China Wakes, US Builds, Woke Wanes And Tariffs Tally

Two weeks ago I argued that China is suffering from a shortage of aggregate demand and that the solution is to have the central government A) bail out banks and local government financing vehicles, and B) use fiscal and monetary stimulus. Perhaps Xi Jinping reads my blog.
China is unleashing some more substantial
stimulus measures :

Chinese stocks immediately soared. Even more encouragingly (at least, if you want China to keep growing), Xi's government looks like it might bail out the Chinese banking system :

For the uninitiated,“injecting capital” means“giving banks money”. It means a bailout.

This is probably even more important than stimulus, since getting banks lending again is the key to a sustained recovery. China boosters have long held that Chinese banks' bad debts don't matter because banks and the state are one and the same - this is called the“unitary state” theory.

That theory is probably wrong. Chinese banks have their own incentives, and fear getting culled by the government if they fail. Injecting them with capital helps them gain the confidence to lend again, because it gives them a cushion against failure.

The final step in this process would be to bail out China's local government financing vehicles, which have become
incredibly important
to China's regional economies. But just bailing out the banks and doing some major fiscal and monetary stimulus should have a big effect in terms of shortening and ameliorating China's recession.

US economic policy has been shifting toward industrial policy. A number of commentators who oppose this shift have been quick to seize on any sign of problems as a reason to dismiss the whole enterprise. For example, in March of this year, Matt Cole and Chris Nicholson wrote an op-ed in The Hill with the bombastic title“DEI killed the CHIPS Act .”

Their single piece of evidence for this bold thesis was that TSMC's fab in Arizona was projected to have significant delays due to a dispute with local construction unions.

In fact, even before that dismissive op-ed came out, the labor dispute it referenced had already
been solved . And just a month after the op-ed came out, TSMC was officially allocated its CHIPS Act money, and suddenly declared that its Arizona project was
now
ahead
of schedule .

Now, less than six months later,
Tim Culpan reports
that TSMC's Arizona plant has started making some chips for Apple. The chip they're making is fairly advanced, and they're reportedly getting good yields:

Everyone who leaped at the chance to declare the CHIPS Act a failure at the first report of delays now has egg on their face.

Meanwhile, Biden's other big piece of industrial policy legislation - the Inflation Reduction Act - appears to be giving US solar manufacturing a big boost. Solar manufacturers are
ramping up production , and the US is getting the ability to build the pieces of the solar supply chain that it had previously outsourced entirely to China and other countries:

This is still small potatoes compared to what China can make, but it means that if a war breaks out, US deployment of solar power won't be cut off.

Note that both the successes in chips and solar are cases where the private sector made most of the investment itself, and the US government simply
prompted
that investment with subsidies.

This stands in
stark contrast
to
cases where
the US government promised to build things itself, and was stymied by its lack of state capacity and its own byzantine permitting process.

A big lesson here is that
Matt Yglesias is right , and the US government has willfully destroyed much of its state capacity since the 1970s. Therefore, the most effective industrial policy, at least right now, is for government to act as the spur for the private sector to invest its own money.

The even bigger lesson, though, is that industrial policy's knee-jerk naysayers need to be a little more circumspect and judicious, or else they'll keep looking silly when industrial policy succeeds. There are certainly problems and challenges and drawbacks associated with industrial policy, and we need smart, thoughtful critics who can identify those. People who simply pounce on any whiff of difficulty are unhelpful.

The US government is becoming more hostile to Chinese imports all the time. Biden recently announced that
he'll limit the“de minimis” exemption
that allows Chinese companies like Temu and Shein to ship Americans small cheap packages without paying tariffs. And Biden's administration is
considering an outright ban
on Chinese components in any cars that are connected to the internet, to protect against possible sabotage.

Meanwhile, Trump is going around promising tariffs, tariffs, and
more tariffs
as the solution to a variety of economic ills (or just because
he really likes tariffs ). While this is far from the most important policy issue in the election, some people are talking about it.

