US-Europe Relations, Japan's Yen Strategy, and AI’s Growth Effects w/ Noah Smith

Today on Upstream, we're airing a conversation with economist and writer Noah Smith, where we explore America's withdrawal from Europe, China's evolving global investment strategy, AI's realistic economic impact, and the complexities of measuring economic value. Hello, sir.

Hey, man.

How's it going?

Going all right.

Thanks for doing this on a Sunday, man. I'm going to the American Dynamism Summit in DC on Tuesday.

So, oh, hell yeah.

Yeah.

I want to be invited to the American Dynamism Summit on DC. I couldn't go, but I would like to be invited.

Well, yeah, we'll make sure that that happens.

Tell Catherine to invite me to these things.

Yeah. Yeah, we'll do this. It's my first time, so I'm not sure exactly what they were looking for, but I will, I will definitely do that.

That's awesome though.

Yeah, I'm excited. It'll be a strange time to be in DC, uh, or interesting time to be in DC.

But you might get to see the cherry blossoms.

Yeah. Yeah. That'd be cool.

Speaking of cherry blossoms, I'm headed to Japan.

Oh, cool. When are you going? What brings you there?

The release of my new book called Weeb Economy.

Oh, wow. Yes. Wow. Is it, is it being released this Tuesday?

Yes.

Oh, amazing.

I'm doing several events and, you know, Basically, they don't have traditional book tours unless you're really famous, but then yeah, I just have, you know, various events and just meeting a whole bunch of influencers to try to get them to promote the book. And then of course we'll do traditional cherry blossom picnics and parties and my birthday party and things, but I'll also have another birthday party or 2. So we'll do that.

Perfect. And we could do a birthday karaoke when you get back, perhaps.

Yes.

Party is up.

Have you seen all these people on like Bluesky or whatever calling me like antisocial and claiming like I never leave my room?

No, I'm not on Blue Sky. Why are they saying that?

I don't know. Apparently I'm not on Blue Sky either, but people forward me this. It's like, it's apparently the new knock on me is that like, I'm an antisocial shut-in who never, you know, hangs out with people. So it doesn't know what's going on in the real world.

Oh, that's just a way to denigrate you or something like that.

Yeah. Yeah. They're just, they're looking for something, you know, like they don't know how to, they don't know where the attack surface is. They don't know how to, To get me. And so they're like, oh, he's antisocial. He's just a shut-in. Like, that's crazy. Like, I don't know. I was out till like 2:00 AM last night. Like, I, you know me, how antisocial do you think I am?

You have a good time.

I do have a good time.

The, yeah, no, it's a good sign when you're getting critiques both on the left and the right, or when, you know, you have enemies on both sides. It feels like you're, you know. Doing something.

Well, maybe it's a good sign. It could also be a sign that the left and right are both just sort of going insane and just criticize anyone reasonably.

Yeah, that's true.

You know, like it's, it could be, it might be a good sign for me, but a bad sign for the country.

Yeah. All right.

What are we talking about today, man?

So I want to get into the, your most 2 recent pieces. I thought they were great. So America and Europe, why America betrayed Europe, or just kind of making sense of that relationship? Because some people will say, hey, we, America, this is kind of the right sort of party line if I understand it correctly, that America's been taken advantage of for a long time by Europe, that we've been sort of, you know, they haven't been paying their fair share. We've been subsidizing, even going back to like things like Paris Accords or something. Like there's just been a bunch of agreements where some people think that America's been sort of being taken advantage by Europe. And now finally America's standing up for itself and saying, hey, you gotta, you gotta pay your fair share. And then there's, you know, you, you linked to this European economist who said, hey, why is America betraying sort of the ideals that it set out to since 1776 in terms of leaving, you know, Europe behind, et cetera, and the values that it holds dear. Why don't you give some perspective on sort of the America-Europe relationship and what's happening?

