2025-07-30 17:53:40
I was going to write about U.S. politics today, but sweatshops came up in an online discussion, so I’ll write about that instead. It’s so rare to have interesting, substantive discussions about economic policy on social media, so I relish the chance to dive into one when it pops up.
It all started with an advertisement for American Eagle blue jeans. The ad makes a pun about the actress Sydney Sweeney having “good jeans”, and a contingent of progressives on social media decided that this meant that the ad was saying white people are genetically superior. Much ridiculousness ensued. The fashion blogger Derek Guy made a well-intentioned attempt to defuse the absurd fracas by diverting attention to the plight of poor working conditions in garment factories in developing countries:
On one hand, yes, I think it’s good to divert attention away from endless, pointless social media race wars, and toward real material conditions for the global poor. Whether garment workers in Bangladesh or Tanzania or Vietnam can put food on the table is far more important than whether some attention-seeking TikTokers call Sydney Sweeney a Nazi.
But at the same time, I think that while Derek is right about poor working conditions in many garment factories around the world, he completely ignored the benefits that those garment factories bring to poor countries — benefits that, in terms of human welfare, far exceed the slightly cheaper clothes that rich people get to enjoy. I posted a chart of extreme poverty in Bangladesh:
Bangladesh’s conquest of extreme poverty hasn’t come from any dramatic program of government redistribution, but from rapid economic growth. In the years since 1990, the country has more than quadrupled its living standards, blowing past Pakistan1:
Back in 2021, I wrote a post about how Bangladesh’s growth has been driven in part by the country’s huge investment in garment manufacturing:
Twenty years ago, most of your clothes probably had a label saying “Made in China”; today, there’s a good chance they say “Made in Bangladesh”. This is from a 2021 World Bank report by Gu, Nayyar, and Sharma:
At a time when many developing economies are experiencing premature deindustrialization, Bangladesh is being touted for an export-led manufacturing miracle. Bangladesh’s exports of ready-made garments (RMG), now second only to China, helped propel the country to lower middle-income status in 2015…Labor-intensive, export-oriented manufacturing driven by the RMG industry has been the cornerstone of Bangladesh’s recent economic growth…
What is more, the industry directly employs about 4 million workers and contributes indirectly to the creation of around 10 million jobs elsewhere in the economy. The RMG industry, which accounted for around one-third of total industrial production, has experienced an annual average growth rate of 10.5 percent over the past eight years…Low wages have helped Bangladeshi RMG exporters remain competitive since the inception of the industry.
The fact is, countries do not start out rich; they start out poor, and they get rich by figuring out how to make things that people want. In Bangladesh, and in some other developing countries, the most valuable thing they’ve figured out how to make (in terms of total value created) is clothing. Making that clothing involved putting people to work for low wages in factories with poor conditions — in other words, sweatshops. This was true for Britain and the U.S. in our early industrialization periods; Bangladesh is simply following in our footsteps here.
In my experience, “sweatshops are bad” is just one of those things that American progressives are supposed to believe — part of the canon, like the idea that incomes have stagnated since the 1970s or that defense spending is crowding out welfare spending. The idea is that greedy American capitalists hurt poor people in countries like Bangladesh by putting our factories there, just so we can have cheap shirts and blue jeans.
This idea is partly rooted in a very reasonable disgust at the sort of working-conditions that prevail in sweatshops. But it also comes from two very old leftist notions. The first is the idea that factory owners unfairly exploit workers, who — according to Marx — ought to capture all of the value of what they produce. The second is the idea that the developed world — especially America and Europe — got rich by stealing resources from poor countries. The idea of sweatshops as a curse upon the global poor comes from the combination of these ideas — instead of stealing aluminum or diamonds, we’re stealing poor Bangladeshis’ labor, paying them wages far lower than what they deserve, and forcing them to destroy their health with poor working conditions.
When I posted my chart of Bangladeshi poverty, Derek Guy responded with a lengthy defense of his initial indictment of sweatshops. Some excerpts:
First, many things contribute to the lowering of poverty. To get a sense of how low-end garment work contributes to this, we have to narrow in on this variable…Lucky for us, two people have. In 2017, [Chris Blattman] and [Stefan Dercon] published a study with the first randomized trial of industrial employment on workers. They worked with five Ethiopian firms — a shoe factory and a garment factory among them — to hire applicants at random and see how their lives may or may not improve.
Unsurprisingly, most workers quit within [a] month and returned to informal work or agricultural work. In those sectors, their pay was similarly low, but at least they didn't face the hazardous industrial work conditions. Crappy garment work, it turns out, was not better for them…
[A]ny time the subject of sweatshops come up, someone who considers themselves to be an economist brings up the economic benefits of paid employment, no matter how low…
But what are we arguing here? This woman committed suicide because she was forced to work dehumanizing 16-hour shifts. If she didn't produce enough that day, she would be fined, taking away money from the very little she was paid. Women in the factory say they are sexually abused — coerced into sex and asked to strip off their clothes for inspections. Their passports are held so they can't leave. These are often exploited migrant workers.
When Rana Plaza [in Bangladesh] collapsed, it's notable that none of the workers wanted the international companies to pull out. They want work! They simply just want work under better conditions. If we view labor as a global issue, shouldn't we — as workers ourselves — be in solidarity with workers abroad?…
[S]houldn't we push for better conditions? Why is it, when sweatshops are brought up, some wish to dismiss such concerns? Is it not possible for consumers to be smarter about their shopping, push for better conditions for workers abroad, and avoid cheap, trendy clothes that don't even make them happy in the long run, but require the immiseration of workers abroad?
But Derek badly misreads the 2018 study by Blattman and Dercon. He claims that the study examines the impact of sweatshops on poverty. But it does not. This is from the abstract:
Working with five Ethiopian firms, we randomized applicants to an industrial job offer, an "entrepreneurship" program of $300 plus business training, or control status. Industrial jobs offered more and steadier hours but low wages and risky conditions. The job offer doubled exposure to industrial work but, since most quit within months, had no impact on employment or income after a year. Applicants largely took industrial work to cope with adverse shocks. This exposure, meanwhile, significantly increased health problems.
Basically, this study took some people who were already applying to work in sweatshops, and gave them the jobs they wanted, and then most of the people didn’t like it and quit.
That is an interesting and important result! It means that in the short term, some people can be wrong about the kind of jobs they would actually want (which has implications for assumptions about rationality). It also means that at any given moment, sweatshops probably have greater labor supply than they would if people had good information about what working in a sweatshop is like.
But Blattman and Dercon’s study does not say that sweatshops don’t reduce poverty! First of all, it’s obvious that many sweatshop workers do not quit — or at least, not nearly as fast as the subjects of this experiment. If every sweatshop worker quit rapidly, sweatshops would quickly run through the entire available labor pool. Someone keeps working in those factories, so there must be some difference between the typical sweatshop worker and the marginal job applicant. The study doesn’t say anything about those existing workers.
Even more importantly, Blattman and Dercon’s study doesn’t say what would happen if all the sweatshops in Ethiopia closed up shop. If all the existing workers at the existing sweatshops suddenly found themselves out of work, they’d go do something else — agriculture, or local services, or whatever. That increase in labor supply in the other poor-person occupations would probably drive down wages in those occupations, leading to an increase in poverty.
And by this same token, Blattman and Dercon’s study doesn’t say what would happen if Ethiopia opened a lot more sweatshops. If government policy or foreign investment spurred the creation of a whole bunch of new garment factories in Ethiopia, it would increase labor demand. This would presumably raise both employment and wages in Ethiopian sweatshops, which would reduce poverty.
So Derek Guy simply misread the implications of the Blattman and Dercon study. In fact, Chris Blattman himself jumped in to clarify that he agrees with me about the overall impact of low-wage manufacturing industries on poverty:
I authored this study & I agree with [Noah] that the main thing driving most countries out of poverty is industrialization. In a weak economy, with few factories, and a few good non-farm options, industrial jobs are no more desirable than the other bad opportunities, but…a growing industrial sector, tends to compete for labor and overtime. Drive up wages and working conditions. It’s a bumpy imperfect process but outside of oil. I’m not sure any other country has reached middle or high income another way.
Fortunately, as I wrote in a follow-up tweet, we do have a lot of other research papers that do measure the impact of sweatshops on living standards. The tradeoff, unfortunately, is that because they tackle this bigger macro question, most of these papers are forced to use empirical methods that are much less solid and reliable than Blattman and Dercon’s.
Economic growth and poverty reduction are macroeconomic variables, as is nationwide investment into industries like garment manufacturing. The problem with macro variables, put plainly, is that there is a lot of stuff going on at once, and so it’s hard to tell what causes what. Basically, to get any sort of intelligible result, you have to make some pretty strong assumptions about the order in which things happen, or about which variables affect which other variables.
