Who Profits in a Post-American World? | Adam Posen

28:04And we have social media going on and a collapse of political bipartisanship for want of a better word. And we did screw up in 2008, not because of globalization, but because we massively deregulated the financial system. And so there's a lot to be angry about. There's a lot to be angry about the people who fought in a war and came home damaged and no war had some victory out of it. So a lot to be angry about, about how the 2008 financial crisis came about and how people were not held accountable in the financial sector. And there wasn't enough support for people if mortgage problems, for example.

28:46And there's a lot to be mad about before you even get to COVID about the way our politics has gone. So it's not about people being mad. That's fine. It's about political exploitation that various people blame it on foreigners, blame it on trade, blame it on globalization when it's really our own doing. And nobody wants to confront that. Nobody wants to be the one to say that. The second point, which is a more technocratic point, is dealing with the national security issue is much more legitimate in the sense of if you step back and you're unemotional, you can see where Washington elites blew it, myself included.

29:28that we didn't take into account essentially what we call concentration risk, that you become very dependent on one place, whether it's China or Taiwan or the Netherlands, whatever it is, for your supply of pharmaceutical goods, of semiconductors and magnets, whatever it is. And so it is worth interfering with the markets, raising taxation, doing investment subsidies to make sure that those goods are supplied and provided. And that is the insight of the last 10 years that I think this backlash has rightly raised. But that's a very much more manageable problem. That doesn't take very much of the economy.

30:15And again, it's not necessarily anti-trade, because if you have one plant in the US in a particular state, and they are guaranteed that they're going to be the one source of whatever it is, pharmaceutical inputs, rare earths in the US, and you say, oh, it's all domestic, it's safe. Well, then you're open to moral hazard, like with the banking system, like with Boeing airplanes, where they say, I'm too big to fail, so I don't have to do this well. You're open to political terrorism domestically. You're open to attack from foreign enemies. The point is to be diversified, and diversified means both abroad and at home.

30:56If you're not diversified and you're concentrated at home, you're pretty much as vulnerable as you were when you were dependent on something abroad. So again, the national security is legitimate, but being anti-globalization doesn't necessarily advance it. The inequality is real, and a lot of the pain and anger is real, but it's not a huge share of the middle class, and it's not all attributable to trade and globalization. I realize I've gone on long, but one more sentence. I looked at this a few years ago when I was asked to testify before a congressional committee on this. And for all the talk about these towns that get killed because their plants moved, because there was a big steel plant or a big auto plant and it closed, most of the places we're talking about, Ohio, second tier cities, Buffalo and upstate New York, These are places where, A, they were already losing jobs, losing the big plants 50 years ago.

31:57It wasn't because of the rise of China. It wasn't because of NAFTA. I grew up in Boston area, and the place was depressed, and the textile plants that had been huge in Boston area in the early 20th century were long gone. And a lot of these companies and plants that moved, they didn't move abroad. They moved to the American South or they moved to the American Southwest. And so, again, the anger is misplaced in terms of identifying the causes.

32:31Demetri Kofinas:To the extent that the US industrial economy, the industrial part of the US economy has become less competitive. What would you attribute that to? I don't agree because as my colleague, Robert Lawrence of Peterson and Harvard published in a book last year, the value added of the US in manufacturing has actually been stable to growing. We're not less competitive. We, in fact, are more productive. We're able, going with your point about lighter capital, we're able to produce more higher end stuff with fewer people. Right. So maybe I should be more specific. For example, let's take the work of Patrick McGee, whose book, Apple in China, we covered with him on this podcast not long ago, and which introduced me and our audience to the larger story of how Apple, through its investments in China, helped build up Chinese high-end manufacturing and create a flywheel of adjacent industries and sectors like, for example, battery manufacturing that have since accrued knowledge into electrical vehicle production, where the Chinese have gone from being a non-player to now dominating the space.

33:40Demetri Kofinas:What is it, do you think, about the way that we have conducted business in the United States in the last several decades? The regulations, the affordability of capital for capital-heavy industries, although the affordability of capital, again, which shouldn't necessitate that capital should go into high margin capital life - And it hasn't because net inflows of capital, this is why we have a trade deficit. There's been huge net inflows of capital into the US. I mean, we're not net outflowing capital. We haven't for 50 years. Right. I agree, which is why I'm saying that the capital doesn't necessarily have to go to capital-like businesses, but it has.