Right. So, you know, I'm not a historian here and there are people who are better at describing the history of this relationship than I am. I would, I would especially talk to Hal Brands. We should probably have him on the podcast. But, but I will say that in, after World War II, both the, both of the superpowers basically wanted European countries to sort of fight for Europe for them. So the, the Soviet Union wanted its, its Warsaw Pact communist allies like Poland to sort of be on the front lines of, of, you know, trying to take, have communism take over Europe and dominate Europe. And America wanted Germany, France, and Britain to sort of be on, be the, the frontline bulwark of, of capitalism, freedom, and democracy and all that stuff in the Cold War. And so, but that meant that we also wanted them in a somewhat subordinate position. So not as much as the Soviets, you know, the Soviets famously, the only countries that the Warsaw Pact ever invaded were Warsaw Pact countries. Um, and so then, but the, but the. You know, the, there was also the saying that NATO was supposed to keep the, keep the Americans in, keep the Russians out and keep the Germans down was the saying that they used. So, you know, we didn't want Germany rearming completely. We wanted them rearming enough to have a defensive force to defend against the USSR, but we didn't want Germany emerging as an independent power after World War II for obvious reasons. Those reasons became less important as time went on. And we got to the point where we would have liked Germany to reemerge as a power. And then, but But by then they had gotten used to not doing that. And so they were like, well, okay, if you're going to make us a dependency, we're going to just be dependent. And now you have to protect us and you have to spend the money and do all this stuff. So, so that was the deal. And then that deal sort of broke down because, uh, a number of reasons. I mean, the, the threat, the direct threat to Europe diminished, you know, the USSR and the Warsaw Pact could have conquered Western Europe if America hadn't been in there and been the bulwark of, of defense. But Putin's Russia cannot. They, you know, it's just not powerful enough. I think they could nuke everybody, you know, they can nuke us, but like they can't, they can't really conquer Western Europe. They're not that powerful. Especially because all the Eastern European countries that used to be the Soviet sort of satellites and proxies and running dogs or whatever you want to call them are now dead set against Russia. They hate Russia. Poland hates Russia. The Baltics hate Russia. Ukraine obviously hates Russia. And so all the, you know, and Romania and Czech Republic and whatever, hey, Russia. Only, only a couple of them still like Russia somewhat, like, like Hungary and, and, you know, maybe Serbia sort of like Russia, but like almost all of them don't like Russia. And what this means is that at the same time, America is now facing a much bigger challenge from China in the Pacific than it did during the Cold War. So during the Cold War, China was a challenge in the early Cold War. But they mostly just had like a bunch of guys with rifles. You know, they could charge the guns, but Korea proved that we could actually defeat that. We would just have lots more bombs and we could defeat the, it was difficult, you know, but we, but we could overcome the Chinese manpower advantage with bombs and planes and lots of artillery and stuff. And so at that point, you know, the Soviet Union was by far the biggest threat, right? And so we, we could focus on Europe as the main sort of theater of defense and the sort of global competition with the USSR. Now China's just mushroomed in power. They've just, they're, they're a bigger manufacturer than us by far now. They just, they're still huge in population terms, but they're, they're still 4 times our size, but they now they're, they can manufacture, outmanufacture us too. So this is a tremendous challenge. The big, in some ways the biggest challenger we've ever faced. The first challenger we faced was really just bigger than us and in, in every way that matters. And so that means we can't really afford to defend Europe anymore, but Europe is so much bigger. They've got East Europe has completely flipped. Poland has flipped and has gotten rich and has industrialized. All the old, almost all the old Warsaw Pact countries have flipped to the side of Western Europe. Germany is reunified. What Europe really has now the power to resist Russia. You know, I mean, Russia's had incredible difficulty conquering Ukraine. Imagine Russia trying to go up also against Poland and Germany and France and England. Just can't do it. Right. So, so there's this very reasonable response. So Elbridge Colby would give you a very reasonable response. of saying, you know, Europe can afford to defend itself and we can't afford to defend Europe and Asia at the same time. So we need to disengage from Europe and let, and focus entirely on Asia and let Europe handle Europe. And that is a reasonable thing to do. But the point is Europe had gotten so used to this role of being sort of in a subordinate role where in exchange for them sort of doing what we say on, on some things, they weren't completely our proxies or satellites, but they are, you know, they're not like our imperial satrapies, right? But they, but they. The Soviet Union bossed its, its, its proxy states around a lot more than we bossed around Europe. Um, but at the same time, they did have a subordinate position in the alliance because we were the big one. Right. And so they, it was very difficult to get out of this position of, of dependency on the U.S. that they had gotten used to being in, in the Cold War. And in some ways, Trump's abandonment of Europe is the only thing that might legitimately shock them into providing for their own defense. At the same time, it, this is, so this is actually, ultimately this is good for Europe because Europe is a, will be a more, Europe actually defending itself will be more effective than relying on America for defense because America can be fickle and, you know, America's weaker than it used to be, et cetera. So that's ultimately good for Europe also because Europe's reindustrialization and defense buildup will require deregulation. It will require the return of the development state and the deemphasis of the welfare state and the regulatory state. So it's all just things that Europe needs, right?

But is it good for us? Do we want Europe to—

This is bad for us. This is help. Europe will be helped in the long run. We will be hurt because we, first of all, we're going to lose markets for our products, not just defense exports. Obviously we're going to lose those because, you know, now no one can trust our weapons because we might just shut them off to make friends with, try to make friends with Russia.

Right.

But then we're going to also, Europe will, will be much more willing to close their markets to us for geopolitical reasons. You know, they kept their markets open to American goods because we were their protector and ally. Now they're not going to. Just one more way in which Trump is going to screw our economy because Europe was a very big, important market for American goods. Now they're going to start closing off. Like Tesla is already kind of fucked just from branding, right? In Europe. And that's probably one reason for its big stock slides is the European situation. But then, but this is going to be all across Europe. We're going to lose access to a lot of European markets and that's bad for us. Now, who, who are we going to go to? Are we going to get China to buy our stuff? Like who, you know, Trump doesn't care about exports. Trump and his people don't understand the benefit, the crucial importance of exports to our country, to our economy. This is going to really hurt us. Exports are incredibly important and they just ignore it. They only think about imports. They do not think about exports.

But how about from a foreign policy perspective, if our allies are stronger, does that help us?

