Noah Smith on Econ 102 - Foreign Policy, Industrial Policy, + Reflections on Biden Thus Far

He's basically trying to stomp on one end of the tech sector so that engineers squirt out the other end into manufacturing, which is what he really wants. Because he's a boomer and he thinks that only like manufacturing is real stuff. He was trying to do that. And I came out with an article that said that, which is still the most read blog post on my blog, on my new blog. It was called, Why is China Smashing Its Tech Industry? And a number of China analysts raged at me over this article and said, you don't know what you're talking about. You're not a China analyst. You're full of crap. Several days later, the Chinese government came out with a policy statement that said the reason we're doing this is so that people will do manufacturing instead. And I said, how about now?

Today we're sharing the debut episode of a new podcast from Turpentine that I think will be of particular interest to Upstream listeners. Econ 102 is where economists Noah Smith and I make sense of what's happening in news, tech, business, and beyond through the lens of economics. Noah leads us into deeper analysis of the topics, key themes that he covers in his Substack, Noah Pinion. Without further ado, here's Noah. Welcome to the first podcast that we're jointly doing together. Really excited about this.

I'm very excited.

So Noah, I want to cover some of your most recent pieces. One of yours is on the debt ceiling, and you start the piece by talking about how you've been more optimistic politically recently, or more optimistic about US politics. And so I thought that could be a good opportunity to kind of do a little bit of an overview of Biden's first term, things we're excited about, things we're not excited about. And so So obviously there are things like Ukraine, things like inflation, sort of the Afghanistan incident, sort of his approach to China. I'm curious what you think are the issues that define the Biden presidency to date. And let's talk about where you're optimistic and where less so.

Right. Well, so my optimism really began before Biden. It began during COVID because we did a lot of effective COVID relief and we did the vaccines, and that was extremely effective. That's when I started to think maybe this whole narrative about the US as this declining empire that you see passed around, including, you know, among some people I hang out with, maybe that narrative was not quite right. Maybe the US still has some strength in it because, and I think that's important to emphasize because I wouldn't equate my optimism with Biden. I know that that's an urge that partisan people have. You know, my guy is in the White House, so now everything must be going great. But no, my optimism began under Trump, actually. But that said, it did not— Biden's term in office so far has mostly made me think that my optimism was not just a fluke, and it wasn't just stuff that we did under the duress of COVID and that there really may be glimmers of a more effective bipartisan approach going forward. I think if you want to look at the good things that Biden has done, I think the most important thing Biden has done that I think people don't even realize is the most important yet is switching our economic policy paradigm. And we'd had kind of this policy paradigm inherited from the Reagan years and the Clinton years that I think was very shopworn and it was starting to really show a lot of weaknesses. And I can go into that later, but I think Biden was the first president. So Trump came along and said, we're going to change everything. But then in terms of economics, but didn't really change a lot. You know, tariffs didn't do a lot. His urging of companies to build factories in America didn't really accomplish much. But then Biden took some of those basic ideas and added a lot of ideas and added a bunch of, you know, politically progressive stuff too. He put his progressive spin on it. But basically Biden took the kind of ideas that Trump was spouting and started to operationalize them into reality. And we see that with the CHIPS Act, you know, and which is the first big industrial policy act we've done in a very long time. We've seen this with, well, infrastructure bill, also the so-called Inflation Reduction Act, which is really just another industrial policy act about building green energy. You know, CHIPS is about semiconductors. And so you've seen those bills and those together constitute sort of a shift toward industrial policy. As the new economic thing that the United States does. And that makes me optimistic because I've been thinking we need that kind of shift for a long time, but also because it appears to be bipartisan. And the CHIPS Act was a bipartisan bill. The infrastructure bill was bipartisan. The IRA was not, but that may have been a result of just posturing as much as anything. The Republicans don't seem too upset about the IRA. And so So I think that that's the most important thing that we've seen from Biden. I think the second most important thing is on foreign policy. We've seen Biden take a very strong stand against both China and Russia. And that was something, you know, Trump had a lot of rhetoric against China, but ultimately was fairly conciliatory on things like export controls. You know, he reversed himself on export controls and made a lot of noise, but didn't do much. And so Biden has really brought down the hammer in terms of substance. The export controls that Biden has done on China are just, and, you know, absolutely, there's something I thought we would only do in the event of a war, right? I'm astonished that he did this bold of a thing. And it really goes with the whole industrial policy. It dovetails with the rest of his agenda. So he's been very tough and he's made a much bolder commitment to defend Taiwan. On Russia, of course, he's supported Ukraine, which Trump was sort of opposed to doing that. So I think that in terms of standing up to these other powers, these other great powers in the world, and in terms of industrial policy, I would say Biden has been a more transformative president than I expected. And it has not appeared to piss off the Republicans. Obama got a lot of stuff done. Obamacare was a big deal. The stimulus was a big deal. But it pissed off the Republicans. That you know repeal and replace Obamacare became this rallying cry for Republicans for years. I don't hear anyone saying repeal and replace the Inflation Reduction Act. I just don't hear it, and or the CHIPS Act, you know, or or something like that. And so so I think with the one exception of some Republicans, you know, one faction of Republicans who wants to withdraw support from Ukraine, I think that Biden has managed to do these transformative things in a way that so far has not. Has not halted the slow creep of bipartisanship back into our politics. And that is very encouraging. So there's where I'm optimistic. I also thought getting out of Afghanistan, although, you know, it was very bad optics, was a good thing. Having a forever war for no point, you know, we can't keep our army in Afghanistan forever as babysitters. Afghanistan has to eventually decide whether or not it wants to modernize. In terms of negative things, I think the cost for Biden being this transformative was that he had to put a progressive spin on a lot of this. And that includes support for unions, it includes support for minority-owned businesses, it even included some explicit instances of racial discrimination that the court smacked down. But it includes all sorts of progressive causes that get woven into these policies. And a lot of times, I think it can just get too much because I think progressives are still wedded to the approach that they developed from the 1970s and 1980s, which was a very obstructionist approach. Because in the 1970s and 1980s, when conservatives were really in the ascendant politically, I think that progressives who then called themselves liberals, I'm that old, you know, used to block things. You know, they, they, they would block development because they were afraid it would, you know, steamroll and disrupt minority communities, especially Black communities. They would block, or, or the environment, you know, they would block industry because they were worried that it would just destroy the environment in various ways instead of forcing industry to sort of clean itself up and manufacture in a more green fashion as, say, Germany or Japan did, they would just block it, use NEPA or some regulations to block it. And I think that approach has become woven into the progressive sort of package that the Biden administration has embraced. And Ezra Klein famously called this the everything bagel of politics.