34:18Demetri Kofinas:And so does that just, in your view, reflect the higher profit potential of investing in software as a service type businesses or other low margin cost enterprises? And is this, in your view, what has largely driven this change and led to the gradual offshoring of critical parts of the supply chain, whether it's in semiconductors or in the smartphone manufacturing ecosystem? Okay. So I think, no disrespect to Mr. McGee and the others, but I think this is just another example of people missing the point. The only value in the iPhone is the intellectual property, the brand, the selling of the software, the brand loyalty, a little bit of the design.

35:05Smartphones are a low-end product. They're things screwed in by very underpaid people in the backwaters of China or in developing countries because that's what it takes. And there's no native or legally documented American workers who would accept those jobs at those wages, and they shouldn't.

35:23Demetri Kofinas:So is that what it is? I'm glad that you said that. So is the argument that it's just been more profitable to organize the American economy It's more efficient and more profitable. How much it's profitable depends on how much you're able to get monopolization, global economies of scale, how much competition there is. But there's no question it's more efficient than this goes with what I was saying about how the income distribution in the U.S. has changed. A larger proportion of the U.S. workforce now is in higher end, more pleasant jobs. Doesn't mean there hasn't been a bulge in people who are not well looked after, not well paid.

36:03But the fact remains, this is because we've moved up the value chain. And this, again, is what Robert Lawrence talks about, that we're in a world where it's not just U.S. and a few others moving up the value chain in China to some degree, but in a world in which heavy stuff is less and less valuable. I mean, it's just cheaper to produce. It's not very scarce. It's not hard to make. And so there are a few things that we lost sight of the national security side. But again, it's really the low end semiconductors that are commodity products that Intel and Texas Instruments and others got out of because they weren't very profitable.

36:48It's the basic inputs to pharmaceutical drugs, the feedstocks, which again, we should have been thinking Mexico should do that. India should do that. Israel should do that. However, we shouldn't be 90 % dependent on China, but that doesn't mean we should be producing it at home. And so many of these things, like solar. I mean, the problem with solar is basically the transistor radios of the 2020s. I mean, it's a low-end product that's mass-produced. It's useful. People want it. It would be nice if it was cheaper here, and we let people buy it without putting up all kinds of tariffs on it. It would be good for the environment.

37:28But it's not like there's good jobs in producing solar panels because that's not the technology.

37:34Demetri Kofinas:This is also true for refining rare earths, for example. Yeah. Well, refining rare earths is slightly different, but it's basically the same. But it's more because refining rare earths, nobody's found a way to do it that isn't really messy in both the sense of the people working there are exposed to a lot of nasty stuff. And there's a lot of environmental negative spillovers around any rare earths processing or mine. So Canada has plenty of rare earths, but Canada is high enough up the income scale and values its environment enough. It chose not to keep the mines open and processing them. My colleague, Colin Hendricks, has written about this extensively.

38:14Others have. You can read there are ways of reducing the environmental costs. There are ways of pricing it higher to make sure you get alternative sources of rare earths. But again, this is not a business that smart money or skilled labor wants to be part of it and avoid it.

38:33Demetri Kofinas:Right. So let's go back to the conversation about the Apple iPhone, because you made a good point. You didn't use this exact example, but people in Texas, let's say, don't want to be screwing individual components into an iPhone. Even though no one wants to do that, the larger macro effects is that in certain important industries, we end up losing critical parts of the supply chain. So then the question is, how do you reverse engineer that? If you identify certain industries, if we can agree on certain industries that are important or certain products or components that we need, how does a government go about shifting incentives to actually get investment dollars to go into those industries and to build competitive sectors?