In exchange for not being our ally? I mean, like, our ex-allies are now stronger. It's good for freedom and democracy, right, to have Europe stand up for itself. That's good for global freedom and democracy. But it's bad for us in terms of having someone who will help us out. Like, there's no chance that Europe will help us in Asia anymore. That's absolutely done. You know, and intelligence sharing, like, we're already, they're already, they want to kick us out of Five Eyes or basically get rid of Five Eyes, partly because they just think Tulsi Gabbard is going to give our intelligence. Straight to the Russians, and and you know they're not wrong either. She probably will because America is trying every single thing it can to make friends with Russia, Putin's Russia. We have decided that Europe weak, Russia strong, and we're gonna you know we want to ally with the strong horse because Trump respects not ideology but strength. Trump views Europe as this sort of like you know weak, effeminate, like feminized, like woke. You know, civiliz— civilization that's surrendering itself to like the Muslim immigrants. And, you know, this is how Trump and his people all think. And they, they think Europe is this weak thing. This, you know, Europe's not gonna make it. Russia's strong. Look at how they can send all their guys into war. No one even cares. You know, like they see all these Russians dying in this meat assault and they're like, wow, strong civilization. They can really motivate people. They, you know, Russians don't go to church, but then they, they have an alliance between the government and like the, the Like patriarch, they have an alliance, you know, between the Orthodox Church and the government. So they think, oh, they're Christian country. Yeah. And they're very manly. They have these, these recruitment ads where they do all these pushups. Yeah. Pushups. So it's even very manly. It's like, yeah, Russia, Russia's the manly civilization. Europe's this weak feminized piece of shit. That's how they think. And so they want to switch our, they want to flip our alliance to Russia, especially because they hope that Russia will help us against China or at least remain neutral in our com— What they see, some of them see, as a coming contest with China. That doesn't mean everyone in the Trump administration wants to have a contest with China. Some want to just surrender. But then I think some want to fight. Some want to stand up to China, and they think that Europe wasn't going to really help us much anyway, and Russia may help us, or at least flipping Russia to neutral would be would be good. And so so I think that from the Trump administration's perspective, what they're also doing here is they're Europeanizing the Russia-Europe conflict. They're saying, okay, Europe. You go fight Russia and we'll go worry about other parts of the world. But our economic ties to Europe were substantial and those are going to be hurt by this. And I don't think that they gamed this out in their head when they decided to flip our alliance to Russia.

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That's a good overview. Is there any credence to the idea that we were sort of being taken advantage of in certain ways and now it's, we're standing up for ourselves even at the cost of sort of, you know, some, some economic gains because of the integration, or is that kind of not the right reading?

Well, I mean, okay, so if, if the goal is stopping Russia, we were shouldering a disproportionate amount of the burden. So in that sense, we're being taken advantage of. If our goal is no longer stopping Russia because we think Russia's good, Russia's, you know, we want to suck up to Putin and be on his side. We want them to court them as an ally, or at least, you know, or at least make them neutral. If, if our idea now is that standing up to Russia is not a good idea, it's something we shouldn't do, then, you know, okay, we're no longer being taken advantage of, but we've also given up that goal of standing up to Russia. So like, you know, It's like someone, you know, suppose we go out to dinner with someone and we always pay 75% of the cost and they only pay 25% of the cost. Are we being taken advantage of in a sense? And the alternative is, okay, we stopped going out to dinner. Well, okay. You know, like now we're not no longer being taken advantage of, but also we don't have dinner. And so what we don't get is freedom enough, you know, to support freedom and democracy and, you know, standing up to the Russian empire. But that may happen anyway. And so Europe may be able to just stand up to Russia anyway. And so then, then it may work out okay, but no thanks to us.

Right.

You know, it's hard to say, like, like when you look at the effects of history, of, of geopolitical decisions on the course of history, it's very difficult to, you know, assign them a good or bad. Like ultimately, was Hitler good for the world or bad? Like, well, he killed tens of millions of people, right? He just slaughtered untold millions of people. But at the same time, in the, in Hitler's wake, we had era, you know, decades of global peace because of a reaction to the horrors of World War II. We had the whole idea of universal human rights. We had decolonization. We had all this stuff that like all this, you know, econo, this stable era of economic growth that allowed a lot of poor countries to catch up. We had all these good things coming, you know, as a reaction against Hitler. And so, well, did Hitler actually do bad for the world or good? Well, well, you know, in the direct I think we should agree that he was bad. Maybe some of Joe Rogan's recent podcast guests would disagree with us and think Hitler did good, but I know Hitler did. Hitler was very, very bad for the world in the direct sense. The reaction against Hitler was good. And I think that the reaction against Trump's betrayal of Europe may ultimately end up doing some good.

Yeah. Yeah. The, so going back to this tweet by Anders Lundh. Is the fact that he's, so what's he missing when he says like, why do Americans accept that Trump is abandoning the West, NATO, and Ukraine? Are they asleep or don't they understand that Trump is betraying everything U.S. has stood for since 1776?

Right. So what he doesn't understand is that Americans don't care that much about foreign policy. You know, I think he's from Sweden. I mean, these small European countries care a ton about foreign policy, always have, because if you are, if you're in, if you're, Like for any European country, foreign policy matters a huge amount. You don't have an economy that's even, that you can even tell yourself is viable on its own. Your security cannot be guaranteed on its own. Like Sweden, if Germany or France or Britain or the, you know, or Russia wanted to roll over Sweden, they, they could, right? They could roll over Sweden. And so Sweden has to think about geopolitics. They have to think about alliances and external stuff. Americans don't, like, they don't feel like they do. They, they do, but they don't. America is a less, we're, we're a smaller, less, uh, naturally secure country than we like to think, but we're not, but we're, we're a lot bigger than Sweden and we're a lot more isolated than Sweden geographically. And so this has given us this sort of perpetual idea that we're, you know, our big, beautiful oceans, as Trump puts them, we, we have this idea that they protect us. They don't really, but we sort of had gotten used to thinking they do. And, and so, and, and we're, we're more economically self-sufficient than Sweden could ever be, right? We're, we, and so we're not economically self-sufficient as Trump's tariffs are showing, but we're a lot more than Sweden. And so what Anders Aslund and what a lot of these Europeans don't understand is that Americans just don't prioritize foreign policy at all. They just don't prioritize it. They don't like what Trump is doing, but it's not even like 5th on their list of things to care about. That's what he doesn't get.