But when people try making the most reasonable assumptions they can, they keep coming up with the result that Bangladesh’s garment boom was a major cause of its spectacular economic growth since 1990. For example, here’s Islam (2019):
This study attempts to explore the [statistical relationship] among economic growth rate, ready-made garments (RMG) exports earning and foreign direct investment (FDI) inflow in Bangladesh. It uses time-series annual data for the period 1986–2018…The RMG exports earning significantly improves the economic growth rate both in the short run and long run. The more the RMG exports earning, the more will be the economic growth rate.
And here are Jiban and Biswas (2022), who use a different statistical approach:
Ready-made Garments (RMG) export earnings, which are almost 80% of the total exports of Bangladesh, have been recognized as one of the main catalysts for the recent development of the country. Therefore, the need to determine whether the RMG export had served as a mechanism for increasing the GDP growth as well as the economic development of the country is topical and pressing…Using data from 1990 to 2020 for Bangladesh, we have found long-run as well as short-run associations among RMG Export earnings, Foreign Direct Investment (FDI), and GDP growth…Our result supports the proposition that RMG export earnings are one of the main growth engines in Bangladesh and this sector leads growth in other sectors also in the long term.
A similar paper by Paul (2014), who uses an approach similar to that of Islam (2019), finds the same result. And Tang et al. (2015), who look at four different countries, conclude that exports are important for growth in all four (though the relationship only holds true in some time periods and not in others).
So although we don’t really know for certain that sweatshop industries are a major force raising poor countries out of poverty, our best guess is that they are.
As for the more immediate impact of sweatshops on poverty, we have somewhat better evidence on that question. We can look at the effect of trade liberalization policies — which encourage the creation of export-oriented sweatshops — on regions that get more sweatshops, versus regions that get fewer. Vasishth (2024) does this, and finds positive effects on health for the children of women in areas with lots of sweatshops:
In this paper, I estimate the inter-generational health impact of maternal employment opportunities using evidence from the ready-made garment industry in Bangladesh. This industry was exposed to a trade liberalization policy in 2005, which generated spatial and temporal variation in the establishment of garment factories and therefore, potential employment opportunities for women. Using a difference-in-difference strategy, I find that the expansion of this sector improved the probability of neonatal survival for children who are born in areas that experience higher growth in employment opportunities post trade liberalization. This is driven by the improved labor market participation by mothers, enabling them to delay childbirth and improve their intra-household bargaining power. [emphasis mine]
Unlike Blattman and Dercon’s paper, Vasishth (2024) isn’t a randomized experiment. But it gets a much broader look at the effects of sweatshops on poverty, because it doesn’t just look at workers applying to work at sweatshops — it looks at everyone in the whole area where sweatshops are located. Remember that an important way that sweatshops raise wages is by increasing labor demand, forcing other employers to raise wages in order to retain their workers.
So while it’s not settled science, the evidence does clearly seem to indicate that sweatshops reduce poverty in poor countries — just as most economic theories would predict. If you’re deeply invested in the progressive narratives of capitalist exploitation of workers and rich-world exploitation of poor countries, it’s tempting to disregard, dismiss, or simply avoid reading this evidence. But we owe it to the world to do better than that. This isn’t one of those issues where we can afford to get it wrong, because if we let ourselves buy into narratives that encourage bad development policies — such as restricting imports from poor countries, refusing to buy clothes made in those countries — it will be the world’s most vulnerable who suffer.
But what about Derek Guy’s argument that we can push for better working conditions for sweatshop workers abroad? In fact, this is something that happens a lot. The U.S. has many mechanisms in place to demand and monitor better working conditions at factories that sell products here. And poor countries pretty much always start implementing minimum wages and stricter safety standards after they escape extreme poverty.
These policies often happen after big industrial disasters, like the Triangle Shirtwaist Factory fire in the U.S. in 1911. After the Rana Plaza factory collapse in 2013, Bangladesh made a concerted effort to improve conditions in its garment industry. International retailers also put pressure on Bangladeshi factories to make life better for their workers. And lo and behold, it worked! Bossavie et al. (2023) find that these efforts did improve conditions and wages in the Bangladeshi garment industry:
After the tragic factory collapse of Rana Plaza in 2013, both the direct reforms and indirect responses of retailers have plausibly affected workers in the Ready Made Garment (RMG) sector in Bangladesh. These responses included a minimum wage increase, high profile but voluntary audits, and an increased reluctance to subcontract to smaller factories. This paper estimates the net impact of these responses…As intended by the reforms, we find that increased international scrutiny improved working conditions by 0.80 standard deviations…[W]e do not find that workers’ wages were negatively impacted: instead, the post-Rana Plaza responses increased wages by about 10%.
That’s a great outcome! But unfortunately, those improved conditions only apply to workers who still had jobs in the industry. It might be the case that well-intentioned activism to improve working conditions in poor countries slows down industrialization in ways that outweigh the direct benefits.
Grier et al. (2023) think this is the case. They find that the reforms after the Rana Plaza collapse led to investment flowing out of Bangladesh to places where labor was still cheaper, leading to a slowdown in the Bangladeshi garment industry:
This study investigates the impact of anti-sweatshop activism on garment industry employment and the number of firms in Bangladesh following the 2013 Rana Plaza factory disaster. The disaster led to activism that created two major brand-enforced factory fire and safety agreements. We…find that it led to 33.3 percent fewer garment factories in Bangladesh by 2016 and 28.3 percent fewer people employed in Bangladesh's garment industry by 2017. Given the importance of the garment industry in Bangladesh's development in providing a pathway out of extreme property, our finding raises important questions about the efficacy of anti-sweatshop activism.
But Harrison and Scorse (2006) paint a brighter picture. Looking at the effects of anti-sweatshop campaigns in Indonesia in the 1990s, they find that some factories move out, but surviving factories hire their workers instead — at better wages and in better conditions:
This paper analyzes the impact of two different types of interventions on labor market outcomes in Indonesian manufacturing: (1) direct US government pressure, which contributed to a doubling of the minimum wage and (2) anti sweatshop campaigns. The combined effects of the minimum wage legislation and the anti sweatshop campaigns led to a 50 percent increase in real wages and a 100 percent increase in nominal wages for unskilled workers at targeted plants. We then examine whether higher wages led firms to cut employment or relocate elsewhere. Although the higher minimum wage reduced employment for unskilled workers, anti-sweatshop activism targeted at textiles, apparel, and footwear plants did not. Plants targeted by activists were more likely to close, but those losses were offset by employment gains at surviving plants. The message is a mixed one: activism significantly improved wages for unskilled workers in sweatshop industries, but probably encouraged some plants to leave Indonesia.
Of course, the way countries can retain jobs and improve wages and working conditions is to raise productivity. In the rich world, we often sneer at the idea of just choosing to raise productivity, because if we could, we would already have done it. The same is not necessarily true in developing countries, which often still have low-hanging policy fruit they can pick.
One of these is technology adoption. Nayyar and Sharma’s 2022 World Bank report recommends this:
All in all, Bangladesh’s emphasis must shift to broader considerations of efficiency and quality as it seeks to diversify its export basket and move up the value chain…Our report finds that firms with higher technology levels in Bangladesh’s manufacturing sector perform better.
They recommend that the garment sector — and other sectors — promote rapid technological upgrading.
The really interesting question — which I don’t think we know the answer to yet — is whether or not anti-sweatshop campaigns from America or Europe force poor countries to invest more heavily in technology and education. Higher wages and more expensive safety measures force factory owners to raise productivity or die.2 That could nudge inefficient managers into investing in better machines, and it might nudge poor-country governments to provide their people with more and better education.
So while progressives like Derek Guy are way too dismissive of the economic benefits of sweatshops, their preferred solution to the problems — activism to force factories in poor countries to raise wages and improve working conditions — might be the right thing to do anyway. After all, Britain and the U.S. started out their industrialization by making a lot of cheap clothes with cheap labor, but they eventually moved on to higher-value, more capital-intensive stuff — and got far richer as a result, while also making working conditions much safer and more pleasant.
Bangladesh would do well to follow in those footsteps next, and if activism by rich-world progressives gives it the nudge it needs to take the next steps, then that’s all for the best. But if that activism simply causes garment factories to close en masse, robbing Bangladesh of its most important lifeline out of desperate poverty, well…that would be bad. So progressives in the rich world should be very careful here; it’s someone else’s lives and livelihoods that hang in the balance.
Pakistan, as it happens, has also made major progress in reducing extreme poverty, but more through redistribution rather than growth.
This isn’t nearly as far-fetched as it might sound. In fact, one of the most prominent theories of the Industrial Revolution is that expensive wages in the UK sparked a tech boom that eventually became self-sustaining.