Right.

And of course, in response to him complaining about the everything bagel, you saw a number of people closely affiliated with the Biden administration tweeting out pictures of Everything bagels, and so it's a problem. You know, because the the the the lawyers who are very used to litigating NEPA stuff and who you know want sort of instinctively want to preserve the courts as the place where this is all adjudicated and are very close with progressives have convinced a lot of these industrial policy people on the left that you need to do industrial policy while also preserving our very lawsuit-centric. Court-centric, you know, sort of method of regulating development. And I just think that in particular is really not going to work. And Biden administration has not really challenged that yet. We've seen very tepid moves on permitting reform, and they're just starting to realize now that if we don't do permitting reform, we won't actually be able to build the green energy because we won't be able to lay the power lines that transmit the green energy to where it needs to go. And so I think that They're just now starting to realize that the everything bagel is not quite working, and the first thing they need to throw under the bus is this cumbersome judicial-centric process of environmental review. So that would be a quick summary of how I'm seeing the Biden administration.

So the wins for— to summarize, recap, the W's for Biden are the sort of approach to foreign policy and industrial policy, and the L's are sort of, you know, creeping or overextended or misplaced progressivism.

Right. And I actually, there was one thing I forgot. I think although I had, I had long been a supporter of student debt relief, student debt cancellation, especially for the generation that graduated into the Great Recession and got a bit screwed there, I flipped and I'm now against it. First because of inflation, because it is inflationary. And, and second, just because it's not, you know, it's targeted toward the upper middle class really. And it's not, it's just not a priority. And we have a lot of other things we need to be spending on, like building out a bunch of green energy or even doing, you know, welfare targeted at the people who really need it, like cash benefits for poor people and kids and whatnot. I just think that I've flipped on student debt relief. I liked it during the recovery from the Great Recession, but now I'm Now, I hope they cancel the plan, actually.

But they're unlikely to because it's so politically important.

Well, the Supreme Court might cancel it.

Oh, got it. Got it. It's interesting. So yeah, in some ways there were some continuations, I mean, the foreign policy side or sort of fulfillment of the things that Trump promised, but maybe didn't deliver on. In other ways, certainly culturally, it's just been this massive drop in kind of the temperature of our political discourse, and things just feel a lot saner. Not to say that they're sane, but in a post-Trump era, you could say all things about Elon all day long. A world in which every day we're talking about Elon as opposed to every day we're talking about Trump is still a saner world.

That is a saner world. And of course, I have to put an asterisk by that because I am worried that Trump will come back worse than ever. It's like one of those movies where you think the bad guy's dead and then he just comes up and he's like, no, He's still alive and you have to fight him again. And he's even worse this time. Or, you know, one of those video games where it's like, this is not my final form.

Yeah.

And it's like, don't want to jinx it.

Totally. And it's, it's one of those things where he could die next year, he could die in like 20 years. Like we, you know, are— it's, we don't know how much longer he'll be in politics. Same with Biden too, of course. But what do you think are really the chances, like, of Trump returning? Or how do you even evaluate like, what is going to play, what needs to play out over the next year? that will help determine either way where Trump has a chance. How are you looking at it?