Yeah. The, I want to, while we're on the foreign policy, sorry, while we're on the foreign policy topic, I also want to talk about China because you had a post about what China's up to right now. But maybe we could start by just giving some context for people who aren't as familiar with their broader strategy the last few years. Is it safe to say that the Belt and Road Initiative has been a colossal failure or how would we? Sort of characterize it.

It's a failure. Yes, I would say it's, it's been primarily a failure. It's sort of, it, it seems to have succeeded in Indonesia, at least with their high-speed rail, although some of the other projects failed, but then, you know, they did build one high-speed rail in like Jakarta. But other than that, most of the projects have gone bad. People have been dissatisfied. The quality has been low. The price is too high. You know, the debt can't be serviced. It's caused all kinds of local political headaches. And so generally the Belt and Road sucked. But China will never admit this and it can easily bear the cost of that failure. And now it's on to other things. So now China is doing a more traditional globalization strategy of, of simply having its companies invest in other countries and build factories in other countries. Like, that's what we do. That's what a lot of people do. They're just like, China's like, okay, Belt and Road, the infrastructure phase of our globalization, of our China-led globalization is now complete. We have completed it, you know.

It failed.

It failed. But then like, they're, they're, they're like, we completed it. That phase is complete. Now we're on to the, now we're on to the development phase. And so now they're just going to offshore. And why are they going to offshore? Because their costs are going up. Like China's labor costs are through the roof and it, because people just made more money, you know, and, and costs have caught up with productivity. And then a lot of their, like their energy costs are going up. Their land costs are going up. Everything costs are all going up and they can no longer just finance everything with like speculative land sales anymore because the, that bubble burst. And, you know, the government is still pumping massive amounts of money into industrial policy. We'll see how long that goes. But in the meantime, like these companies are just seeing their, their costs go way up. And so they're like, let's build cheaper stuff because cheaper stuff is the Chinese way. It used to be the American way. Now it's the Chinese way. And so America is just, China is just like America. 100 years ago, but where the Republicans always win. That's what I say. But then, but so, so China is now Chinese companies like BYD, for example, the car company, a world's top car company. Sorry, Elon. BYD is outsourcing a lot of production all over the world. And other electric car companies are, and electric vehicle companies are outsourcing production all over the world, battery companies, energy tech, stuff like that, all being offshored. And one reason it's being offshored is that this shit is heavy. You do not want to put a car or even a car battery, which is insanely heavy. You do not want to put that stuff on a barge and pay to ship it around the world if you could just build it locally and ship it locally. Another reason is because taste in cars changes really fast. This is something that Bill Knudsen actually, before he worked for the Defense Department, Bill Knudsen discovered this at Chevrolet. And he's, this is how he built Chevrolet to be bigger than Ford. Because they switched models really fast. They switched colors. They switched looks. They realized that people's taste in cars evolves insanely fast. People don't want to buy a car that looks like it's from 5 years ago, much less 10 years ago. And when you're on the ground and the, the local demand shifts, you need to have factories close to the consumer. Now, I, I do think that China will eventually outsource some other stuff, but they really don't want to outsource electronics. So they're really putting their foot down and trying to not outsource electronics. But in terms of cars and energy and like other heavy stuff, they may eventually outsource. They probably won't outsource shipbuilding because they think it's navally important. It's not that profitable anyway. They, they, they might outsource other heavy stuff, right? Steel. I don't know. They've got too much steel. Now I'm starting to sound like Trump. They've got too much steel. It's like, okay, they have overcapacity in the steel industry. I, I have, I have sympathy for, for Trump and his sort of impressionistic statements because, you know, I, there's sort of these things where if you're immersed in a media environment, it's one of those, if you know, you know, things where you just make references to things and some people know what you're talking about. Other people are like, what is he talking about? So that may be true with me too. Maybe I'm a little Trumpian. But anyway, so, so China's outsourcing. They're outsourcing to a whole bunch of other countries, not so much low wage countries as you might think. So they're not out actually outsourcing much to Africa. And this is sort of dashing hopes of many of us who hoped that that would happen.

Yeah.

There is a little bit of outsourcing to Africa, but actually fairly little. And they're refusing to outsource to India. So they're basically, China is blocking outsourcing to India, but they're outsourcing to medium income countries. They are outsourcing to a few low income countries, such as Morocco and Indonesia and Vietnam. These are relatively poor countries that could definitely use the investment and will develop, you know, faster as a result of Chinese companies pouring capital into them and building all these factories there. They're investing a lot in middle income countries. So Brazil or Hungary or Mexico or Thailand, places like that, places that are not rich as we know it, but very far from poor. And so, and so, so that's what China is doing in terms of outbound investment. They are, they're going to help industrialize other parts of the world. That's going to happen. And that's good. That's good. We want that. We want, there's this old theory called the flying geese theory that said that the geese Like, you know, we'll, we'll fly the, the sort of like manufacturing companies will like fly in a flock to each country. And then anyway, there's more to the theory than that, but I won't go into it. But I guess the point is that, but the point is that China's saturated. No one's investing in China anymore. Like they're pulling their money out. I mean, a few, a few companies are investing in China, but countries in net are pulling money out of China.

Do you want to say more about why?