2025-07-28 15:30:50
During the Biden years, a lot of us thought that the next era of world history would be defined, in large part, by economic and geostrategic competition between the U.S. and China. That’s looking a little less likely these days. Donald Trump still makes the occasional aggressive noise toward China, but his approach has become much more conciliatory. Slowly or quickly, he’s walking away from most of the policies the Biden administration was using to stand up to China — canceling export controls, canceling industrial policy, putting tariffs on key allies, defunding research, and so on.
Meanwhile, China is reaching the zenith of its power. Its share of world manufacturing1 has rocketed up to levels similar to what the U.S. enjoyed in the mid-20th century, when it was the planet’s undisputed industrial colossus:
China’s cities feel like the future to people who go there — their infrastructure is gargantuan and newly built, they’re filled with robots and electric vehicles and futuristic payment systems, and the buildings are covered in LEDs. China’s innovation system is producing fewer world-changing breakthroughs than America did at its peak, but has nevertheless managed to put the country at the forefront of science and technology2 through an accumulation of incremental discoveries. The world’s electric cars, drones, ships, industrial machines, and robots are made in China, and — thanks in part to Trump’s surrender — its semiconductors and aircraft may soon be made there as well.
But being the world’s most advanced and powerful country is a relative thing. In an absolute sense, I think it’s very possible that the Chinese Century — or the Chinese Half-Century, or whatever it turns out to be — will underwhelm. Technologically, most rising countries transition from making things better to making new things, but China may remain mostly a fast follower. Economically, China will have the most global heft, but its living standards may remain below those of the U.S. and Europe. Socially, China may remain repressive and stifled, without the kind of efflorescence of art and culture that came out of Japan, the U.S., and the UK in their heyday. Geopolitically, China may remain inward-focused and never transform the global system the way other powers did (though given its repressive politics, this will probably be a plus for the rest of the world).
I’m not going to claim, of course, that all of China’s shortcomings will be due to the actions of a single leader; that would be absurd. Every country has major limitations, even at the height of its power. China’s cities sprawl too much, for reasons that have nothing to do with Xi Jinping. Xi didn’t create the real estate bubble whose aftermath is now slowing Chinese growth. Nor did Xi cause the low fertility rates that will weigh heavily on China’s economy in the latter half of this century.
And yet I think there are many ways in which Xi’s overwhelming power and personal limitations are combining to hold China back from its potential greatness.
Powerful leaders are a risky strategy for any country. Mao Zedong’s rule was an economic and humanitarian disaster that left China far behind in the development race. Deng Xiaoping, in contrast, was the true Great Man of modern Chinese history, unleashing rapid economic growth through economic liberalization, while appointing successors (Jiang Zemin and Hu Jintao) who would largely stay that course.
This is hardly a phenomenon unique to China, of course. But the Communist Party’s system tends to concentrate power in the hands of a single man, because succession and consolidation of power are based on backroom machinations and use of the legal system to imprison rivals. This became apparent once the country ran out of Deng’s chosen successors, and control of the Party became a free-for-all. Xi Jinping consolidated his power by ruthlessly crushing his rivals, including Bo Xilai and Zhou Yongkang, as part of an extensive “anti-corruption” campaign.3
Xi then gave himself power far exceeding what Deng, Jiang, or Hu had enjoyed. He personally led many of the organs of the Chinese party-state, and started appointing loyal cronies instead of technocrats to positions of authority. He has cultivated a personality cult, inserting himself and his writings into every corner of Chinese life. For detailed explanations of how this happened, and what it entails, I recommend Chun Han Wong’s book Party of One and Cai Xia’s 2020 article in Foreign Affairs.
In fact, Xi’s approach to dominating his party and his country somewhat resembles that of a famous 20th century leader: Joseph Stalin. Some will bristle at this comparison, because Stalin’s name is now most closely associated with the millions of murders he committed; Xi has been repressive, but hasn’t done anything close to Stalin’s atrocities. Instead, the similarity is in their leadership style. Xi and Stalin both muscled their way to the top of an existing Communist Party by appointing loyalists to every position of importance and purging rivals in a ruthless and paranoid manner.
The best articulation I’ve seen of this parallel is in this conversation between Victor Shih and Dwarkesh Patel:
When you have a leader that strong, it creates a lot of big risks for a country — even one as large, productive, and technologically advanced as China. These fall into two basic categories:
A strong leader making bad choices with no one to restrain him
A strong leader doing destructive things in order to remain in control
The most obvious risk of having a supreme leader just isn’t that competent — that his skill at dealing with policy challenges doesn’t match his skill at consolidating power. In a democracy, the people can vote a bad leader out. In a bureaucratic oligarchy, elders can remove an incompetent leader. But in a dictatorship, you’re pretty much stuck with whatever the dictator wants to do, unless you want to take the extreme risk of removing him by force.
Throughout most of the 2010s, as China grew steadily in strength and technological acumen, there was a general feeling — at least, outside the country’s borders — that Xi Jinping was probably an effective leader. But in the years during and after the pandemic, it became very apparent that he was making a lot of big mistakes.
The most obvious and spectacular one was Zero Covid, of course. Long past the point when it was clear that the virus had mutated into a more contagious form that couldn’t be contained, Xi persisted — often personally overruling China’s party elders. This ended up hurting China’s economy, and probably touched off the real estate crash.
The Zero Covid debacle sparked a general realization among China’s elite that their most powerful leader since Mao was not the genius he made himself out to be. But it was hardly the first big mistake Xi had made; in fact, stumbles and blunders accumulated for years, and continued after Zero Covid. I wrote about these in a post in 2021, which I updated in 2023:
Here are some excerpts from what I wrote:
Xi didn’t create China’s [real estate] dilemma, [but] he didn’t do much to fix it either…Daniel H. Rosen of Rhodium Group wrote out a long litany of hesitant, half-cocked [real estate] reform efforts Xi has undertaken, only to reverse course each time…
Meanwhile, there’s the strong possibility that Xi’s crackdown on industries he doesn’t like will turn out to have been a mistake…
[D]iplomatically, he has put China in a worse position…Xi’s pressure on Southeast Asian nations over control of the South China Sea has led to strong negative attitudes toward China in Vietnam, the Philippines, Indonesia, and other countries…As in other Asian countries, Indian public opinion has become sharply more anti-China…
Then there’s the case of Belt and Road. Xi’s big plan to build infrastructure in other nations in order to secure diplomatic fealty, access to natural resources, and pork for Chinese companies ended up being mostly a debacle. From a port in Sri Lanka to rail projects in Africa to a whole host of projects in Malaysia, partner countries found themselves owing money to China without reaping the promised economic benefits. Even in China’s faithful ally Pakistan, things didn’t work out so well. The whole project is losing momentum…
His “wolf warrior” diplomacy — basically turning the Chinese diplomatic corps into swaggering, bellicose bullies — has backfired spectacularly, giving China a bad reputation around the world…Finally, Xi’s crackdown on video games, LGBT people, pop culture fandoms, and other freedoms has reinforced the country’s totalitarian reputation.
Starting around 2023, in a seeming attempt to right the ship, Xi made a major policy pivot. Chinese banks (which are all effectively state-controlled if not state-owned) were instructed to stop lending to property developers and real estate related companies, and instead to lend huge amounts of money to manufacturers. Along with the flood of bank loans, Xi dished out a truly massive amount of subsidies for manufacturing industries — the most expensive industrial policy that any country has ever undertaken.
The idea was to make China the world’s supreme manufacturing power — an idea that Xi Jinping has long cherished as a route to Chinese national strength and security. Naughton, Xiao, and Xu (2023) write about how the imperative toward national power and national security lies at the center of Xi’s policy program.
This new industrial policy has had some spectacular successes. Chinese EVs increasingly dominate the global auto industry, and it’s achieving similar successes in industries like robots and drones that use a similar suite of technologies. China is also continuing to free itself of dependence on foreign-made components, which would help it to fight a hypothetical war, and which has led to large trade surpluses.
However, Xi’s big success here may prove short-lived. The industrial lending boom is already slowing:
The reason is falling profitability. Contrary to popular belief, China isn’t a very export-intensive economy — it consumes most of what it makes. And that means that when China’s government pays its companies to produce more and more and more, it ends up competing their profits to zero, or even forcing many producers to take a loss. I wrote about this in a recent post:
The problem is only getting worse:
China’s industrial earnings fell for a second straight month, with authorities set to intensify their drive to rein in excessive competition that’s dragging down prices…Industrial profits dropped 4.3% last month from a year earlier, after a contraction of 9.1% in May…The extended earnings decrease underscored the urgency to curb cutthroat competition among companies — dubbed “involution” in China…The smaller haul hurts business confidence and could make companies more reluctant to invest and hire.
