S. tech companies by aggressively enforcing regulations like the Digital Markets Act and Digital Services Act that impose heavy fines and restrictions for non-compliance. Europe hopes this regulatory push will impose hefty penalties on U.S. companies that violate EU data privacy, AI, sustainability, and defense procurement rules. To the extent that Carney’s view of “rupture” with the United States prevails, this sort of enforcement will increase. It will irritate Trump and U.S. companies — but it is no bazooka.

However, even before world leaders gathered at Davos, politicians across Europe began to contemplate a third bazooka. Should they threaten the upcoming World Cup? This would have been unthinkable even a few months ago. A French lawmaker asked whether Europe can “imagine going to play the World Cup in a country that attacks its neighbors” and undermines international law. A senior German conservative said it would be “hard to imagine” World Cup participation if Trump followed through on his threats.

European leaders are right to view the 2026 FIFA World Cup as an exceptional opportunity. It is, by viewership, the largest sporting event in the world. The 2022 World Cup in Qatar reached around 5 billion people, with approximately 1.5 billion (nearly one in five humans worldwide) watching the final match. This dwarfs events like the Super Bowl (seen by about 115-125 million).

The 2026 World Cup will take place from June 11 to July 19, 2026, across 16 host cities: 11 in the U.S., 3 in Mexico, and 2 in Canada.2 This is no mere sporting event – it is a massive soft-power project with hundreds of thousands of visitors and billions of dollars of economic activity. Weeks of global television coverage will frame the host countries as competent, welcoming, and central to the world’s cultural life. The U.S. will celebrate its 250th birthday in the middle of the festivities.

Trump has always understood this kind of power instinctively. Status, spectacle, and displays of domination move him. For Trump, the World Cup is not mainly about soccer. It is about packed stadiums, cheering crowds, and himself in a global spotlight, greeting fawning foreign leaders. The implicit message is that the world has come to America on America’s terms.

Any visible criticism of Trump by world leaders or mass demonstrations during the World Cup will puncture that image. It would tell the world that a critical mass of advanced democracies believe the United States, under its current leadership, has crossed a line that disqualifies it from hosting the premier world sporting event.

French, German, English, and Scottish politicians have advocated for the EU to boycott the World Cup.3 A boycott is impractical for two reasons. First, national football associations, not governments, decide whether their national teams attend the World Cup. A boycott would face a massive collective-action problem in coordinating sovereign athletic federations with different domestic politics. Football associations would face backlash from players whose careers are finite, from sponsors with billions at stake, and from fans who have waited their entire lives for a World Cup.

More fundamentally, sports boycotts rarely work. The Moscow Olympics in 1980 and the retaliatory Los Angeles boycott in 1984 are the canonical cases — and both are widely viewed as failures that punished athletes more than governments. Calls to boycott Russia’s 2018 World Cup after it annexed Crimea went nowhere. So did efforts to derail Qatar’s 2022 tournament over labor abuses and human rights. These failures should make European soccer elites cautious.

Lessons in Combatting Trumpism

This week offers lessons for Trump’s adversaries at home and abroad.

First: American business needs a collective voice beyond the stock ticker. When CEOs oppose policies that plainly hurt their interests, markets notice—and Trump notices markets.

Second: Congressional Republicans should take note. Pushing back on Trump can work. Lawmakers have been ducking their responsibilities for years, but this episode is a reminder that Congress is a coequal branch, not a spectator. Individually, legislators are rarely brave. But when contradicting Trump is less dangerous than explaining his behavior to voters, they will choose self-preservation. Voters should remember that.

Third: Europe needs bigger bazookas. A World Cup boycott may be unrealistic, but using the tournament to embarrass Trump is not. European and Canadian leaders are hunting for leverage over what actually moves him—not tariffs, which come and go; not legal briefs or diplomatic protests, which he ignores—but prestige, spectacle, and dominance on the global stage. Alongside capital markets and fractures within his own coalition, this is where Trump is exposed.

The very discussion of a World Cup boycott signals something deeper: Europe no longer trusts the old mechanisms to restrain American power. It reflects a clear-eyed view that Trump’s America is more vulnerable to symbolic isolation than to history, moral suasion, or law. Domestic opponents of the President—a majority of Americans—can use the World Cup the same way: to affirm democratic norms and practical reforms in full view of the world.