Well, you know, here I'm not really a specialist, but I see Trump's advantage is the Republican primary system, which the Republican primary system, unlike the Democratic primary system, is a first-past-the-post system. So if you get 30% and everyone else gets 29%, you win all of the delegates from a state. And so you don't have to actually be more popular than any— than everyone else combined, as you do with Democrats, to win. All you have to do is be, you know, the— have a plurality. And so that's how— that's actually how Trump won the first time. And that's how Mitt Romney won as well. And that's the problem because Trump has this very solid fired-up base that I think does not constitute a majority of the Republican Party, but constitutes such an unshakable hard block that you'll have to get someone else very charismatic, you know, in order to beat him. It can't just be anyone but Trump. because the Republican primary system just doesn't work that way. I think, and I'm not sure that Ron DeSantis can do it, honestly. Like, you know, he's short, he's got a squeaky voice. I don't know. I would, you know, if I were Republicans, then I guess I would probably bet on Glenn Youngkin because he's optimistic in the way that Ronald Reagan was. Whereas DeSantis is sort of, He's fiery and consumed with culture war stuff, but he doesn't have that optimism of like, you know, it's morning in America and maybe we're not ready for it yet. Maybe we're just, you know, it's been too few years since the pandemic and the Trump years and we're just still in our 1970s. Because I really do think we are in the 1970s. Come again. And maybe by 2028, we would be ready for a conservative like Youngkin to come in and give us this optimistic Reagan-esque conservatism. And I just don't think the nation is necessarily there yet. If you ask Republicans what their main issues are, the word woke appears in like a majority of them. And which that means people are pretty online. Online has taken over. And so, so I don't think we're, we're to the Reagan part yet.

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You know, I think it's, it's interesting because I thought wokeness was and is a, you know, a good word for a certain collection of, of social justice movements on the progressive side. I thought that was a good and useful word. And now Republicans, of course, have co-opted it and they're just using woke to mean anything that they don't like, including things that we thought we had settled back in the '60s and '70s. You know, just, I don't know, teaching Black history in history class. I learned all that stuff and now it's woke. I don't know. Like, I feel like it's become this catch-all term and maybe we'll get tired of it in a couple of years. Who knows? You know?

Yeah. The, um, Going back to foreign policy, so is your ideal foreign policy or what you would recommend pretty similar to what Biden has done right now? Or where would you differ if at all or advise?

So Biden has done a much better job on foreign policy, certainly a much better job than Trump, Obama, or Bush, which were— I mean, Obama was the least bad of those, but he was bad. You know, he let Russia stomp all over Crimea, he engaged in some, some inadvisable stuff and he ignored the threat of China, basically. And, and somehow Bush and Trump were worse because Trump just started fights with all of our allies, whereas Bush started a pointless war. And so, you know, we haven't really had good foreign policy people since.

But is it fair to note that Trump is the only one who didn't have a war, or is that a red herring?

No, I mean, like, you know, It is good not to have a war. It is bad to invite a world of war. You know, Trump weakened America's alliances in ways that I think made a war over Taiwan more likely and that may have made the Ukraine invasion more likely as well. I think, you know, it's not as simple as like pro-war, anti-war, although some people would have you believe that.

Yeah.

It's more like pro-stability or pro-chaos.

Yeah.

So we can either do the chaos or invite the chaos. And Bush did the chaos and Obama and Trump more invited the chaos.

Hmm. Yep. That makes sense. And so define what Biden is doing exactly that is making it, you know, a positive impact.

What Biden is doing that's better is he's recognizing, although he hasn't gotten 100% of the way there, but he's gotten some of the way there. He's recognizing that the 1990s are well and truly over, that the American You know, America no longer is the de facto leader of this community of nations that can just isolate rogue states whenever it wants. You know, just because the Americans say that and then everybody just jumps when the Americans say. He's starting to understand the value and importance of alliances. And I would say the most important alliance that he's understanding the value of, which has flown completely under the radar, is Japan. People think Japan is pacifist. It is not. Even before it, it quote unquote reinterpreted its pacifist constitution. A few, you know, a few years ago. Even before that, it was not really pacifist, but now it has reinterpreted the constitution to basically allow a normal military, and they're engaging in a military buildup. And Japan is very, you know, they, they want to oppose China's economic hegemony and a Chinese conquest of Taiwan. And Kishida, the current Japanese prime minister, is at the forefront of both those efforts. And Biden has been collaborating with them very closely. And so this revitalization of the alliance with Japan has been very important. The sort of reinvigoration of NATO, which Trump actually wanted to withdraw from, and which Obama basically ignored, and which George Bush attempted to kind of co-opt and abuse a little bit. You know, Biden has simply reinvigorated our Cold War stance toward NATO and said, we're going to just defend Europe from Russian conquest. That's the point of NATO. That's what we're going to do. And, you know, so I think that in terms of alliances, Biden has just focused more on our allies, realized that we can't go it alone like we did in the '90s. In all of his 3 predecessors, Obama, Trump, and Bush, all still had the go-it-alone mentality long past the point where it worked. And Biden is no longer going alone. And that's good, but he's not all the way there. You know, there remains to be, you know, there remains a lot to do in that direction and we're just getting started.