In principle, this isn’t too hard of a problem to solve. Just cut off subsidies, restrict bank loans, and encourage the successful companies to buy the unsuccessful ones. Industries will consolidate, profitability will be restored, and China will have a set of healthy national champions. That’s how industrial policy is supposed to work.
But there are two problems with this. First, there’s the political problem — if you spend several years telling everyone they’re going to get a job in a car factory, and then you start closing down all the car factories, people get mad. Companies in China tend to be highly localized, with strong support from one regional government or another. A lot of them are basically regional champions. So if China’s central government starts killing a lot of regional champions, it could lead to anger in the provinces.
A bigger problem, though, might simply be Xi Jinping’s personal idea of what makes a good and powerful economy. He’s less focused on GDP growth numbers than raw output, because his main focus is national security; even if companies are so unprofitable that they’re destroying economic value rather than creating it, Xi might think it’s worth it, in order to make more cars, more chips, more drones, more batteries, and so on. Whoever makes the most stuff, after all, can make the most military stuff, especially in case of a war.
If China does start a big war, that’ll be bad. But if it doesn’t start a war, then all this preparation, in the form of structuring the whole economy around industrial overproduction, will also be bad, because it’ll make Chinese people poorer than they ought to be. Naughton, Xiao, and Xu write:
Despite the incorporation of market mechanisms into [Xi’s industrial policies], it is certain that [they] represent a substantial expansion of direct government intervention and even control. They will be expensive, they will distort market forces, and they will create new opportunities for moral hazard and even corruption. However, this is the price paid for absolute security: it is in line with the maxim “millions for defense, but not one cent for tribute,”…The complex of policies adopted after 2020 clearly demonstrate the triumph of national security over all other policy objectives…. China, in other words, is getting better at running industrial policy, even as the objectives of that industrial policy become less beneficial to China and the world.
Put in plain terms, Xi Jinping is reorienting China’s economy around producing a bunch of stuff that Chinese people don’t want or need, because this fits with his idea of what makes a country strong.
Eventually, if the economic effects get bad enough, Xi will probably temper those policies, just as he canceled Zero Covid and tried to reverse his crackdown on the Chinese software industry. He is stubborn, but not infinitely stubborn. But by then, the damage may be done. China’s banking system may be saddled with a huge pile of nonperforming loans to manufacturing companies, on top of the pile of nonperforming loans to real estate companies that already sit on their books. China’s total debt to GDP ratio — including both public and private — is now well ahead of Western countries.
A wave of industrial bad debt would add to the general financial and economic malaise in China. It would basically be like Korea’s 1997 industrial debt bust, added on top of Japan’s 1991 real estate bubble, but scaled up to China size. And if banks responded by keeping failing manufacturers afloat through infinite cheap loans, China really could start to look like 1990s Japan — but worse, since China’s subsidies were more lavish and inefficient to begin with.
In other words, Xi’s big idea for China’s economy may end up being just as bad as his big ideas for Covid, the tech industry, real estate, diplomacy, and international development. Just as China’s economy reaches the zenith of its potential, it might be brought back to Earth by one man’s unorthodox ideas.
Xi’s ability to deal with external challenges may be wobbly, but up until now at least, he has always been able to deal swiftly and effectively with internal challenges to his own rule. But that could change over time, as Xi ages into the winter of his political career.
Xi Jinping is 72 years old. That’s not exactly superannuated — Donald Trump is seven years older, and Deng Xiaoping ruled effectively throughout his 80s. But 72 is old enough where everyone starts thinking about who the successor is going to be. In a liberal democratic regime, this is less of a high-stakes question, because the parties are going to alternate in power anyway. But in a brutal, winner-take-all autocracy like China has once again become under Xi, the succession could literally be the difference between life and death — and certainly between riches and poverty — for a vast number of Chinese elites. Remember that many of Xi’s enemies ended up in prison.
Xi hasn’t yet chosen a successor. He has recently delegated some of his policy authority to a trio of loyalists — Cai Qi, Li Qiang, and Ding Xuexiang, all of whom are in their 60s — but none of them has emerged as a clear successor, and none seems to have their own independent power base. They seem like the kind of people a leader appoints when he’s getting old but doesn’t want to elevate a potential challenger.
Xi changed China’s rules to remove term limits, so as long as his health holds up, he could rule for another two decades; perhaps he doesn’t think he needs to start thinking about a successor yet. But other people in China will definitely be thinking about this all-important question; they’d have to be fools not to be plotting and planning and sharpening their knives right now. Xi, being a consummate master of backroom politicking, undoubtedly knows this. And he also certainly knows that whoever wants to rule China after his passing has an incentive to undermine his power before he’s dead or out of office.
Like other aging dictators, Xi will have to spend an increasing amount of time fending off such challenges to his power. If leaders become more physically infirm or mentally slow, this only heightens their vulnerability, and requires them to be even more ruthlessly paranoid in order to stay on top. Writing in The Wire China, Victor Shih explains how this typically goes:
An alternative explanation for Xi’s absence is that he is beginning a new phase of his administration that is more inward looking, and increasingly preoccupied with internal political issues than external influence…
Two factors drive the inward orientation of aging dictatorships. First, as illness compounds their aging, dictators still need to tend to their domestic political survival, while foreign policy increasingly becomes a secondary concern…
The second major factor leading aging dictatorships to turn inward is that they typically become increasingly preoccupied with succession issues…This process can at the same time elevate the risks of a challenge to the dictator’s power, because potential successors have strong incentives to build up their own power bases. In turn, the aging dictator needs to devote even more time and effort to preventing coups, even as he or she needs to dedicate more time to their own health care.
To be clear, there is no sign that there was a credible challenge to Xi’s power in late May and early June in China, when he disappeared from public view for close to two weeks…Still, even if his absence was caused by a regular, pre-scheduled medical procedure, such events will likely become more frequent in the coming years. Perceptions of a power vacuum may become a common event; and in turn, this may compel Xi to devote even more of his time to ensuring stability [of his power].
It’s notoriously hard to read the tea leaves of Chinese politics, since almost everything happens in secret. But there are some signs that Xi might be starting to enter his “lion in winter” phase. Shih notes that Xi recently skipped the BRICS summit, which he always used to attend. And the Economist reports that Xi has become more reclusive in recent months:
After taking office Mr Xi wielded power through a host of party commissions that permitted him to sidestep the state bureaucracy and other vested interests…But more often he’s now sending written instructions to related meetings rather than attending them, says Neil Thomas of the Asia Society, an American think-tank.
The number of such meetings appears to be dropping, too. The most important commission, on economic reform, met 38 times in the first five years he was in charge. Since 2022 it has held only six meetings and none has been publicly announced since August 2024. Its communiqués are also shorter, which suggests it is making fewer decisions. Other commissions led by Mr Xi have similarly fallen off, notes Christopher Beddor of Gavekal Dragonomics, a research firm headquartered in Hong Kong.
Meanwhile, Xi has stepped up his purges, especially of the military. Some of the generals he has purged were his own appointees. The Asia Society Policy Institute reports:
The final months of 2024 witnessed a new wave of purges in Xi Jinping’s China. On November 28, the Defense Ministry announced the suspension…of Admiral Miao Hua, the number four military leader below Xi…Miao’s ouster makes him the third PLA general in charge of political and organizational work Xi has purged, and the second of the six members of the 20th Central Military Commission…Rumors of more purges have been circulating but they are often impossible to verify, especially when they involve high-ranking PLA officers…
The phenomenon is not confined to the military. Purges of civilians have also been numerous…[A]t least 58 high-ranking [Party] cadres lost their positions in the first three quarters of 2024 and 642,000 cadres at various levels were punished over the same time period, according to official statistics. Among 205 full members of the 20th Central Committee of the Chinese Communist Party (CCP), at least eight were purged…eight seemed to be in trouble given their prolonged, unexplained absence from important meetings among other signals; and three were sidelined. In all, those affected comprise 9.3 percent of the members of China’s most powerful body of political authority[.]
And The Economist has data showing that investigations of senior officials have tripled since the pandemic.
This will also probably have ramifications for the relationship between the state and the private sector in China. Even at the start of his rule, Xi instinctually tried to increase state control over the economy. The 2021 tech crackdown was partly motivated by Xi’s disdain for the consumer internet industry, but the desire to crush alternative centers of ideas and popularity probably figured into the decision as well.
Now, as Xi advances into his later years and his hold on power becomes more tenuous, he will be even less tolerant of private companies or entrepreneurs who could challenge him or fund his rivals. The natural response will be to double down on his traditional approach, and exert even more heavy-handed control over the private sector. That’s unlikely to be good for the Chinese economy.