39:14Demetri Kofinas:And what is the bottleneck to effectuate that? Demeter, you've put your finger on a really critical issue. And so if you'll allow me, let me tell you a couple stories related to that. So as you said, what happens if we could agree? And I wrote an article in Foreign Policy Magazine a few years ago, very critical of the Biden administration's industrial policy approach to this. And I'm not an anti-government person. I was considered pretty center-left prior to this period. But I was talking about the better and worse ways to do it. And I got a meeting with a senior staffer at the White House under Biden.

39:50And I talked with this person about why can't we have a commission of engineers and experts or a set of data with a clear set of staff to decide what's a critical national security industry, where are we dependent too much abroad, where is it too concentrated? And this person, in a gentle way, laughed at me. And they said, there's no one in the government who has that interest, because if the Defense department says that, then they don't get to control and expand what everything is in that list, or they get blamed because something was off that list. If you say that, then the commerce department, particularly under their Trump administration, doesn't get to essentially sell exemptions and on an arbitrary basis decide, I like this industry.

40:37I think autos are really important. I don't think that's very important. And the president and the commerce department really want to keep that. And then you don't get Congress getting to make earmarks or they don't make earmarks technically anymore, but anyway, getting to decide I want this in this district. So there's a huge political incentive to not do this the right way. But in the past, in the 50s, 60s, 70s, into the 80s, we did have expert commissions, some of them internal to the government, some of them with external people, which did make these kinds of determinations. It's specifically with respect to the defense industrial base and also things like the base closings.

41:18How do you decide which military bases are worth having? And so it's a doable problem, but it just requires the opposite direction of travel from where the Trump administration is going, which is having some amount, accepting that there are experts who may get it 90 % right or 88 % right, but better than having politically arbitrary choices. And that there's a fact base you can use to make these determinations. So I think people make it to be a bigger problem than it is. And so then everybody says, well, but you need these nests or networks or local environments of many companies in a given industry to have all the spillovers in the supply chain.

42:14And that's right as far as it goes. But the U.S. has historically been better at doing that than any other country, basically, or certainly as good as Germany or China until very recently. And you can make it happen. So then comes your point, which is what can you do? Well, that's where you do start doing government expenditure. And instead of playing games where the Biden administration was scared to ask for deals out of Congress and wanted to attach all these riders to how they allocated money, or the Trump people wanted to do it with private companies and extracting something again for that, even from domestic companies.

42:57You can do it by straight up subsidies. You can do it by investment in particular R &D. You can do it by funds to universities instead of trying to shut down our universities, which are the engine for the last 80 years of our technological progress. You can put funding that goes to research in these particular areas and it will naturally spin off into these fields. And you can make deals, again, with countries that are friendly, have military alliances that were at least in a win-win insurance relationship with the US, and say, we're going to give you a long contract to produce X. But we're not doing any of that.

43:44Demetri Kofinas:So maybe two questions. Let me see how I can segment them. One is that the Biden administration seemed to have attempted to do some of those things. I'm curious to know where you feel they fell short. And then the other ride along question is specifically having to do with chip fabrication, because I think the CHIPS Act was arguably the single biggest piece of industrial policy legislation of the Biden years. How has that gone, do you think? How is that going? And how have some of those dynamics and misincentives that you talked about earlier shown up in our attempt to rebuild chip manufacturing in the United States?

44:20So I would refer your listeners and you to, obviously there's that Chip Wars book, which was marvelous, but I would also refer you listeners and you to my colleagues at the Peterson Institute, Chad Bowne and Mary Lovely, both of whom have done extensive work on this. And what we found is, or what they found, is that these tariffs and subsidies have not generated very much new production in the US. And this was partly predictable because it requires a lot of investment, as we're seeing now with the LG, Hynix.

45:01Demetri Kofinas:Just to be clear, you're also talking about tariffs and subsidies that go back to the Biden years as well. Yes, yes, yes, yes. Sorry to be unclear. Yes, that's what I meant, that we're part of the whole chip. A lot of people don't know that we had tariffs before Trump. Oh, yeah. No, no. Trump put on a huge amount of tariffs. Biden kept them all and added a few more, and then Trump put on a huge amount more tariffs. But the Biden administration certainly supported the tariffs. And it didn't really work so well. And so Chad Bowne, B-O-W-N, who I mentioned, served in the Biden administration for a little while as the chief economist of the U.S.