Yeah. I want to transition to, well, actually going forward, whether Biden or Trump or whoever wins next, like, what do you think, what do you expect to be the main concerns of foreign policy of the next cycle? Like looking forward.

Well, I mean, it's China. That's, yeah. That, you know, Russia is scary and aggressive, but ultimately it's a sideshow to the real contest of will China control Asia?

Right.

And thus control the entire global economy. And that's really the question that is going on now. The United States is in a disadvantageous position relative to China in many ways. We're not in Asia directly. Our territory is not there. We, We're much smaller than China. We are used to being bigger than our opponents, or at least the same size as with the Soviet Union. We are not used to being one quarter the size of an opponent. China has, you know, the manufacturing cluster. China is like the workshop of the world right now. And while I think that will shift eventually and manufacturing will flow out to other regions, I think that that will for the next 10 to 15 years. China will still have that advantage in a big way.

Yep. The, and say more about the ideal containment strategy. Like what would you be doing to make sure that, you know, um, we don't have an outcome we don't want to see in terms of China controlling Asia?

Right. So I think that the export controls are a good idea.

Yep.

Um, they will not stop China from getting advanced semiconductors, but they will slow it down. And that is, you know, that's the best we can do is to slow them down. And then we're— friendshoring is very important. So currently we've talked about it and we've made some sort of moves behind the scenes to encourage it, but we need to have more explicit incentives for friendshoring, and that should include treaties. I know everyone thinks free trade agreements are bad, but— and sometimes they are, but I think that we need treaties that encourage friendshoring to India, to Vietnam, to Indonesia. And also to the rich countries of Asia, to Japan and Korea, you know, that help shore up the economies of these places, but also allow us to get production out of China as fast as we can. Because to get some production will come back to America, and we should encourage that, of course. That's reshoring, right? Or nearshoring, I guess, Canada and Mexico. But then, but the manufacturing center of the world is Asia. That's where the supply chains are. That's where all the people are. That's where the growth markets all are. And so that's— it will be very difficult to make North America replace Asia as manufacturing center of the world. And frankly, it won't happen for 50 years or maybe probably ever because Asia is where the people are. And so we've got to move supply chains out of China to what they call Alt-Asia. I think Mike Bird of The Economist coined this term and I really like it. It just means Asia that is not China. And so that's because that's where the manufacturing has to go. And so I think friendshoring, we've got to move in that direction. The other thing we need to do is just sort of what Biden is trying to do, and we just need to continue to try to do it, which is ramp up military cooperation with our allies, especially with Japan and India, but also see if we can cooperate with some, maybe some new allies like Vietnam. I think Vietnam could be an important ally for us. And of course, we have history. There, which somewhat stands in the way. And some people have human rights concerns because Vietnam is not a democratic country. But I think we need to kind of put that aside for now. We don't have the luxury of caring about that right now. So we should ally with Vietnam.

Yeah. And say more about how you think about China, right? Like to take 2 sort of very different people, you know, Peter Zeihan is famously very bearish on China, thinks it's going to implode for any number of reasons at some point in the next decade or two, if not sooner, because whether it's poor demographics or whether it's they import a large percentage of their oil and they're using routes that the US protects, and if US retreats, they're much more vulnerable, or their credit crisis, or just all sorts of interlocking crises, any one of which could be a very significant blow to China's position. I know you're not as bearish, so I'm curious to discover where exactly you disagree. And then on the other hand, someone like Balaji is far more bullish because of their technological capacity and their— he thinks just the level of talent is very high. So where do you disagree with both of these people perhaps, or such? Where do you stand?

So I think China is so big, people don't understand how big China is. China is as much bigger than us as we are bigger than Germany. Imagine, you know, Germany trying to stand against us. Like, they could be more technologically advanced than us. They could be more economically efficient. They could, whatever, they could be better at fighting on the battlefield. In fact, I'd argue that all those things were true at some time. And we just rolled right over them. No contest because they're small. And, you know, Japan too, you know, even had Japan been as technologically you know, advanced and efficient as us at the time, there's no way they could have stood against us because we're bigger. As long as we sort of halfway get our shit together, so to speak, we can roll over smaller countries. We don't have to be tippy-top efficiency. But China is in the same place relative to us. They are 4 times our size.

Wow.

And you can have all of these pessimistic things be absolutely true and still have China be by far the most formidable opponent that we've ever faced. Right. You know, if China is only one quarter as economically efficient as us, that means that their total economic power is the same. Right. If they're, if they have one quarter our GDP, that means they have the same total GDP as us. And total GDP is, you know, and that's before you consider other advantages like we're having trouble making ammunition. China does not.