In other words, even though Xi is only 72, we may already be seeing him go into the “lion in winter” phase that other aging dictators tend to go through. And that may paralyze, distract, and unsettle China for years to come.
For people in China, one or two more decades of increasingly reclusive, paranoid Xi Jinping rule sounds like an unappetizing prospect. Chinese society — its corporations, its cities, its talent — are now robust enough that Xi is unlikely to be a calamity like Mao was. But one or two decades of a slower-growing economy, less individual opportunity, and a more repressive society won’t be the optimal way for China to enjoy the zenith of its power. China’s people are incredibly talented, hard-working, and creative, and they deserve better than an aging Xi Jinping.
But for the rest of the world, Xi’s blunders and his increasingly inward focus might provide a temporary reprieve. China’s economic and technological power at this moment in history is truly spectacular; if its leaders wanted to turn that power toward conquest and domination, they could. In fact, every other great power did try to use their power to dominate weaker nations to some extent.
But if Xi Jinping spends the next one or two decades suppressing internal challengers and committing economic blunders, it could save the rest of the world from the threat of Chinese hegemony. An inward-looking, mildly sclerotic China would be a bit of a tragedy, but it would also allow countries like Japan, India, Vietnam, and Korea — and of course the United States — to breathe a sigh of relief.
Right now, with Donald Trump busy smashing everything that made the free world such an effective bloc in the first Cold War, Xi Jinping and his personal shortcomings might be our best hope to avoid domination by the most powerful autocracy the modern world has ever seen.
Note: I often post the UN’s forecast that China will account for 45% of all global manufacturing value added by 2030. But Jonathon P. Sine points out that 36% would be a more realistic projection:
36% is still a hell of a lot, though — it’s about where America was in the early 60s.
Some measures put China still slightly behind the U.S., but closing the gap fast.
Obviously Xi’s rivals were corrupt, but so was every Chinese leader, including Xi himself. When everyone is corrupt, it’s easy to crush your rivals while also actually reducing corruption somewhat.
2025-07-26 18:01:45
I think it’s pretty uncontroversial to say that the MAGA movement is the most powerful and important political movement in America today, by a wide margin. Trump’s control of the presidency, and his unprecedented domination of the Republican Party, mean that even though MAGA isn’t a majority of Americans, it has complete control over the federal government. That control will diminish, but not disappear, if Democrats take back one or both houses of Congress next fall. In the meantime, despite falling popularity, MAGA reigns supreme.
And yet I can’t help thinking that despite its current dominance, the MAGA movement doesn’t have much of a long-term future. It has managed to win some elections, by harnessing popular rage — against Democrats, against immigration, against educated elites, against economic conditions, etc. But rage doesn’t last forever. In order for a movement to have longevity, I think it needs to build something. Things like physical infrastructure, institutions, and culture have a lifetime that long exceeds the cascade of emotions that first brings a movement into being.
Successful political movements in America have always been, at least in part, constructive movements. The New Deal built vast infrastructure, government agencies, social insurance programs, regulatory regimes, and much more. The conservative movement of the late 20th century gave rise to modern American business culture, a Christian revival, a military whose power was unrivaled for a generation, and organizations like the Federalist Society. Even the New Left movement of the 1960s and 70s ended up leaving its mark on America by taking over university departments and creating a bunch of NGOs.
Trump’s administration is certainly fond of the symbolism of building a new America. Trump’s Department of Homeland Security recently posted the famous 1872 painting American Progress, depicting pioneers going to settle the West:
And yet in terms of the actual on-the-ground reality, I don’t see MAGA doing much pioneering. Instead, I see a fundamentally deconstructive movement — a furious assault on progressive culture, liberal institutions, and the structure of the U.S. economy in general, with no idea of what should replace it. On culture, factories, infrastructure, energy, technology, and institutions, MAGA is tearing things down without building things up.
Let’s talk about culture, first, because I’ve already written a bit about that. When I was a kid in the 1990s, conservative culture was blossoming. Evangelical Christianity was the tentpole of that culture, of course, and there was an efflorescence of religious revival — megachurches, Christian TV stations, Christian rock, and so on. But it blended with other conservative cultural elements as well — patriotism, respect for the military, country music, etc.
I remember an event at my high school called See You at the Pole, where teenagers would go pray around the American flag. Although some of my liberal friends looked askance at this gathering, I admired its constructiveness and positivity. I certainly have much to criticize about late 20th century conservatism, but it was a grassroots outpouring of enthusiasm and devotion that built new traditions, communities, and group activities all over America.
Contrast that with Donald Trump’s right-wing movement over the past ten years. In a post back in March, I pointed out that there was no nationwide grassroots cultural movement associated with MAGA:
Trump’s movement has been around for a decade now, and in all that time it has built absolutely nothing. There is no Trump Youth League. There are no Trump community centers or neighborhood Trump associations or Trump business clubs…Christian affiliation and church attendance remain well below their levels at the turn of the century. Republicans still have more children than Democrats, but births in red states have fallen too.
In Trump’s first term, the attempts at organized civic participation on the Right were almost laughably paltry. A few hundred Proud Boys got together and went to brawl with antifa in the streets of Berkeley and Portland. There were a handful of smallish right-wing anti-lockdown protests in 2020. About two thousand people rioted on January 6th — mostly people in their 40s and 50s. And none of these ever crystallized into long-term grassroots organizations of the type that were the norm in the 1950s…And in Trump’s second term so far? Nothing. Even the rally numbers are way down…
The MAGA movement, you see, is an internet thing. It’s another vertical online community — a bunch of deracinated, atomized individuals, thinly connected across vast distances by the notional bonds of ideology and identity. There is nothing in it of family, community, or rootedness to a place. It’s a digital consumption good. It’s a subreddit. It is a fandom.
Say what you will about the woke movement, but it built plenty of culture. It created NGOs, protest movements, and campus groups. It created new quasi-religious rituals in the form of land acknowledgements and other customs. I was never particularly into that culture, or eager to join those groups, but they did represent a fairly cohesive cultural program for what a future America would look like.
The MAGA folks have focused a lot of energy on rooting out woke culture at universities and government agencies. But what will they put in its place? If woke dies, what comes next for America? Trump’s movement doesn’t seem to have an answer.
2025-07-24 18:28:39
Adam Ozimek had an interesting tweet today:
It’s a compelling point. The op-ed he’s referring to is by law professor Zephyr Teachout, in which she accuses grocery stores of using market power to squeeze out smaller competitors and raise prices for consumers. I’m not sure who has “mocked” Teachout’s article, but Alex Tabarrok did a very good job of dismantling its arguments. As Tabarrok points out, Teachout’s argument is simply incoherent; she blames big grocery stores for jacking up the price of eggs, but then she cites lower egg prices at big grocery stores as evidence of this wrongdoing:
Cities have the power to bring down food prices…Big retailers often flex their muscles to demand special deals [from suppliers]…Those discounts are…a major reason that prices are so insane…
Consider eggs. At the independent supermarket near my apartment, the price for a dozen white eggs last week was $5.99. At a major national retailer a few blocks away, it was $3.99…
So the next time you’re staring down a $10 carton of eggs, remember: Call the mayor.
How can big grocery stores raise the price of eggs by charging lower prices for eggs? It seems obviously nonsensical. Teachout argues that big stores use their market power to force suppliers to give them discounts, which in turn forces those suppliers to jack up prices for small stores. She thinks the latter effect outweighs the former — if not for market power, she thinks, eggs would cost $3.99 at the small stores too.
This story requires some pretty heroic assumptions. For Teachout to be right, we have to assume that the suppliers have insufficient market power to resist the big stores, so that they’re forced to offer Costco lower prices. But we also have to assume that the suppliers are able to squeeze the small stores in response, which means we need to assume that the suppliers have some market power of their own — just not as much as the big stores. All of the market power has to work out just right, or the whole story falls apart.
But here’s the thing. We don’t have to just assume all of that stuff; we can easily go check the data. It turns out that even the biggest grocery stores make almost no profit. Costco and Walmart, the biggest and presumably the most powerful grocery stores in the country, both have profit margins of less than 3%, compared to around 12% for the S&P as a whole. Other big stores like Kroger make even less. The big-box grocery stores therefore have very little market power, and are operating at close to cost.
And this makes sense given the fact that the grocery industry is very fragmented — Walmart has a 25% market share nationwide, but everyone else is in the single digits. (And there aren’t even any Walmart stores in NYC!) As Tabarrok notes, the obvious reason the big stores getting better deals from the suppliers is that they’re buying in bulk — which of course is perfectly legal.