That the World Cup is even being discussed as leverage tells us what’s at stake. Not just Greenland. Not just tariffs. But the norms that once kept geopolitical conflict from corroding long-standing alliances. When the World Cup becomes a weapon, the line between politics and everything else dissolves—and it’s a hard line to redraw.

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Musical Coda

Both Democrats and Republicans like to bemoan America’s loss of manufacturing jobs. They agree that Chinese mercantilism poses a threat to American workers and to geopolitical stability. But much of this sentiment rests on memes, slogans, and half-formed ideas. “Manufacturing matters”, “Bring back the good jobs”, and “Rebuild the arsenal of democracy” are vibes, not strategies.

We need to think harder about exactly which manufacturing matters. Specifically:

• What does America need to manufacture and why? Nobody argues that the U.S. needs to make T-shirts or socks. Many people believe we should manufacture critical semiconductors and rare earth metals. Some make a strong case for electric motors, drones, and batteries. But what about the thousands of complex manufactured goods in between?

• What are America’s specific long-term policy goals? If “economic security”, “military security”, or “developing strategic sectors” is a goal, what exactly do we mean by that? Over the past fifty years, U.S. policymakers have flagged a rotating cast of products and sectors as candidates for federal manufacturing support. Nominees have included semiconductors, telecom infrastructure, HDTV, AI, quantum computing, supersonic transport, wide‑body jets, space launch, satellite manufacturing, shipbuilding, synthetic fuels, solar panels, batteries, nuclear, biopharmaceuticals, advanced chemicals, precision machinery, and robotics.

• What are we willing to sacrifice, spend, or trade off to achieve these goals? Achieving anything in the public sector demands exceptional focus. This means saying no to competing demands. Moreover, a public dollar invested in helping to reshore civilian manufacturing is a dollar not spent on something else. All tariffs impose costs — the debate should be whether the costs are worth it, not whether they are free.

Manufacturing is Not a Jobs or Productivity Program

Many political leaders argue that restoring manufacturing creates high-wage jobs or accelerates economic growth. This is rarely the case for several reasons.

• Factory jobs no longer pay more than service jobs. Politicians talk about manufacturing jobs as if they’re the backbone of the American middle class. This mostly reflects nostalgia for a time when a man with a unionized factory job could support a family, and own a home, a motorboat, and a cottage on the lake. We should aspire to the abundance and economic security that these memories reflect, without trying to bring back lower paying, mind-numbing assembly-line jobs.1

• Growing manufacturing does not create many jobs. Manufacturing now employs only about 8% of the U.S. workforce, so even a miraculous 20% increase in factory jobs would make little difference to overall employment. But we will not see substantial job growth in manufacturing because only highly automated factories can afford to return to the U.S. No American company will hire legions of workers to assemble toasters, polish iPhones, or tighten bolts.

• Factories do not increase productivity more than services do. There is a vague popular belief that having more factories increases productivity, but more manufacturing is unlikely to mean greater productivity. Manufacturing often raises productivity in poor countries as they start to industrialize, but it won’t in the United States. If manufacturing improved productivity in advanced economies, both Germany and Japan would be richer than America. They’re not. They would have seen faster economic or productivity growth. They have not.

• Manufacturing often adds less value than services. As manufacturing has steadily declined as a share of GDP, the U.S. has outperformed most of the rich world thanks not to factories, but to high-value services such as software, finance, design, logistics, management, and research.

  The example of Apple makes this painfully clear. In his indispensable book, Apple in China, Patrick McGee details how the company became more deeply entangled in Chinese manufacturing than any other major American firm. But Apple still captures more than 80% of global smartphone profits while selling only 20% of all units. Apple demonstrates that manufacturing is neither necessary nor sufficient for productivity growth or value capture in a rich economy. McGee capably documents that the problems with Apple’s deep integration with China are not economic – they are geopolitical.

  This story is not unusual. Design, marketing, and distribution often account for most of a product’s economic value, especially in brand‑driven and commoditized manufacturing sectors. Manufacturing is still essential, but it is frequently the lowest‑margin, most easily outsourced part of the chain. Modern firms derive the majority of their market value from intangible assets such as brands, design, software, and know‑how rather than from plants and equipment. For companies that operate worldwide, distribution, logistics, and customer support are harder to replicate than basic production.

  Crucially, there are exceptions. When production is capital-intensive, technically complex, or protected by process know-how and IP, manufacturing can be a major source of value. Advanced materials, some pharmaceuticals, and semiconductors are leading examples.