Right.

We're having trouble making vehicles and missiles and whatnot. China does not. So, you know, they're institutionally, they're set up to be able to manufacture huge volumes of things without as much regard for procedure and NEPA and, or just the environment in general, or, you know, land rights or anything. They have advantages there. So, so I think Zeyhan is directionally correct, which is a word that people in the VC space use when they mean Uh, he's got a point, but he's exaggerating massively, which is to say that China is not going to collapse from these things. Maybe it'll— a collapse would require political infighting, people overthrowing Xi Jinping or whoever is in power. Collapses are political things. Um, in terms of the economy, China won't do economically as well as us on a per capita basis, but they will not collapse. It's not going to look like the Soviet Union. And honestly, if the Soviet Union had had 4 times our population, their economy would have also been bigger than us, even with their crappy system that they had. Right? So China could be as bad as the Soviet Union and still have as big an economy as ours. Like sheer size.

Do we need to get to a billion Americans as a foreign policy measure?

Um, well, that's a, that's a radical take. I'll settle for 500 million.

Okay.

Um, but yes, yes, uh, obviously Increasing our population is important because not just because, you know, that gives us more total GDP, which gives us more power, although that is true, but also because it gives us more of what they call an agglomeration effect. So companies want to go where the market is. And the reason they all— the reason America has been a leader in foreign direct investment is because everyone wants to sell to the US market.

Yeah.

You know, so we need to keep that market big because Asia, now that Asia is no longer poor, you know, then that's the biggest market now. As a whole. And so, and, um, so we want to keep the American market big so that technology industries, high-tech cutting-edge industries, including manufacturing and software and whatever, want to locate all their factories and offices here or continue to want to locate them here. So that's the other advantage of population besides just pure numbers.

Yeah. You wrote a piece about real estate in China. Why don't you unpack that piece? That it's a—

Oh yeah. So I think it's interesting because when we when we talk about China and we think about China, it's always in terms of their exports, right? It's oh China's making all the electric cars. Can China make semiconductors? China makes your iPhone blah blah blah. It's always in terms of that, which of course that is important. That's important to any economy and to China's. But when you look at what's actually the biggest driver of the Chinese economy, it's real estate. It's um. It is construction, property development, the sale of land, and the financing of real estate transactions. Those are the real estate-related industries. And together, those make up like, you know, over a quarter of China's economy, maybe, you know, 29% or 28% or somewhere around there of China's entire economy. That's more than exporting industries make up. And it's this massive source of employment. It's, you know, it's, it's, it has been the biggest driver, just this giant build-out of Chinese real estate. And if you look at the pictures, it's just incredible what China has built, the infrastructure, the, the soaring forests of apartment towers, et cetera, et cetera. And, but yet the importance of real estate goes far beyond just the economy and jobs in China. It's also the most important financial asset. So you can see that almost all wealth in China is in real estate. Whereas in America, it's pretty evenly balanced between real estate, stocks, and bonds, or in Japan or in other rich countries. Real estate might be somewhere around a third of wealth. In China, it's like 90%. It's most of the wealth. So whether you're talking about regular households with their retirement account nest egg, just their normal middle-class nest egg, or whether you're talking about rich people You know, with their, with their massive fortunes in China, almost all of those fortunes are in land and almost all of those nest eggs are in land. And when you have a bit, but if you look at the prices people are paying, it's, it's pretty insane, the prices they've been paying for this land because they're using it as an investment property, investment vehicle, you know, a speculative vehicle instead of like a place to really live. or a place that you really need to put an office, or— but especially residential. So, um, China has reached developed country levels of floor space per person. Chinese people have plenty of places to live, and there's all these people who own second homes, third homes, whatnot, or just big commercial properties or plots of land or, or a building or whatever. And that's their— that's their fortune. And yet a lot of it's not going to be used. A lot of it is waste. And if you look at Michael Pettis, the economist, He's written a lot about how a lot of this investment that China has done, especially over the last 15 years, has been pretty wasteful. And so what that means is that if and when real estate slows, and it has already slowed, there will be a reckoning in terms of the distributional consequences. And so that's the second. So real estate is an important driver of China's economy. And it is a very important, and it's the main source of wealth. In the country. But in addition to all of those, it is the main source of local government revenue. So the, the third use of real estate in China, the third way it's important to the economy, is as a source of local government revenue. So when local governments in China, um, you know, provide any public services or build infrastructure or, uh, you know, education or anything, or do industrial policies, They needed to finance that with land sales, with revenue, because China does not have property tax.

Yeah.