Going after grocery stores doesn’t make sense. But Democrats just keep doing it — Elizabeth Warren blamed grocery stores for rising food prices during the post-pandemic inflation, and Joe Biden blamed them later on. Kamala Harris wanted a law against “price gouging” for groceries.
What’s going on? The likeliest answer, I’m guessing, is that Democrats think that by going after grocery stores, they can harness populist rage. The 2010s were a time of popular anger in America, and it felt like whoever could harness and direct that roiling energy would reap political dividends. And since the end of the pandemic, Americans have been mad about inflation. Food is an absolute necessity of life, so higher food prices really hurt the average American. Groceries are something that people buy very frequently, so they tend to notice price changes.
And just like with health insurance, Americans probably tend to get mad at the consumer-facing company who actually charges them money, rather than at the shadowy suppliers who are billing the consumer-facing company — or at external forces like supply shocks. Indeed, grocery stores have become less popular as prices have gone up, even though the stores aren’t profiting much:
So it might make political sense to raise a hue and cry against grocery stores, even if the economics doesn’t make much sense.
But there are at least two big problems with this strategy. First of all, since grocery stores aren’t the actual source of high food prices, coming down hard on them won’t actually help American consumers. Laws against “price gouging” will just force grocery stores to lose money when supply shocks raise their costs. Their thin margins — which don’t actually rise during inflationary episodes — will go negative. They will probably have to close some stores, leaving consumers less well-served, and ironically increasing concentration of the grocery industry at the local level.1
If progressives try to get the government involved in the grocery business, as Zohran Mamdani wants to do, it probably won’t end up going well. In fact, Kansas and other states have experimented with government-owned stores, and they have — pretty predictably — underperformed:
KC Sun Fresh was the city’s attempt to alleviate a lack of access to healthy food in its urban center…But the store, in a city-owned strip mall, is on the verge of closure. Customers say they are increasingly afraid to shop there — even with visible police patrols — because of drug dealing, theft and vagrancy both inside and outside the store and the public library across the street.
KC Sun Fresh lost $885,000 last year and now has only about 4,000 shoppers a week. That’s down from 14,000 a few years ago…Despite a recent $750,000 cash infusion from the city, the shelves are almost bare…
High-profile projects have [also] failed in recent months in Florida and Massachusetts.
As Ezra Klein and the Abundance folks like to point out, at some point you actually have to make stuff work in order to make the voters like you. Getting Americans mad at an undeserving target like grocery stores might win you a couple of elections in the short term, but in the long term, you have to actually address reality; if you fail to bring down food prices, people are going to feel betrayed and get mad at you for failing to keep your promises.
Donald Trump is finding that out now. He campaigned on the idea that kicking out immigrants would bring down prices. Now ICE is rampaging through American communities and rounding people up for “Alligator Alcatraz”, but prices aren’t going down, or even slowing. As a result, inflation has gone from one of Trump’s strongest issues to one of his weakest:
If Democrats blame the cost of living on corporations with 2% profit margins, their attempts to make life in America cheaper will fare no better than Trump’s, and will lead to similar disillusionment.
Meanwhile, there is a well-deserving target that Democrats could attack instead: Trump’s tariffs. Believe it or not, when you tax imported goods, consumer prices go up:
A new analysis from Yale’s Budget Lab, a nonpartisan economic research group, outlines the sweeping effects of 2025’s trade policies…[F]ood prices are expected to rise, with fresh produce alone projected to jump more than 5% as new import taxes ripple through the food system…The report estimates that recent U.S. tariffs — including new taxes on imports from China, Mexico, and Canada — will raise food prices by 2.6% overall in the short run, with sharper increases expected for categories like fruits and vegetables.
There are some signs that this is happening already. Inflation ticked up last month, and imports saw significantly higher price hikes than other goods. Independent investigations have identified a bunch of consumer goods whose prices are probably being pushed up by tariffs.
Trump’s tariffs are an obvious and well-deserving target for Democratic attacks. But because many progressives have decided that “neoliberalism” is the root of all America’s problems, and that attacking neoliberalism is the way forward — and because tariffs are, without a doubt, an anti-neoliberal policy — some progressive Dems have been hesitant to condemn Trump’s tariffs as harshly as they ought to.
It would be pretty ridiculous if Democrats gave a GOP President a pass on policies that actually are driving up the cost of living, in order to try to gin up a populist crusade against grocery stores that are not driving up the cost of living. That would be, in the parlance of internet slang, an epic fail. Fortunately, it looks like Dems are slowly starting to unite around an anti-tariff message.
That’s the right thing to do, but it’s going to scare some progressives, because free trade is a pillar of — gasp! — neoliberalism. Nor is it the only area in which a return to the economics of Bill Clinton seems warranted. There’s also the exploding national debt. Trump’s “Big Beautiful Bill”, which will increase deficits by cutting taxes, is highly unpopular with voters. Those new deficits will only add to the problem of rising interest payments that are threatening to swamp the federal budget:
America has too much debt, and it needs austerity — tax increases and spending cuts. Progressive think tanks who pushed the Biden administration to do a bunch of deficit spending in order to stimulate employment are seeing their influence wane, and the radical pro-deficit ideology that calls itself “MMT” has deservedly been disgraced.
And Adam Ozimek is also totally right that in the longer term, deregulation will be an important tool of providing abundance for the people of America. The Abundance agenda isn’t just about deregulation, as its lazier critics allege. But deregulation — especially reforming regulations like NEPA that hold the government back — is definitely an important piece of the equation.
Meanwhile, if we look at what’s happening overseas, market-oriented policy is doing pretty well. Javier Milei’s libertarian program is showing some promising results in Argentina, especially compared to the disastrous Venezuelan socialist regime that some leading American progressives supported. Countries like Poland and Singapore have rocketed up the income charts, thanks mostly to neoliberal policies and foreign investment.
So if Democrats should embrace free trade, austerity, and deregulation, won’t that just make them neoliberals? Well, to some extent, yes. Economic reality — rising interest costs, persistent inflation, the harms from poorly crafted regulation — means that if Democrats want to actually improve the lives of average Americans, they need to return at least partially to the approaches of the Clinton years.
Politically, neoliberalism makes sense too. Trump has seized the banner of anti-neoliberalism for himself, and it’s not going well for him. Simple opposition to Trump’s disastrous ideas will probably earn political dividends for Dems in the short term.
As for progressivism, a neoliberal welfare state centered around things like child tax credits will be a much more effective way of helping the poor and working class than a kludgeocracy of consumer subsidies, rent controls, “everything bagel” contracting requirements, government job provision, share buyback bans, anti-price-gouging laws, and so on. Clinton and Obama made progress toward a simple, effective neoliberal welfare state, with expansions of the EITC and CTC, as well as programs like food stamps. Redistribution isn’t always better than “predistribution”, but in America the former has proven more politically feasible than the latter.
But at the same time, there are important reasons Democrats shouldn’t just copy-paste the Bill Clinton economic approach. For one thing, the country still needs industrial policy if it’s going to stand up to China effectively, both on the economic front, and militarily. Also, a key piece of the Abundance agenda is state capacity — the ability of the government to get things done in-house. The government needs to build infrastructure and energy (and hopefully housing), and continuing to outsource those crucial functions to overpriced consultants and ineffectual nonprofits is not going to cut it. The U.S. needs a bureaucracy big enough and competent enough to be able to carry out projects that the private sector won’t do — or won’t do fast enough and at big enough scale.
So what Democrats need to do is to pivot towards a new economic program that combines Clinton-style neoliberalism and the kind of “development state” common in East Asia. We need fewer ideological crusades and populist kludges, and more competence and capacity. The challenges of today’s world are very different than the challenges of the 90s, and will require some different policies. But Democrats have veered too far away from what worked in the 90s, and that era still has plenty of lessons to teach us.
Basically, if stores are forced to take losses during supply shocks, they’ll have to make more profits during normal times to make up for that. The only way to make more profit during normal times is market power. And the way to increase market power is to increase concentration at the local level, so consumers get charged more. Thus, anti-price-gouging laws will probably exacerbate the very problem they claim to solve.
2025-07-22 17:35:21
We often talk about ways in which Japan is ahead of other developed nations; in the old days, people said this about technology, while more recently it’s usually about social trends like sexless youth. But when I lived there, I often noted ways in which Japan was behind the U.S. Trends in fashion, music, and culture seemed to get popular in Japan about five to ten years after their heyday in America.1
For a long time, mainstream Japanese politics was essentially devoid of the type of xenophobic, conspiratorial, nativist populism that has defined the MAGA movement in America and parties like AfD in Europe. The late Abe Shinzo, Japan’s prime minister from 2012 to 2020, had the reputation of being a rightist. But in fact, he governed as much more of a Reaganite conservative, or sometimes even a liberal; he opened the country to immigration and supported women in the workplace. When an anti-Korean hate group arose in the early 2010s, Abe passed Japan’s first law against hate speech and put the hate group on a watch list, ultimately demolishing it as a political force.