Oh, well, so rising costs are obviously a big reason. Also, the Chinese government has made them less welcome and has tried to like push out foreign companies and replace them with national champions in their domestic market. And the third reason is that de-risking. So the idea, if there's a war or increased geopolitical competition, we might not be able to get our assets out of China. Because remember, China imposes capital controls. You can't just sell yuan for dollars anytime you want, right? So because you can't do that, you have to get your money out of China very slowly over a long time. And if you think that over the next 10 years, you might not be able to get your money out of China consistently, well, then there's no point in being in China in the first place. So I think that those are the reasons for decoupling in terms of investment decoupling. But so I think Chinese companies are still investing massive amounts of money in China, but they're also looking overseas for places where they can reduce costs, be closer to customers, et cetera, especially the car companies. And, and then I think that, yeah, so, so that's basically what's, what's going on with China and globalization.

And maybe you can back up and say a little bit more about how foreign investment works or FDI works. kind of the theories behind how developing countries use it and how that evolves over time.

Right. So FDI is actually a fairly badly designed catch-all term for several things. If you buy foreign real estate, that's FDI. FDI is foreign direct investment. That's a contrast to foreign portfolio investment. Like when people, we buy Chinese stocks or bonds, right? That's portfolio investment. But if you buy real estate, real estate's a real thing, you know, bricks and mortar, You got a house or whatever, like apartment building. So that, that's counted as a real investment. So that's counted as foreign direct investment. Another thing that's counted in foreign direct investment is mergers and acquisitions. So if you have a Chinese company, if they buy an American company so they can like strip mine them for technology or like maybe use them as a beachhead to get into the American market, that is counted as FDI as well. But the kind of FDI that really helps to industrialize a country is called greenfield FDI. Which means, and it's usually in manufacturing. And what this means is that a company actually builds a factory somewhere. So China, a Chinese company like BYD builds a factory in Brazil. They build a factory in Hungary. Now that will increase employment of Brazilians and Hungarians because someone will have to work at that factory, right? I mean, they can bring in some employees from overseas, but then really they're going to hire a bunch of locals, right? Because expensive to bring people over. They're going to hire a bunch of locals and also, you know, and so then, so that's one thing that, that greenfield FDI does. Another thing it does is it transfers technology. To the receiving country. So if a Chinese company buys an American company, the technology transfer is going from America to China, right? It's buying the American company so it can strip its technology and learn how it does things and then do it itself and then fire all the American workers and da da da, right? Again and again. But if China builds a factory in Brazil, it, it's not doing that so it can get technology from Brazil. Brazil is going to get technology from China because Chinese companies are going to have to teach them how to build stuff. In the future, maybe those Brazilian companies can use that technological base to sort of climb the value chain, learn how to do more complex processes and sort of, you know, do that. And so that I think is, that's an important distinction between the types of M&A. So technology greenfield FDI transfers technology to the receiving country. It creates jobs to the receiving country. And I think those are the 2 main differences.

Yeah. If you could. Advise China's economic policy regarding some of the issues that we've been discussing, what advice would you give them?

I would say trying to suppress India's rise by refusing to invest in India is a losing proposition because not only will it make India mad at you, but then India, India's cost advantage when it builds up a whole like giant electronics industry, giant car industry, India's cost advantage will benefit whoever invests in India. So Chinese companies, by avoiding India or being told to avoid it or telling the government, telling them to avoid India, Chinese companies will lose out in the end. They will lose out because like Apple and Samsung and I don't know, Panasonic, whoever, like those companies will build stuff in India and they will take advantage of low Indian costs, big Indian domestic market and other, everything else that, you know, you get from being in a huge market with low labor costs, everything that people used to get from China. And so by avoiding India, China is going to, is isolating itself a bit, even though it's, it's trying to integrate itself with all these economies around the world, like Brazil and Indonesia and Vietnam and Mexico and Hungary, like that's a, and Morocco, that's real globalization. And those are all important economies, but then like India is just bigger than all those combined. Like it's huge.

And so what are the effects going to be of blocking out India?

Well, I think that India is going to have a slightly harder time of it. I mean, On one hand, I think that Chinese investment would be less beneficial than some other kinds of investment than, than other countries' investment. I think Chinese companies, even if they did invest in India, would be more reluctant to transfer their technology to India than say Japan or Korea or the U.S. or whatever, which won't really, or Germany, which won't really mind that much transferring their technologies. But China is very wary of this. It's very like, no, we don't want to build up India's technological capacity. So even if they did have more FDI, it would be more of a low level, you know, like here, sew us some shirts kind of thing, slap together these circuit boards, whatever. So that's, I think, you know, the, the, the India's loss is not huge from this. It's, it's, it's substantial, but it's not huge. And I don't think this will derail, sorry, I don't think this will derail India's organization, India's industrialization. If India, whether India industrializes or not will not be the a thing determined in Beijing. It will be determined in New Delhi.

And what will this mean for India itself?

Well, I think that, that, I mean, India ultimately will industrialize anyway. Like India has a lot of stuff that still needs to do. So in terms of India's industrialization, there's a few basic big tasks. One of those tasks is labor mobility. Women have to start leaving villages and moving to cities and working in factories. That has to happen. And education literacy of women in, especially in rural areas needs to improve a lot. India's schools are still dysfunctional, like outside of the big cities. They need to increase education, education, education, and increase mobility. Get those factory girls. You know, it's this very consistent pattern. Every time you see a country industrialize, they've got this flood of women specifically who move from the towns, from from the villages to the cities to work in clothing factories and then like furniture factories, electronics factories, and other light manufacturing, you know, things where you don't have to like wrestle some giant heavy thing. And instead you just have to put something together with your fingers and, you know, women have higher manual dexterity than men on average. And so, you know, probably because they just have tiny fingers. And so small fingies let you sew better. Which is why sewing was traditionally women's work, right? You, if you have small fingers, you can sew much tighter stitches, et cetera. And then you, and then so in textile industries, very important. And then electronics industries, you have to be able to put little things together with your hands for assembly. Just women are better at that. And so, so men are better at wrestling around big chunks of stuff. And so on average, obviously.