And so property tax is the way local government is traditionally funded. China doesn't have it for historical reasons and for political reasons. And so they use land sales to fund local government. Now that the real estate industry in China is kind of going bust and land sales are tapering off, local governments are in big trouble and they're going to need to either switch to property tax Or the central government is going to have to step up, raise taxes a heck of a lot, and start funding all the local governments in the country, which is sort of like what Japan did. But they're going to have to figure out something because the model where local governments all fund everything on land sales is at a dead end.

Yeah. Let's talk about— let's return back to industrial policy. You've talked about China's industrial policy. Why don't you compare and contrast China's and the US and what the US can learn from China or avoid from China?

Well, that's a you know a huge topic obviously. But I would say that China's industrial policy has really shifted. There were two eras, and in the first era, which was under Deng Xiaoping, Jiang Zemin, and you know most of Hu Jintao, industrial policy was mostly done at the local level. So you'd have local provincial leaders and and city leaders even were tasked with. Raising growth, and they could do that basically any way they wanted. And, um, there was also a bit of corruption where they made money from the real estate, which gave them an added incentive. But basically they had this incentive to boost local growth, so they went out and lured industries in. And they, you know, the, the people from Guangzhou would go over to America and say, hey, would you like to manufacture here? You know, and then, and then lure some manufacturing enterprise there. And of course they'd have to build infrastructure and provide housing And water and all those things that you need to do to attract industry. And so that was local industrial policy. But, and you'd have some, you know, city try to be like the place where phones are made or the place where this car part is made or something. And you'd see them focus on these particular industries. Now, starting under Hu Jintao, Hu Jintao sort of drew up some plans to change this to a more nationally focused industrial policy. But then Xi Jinping really did those plans and made much more plans, starting with the Made in China 2025 initiative, which largely failed. It was this basically said, we're going to give subsidies at the national level of, you know, what we would call the federal level in America. But then at the central government level, we're going to give all these subsidies to companies in favored industries, especially semiconductors, electric cars, robotics, wide-body aircraft and whatnot. This failed, as in the companies that got those subsidies ended up performing worse than the companies than similar companies that didn't get the subsidies. So the subsidies, it actually backfired in a pretty big way. And so, you know, but then they doubled down. So now China is taking another pass at this national industrial policy. And who knows whether this time they'll get it right. We do have some countries in history who did get that right. South Korea actually managed to do that successfully. So there may be a model to emulate there. The United States is responding in kind to some degree with the IRA and the CHIPS Act. So the CHIPS Act basically, you know, it does throw a bunch of money at semiconductor companies. It does a lot more than that, but that's one thing it does. And that is reminiscent of what China has done. And so you can make an argument that says, if they do it, we need to do it because even if it's not the most economically efficient thing, there's no way our semiconductor companies can survive in the face of that kind of competition unless they also have subsidies, even if all these subsidies are just ultimately hurting the industry and hurting the market. We can't let our companies be proportionally hurt more. You can make that competitive argument, but it is something— it looks similar to what China's doing, but on a somewhat smaller scale and probably going to be less wasteful for that reason. And the IRA is similar. You see China subsidizing green technologies and electric cars and things. We're trying to do the same. And in China, it's really working. And in America, it's not working yet.

Yeah.

EVs are doing okay in America, but, but power infrastructure is not because of NEPA and because of some other things too, but especially because environmental reviews take years and years and years and years and years to complete. And you can sue people at any time and stop development, which raises the cost of development by a factor of 2 to 3x. And so then, you know, because you're, you're in these delays for years and so that's We're so far having trouble executing the same style of industrial policy as China because when we pay money for things, things don't get done like they do in China. In China, when you write a check for something, that check turns into things. In America, when you write a check for something, that's only the beginning of a long and laborious process of turning it into real things. And so I think that's sort of the broad sweep of what's going on here and what the industrial policy looks like now, I would say. You, um, yeah, so, so China is lobbing large amounts of money at things which may, which will be wasteful, uh, and which may in the end be effective or ineffective. We don't know yet. America is largely, is lobbing moderate amounts of money at things, uh, in a way that, um, is having trouble, may not even get to the, the chance to be wasteful because it's getting blocked by our, uh, kludgy system that we've blocked that we've set up to basically block development. And so that's sort of the state of play here. But I think that industrial policy might make America's institutions better and China's worse.

Hmm.

Because in China, you had these local governments that were all sort of competing with each other and all sort of trying out a bunch of different experiments. And that, you know, let a million flowers bloom. And now you've got the central government has taken over and is just Xi Jinping and his couple of buddies that you always see with him are deciding who gets all the money. And they're doing other things like Xi Jinping tried to stomp on the IT industry so that engineers would go into manufacturing instead.

Interesting. I didn't realize.

Remember that back in 2021, he started like, they disappeared Jack Ma for like weeks. Yep.

But I didn't realize, I didn't make the connection with the manufacturing.