45:34State Department. And he worked very hard in trying to make these things work in practice. And this goes to my broader argument in the New Economic Geography and in a couple previous pieces in Foreign Affairs, that businesses and companies have agency. I mean, it doesn't mean you can't affect them by law, you can't affect them by subsidies. But this is where the so-called neoliberal economists have a point, that you can't by I diktat. Just tell people you have to invest here and it works. That's not even a question of obsessively believing in markets. That's the reality. That's why the Soviet Union didn't work.

46:12That's why these attempts at import substitution policies in Latin America and India for decades failed. And so you have to go at it with a more humble attitude. You have to go at it with a recognition that building these capacities takes time, and therefore you need to make trade deals and stockpile and purchase agreements and figure out what your needs are, much more immediate term. And in the end, again, I don't mean you should let business rip off the American people or be laissez-faire, but you have to be more pro-business investment in the sense of recognizing their incentives. And the Biden administration totally messed that up because they attached all these things to the policies and they allocated them to states where there were not necessarily the workforces needed to get the chips plants built.

47:15And they ran an anti-immigration policy that wouldn't let us import the skilled labor, even if only temporarily to train the American labor to do it. Because even good construction people, it's a very different skill to build a semiconductor fab or related industries.

47:31Demetri Kofinas:I mean, that was also reported in the press that TSMC was frustrated with the quality of the workforce that they were dealing with. Absolutely. Yeah. And so you would like to think about this again as a springboard, that as we did with Toyota and Honda plants in the 80s in the US, that you transfer technology know-how skill by bringing in willing foreign investment. And we've seen this now get even worse with the events over the last couple of weeks of the Trump administration interfering with the Korean semiconductor plants. And which these were workers who were brought in actually on legitimate visas, a few of whom had overstayed or something, but which were just there temporarily to build the plan.

48:21And the anti-immigration, anti-globalization, stick it to the foreign companies backfired.

48:27Demetri Kofinas:So I'm scribbling down some notes here because I don't want to forget this question I have, but let me ask you this other question. So do you think that that reflects, this is something I'm very curious about. Specifically, some of these policies around both tariffs and also visas, immigration. Do you think this reflects a worldview or a doctrine on the part of the Trump administration? Or is this something that's politically expedient and appeals to the base, and that's why they're doing stuff like this? I'm curious, is there any way to really know an answer to that question? Historians will eventually know, and possibly some serious political reporters will try to disentangle.

49:04But my experience in Washington over the years, and my research as a social scientist of political economy, is that, Dimitri, when a major government pursues a policy, it's got multiple motivations because it's got multiple constituencies. And the policies that get pursued tend to be the ones that serve many purposes at once. So under the Biden administration, Jake Sullivan and Jennifer Harris at the NSC basically tried before they got in to reverse engineer a policy that was this will appeal to the voters in these districts in Wisconsin, Pennsylvania, Ohio. and it will address the legitimate national security problem and it will look good to undercut Trump's populism with Biden's populism and it will mistakenly reinforce our need to get heavy industry back in the U.S.

50:04and and and and they reverse engineered this whole thing and it turned out and part of it was again to say we're not going to be dictated to by economists by certainly market-based economists, because we just know what's possible. And it all blew up because it was this jury-rigged crazy thing. And it didn't recognize economic reality. And that's part of why we had inflation and part of why it didn't work. And so then under Trump, I think all things are in play. Again, I think there is a genuine worldview on the part of Trump and several of his cabinet officials and several of the people around him, that the world has been screwing over the U.S., that foreign migrants have been screwing over the U.S., that our allies have been free riding and screwing over the U.S., and we will have to take that on.

50:55And I think there is also a group of people who say this plays really well in Peoria and this helps Trump win. And I think there's a group of people who say this is really great because then we can sit on top of decisions about tariffs and exemptions and subsidies and extract value, either for our personal gain or for the US government or for particular companies. And it happens to bear some relevance to a legitimate concern, which we keep coming back to, which is the national security need to diversify sources of critical inputs. And so all four of those, plus some other stuff is in play. and I don't think anybody can in real time disentangle this and I mean the same is true I mean I hate to make this analogy but the same is true with the rise of fascism in Italy in Germany and Japan in the 20s and 30s and for that matter in France that partly was a bunch of people who believed that whether it was Jews or gays or foreigners or gypsies or whoever, were the source of our problems.