Where Manufacturing Matters: Political Power, Spillovers, and General-Purpose Technologies

The strongest case for a strong manufacturing base is geopolitical. Detering adversaries requires precision explosives, modern drones, missiles, and submarines. Consultants and PowerPoint decks won’t do the trick. Large countries like the United States are very unwise to rely on vulnerable overseas producers for critical defense capabilities like semiconductors, drones, ships, and explosives.

But what of civilian products? Thousands of goods are more complex than socks and T-shirts, yet less complex than semiconductors. The chart below shows total U.S. imports based on their complexity. Clothes, furniture, toys, and other simple, cheap consumer goods are shown in the lightest colors. They make up a surprisingly small share of U.S. imports. On the other hand, we import enormous amounts of stuff shown in green: cars, industrial machinery, electronics, advanced chemicals, pharmaceuticals, metal products, computers, and phones. These are complex, high-value items that are only made in a handful of countries.

Anyone serious about reindustrialization needs a point of view about these goods. Do we need to build domestic capacity to produce them, or is redundant capacity sufficient? Do we need surge capacity for emergencies, or can we depend on reliable allies?

Sorting this out requires that we answer several uncomfortable questions:

• Which products are genuine chokepoints that adversaries can weaponize? It has been evident since 2010 that China could use its dominance over rare earths to its strategic advantage.2 China dominates production or processing not only for these metals, but for at least 29 minerals that the U.S. deems critical. In 2024, the U.S. imported 48–76% of its lithium, nickel, and cobalt, all essential for EV batteries and grid storage. China and India supply about 60% of the active pharmaceutical ingredients used in U.S. medicines (and India relies heavily on Chinese inputs.)

• Can we shift manufacturing capacity in a crisis? It is easy to mislead ourselves with inspiring WWII-era stories of car factories retooling to produce tanks and planes. Modern weapons and advanced manufacturing are today far more specialized. You can’t turn a Tesla plant into a missile factory as quickly as the U.S. “arsenal of democracy” once turned Ford plants into tank and airplane factories.

• How large are the innovation spillover effects from manufacturing? Even when manufacturing itself is not a significant source of value, factory skills sometimes “spill over” into other capabilities. There are three broad categories of spillover effects.

1. Manufacturing-dependent innovation. In some technically complex industries, like semiconductors or batteries, giving up production means giving up product innovation.3 In these cases, especially in sectors that are essential to national defense, public investment or subsidies can make sense.

2. Kickstarting manufacturing ecosystems. In other cases, the benefits of innovation are captured not by a single firm, but by a broad ecosystem that is tough to finance privately. Federal CHIPS and Science Act subsidies, combined with New York state incentives, led to Micron’s large memory‑chip complex near Syracuse. The fab was explicitly framed as an “anchor” for a broader regional semiconductor cluster rather than a single plant. Public money supports local suppliers, workforce programs, infrastructure, and tech‑hub grants to deliberately build a supplier ecosystem of tool vendors, materials providers, and specialized service firms around Micron and other chip fabs.

   Likewise, the federal Manufacturing Extension Partnership (MEP) network and DOE Industrial Assessment Centers are long‑running examples of public programs that provide technical assistance to small and mid‑sized manufacturers, helping them adopt new processes and connect to higher‑value supply chains.

   A range of federal and state initiatives (e.g., Commerce’s Tech Hubs, the Good Jobs Challenge, Recompete, Manufacturing USA institutes, and earlier “Investing in Manufacturing Communities Partnership,”) are designed to strengthen regional ecosystems, not just isolated plants. Examples include Central Indiana’s Heartland BioWorks biomanufacturing hub and other regional advanced‑manufacturing networks where public funds support shared R&D, training pipelines, and supplier‑matchmaking that tie local firms into national and global value chains.

3. Investing in general-purpose technologies. Historically, many general-purpose technologies have generated large benefits for entire economies well beyond the firms that first developed or adopted them.4 Most rely at some stage on public investment in basic science, mission‑driven programs (especially defense and space), or enabling infrastructure and standards, to reach the scale and maturity needed to transform whole economies. (Today, China may understand these effects more deeply than the United States does.)

   Policymakers can make a coherent, efficiency-based argument for public subsidies of general-purpose technologies, especially for advanced research and capital investments in large-scale production. Today, we should ask whether solar, batteries, electric motors, as well as AI and quantum computing technologies are sufficiently critical and the benefits sufficiently diffuse to meet this test.