Oh yeah, yeah. So actually this was kind of my big win in terms of China forecasting. I can tell you the story. Basically, Xi Jinping started cracking down on tech companies. And at first it was like, oh, it's just Jack Ma because they thought he was criticizing the government. But even the tech leaders like Pony Ma of Tencent or all the, whoever the Didi guys are, they just suck up to the government all day. They're just complete government creatures and their companies got cracked down on too. So I thought, okay, what's going on? I thought back to something that my friend Dan Wong had told me, my favorite China analyst. Said that China, China's leaders don't consider IT to be real innovation. They consider it window dressing and commercial, you know, sort of like entertainment bullshit. And they don't consider IT to be real innovation. And so I said, okay, well, so what's going on here is that Xi is trying to stomp on the IT sector so that, like stomping on the one end of a tube of toothpaste, toothpaste squirts out the other end. He's basically trying to stomp on one end of the tech sector so that engineers squirt out The other end into manufacturing, which is what he really wants because he's a boomer and he thinks that only like manufacturing is real stuff. He was trying to do that, and I came out with an article that said that, which is still the most read blog post on my blog, on my new blog. It was called Why Is China Smashing Its Tech Industry? And a number of China analysts raged at me over this article and said, "You don't know what you're talking about. You're not a China analyst. You're full of crap." Several days later, the Chinese government came out with a. Policy statement that said the reason we're doing this is so that people will do manufacturing instead. And I said, "How about now?" So then, so that was a a win for me because I could you know I may not know all the details of of China's decision making and and policy apparatus, but I do know a boomer when I see one. And Xi Jinping is a boomer.

Well, in the U.S., I mean. You know, Peter Thiel said people have, you know, gone to bits instead of atoms because atoms have, you know, we've outlawed building atoms or made it so hard to do so. But that's not been the case in China. Why haven't they had more? Is it just lower status or less interesting to a new generation? Or why do you think that was the case, that not enough people were in manufacturing, but they don't have the same challenges that we do?

Oh, why? I mean, I think that China had lots of manufacturing and was starting to develop a robust IT sector located mostly centered on like Shenzhen. And then Tencent was a big company, Alibaba, huge company, obviously, Didi, Uber clone, whatever, but better because it's in China. And just a whole bunch of IT innovation, really cutthroat, really, there are a lot of unethical business practices. They're much more competitive than whatever Google or Apple would do to each other. But they were building this giant sort of IT empire. And because of the Great Firewall, they couldn't really get out of the country.

Right.

So it was just the Chinese market. So, but if you were a smart young person in China, you dreamed of going into IT instead of going into manufacturing because manufacturing is annoying. You've got to go to nasty factory floors. You've got, you know, it's, it scales less quickly. In IT, you had this big dream of like blitzscaling with very small amounts of capital. I mean, you know, you're a software VC yourself.

Yeah.

So that dream, China had that dream too. And Xi Jinping said, no, hold up. No, our smart people can't be chasing the dream of winner-take-all markets in software. We're not here to build the next Airbnb. We are here to make missiles and weapons, and we are here to make tangible things that I can pull out in a parade and lead to the glory of China and other blah, blah, blah. I mean, it's very like 1960s idea.

Chinese dynamism.

Chinese dynamism, yes. The fact that I'm making fun of Xi for this does not mean that it's wrong for us.

Right.

Because we're on the opposite side of this, right? In America, what we've got too much is just finance. Too many of our smart people, you know, the problem isn't even our smart people going into software, it's our smart people going into hedge funds and consulting and private equity and, you know, business services and blah, blah, blah. Our smart people going to the sort of the East Coast paper belt. Or just becoming lawyers, I guess, uh, you know, instead of, instead of going into, um, stuff that could be exported. America— so I, I won't say that manufacturing is the only— it's not the only thing that can be exported. You can export software, and we do.

Yep.

Um, you can export many kinds of services, and we do. But we, we have such a big economy that a lot of, um, a lot of people just focus on You know, focus on doing things where they sell things to other Americans, right? If you're on the, if you're like a Harvard grad on the East Coast, you could try to, you know, make a company that makes chips that are better than whatever Taiwan is making right now. You could do that, right? Or you could go, you know, go into consulting or go into private equity or whatever, and you can make a bunch of money just selling American stuff to Americans.

Yeah.

And so I think, but I don't want to stomp on the private equity industry. You know, I don't want to say, okay, we're just going to cancel private equity so that everyone leaves private equity. I want to simply shift our incentives. I want to incentivize the exportable stuff so that people shift out of private equity on their own instead of being terrorized by the government like Xi Jinping tried to do. It was a ham-handed thing and they reversed it fairly quickly. After maybe 6 months or 9 months or something, they were, they reversed it. And of course, all the entrepreneurs in China are still cowering in fear because they're like, oh God, you know, if I, if I stick my head up, like maybe they'll re-reverse themselves back to crush mode next week.

Yeah.

And so it's, it was a bad way of executing this, but the, the idea that a nation's industrial mix matters is still important. It's just the way they went about it was, was dumb.