Yeah.

But then, so you'd get women from the countryside, a flood of women to come into the factory. And so, and so like you had this in England, right? You had a whole bunch of like girls, just single girls, like working in these factories. Right. And every guy was like, mm, factory girl.

Yeah.

And trying to pick up these factory girls. And the factory girls were sitting there at their shitty job, slapping together something or sewing or whatever in the sweatshop, just waiting for some dude to come along and like rescue them so they could like marry a dude and become housewife because that was like the dream. That's how you escape the factory floor.

Yeah.

Right. And so my, my grandmother, my grandmother, this happened to, she, she was a kid of immigrants. She was, you know, grew up poor and worked in a sweatshop. And eventually she got a better job doing punch cards at IBM. She was, she was called a programmer, actually. That's what, that's where the word programmer came from, the people who did punch cards. And, and so she did that. And then one day she met like a, you know, army officer guy and my grandfather. And then, you know, then she became a middle-class housewife. So she actually lived this, this working class to middle class dream of, of the factory girls. You know, it's not, the past is not so far past. And if you read this amazing book called Factory Girls, this, this book about China, you see all the same stories. It tracks these like 3 women who go from the, the farm to the town, to the, to the big city in Guangzhou to like work in the textile factories. And then later the work in the electronics factories mainly. of them even works for Huawei, actually. And, and that, this is before everyone knew Huawei was an important company. But then, so, so the factory girls are really important. India's not getting them. So India needs factory girls. I'm going to write that post. India, factory girls. You need this. And, yeah, so, so that's one thing they need. They need better education. Also, there's still some red tape. Like Modi's been cutting red tape on business somewhat. Like India is the land of red tape, dude. India is just like, Frickin' California.

All right, it's like that.

And so they've been cutting red tape, but they need to cut it a lot more.

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And zooming out, maybe recap, it's kind of ironic that America is isolating and China is seems to be globalizing further or integrating further. It's like this great, you know, Balaji likes to say history is running in reverse. And, you know, he overextends the analogy sometimes, but maybe this is one, one example where it's happening.

Well, Balaji goes through cycles of being right about things and wrong about things. He's right about COVID wrong about like, you know, financial collapse. And then, and now he's absolutely right about globalization right now. So Balaji and I actually talk all the time and our ideas on what this means have converged. So basically he's right. China's becoming like champion of globalization, even though its globalization is not ideal. You know, it's trying to cut out India. It's being very aggressive and bullying people. It's hoarding too much technology. It's basically, it's indulging in, it's, it's using overcapacity to like flood, you know, hurt relations with other countries by destroying their native industries, by flooding them with export products. It's doing, it's making a lot of mistakes. Belt and Road was a failure. Like I could name all these mistakes that China's making. Right. But none of those are anything compared to America actually trying to cut itself out of the global economy. That's just suicidal. That's like someone paid Trump to smash America. Like, I'm not saying they did. I'm saying if they did, they'd pay him to do stuff just like this. So like, yeah, anyway, we're being very stupid. We can't capitalize on China's mistakes because we're making big, we're busy making bigger mistakes of our own.

And the biggest mistakes that China is making at the moment include?

The biggest mistakes China is making include not embracing India economically, overcapacity that makes other, makes other countries, this is in terms of economic globalization mistakes, right? This is not in terms of other stuff like war or, or, you know, domestic political oppression or anything like that. I'm just talking about in terms of globalization, the things China is doing wrong, they're trying to cut out India. And then overcapacity, I think, is the other big mistake.

That makes sense. Now. Speaking about your book in Japan, one of the questions that came in actually was, is there anything, this is from Vincent, is there anything that Japan should do to strengthen the yen?

What should Japan do to strengthen the yen? Japan should go to Trump and say, hey Trump. So, so Trump still thinks the yen is weak and that Japan is taking advantage of us by exporting too much stuff to us. That's, that's wrong. That's, that's decades out of date, but Japan can absolutely capitalize on that. Say, hey Trump, let's do Plaza Accord 2. You know, let's strengthen the yen. We're going to do it for you because we believe in you, Trump. We love you. We want to strengthen the yen just for you. And then negotiate a thing where America buys yen, you know, have the, have, have the Fed buy some yen, print some money, buy yen. And then, and then this will be good for Japan because the yen will strengthen to the point, you know, the yen, they don't want it too strong, but they're very far away from too strong. It's way too weak. And so then, yeah, Japanese manufacturers can't even afford their imported components and like Japanese people can't afford food and fuel. So like they want a stronger yen. So, so just do Plaza Accord 2, have American, have Trump, get Trump to have America buy yen, intervene in the forex market.

Yeah. Interesting.

And Trump's going to, you know, try to force lower interest rates and maybe, maybe he will. And then depending on what happens with interest rates and then Japan ultimately will need to raise interest rates, but raising interest rates. is the hard way to strengthen your currency, right? Because it hurts your economy because it makes it harder for companies to borrow and invest and hire. So, so raising interest rates is the, is the, that's the hard way. The easy way is to get some other country to just like, you know, strengthen your currency for you by buying your, by buying it, by buying it, you know? So like, let's do that. America should help them. And Trump wants to.