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For example, the economist
Kim Clausing argues
that instead of tariffs, the US should reduce the incentive for offshoring by cracking down on tax havens. But I think that while this is a laudable move, it wouldn't really do much vis-a-vis China, because China is not a tax haven. Clausing's proposal really misses the reason that Democrats have been embracing tariffs on China, which is
national security .

Oren Cass, meanwhile, has
a post at the Atlantic
making a general case for tariffs as a useful policy tool. Some excerpts:

Cass also argues that the harms from tariffs will be limited when foreign companies circumvent the tariffs by building their products in the US. And he points out that tariffs do raise tax revenue.

These are all reasonable arguments, and you'll find me saying similar things when I defend industrial policy. But there are two questions here that Cass doesn't really address.

First, even though I think Cass has mostly identified real externalities, that doesn't mean tariffs are the most effective policy tool to address those externalities.

Tariffs' effects are limited
by exchange rate adjustment - when you put tariffs on China, the yuan gets cheaper, partially negating the effect of the tariff. Also, tariffs on intermediate goods actually exacerbate many of the externalities Cass talks about, by
blocking domestic manufacturers
from getting affordable inputs for their production processes. That may be a cost worth paying, for national security reasons, but it is a real cost.

And second, Cass'
general
defense of tariffs ignores many of the real, specifc features of Trump's tariff proposals. Trump would
slap tariffs on US allies
- this would decrease national security rather than enhance it, because it would limit the markets available to companies on both sides, preventing them from achieving economies of scale. It would also hamper both sides' defense-industrial bases.

So on both sides of the tariff debate, I still see too much debate about ideal policies, and not enough engagement with the specific policies being enacted or proposed. That said, I think the debate is MUCH improved from where it was just a few years ago, so that's good. Articles like Clausing's and Cass' are making reasonable arguments instead of shouting ideological positions, and I always want to see more of that.

4. Wokeness recedes

“The conservatism of a religion - its orthodoxy - is the inert coagulum of a once highly reactive sap.” - Eric Hoffer

As long as we're on the topic of 2010s identity politics, let's talk about wokeness. Back in 2021-22, I wrote a series of posts about this sociocultural phenomenon, which I summarized here .

My basic thesis is that wokeness is a Protestant-derived American belief system and social phenomenon that has been around since before the founding of the United States, and that it periodically resurfaces for a while when technological and economic changes allow.

And my basic prediction is that after the efflorescence of the 2010s, wokeness will recede into a waxy orthodoxy, governing a shrinking set of university administrations and school boards and online communities, until it reemerges on the scene many decades from now.

Last year, Musa al-Gharbi wrote
a great post
in which he pulled various data sources to show that the“Great Awokening” of the 2010s is receding. Now The Economist has
a similar post , with different data sources. Here are a few excerpts:

This fits with my predictions from 2021. And if I'm right, this trend will continue over the next few years, even as conservatives continue to find and highlight examples of wokeness in media, academia, and other progressive parts of American culture. Wokeness is an orthodoxy now, and orthodoxies aren't fun and cool anymore.

But wokeness is very optimized for being a charismatic activist movement, and not very optimized for being a conservative set of rules and traditions. So I expect its decline to be swift...until, of course, it bursts forth once again. But that will be when you and I are very old or dead.

5. Unions versus automation

It's very hard to be a pro-union pundit when
unions make demands like this one :

Banning automation is just a way of killing the goose that lays the golden eggs, ultimately hurting dockworkers. Meanwhile, it acts as a tax on the whole US economy. If you didn't like the inflation of 2021, you should want more efficient, high-capacity automated ports. The US should emulate Rotterdam instead of retreating into self-defeating luddism.

This abridged and reorganized article was first published on Noah Smith's Noahpinion Substack and is republished with kind permission. Read the original here and become a Noahopinion subscriber here.

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