But like raves and backwards baseball caps, Trumpian politics has finally made it to Japan’s shores. A new political party called Sanseito2 has won a surprising number of seats in Japan’s recent Upper House election, running on a platform that mostly looks like it was copied directly from MAGA:
Its leader is a former supermarket manager who…campaigned on the Trumpian message “Japanese First.”…Now Japan’s burgeoning right-wing populist party Sanseito has…bagged 14 seats [out of 248] in Japan’s upper house…
Party leader Sohei Kamiya founded the group in 2020 by “gathering people on the Internet,” then gradually began winning seats in local assemblies…It gained traction during the Covid pandemic, during which it spread conspiracy theories about vaccinations and a cabal of global elites…[I]n the run-up to the upper house elections, it became better known for its “Japanese First” campaign – which focused on complaints of overtourism and the influx of foreign residents…Sanseito tapped into these frustrations on its “Japanese First” platform, along with other complaints about stagnant wages, high inflation and costs of living…
The party supports caps on the number of foreign residents in each town or city, more restrictions on immigration and benefits available to foreigners, and making it harder to naturalize as citizens…Sanseito is also pushing for stronger security measures and anti-espionage laws, greater tax cuts, renewable energy, and a health system that leans away from vaccines.
Some of this — for example, the antivax stuff and the ranting about globalist elites — is clearly just the spread of memes from the U.S. and Europe to Japan. Kamiya Sohei, the party’s leader, even said some stuff about “Jewish capital” in a speech; Japan’s banks have essentially zero Jews in them, so you know this is just something he read on the internet.
But the party’s main issue — restrictions on immigration and tourism — isn’t just mimicry of Trump or AfD. Instead, it’s a response to a real and important trend that has affected the entire world, and happened to hit Japan a little later than other countries.
There are three main reasons for the global migration boom. The first is the internet; as people in the developing world get more information about how to move to rich countries, and learn what life in rich countries is like, a lot more of them get the idea to move. The second reason is global development; as each country first starts to escape poverty, its people get enough money to move out.3
The third reason is low fertility rates. All rich countries now have fertility rates that will cause them to dwindle and shrink in the long term. This causes labor shortages in many industries. Rather than accept large-scale economic and social disruption from labor shortages, essentially every rich country eventually chooses to turn to immigration to plug those gaps. Japan took a little longer to reach this decision, but ultimately it ended up doing much the same thing everyone else did:
If you want the detailed story of how and why Japan opened itself up to immigration, read that post. But the basic story is that Japan has, in fact, opened itself up to immigration:
The “Korean” people on this chart are almost all “zainichi” people, whose ancestors immigrated from Korea and who have South or North Korean passports and citizenship (Japan does not have birthright citizenship), but who are functionally Japanese. The real influx of foreigners only started in the 1990s, and it was only around 2013 that true permanent mass immigration began. That immigration is mostly from Vietnam, the Philippines, and Nepal, though some other Southeast Asian countries, as well as the U.S. and Taiwan, are starting to figure into the mix as well.
I travel to Japan quite frequently, and this immigration is very noticeable. Plenty of convenience stores have Nepalese and Chinese clerks; plenty of restaurants have Vietnamese cooks. Also keep in mind that the numbers above count only the foreign-born, not the children of the foreign-born; Japan’s youth are diversifying more rapidly than the population as a whole.
In fact, it’s an open question whether this immigration will degrade some of the special characteristics that make Japan such a great place to live in the first place. Japan is not the U.S. — it’s not a nation of immigrants, and it has traditionally defined its national identity in terms of a unique culture that newcomers don’t share.
Other than making it slightly harder to talk to convenience store clerks, mass immigration hasn’t yet really changed the face of Tokyo, Osaka, or other big Japanese cities. But in specific areas, immigration is forcing big local changes to Japan’s way of life. There are now over 200,000 Muslims in Japan; mosques, Muslim schools, and Muslim graveyards4 have radically reshaped some neighborhoods.
Then there’s the possibility of crime. Unlike the United States, Japan’s society functions on the assumption of almost zero violent crime. Its famously safe streets give women and children the freedom to walk around at night alone without worrying — a freedom that’s totally alien to Americans, and a constant source of wonder for people who visit Japan. The assumption of total public safety also allows cities to be built with a level of walkability and density that the crime-ridden U.S. shies away from.
Immigrants in Japan are generally surprisingly well-behaved. Unlike in the U.S., the average immigrant in Japan is going to tend to be a little more rowdy and unruly than the locals, just because Japan is one of the most peaceful countries on Earth to begin with. But acculturation is real and powerful; people tend to follow the social norms of the people around them, so when you drop a random American or Australian in the middle of urban Japan, even if he was a gangster back home, he’ll probably follow the rules like everyone else does. (In fact, I knew two such former gangsters in Osaka.)
On average, it looks like foreigners get arrested at a bit less than twice the rate of native-born Japanese people. Given the very low baseline, this isn’t a very significant amount of crime. Japan has a murder rate of about 0.23; even doubling that would still leave them safer than Korea or China (and safer than Japan when I lived there in the 2000s, for that matter), so increasing it by a far smaller percent via immigration isn’t going to change the nation’s fundamental character. Immigrant crime isn’t a big deal in Japan…yet.
But if the foreign-born population of Japan keeps growing, will this still hold true? If Japan’s population goes from 3% foreign born to 16% — the level of the UK — there will be large enclaves where foreigners and their descendants live out their lives mostly surrounded by each other instead of by Japanese people.
At that point, will acculturation to low crime rates break down? That’s probably what happened in France, where “banlieue” immigrant neighborhoods are high in crime and have seen frequent rioting, despite the overall peacefulness of the country. It would be a shame to see Japan forced to become like France, with guards armed with machine guns standing on street corners. The loss of the ability of women and children to walk safely alone at night in urban areas would be a tragedy. The scary thing here is that we don’t really know if this will happen, or how much immigration it would take to bring it about…and we won’t ever know, unless and until we wake up and find that it’s already too late.
So it’s reasonable for Japanese people to be uneasy about the possibility of continued mass immigration. In fact, although I’m personally an advocate of continued large-scale immigration in America, I’m pretty apprehensive about the prospect when it comes to Japan. And I can understand why some Japanese people are apprehensive as well.
In fact, I think there’s another reason for the rise of nativist politics in Japan: the overtourism problem.
In recent years, thanks in part to a concerted decades-long campaign by the national government, the entire world has learned that Japan is an easy place to visit and get around in. Translation apps, Google Maps, cheap international roaming, and Apple Pay have made it even easier. Japan is an incredibly unique, pleasant, and fun place, and it’s also now a cheap place for foreigners, thanks to the recent weakening of the yen. Everyone who recommends travel destinations says the same thing: Go to Japan.
As a result, Japan has become absolutely flooded with tourists. In 2024 the country probably received about 37 million travelers:
If this boom were dispersed evenly throughout time and space, it wouldn’t be very onerous. If every tourist came for only one week, and they were spread out evenly throughout the year, 37 million annual visitors would represent only 0.6% of the Japanese population. That’s tiny.
The problem is that the tourists are not spread out evenly through time and space. They crowd into a few places — the west side of Tokyo, the older neighborhoods of Kyoto — at a few times during the year. During the cherry blossom season in late March and early April, west Tokyo feels as international as NYC. The coffee shops and restaurants and parks are crammed with foreigners, few of whom can speak Japanese. Train stations are jammed up with tourists fumbling with their payment cards at the ticket gate. It’s almost impossible to get a dinner reservation.
In some neighborhoods, the crush goes away during off-season, but some of Japan’s most beautiful and vibrant spots have been hollowed out into tourist traps. Golden Gai, a small drinking district which houses some of Tokyo’s coolest little bars, is now almost entirely tourists. Shibuya, once the beating heart of Japan’s youth culture, is now a museum of itself. Akihabara is no longer the haunt of anime nerds and social outcasts, but a place where tourists go to shop at a shrinking number of increasingly generic stores.
Nowhere has it worse than Kyoto. Reeves Wiedeman had a great travel report in the Intelligencer the other day, illustrating how everything that made Kyoto interesting and distinctive has been either chased away by a constant choking throng of tourists, or crassly commercialized to sell to foreigners.
This is what economists call a “congestion externality”. If only one tourist goes to Shibuya, she can get lost in a neon wonderland; if a million tourists go to Shibuya, the neon wonderland gets replaced by something empty and tawdry, and no one gets to enjoy it.