Okay. This is good foreign policy stuff. I want to go back to something you also alluded to in one of your 5 Things posts. You sort of did a brief reflection on AI and economic progress. And you sort of mentioned how Tyler summarized something you've been thinking about. You know, we had Nathan on a few months ago and, and you've been talking about how, you know, it's sort of not the end of, end of all jobs. What is your sort of latest thinking about just how to think about AI and economic growth in terms of what it means?

Well, I don't know. So, so Tyler had a really interesting post where he referenced this thing called the O-ring theory of economic development. Did we not talk about this before? Anyway.

Not, not this one. No.

Okay. So, so the O-ring theory is basically a theory of development that says that, so, so the O-ring was this, this piece of the space shuttle in the 1980s that failed and that made the whole, the whole shuttle explode. Much like a SpaceX Starship rocket. The, it exploded, but unlike the Starship, it killed 7 people. There's, you know, yeah, I was actually. Technically alive for that one. Anyway, but yeah, so Challenger exploded and it was the O-ring that did it. This little rubber thing. I think it was rubber. I don't remember what it was made of. Anyway, it, it froze and it crumbled and then gases escaped and blew up the whole thing. And, and so one little piece destroyed the whole thing. And so the idea is that, that economic development can be destroyed by having critical, a couple critical pieces missing, just like an O-ring. And, and that's the theory and you can formalize this theory and make a bunch of predictions while blah, blah, blah. But I think that just the basic concept is that in development, you have to have everything go right. You have to have a whole bunch of things go right. And so if you look now, I think that Tyler is thinking extremely powerfully about new technology as returning a country to developing country status temporarily. A technological revolution makes a country more like a developing country for a while. And so I think that AI will make us more like a developing country because we'll have to repurpose a lot of our economy to work with AI, right? Maybe we can grow fast also. It'll just be very disruptive, but offer the promise of faster growth. So that's the idea that we're back to being a bit like a developing country. And now, like now we have O-ring, we're subject to O-ring theory. So if there's a few things that aren't set up to, to take advantage of the economy of AI, of, you know, the new AI economy. It could slow down the whole thing, just like it's been very hard for like Tanzania to develop or like whatever, you know, there's just a few things slowing them down. And so I think that, yeah, basically like our laws, our legal structure could slow us down. Sort of the way that companies negotiate contracts with each other could slow us down. The nature of human decision makers in high positions in our companies could slow us down. I could name you just a million things that slow us down, right? Copyright law. I don't know. You're illegally scraping data. You're stealing my data. That could slow us down. And so like a whole bunch of stuff could gum us up and, and that could substantially limit the progress from AI. Now the question is, what about China? If China just over— just finds and overwhelms every problem with AI development, what happens to them? There might be technological issues. So it might be that hallucinations are so fundamental to what AI does that it's just one fly in the ointment that prevents them from achieving wide You know, sort of adoption for everything. So there's technological O-ring problems and there's political, legal, institutional O-ring problems. And we can say China will probably be able to solve the, the, the latter, but maybe not the former. It's hard to say.

Yeah. The, yeah. And so if you had to guess like the growth rates or like, or what, you know, sort of some people were saying, oh, I think Tyler said like 5% or some people were saying, oh no, 10% or.

I'd, I'd guess close to Tyler. You know, it's, it's dead reckoning. Like obviously I'm just going out on a limb and just making some stuff up, right? Like no one can forecast these things, but Tyler's sounds more intuitively reasonable to me. The amount of productivity that you need to grow at 10% is just staggering. It's unthinkable. No one's ever done it. Like we've had countries that grow at 10%, like China in its, in its heyday, Korea in its heyday, et cetera, even Japan in its heyday grew briefly around 10%. But, but that's the fastest we've really seen countries grow at any sort of like more than like one year at a time, like at a, you know, at a sustained pace. And to get that, they had to build up capital. Most of, a lot of that growth came, well, some of that growth came from increasing population, actually. They had big population booms. Most of that growth, a lot of that growth came from building factories, building houses, building roads. Now we've got factories and houses and roads. And AI, you know, no matter how smart it is, or even if it gets robots, it's not going to just like build us a whole new built environment very quickly. Right. And so, especially because of NEPA, I don't know, but like also just because it's, it's really expensive to do that. And we already have houses, you know, we don't need, we, you know, we could have more, but like, you know, the impetus is smaller. And so, so when you don't have a built environment, like you didn't before modern times, you can build one really fast and that allows you to grow at 10%. Productivity growth would only ever grow at like a couple percent. Productivity is really hard. So the idea of AI making us grow at 10% productivity, like that's the idea that AI will produce a productivity boom far in excess of any technologies we've ever seen. Electricity, steam, internal combustion, you know, anything we've ever seen, like just pales in comparison to the productivity unleashed by AI. And like, I don't get why that's true. Like AI is not even a physical technology. It may be able to help us research incrementally better materials and engineering designs, right? But it's not a physical technology. Like all the stuff in the digital world, maybe it'll, it'll, you know, create 10% per year productivity growth in the software industry alone. In fact, I think it'll do even more than that. I think it'll do better than that in that industry, right? Maybe in like legal consulting, all this, like, you know, stuff that's just manipulating symbols in the, in the internet. Like maybe it will give high rates of productivity growth, but so much of our economy is not that, that I doubt this sort of overall, you know, this idea that AGI is so general, you can just press the AGI button and then everything happens, you know, then robots build everything for cheap and then new materials just get discovered that can do anything, wonder materials and stuff like that. I don't think we've seen signs of that yet. We've seen a couple scientific advances that were aided by ADI, AGI, and not AGI, it's just AI, whatever we have now. A, what do we call it now? Like ABI, artificial basic intelligence.