• What is the opportunity cost? Professional talent, skilled labor, electricity, capital, and political attention are all scarce. In a world of finite resources (admittedly not the world the federal government thinks it lives in), money has an opportunity cost. Money spent relocating civilian manufacturing back to the U.S. is money we will not spend on other worthy goals. Plus, we make these decisions in an environment filled with passionate advocates who are far more skilled at articulating the benefits of their policies than the full costs.

Hard Truths About Reindustrialization

I’m broadly sympathetic to the impulse to reindustrialize America. China’s manufacturing dominance is real, and parts of our industrial base, including critical defense needs, are shockingly hollowed out. Every American should care about this.

But sympathy isn’t a plan. Industrial policy is about choosing what to build, what to ignore, what to import, and what to subsidize. In all cases, the U.S. will depend critically on trusted allies who can produce critical goods and sell them to us free of tariffs. Trump has subjected our allies to his dangerous whims, grievances, and tariffs — most recently for opposing his plan to conquer Greenland. Trump explained his need for a ton of tundra as a personal “psychological necessity.”

Trump represents the worst possible form of industrial policy because he cannot distinguish it from self-serving patronage. His personal wealth and family businesses appear to have benefited substantially in the past year from deals that raise serious conflict‑of‑interest concerns, even when they are not clearly illegal. Much of this centers on crypto ventures, international real estate, and licensing deals, as well as regulatory or institutional changes that reduce oversight of such conflicts.5

During Trump’s first year back in office, the U.S. government took equity stakes in companies, bought golden shares, entered pre-purchase agreements, invested in industrial banks, and implemented supply-chain screening. These are state interventions in markets that not long ago would have triggered cardiac arrest among Republicans if Democrats had proposed them. It is hard to know whether the GOP will still favor these things once the Trump fever breaks.

The danger we face is not that America will do nothing. It’s that we’ll do many things badly: scatter subsidies across politically favored industries, oversell job creation, underspecify security goals, tolerate corruption, and underinvest in manufacturing that can genuinely make a sustained difference to American well-being.

Manufacturing does matter – just not in the way most people think. It does not matter everywhere, all at once, at any price. The task isn’t to bring back the past. It’s to decide, with brutal clarity, what elements of our industrial future are actually worth paying for.

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Musical Coda

For the past century, the United States has operated the most successful talent-attraction system in history. It does not appear to be a coherent system, as it depends on a shambolic and loosely coordinated mix of research universities, federal funding agencies, immigration policies, thousands of technology companies, and unfathomably complex labor markets.

The combined effect of these institutions attracted talent to America’s shores for several generations until the Trump administration deliberately began to weaken them. The damage so far has been minor, but, as with Hemingway’s description of bankruptcy, the impact of Trump’s actions may well be gradual, then sudden.

As the U.S. has weakened the policy scaffolding that made it the default destination for the world’s leading researchers, other countries have begun to aggressively compete for high-skill talent. The result is not a cinematic “brain drain” that empties American laboratories overnight. This would be a crisis, and America might respond. Instead, we face the slow corrosion of a thousand small decisions. A postdoc chooses Toronto over Boston. An AI researcher joins a lab in Paris rather than a company in San Francisco. A doctoral student decides not to apply to a U.S. program.

As these individual decisions accumulate, they compound, and the United States loses something that money alone cannot rebuild: its position as the world’s central node of scientific discovery.

The Competitive Advantage We Barely Noticed

Day-to-day, few Americans recognize the powerful U.S. system for attracting talent, which consists of several elements.

Generosity. Until recently, researchers could reasonably assume that generous federal science funding through the National Institutes of Health and the National Science Foundation would continue year after year. Universities planned hiring and graduate admissions on the assumption of steady funding.

Predictability. Scientific research is a long-horizon enterprise, so predictability mattered as much as generous funding. A doctoral program is five to seven years. A biomedical research agenda can span decades. When uncertainty rises, participation falls. Scientists are unusually sensitive to the risk of cuts because their careers are unusually path-dependent. Miss one grant cycle, one visa window, one cohort of graduate students, and the damage can persist for years. Increasing risk leads researchers to seek a more stable environment. Foreign students can only invest a decade of their lives training in the U.S. if they are confident that their visas will not suddenly disappear.

Talent clusters. In many fields, talented people seek one another out because they know that interactions with skilled colleagues improve their work.