Congestion externalities also strain the efficient public transit systems and well-designed streets for which Japan is famous. Cities are best when they’re built for continuous occupancy, but tourism is seasonal. That means if you build a train system to handle peak tourism season, it’ll be underused for much of the year. But if you build a train system to handle the average number of riders in order to maintain profitability, it’ll be unusable when the tourists come. There’s no fully satisfactory solution to this problem.
And all that is before we take tourist behavior into account. In Chicago or Philadelphia, a tourist is probably going to be less rowdy and more law-abiding than the locals; in Japan, it’s just the opposite. Tourists don’t acculturate as much as immigrants do; they haven’t been in a country long enough to know how to follow the local rules and norms.
As a result, you now see huge numbers of videos of tourists acting up in Japan. I’ll post just a few:
And of course there are all the high-profile cases of streamers going to Japan and behaving badly in order to get attention online.
This isn’t as bad as murder or theft, obviously, but it does degrade the character of a nation like Japan. The anti-foreigner anger fueling the rise of Sanseito isn’t just because of immigrants; it’s partly because of tourists.
And the real crux of the tourism problem is this: When does it end? If this were a temporary issue, it would be bearable. But Japanese people can look at places like Venice and realize that tourism isn’t a temporary phenomenon; if nothing ever gets done, the country’s Tier 1 cities are going to be theme parks for all eternity.
Cutting down on overtourism would probably go a long way toward defusing Japan’s rising anti-foreign backlash. One simple policy would be for each city to levy a surcharge on hotel reservations made to foreign bank accounts. This would allow Tokyo and Kyoto to selectively raise the price of tourism to those hot destinations, pushing international travelers out to cheaper smaller cities and rural areas where their dollars are more needed. (It would also raise revenue for the government.)
I think it would also help to arrest and punish of tourists who engage in criminally disruptive behavior. All Singapore had to do in order to get a reputation as a country that brooks no nonsense from tourists was to cane one guy for vandalism.
But cutting down on overtourism won’t solve the whole problem. Japan is simply not traditionally a nation of immigrants, and so learning how to deal with mass immigration is going to be a bumpier road than it was for the U.S. (And note that even for the U.S., it was often bumpy indeed…like now.)
Fortunately, Japan has some time. Anger at immigration has not yet come to dominate the national mood. Polls still show very favorable sentiment toward immigration. Here’s one from 2024, showing that pro-immigration sentiment has actually increased in recent years:
So the Sanseito backlash is still among a minority of Japanese people. But as we’ve seen with MAGA in the U.S., a minority of very dedicated, angry people can create a lot of trouble for a country.
Japan’s ruling LDP is going to have to act. Traditionally, the LDP wins by being ideologically flexible and addressing the concerns of the electorate as they arise. It needs to do so again, so that the immigration problem doesn’t end up causing the rise of a Trump-like figure.
The first thing Japan’s leaders should do is to improve immigrant selectivity. The country has struggled to attract skilled immigrants en masse, due to low entry-level salaries and the language barrier. But the government should redouble its efforts — as the U.S. becomes a less attractive destination, Japan may emerge as an attractive alternative. In fact, this is one of the main topics of my recent book, Weeb Economy. (Sadly, the book is only available in Japanese.)
But skills aren’t the only kind of selectivity. Japan can selectively target immigration from countries that are culturally and religiously similar to itself — places like Vietnam and Thailand. It can try to attract political dissidents from China, and refugees from the Hong Kong crackdown.
The second thing Japan should do is to improve assimilation policy. Japan’s system for dealing with immigrants was built on the assumption that they were temporary expats or guest workers who would eventually go back to their home countries. The children of foreigners often attend their own schools, and some of them end up with limited Japanese ability.
This has to end. Kids born to foreigners in Japan should be sent to Japanese schools, so that they learn the language, and — even more importantly — so they acculturate to the norms of the Japanese kids around them. The only kids who go to international school should be those whose parents intend to leave soon.
It’s also worth looking at the idea of residential dispersal, in order to prevent the formation of ethnic enclaves that resist Japanese culture. Singapore does this by enforcing racial diversity within each apartment block. Japan probably doesn’t have the ability or the will to go that far, but Sanseito’s idea of capping the foreign percentage in each municipality could actually be on to something. Such a cap is unworkable, of course. But the government could certainly offer vouchers for foreigners to live in neighborhoods where they’re scarce, thus helping to speed up assimilation. Japan could also act to break up poor immigrant enclaves, like Denmark does.
One other idea I had was for the Japanese government to provide free intensive Japanese language classes for all immigrants who intend to settle in Japan. These classes would also function as networking events; Japanese speakers and conversation partners could be invited to the classes. This could be matched by industry — Japanese engineers could come meet immigrant engineers, and so on. This would help immigrants build up their native connections in Japan, and to more quickly become embedded into Japanese society.
Anyway, unless Japan decides to reverse course and shut out immigrants — which would have negative consequences for its economy — it’s going to have to learn to assimilate the ones who do come and settle down. European countries are already trending strongly in this direction; Japan doesn’t have to copy their policies, but it can certainly learn some lessons from observing the Europeans’ efforts.
In any case, I don’t expect Trump-style policies to prevail in Japan. Sanseito is unlikely to become Japan’s main opposition party, much less take over the country. But Japan’s leaders should display their traditional nimbleness, and act to defuse the main source of anger behind Sanseito’s rise, before the issues get even harder to handle.
In fact, there’s a long and storied history of cultural transmission and retransmission back and forth between the U.S. and Japan. The best book about this subject is W. David Marx’s Ametora, which deals with men’s fashion.
The name technically means the Political Participation Party, though I think “Populist Party” might be a better translation. It’s also a pun on the word “agree”, so when you hear it, it sounds like “the party you agree with”. Clever!
Eventually, when the country gets rich enough that moving out is a bad economic proposition, emigration trails off.
Traditionally, Japanese graveyards are very compact, because Japan cremates everyone. Religious Muslims refuse to cremate bodies, requiring much more land for graves; in a country as space-constrained as Japan, this can become a major problem very quickly!
2025-07-20 17:41:13
Have you ever had a song stuck in your head? You just walk around humming it all day, and you can’t quite seem to get it out. I find that some intellectual ideas work kind of like that. Some people walk around all day reflexively applying the word “neoliberalism” to everything they don’t like about the modern world. Others are convinced that solar power and batteries will never be viable technologies. Still others blame immigrants for every way in which their country is not yet a paradise, or think that vaccines cause every health problem in society. And so on. Once an idea like this gets stuck in your head, confirmation bias takes over, and you begin to see it everywhere around you — which only reinforces the strength of the idea in your mind. Instead of an earworm, it’s a brainworm.
In the last decade, a new such idea has taken hold among many Americans. This is the idea that artificial intelligence is going to be bad for the economy and for society. To some people, AI is just an inherently suspicious and threatening technology, whose main function will be to deprive regular people of jobs and increase inequality, without boosting society’s overall productivity and wealth by a significant amount.
This AI pessimism is surprisingly common among people I’ve met in the AI industry itself. Although many engineers I talk to are excited about AI, some think that the products they’re creating are eventually going to make large segments of humanity obsolete; these folks’ goal is to make as much money as possible before their own creations inevitably destroy their own careers.
I also encounter a surprisingly large number of center-left thinkers who adopt a similar viewpoint. I remember going to a conference of center-left “progress” types a few years ago; while most of the discussions were about how America can overcome NIMBYism, when it came to AI, the conversation suddenly shifted to how we can restrain and slow down the development of that technology.
In the economics profession, the AI-pessimist viewpoint is being aggressively championed by none other than Daron Acemoglu, probably the top economist in the world, and a recent recipient of the Econ Nobel. Acemoglu wrote a book (with Simon Johnson) about how the grand sweep of economic history shows that society can’t leave the creation of AI to the entrepreneurs and venture capitalists. But although he argues that AI will destroy jobs and cause a massive rise in inequality, Acemoglu also thinks that all that automation won’t do much to raise productivity.
But AI-pessimist sentiment is hardly confined to a few elites; in fact, the average American is pretty negative about the technology:
And in international comparisons, the U.S. stands out as almost uniquely apprehensive about AI:
In other words, Americans are very primed with AI pessimism. Even the smartest among them tend to jump at any shred of evidence that AI is killing jobs, or turning society into a feudal hellscape, or any number of other negative effects.
But each time this happened so far, when we look closely at the evidence — or just waited for the results to come in — the panic turned out to be a false alarm. AI has not yet had a detectably negative effect on the job market, which remains just about as strong as it has ever been in the country’s history:
Now this situation may reverse; someday soon, AI might start killing jobs en masse and sending inequality to the moon. We don’t know. But it hasn’t yet, and it’s important to understand why each burst of AI pessimism so far has been a false alarm.