Yeah. In addition to the kind of geopolitical risks that we saw perhaps during COVID of not being, you know, not having as many internal capabilities on the manufacturing side, do you think the argument that just jobs for, you know, the manufacturing industry is an important reason to bring back or sort of build internally, or are you less sympathetic? Like, what do all the men who had all the jobs who went away, what do those people do?

Well, that so so no. The answer is no. I don't. I think that labor-intensive manufacturing is something the United States has no advantage in, and to try to you know bring back the the era where a million bazillion people worked in factories is like trying to just give people spoons to dig ditches. It's not that's not coming back, and it would be inefficient and uncompetitive if we were to try to do manufacturing in that way with the cost structure that we have here. In America, it's not happening. Yeah, we in terms of providing mass employment, what provides mass employment is just service industries. But that doesn't mean manufacturing isn't important as an industry. It's it's important for a different reason. It's important because when you get export revenue, when you sell things to other countries, and manufacturing is the easiest thing to export, it's the easiest thing to sell. When you get Export revenue, it circulates around the domestic economy in what's known as a multiplier effect, a local multiplier. So I get $10 from, you know, from selling something to Austria, and then I take, take that $10 and I spend it on a dentist appointment or a haircut or food at a restaurant or whatever, and that money gets passed around. Whereas if you, you know, in terms of money, in terms of things you do to sell to other people near you, you don't have that much of a multiplier effect.

Yeah.

Because the money is just being handed from one American to the other, but money coming in from outside America actually gets spent more, and that's called a local multiplier effect. So exports are very important in this sense. Also, exports on the world market, there's a sort of a discipline there. Where in order to sell in the world market, you need to be productive. You need to have good stuff, right? Because you're not just competing against the people next door, you're also competing against the people from Europe and Japan and Korea and Taiwan and China and whoever else is trying to make stuff. You're competing on the world stage, and that's the biggest stage. So American productivity, I think, suffers from the fact that we don't get out there and compete in the world stage very much. Because people are trying to do this domestic selling. So the reason we want to revitalize manufacturing is for technology and for export, not for mass employment.

That makes sense. But going back to mass employment, you mentioned services. What are men who are non-college educated going to do? Like what services?

Oh, I mean, well, the obvious thing is construction. If we can get people building more stuff, that construction is a classic job. You know, my dad was even a construction worker for a little while. So that's, that's the obvious answer, but there's, there's tons of stuff you can do. There's tons of, you know, office work around, um, uh, you know, you don't even have to go into like traditionally female-dominated employment, like nursing or teaching or whatever. You can do those things and some men do, but the idea that we need to just make men comfortable with being nurses en masse, whatever, maybe, I mean, it wouldn't hurt, but it's, I don't think it's Like that big of a deal. You know, if you look around, most people who are non-college educated have jobs like, you know, installing your smoke alarm or, you know, fixing your boat or selling your boat or selling you a car or, you know, not the giantest fan of car dealerships, but yeah, selling your car or just, or, you know, installing your air conditioner or things like that or stocking warehouses. Right? Or moving around merchandise, working at Best Buy, explaining, you know, you don't have to have a college degree to like explain how like a webcam works at Best Buy. And so, so there's, there's tons of work for non-college people out there. I think we need to make that work better. I think we need to make that those jobs all that I just listed right there. I think we need to make all those things pay better than they do.

Yeah.

And so, you know, I'm not going to ingratiate myself to a lot of people in the business world by saying that I'm pro-union for those industries. those local industries, I'm pro-union, um, whereas for export industries or government industries, I'm not as pro-union. Um, but then, but, but I really do think there's a lot of, of jobs out there, and I'm not, you know, driving a truck. So people thought, oh, AI trucks, that's going to happen. Um, you know, my, my friend with the AI truck company, it, it unfortunately collapsed and, um, and didn't work. And then, but it was, it was You know, one of his competitors, I think, was a complete fraud. And so the AI, the AI, you know, automated truck companies didn't work. And now everyone wants to hire truckers and they're just like massive job employment for like opportunities for truckers.

Yeah.

Who thought— did you really think in 2014, did you really think that in 2023 we'd be sitting here talking about a shortage of human truckers?

No. And on the converse, it seemed like the people, they said the fields that were safe were caring and creative fields. And yet it's the writers who are striking. You know, we would've imagined the truckers striking, not the writers and therapists.

Your creative field is safe. Here comes ChatGPT. I don't know. So like, we don't really, it just shows the sort of the hubris of trying to predict what the occupations of the future will be. And I'm going to write about this soon. You'll have many interesting posts like this to interview me about for this podcast in the future.

Econ 102 is a podcast from Turpentine. The network behind Moment of Zen, In the Arena, The Cognitive Revolution, and more. If you like what you hear, subscribe and leave us a review in the App Store. You can keep up with both of our Substacks for written analysis of the topics we cover in the show at noahopinion.substack.com and eriktorenberg.substack.com. Thanks for listening.