52:10And a bunch of people who said foreigners after World War I ripped us off, or the imperialists in the case of Japan ripped us off. And there were a bunch of people who said, wow, bad things are happening. People are angry. It's a really good way to mobilize them to vote and support my party. And there were a bunch of people involved in these governments who got rich because the government intervening in this way in the economy made them a place where they could run a protection racket. So as a forecaster, which is part of my day job is I'm a macroeconomic forecaster. And I used to do that as a central banker.

52:47I keep telling people, if you're trying to forecast, don't get into all these games. Is it Besant? Is it Lutnik? What do they really believe? Are they up? Are they down? Who's in the White House that day? It doesn't give you any reliable information for forecasting. Maybe in history, this will get unwound. But for the time being, just take it as given. There are multiple reasons why they're on this path. None of them necessarily mean that it's the right path for the American people or the American economy. But this is the path they're on. And there are multiple forces urging them in that direction.

53:23Demetri Kofinas:That's a great analysis. I also think, I can't speak to Imperial Japan, but certainly in interwar France and Germany, the collapse in social trust and institutional authority played a very big role. And I think that's something that we see here rather concerningly. I've heard you discuss that with previous guests, and I very strongly believe that. And I don't pretend to be expert on that. What I just keep trying to push back on this point is there is an assumption made by a lot of people, including a lot of economists, that if people are angry, it must be for economic reasons. People may, even if they say it's for economic reasons, people may be angry because of all these other factors.

54:02And it's very deep seated. And so just because people say they're angry about economics doesn't mean that's the real cause.

54:10Demetri Kofinas:No, I agree with that. Actually, I just recorded an episode with Paul Kingsnorth. I don't know if you know who that is. But I think an important source of the problem is, as he would describe it, a collapse in culture. And as I've described that in terms of a collapse in identity and who we are, what we stand for, how aligned are the outcomes of our economy or the outcomes of our politics with what we say we stand for, our sense of justice and reciprocity. So, Adam, I'm going to move us to the second hour. I want to dig in a little bit more into this conversation about industrial policy, because it seems to me that the two...

54:43Demetri Kofinas:This is my sense, but I could be wrong. The two most difficult or challenging and also important areas to focus on are creating, one, a flywheel of... Reigniting a flywheel of expertise in these lost sectors, because that seems to be a real challenge when I speak to people that work in these industries. It's hard to find people. A lot of these are apprenticeship type learning environments where it's not like you can go get a degree and acquire the requisite skills. And the other is this challenge of creating a commercial ecosystem that supports and feeds into these, let's say, in this case, chip fabrication.

55:17Demetri Kofinas:I also want to talk a little bit about what the Trump administration's China policy is. I did a dinner in DC for our genius community some months ago, and the joke ended up being that the dinner was supposed to be about the Trump administration's China policy. And at the time, and I still am not clear entirely on what that policy is, And it almost feels like we've gone after our allies and hit them heavy with tariffs. And in part because those are easy pickings because they have nowhere to go. They're kind of in the cage. They're stuck with us. We have a lot more leverage over them. And so I'm curious to understand what exactly the policy is with China.

55:49Demetri Kofinas:And then maybe we'll have a chance also to talk about what this means for treasuries, what this means for global safe assets. And also last question, maybe to talk about the Fed and what is going on there exactly. I know that's something that you've covered and talked about. For anyone new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want access to the second hour of today's conversation with Adam, head over to hiddenforces.io slash subscribe and sign up to one of our three content tiers.

56:22Demetri Kofinas:All subscribers get access to our premium feed, which you can use to listen to the rest of today's conversation on your mobile device using your favorite podcast app, just like you're listening to this episode right now. Adam, stick around. We're going to move the rest of our conversation onto the premium feed. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io slash subscribe and join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolaou.

57:00Demetri Kofinas:For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at Kofinas, and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time.