The effect of proximity on scientific research productivity is surprisingly strong. When MIT analyzed papers and patents, they found that even in the digital age, researchers in the same workspace were significantly more likely to collaborate than those farther apart. Research from Harvard Medical School found papers with co-authors in the same building received far more citations, and the impact increased as the physical distance between the first and last authors decreased.

As returns to talent have increased, both stable scientific research funding and a coherent immigration policy have become cornerstones of industrial policy. Every modern government understands this.

The High Cost of Immigration Uncertainty

Despite its many flaws, the H-1B visa system functioned as a pipeline that connected global talent to American institutions. Universities used it to recruit scientists. Companies used it to staff cutting-edge research teams. Startups used it to hire specialists. However, the Trump administration’s immigration policies have sharply increased both the costs and the risks associated with visas.

Funding cuts. Trump entered office determined to slash university research funding. The National Institute of Health and the National Science Foundation bore the brunt of these cuts. Some funding has been recovered through ongoing lawsuits, and additional amounts may yet be recovered through congressional action. But the uncertainty has slowed and damaged research projects and frozen hiring.

Visa fees. Trump’s crackdown on immigrant researchers has led many researchers to question whether they can count on visa renewals. His $100,000 fee for each H-1B visa is damaging to research universities, which cannot absorb a six-figure fee for each researcher as readily as large firms can.

Visa barriers. The new policy has made it more difficult for businesses—and especially universities—to use visas to recruit scientists from abroad. A recent report from the nonpartisan Niskanen Center notes that immigration policy has become a central instrument of labor and economic strategy. Yet, while countries worldwide are competing to attract top talent, the United States has moved in the opposite direction by imposing new hurdles on the legal immigration of high-skilled workers.

The damage this causes doesn’t show up immediately. In the U.S. system of knowledge production, universities are upstream of everything else. They train the researchers who populate firms, labs, and startups. A policy that starves the upstream development of critical talent inevitably weakens downstream organizations. But it takes a while.

Hidden costs. Defenders of these restrictions often argue that they protect American workers. But this framing misunderstands the labor market for frontier science. The relevant comparison is less “a foreign scientist versus an American scientist” than “a U.S. lab versus a foreign lab.” When a quantum physicist or AI researcher cannot enter the United States, the work relocates. And so do the spillovers: graduate students, startups, supplier networks, and tacit knowledge. These are not paper losses – they are the economic substance of innovation.

The World Responds to U.S. Carelessness

The United States enjoyed an advantage in scientific research that has accumulated since the Second World War. Even when other countries funded research, they rarely matched the U.S. ecosystem’s scale, prestige, or openness. The world’s most talented scientists, managers, and investors came here as a result.

That world is ending.

• The European Union has announced a Choose Europe for Science initiative to enable U.S. researchers to “explore national and regional funding and support schemes available across 27 EU Member States.”

• France is recruiting “30 outstanding U.S. students for one year of master’s-level study at one of 15 top French institutions…(in) Science, Technology, Engineering, Mathematics, the Humanities, Social Sciences, and the Arts. The French government recently hosted a “Choose Europe for Science” conference to help EU countries target U.S. scientists.

• Canada recently announced it will spend $1.7 billion to “attract top global talent.”

• Tiny Norway is targeting $10 million at US scientists. On April 26, the Chamber of Commerce of equally tiny Denmark made an offer on Instagram to U.S. researchers: “To all the brilliant researchers in the U.S. feeling uncertain right now: Denmark is open – and we need you! Across the Atlantic, we’re watching with concern as politics begins to overshadow science.” The Danish Society of Engineers will create a “fast-track initiative to welcome up to 200 American researchers over the next three years.”

• Spain is expanding its program to attract international scientists, specifically “researchers who are in the United States and are being scorned by the current administration.” In addition to awarding $1 million to each researcher, Spain offered scientists from the United States an additional $200,000 for their research projects.

• The Australian Academy of Science has launched a Global Talent Attraction Program aimed at U.S. scientists, asserting that “Australia has an urgent and unparalleled opportunity to attract the smartest minds leaving the United States to seed capability here and nurture the next generation of scientists and innovators.”

• The United Kingdom has launched a new program to disperse money to enable 10 of its research organizations to attract international scientific talent.

• China, which is already outpacing the U.S. in scientific research, is surely laughing at headlines in The Economist declaring that “America is foolishly waving goodbye to thousands of Chinese boffins.”