Right. Well, people are even saying superintelligence is something above AGI or something like their new, new tech.

Yeah. Super artificial superintelligence, artificial godlike intelligence. Well, then you're back to AGI anyway. All right. So yeah, basically there's a lot of stuff that AI will only marginally touch. Like physical stuff. It can do research. It can run robots, but robots run on energy too, man. Like robots, robots take joules. They're big, you know, they're there. They can make, we can make lighter, cheaper robots. There's lots of incremental stuff we can do, but there's no reason to think that we'll get 10% productivity, that we'll get productivity growth far faster than anything that's ever happened in the universe.

Yeah.

Okay.

That's a good overview. Maybe, maybe gearing in closing, there's one other thing that you wrote about, which I think was kind of interesting. Is why is government spending part of GDP? And is there something misleading about that? Or how should we, how should we think? Should it be there? How should we think about sort of, you know, GDP in this context?

It's a great question. So, you know, Elon recently said government spending shouldn't be in GDP. Actually, government spending has done worse than private sector GDP. So, but anyway, we've been actually, yeah, anyway, that aside, should government spending be in GDP? So. The answer is, is yes, somehow, because the government creates actual value. You know, if you create value, then you should be in GDP. GDP does not include opportunity costs. So it might be that if you fired everyone at the DMV and had them go work at a car company, then it could be that GDP would go up. But that doesn't mean that the government people are destroying value in their jobs because, you know, the, the value they create is not net of opportunity cost. We don't think that we don't calculate value creation by subtracting, you know, the, like all the amazing things you could be doing that we don't even know about, right? Like it could be that every single person who's like working a job could be doing something more productive. And then we can say, do we say that people are value destroying? No, we don't say that. Right. Like take like Andrej Karpathy, maybe there's something better that Andrej Karpathy could be doing with this time than like working on AI stuff. Maybe something even better. But if we subtract that opportunity cost from calculating Andrei Karpathy's value created, then we get that Andrei Karpathy is a value destroyer. And we get every single human's a value destroyer in the world because no one is doing their full max potential. And so if we subtract people's max potential from the amount they create, we're getting a bad, we're going to get a negative. We're going to say everyone's value destroying. Okay. And that makes no sense. That's nonsense. So it doesn't make sense to say that every human is a value destroyer just because I, I can imagine there's something better they could be doing out there. So in that sense, no, government people are creating real value. Like the DMV creates value, right? It's not a value destroyer. It's clunky. It's inefficient, but it's not a value destroyer. Similarly, like, you know, people who process insurance claims for Medicare are creating value, right? Like the private sector could have people processing insurance claims, but like, but the private sector could have people process insurance claims, but like they're creating value too. Like when you do work, you create useful work, you create value. And so, so in that sense, we do need to include government stuff and government workers in GDP. We just do. Now the question is, is there a distortion here because the government overpays for things? The answer is yes, there is. So we, when we value private sector, when we calculate private sector GDP, we calculate based on market price. We say you bought that stereo for $50. It must be worth $50. But if the government buys like a tank for $1 million or something, right? Or however much a tank costs. If I, it's been a while since I bought a tank myself. If the government buys a tank for $1 million, we say, is the tank worth $1 million? Well, if you consider the government to be like the aggregate will of the consumer voters, then yes, but it's not really, right? There's a lot of distortions in that. Like if you, if you, I'd say that there's probably a lot of government purchases that really, that don't create as much value as the amount that they pay, where the market price would be a lot less, even if the externality that the government's trying to address were properly priced. So, you know, the, the, the literal combat ship was a big boondoggle. Should we have valued that as at cost in GDP? No, because it was a piece of crap. So, so I think that. Government GDP can be overstated because we value it at cost instead of at market price. There's no market, right? There's just government buys. And so I think that you can also, you know, include this in like various, you know, monopsony models and stuff like that. So you can say that, but the government's the big one here. So yes, there is a sense in which government spending should not just be directly naively put into GDP without some sort of adjustment. That tells us how much do people really want this shit.

And so, yeah, that's pretty good sort of explanation, or that makes sense in terms of how we should, how we should think about it.

There needs to be some adjustment. We don't have an adjustment, but the adjustment's probably going to be relatively minor. Like the amount of, the amount of value that our, our military is actually destroying because we don't really need a military and we're just having one to, or, you know, because some weirdos in government wanted national pride or something like that. Like, I don't think it's ultimately going to be that big. Yeah. So no, Elon's wrong. But there, but there are reasons to worry that government GDP is mismeasured, but Elon's still wrong.

And so would you want to say more about if we were trying like better ways of doing it or?

Well, I don't know. I, I've heard people talk about this, but I think basically you have to do, you have to make a lot of assumptions about like demand curves and, and like how much people like this attribute and that attribute of a product. You know, how much do people really like highways or how much are they just convenient? 'Cause the government decided that's what it was gonna make, et cetera. You can do that. It's just hard. It requires running a lot of regressions and then sort of believing your regressions.

Should we, uh, should we wrap on that?

That sounds good. Yeah.

Yeah. This was a, a great overview of, of, of recent pieces. Have a, have an amazing time going to Japan. Preorder, well, is the book launches on Tuesday. So by the time this comes out, the book is The book is out. Well, everyone—

Yep. And I'll write a— I'm gonna write a post about it next week.

Perfect. Everyone purchase the book and, uh, yeah, sounds good. I'll see you on the other side. Thank you, sir. Till next time.

Until next time.

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