By making U.S. immigration policy more hostile and scientific funding less predictable, Trump has narrowed the gap between the U.S. and other countries. Visa uncertainties that once seemed tolerable become decisive. Funding delays that once felt annoying become disqualifying. The U.S. no longer wins by default.

The early results are troubling. A survey by Nature Magazine found that 75% of scientists surveyed are considering leaving the U.S. and announced a 32% increase in applications from U.S. scientists for overseas positions.1 This fall, the number of international students enrolling in U.S. universities fell for the first time. It declined by 17 percent compared with last year.

Leading Technology Sectors Depend on Research Scientists

All scientific fields matter, but some matter more than others. It is especially valuable for the U.S. to continue to lead advances in medical research, artificial intelligence, and quantum computing because these are general-purpose technologies. Advances in these fields spill over into sectors such as manufacturing, defense, health care, logistics, and energy. They raise productivity broadly.

The United States’ advantage in these areas has always depended on dense research networks. Informal conversations matter. So do graduate seminars, shared datasets, and labor mobility between academia and industry. When that density thins, progress slows—not linearly, but exponentially. Networks fracture. Feedback loops weaken. The invisible infrastructure of innovation erodes.

This is why even small outflows matter. Losing a few senior researchers is bad. But it is even worse to lose the graduate students and postdocs who would have built the next generation of labs around them.

It is tempting to dismiss concerns about brain drain by pointing out that American universities remain world-class. This is true—and misleading. Infrastructure takes decades to build; it does not vanish overnight. But that is the danger. Advantages that took decades to build can be dismantled slowly enough as to trigger no political alarms.

The United States is still benefiting from investments in research after World War II, the expansion of graduate education, and the openness of Cold War-era immigration policy. These are sunk costs that continue to pay dividends.

But sunk costs are no guarantee of future returns. The U.S. remains strong today, but whether the next cohort of scientists will anchor their careers here is far less certain. Once they decide to look elsewhere, this becomes an extraordinarily expensive problem to solve.

An Economic and Political Challenge, Not a Cultural One

Debates over immigration and science policy are often proxies for culture wars about cosmopolitanism versus nationalism. That framing obscures the stakes.

Economists refer to scientific talent as a “non-rival input.” Attracting more of it doesn’t reduce opportunities for domestic researchers; it expands them by increasing funding, collaboration, and institutional scale. The historical evidence is overwhelming that regions with higher concentrations of skilled immigrants produce more innovation and higher wages for native workers.

When the United States restricts high-skill immigration or destabilizes research funding, it shrinks the pie, which does nothing to protect workers. Other countries understand this. That is why they are spending real money to attract talent. They view scientists as productive assets rather than cultural symbols.

Moreover, Trump has a coherence problem. He wants the U.S. to lead global AI, quantum computing, and biomedical research, but he deliberately undermines the institutions that produce that leadership. Trump is skeptical of international expertise even as his goals depend on it. He aspires to global dominance but chokes off access to the talent the U.S. needs to compete globally.

This incoherence is itself a competitive disadvantage. Scientists value clarity. They choose environments in which rules are stable, and futures legible. When policy sends mixed signals, researchers with choices—the top talent that drives innovation—inevitably move first.

Recharging the Magnet

None of this is inevitable. The United States still has extraordinary universities. It still has deep capital markets. It still has a culture of scientific ambition. The losses to date appear marginal rather than catastrophic. But marginal losses are how great powers decline.

Fixing this requires that U.S. immigration policy align with economic reality. It requires stabilizing research funding to enable universities to plan. It requires recognizing that global talent competition is a foundation of American prosperity – not a threat to native-born workers.

Bipartisan solutions are well-understood. The U.S. can fast-track visas for advanced STEM graduates and reduce funding uncertainty for research institutions. The barrier is political will.

History offers a cautionary lesson against any country treating scientific supremacy as an inheritance to which it is entitled. Germany’s pre-war dominance evaporated when it closed its doors to intellectual openness, driving many scientists to the U.S. Britain lost scientific preeminence in the 1950s and 60s when its talent followed opportunity elsewhere. Countries that wish to lead scientific advances must cultivate and sustain the institutions that enable them to do so.

America’s advantage was earned by institutions that welcomed talent, funded curiosity, and tolerated risk. We can choose to weaken or strengthen those institutions. The question is whether policymakers recognize what is at stake before erosion becomes collapse.

Because once the world’s best scientists stop seeing the United States as the obvious place to build their lives, no amount of rhetoric will bring them back.

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