2025-06-29 17:53:45
There are many things to despise about Trump’s deeply unpopular budget bill, known as the One Big Beautiful Bill, or BBB. It would expand the national debt to dangerous levels with irresponsible and unnecessary tax cuts. It would shift the distribution of income upward. But perhaps the most ridiculous, pointless, and downright insane feature of the BBB is its attack on American energy supply.
Previous versions of the BBB eliminated government subsidies for solar and wind energy. The new version now being debated in the Senate would actually add a tax on solar and wind energy. Politico reports:
Senate Republicans stepped up their attacks on U.S. solar and wind energy projects by quietly adding a provision to their megabill that would penalize future developments with a new tax…The new excise tax is another blow to the fastest-growing sources of power production in the United States, and would be a massive setback to the wind and solar energy industries since it would apply even to projects not receiving any [tax] credits…
Analysts at the Rhodium Group said in an email the new tax would push up the costs of wind and solar projects by 10 to 20 percent — on top of the cost increases from losing the credits…
The provision as written appears to add an additional tax for any wind and solar project placed into service after 2027…if a certain percentage of the value of the project’s components are sourced from prohibited foreign entities, like China. It would apply to all projects that began construction after June 16 of this year.
The language would require wind and solar projects, even those not receiving credits, to navigate complex and potentially unworkable requirements that prohibit sourcing from foreign entities of concern — a move designed to promote domestic production and crack down on Chinese materials.
In keeping with GOP support for the fossil fuel industry, the updated bill creates a new production tax credit for metallurgical coal, which is used in steelmaking.
Jesse Jenkins, a widely respected energy modeler and Princeton engineering prof, has estimated how much this GOP bill would raise taxes on solar energy, and it’s a lot:
Later in his thread, he explains how he arrived at these estimates.
But it gets worse! As Jenkins notes, the bill would also tax nuclear and geothermal energy and battery storage, and subsidize the coal industry:
The new draft of the 'One Big Beautiful Bill'…now contains FOUR tax increases on wind & solar projects — and two facing nuclear, geothermal, and batteries.
It ends tax cuts for wind & solar projects…
It kills accelerated depreciation available to wind & solar investments since 1986…
It imposes a new tax on wind & solar projects…
Raises taxes on US wind manufacturers…
The bill ALSO raises taxes on batteries, geothermal and nuclear projects that can't meet significant, burdensome requirements to prove not a drop of Chinese content as well. And they all lose accelerated depreciation too it seems…
The kicker: the bill raises taxes on the electricity technologies of the future while ALSO creating a new subsidy for coal used for steel making, coal that we…export to China so they can dump cheap dirty steel on the global market! THAT is the GOP's plan for energy dominance??…
And of course, it does that while murdering 100s of US manufacturing projects set to employ 100s of thousands of Americans in good paying jobs building the energy technologies of the future.
Michael Thomas of Clearview Energy, a company that tracks energy-related data, estimates that this bill will lead to the cancellation of more than 500 GW of planned energy supply in the U.S.:
That would have represented more than a 42% increase in U.S. electricity production, and it would have gone to power homes, factories, offices, data centers, and more. Now, under Trump’s budget, that will all be gone. Thomas estimates that this will lead to substantial increases in electricity bills for Americans:
CNN has an interactive tool that allows Americans to see how much their energy bills could go up if Trump’s BBB passes, according to estimates from the think tank Energy Innovation. They write:
Red states including Oklahoma, South Carolina and Texas could see up to 18% higher energy costs by 2035 if Trump’s bill passes, compared with a scenario where the bill didn’t pass…Annual household energy costs could rise $845 per year in Oklahoma by 2035, and $777 per year in Texas. That’s because these states would be set to deploy a massive amount of wind and solar if Biden-era energy tax credits were left in place. If that goes away, states will have to lean on natural gas to generate power.
Trump’s bill wouldn’t just make energy more expensive; it would make it less reliable too. In Texas, adding solar and batteries to the grid has allowed it to avoid blackouts. This is from the New York Times last year:
During the scorching summer of 2023, the Texas energy grid wobbled as surging demand for electricity threatened to exceed supply. Several times, officials called on residents to conserve energy to avoid a grid failure.
This year it turned out much better — thanks in large part to more renewable energy.
The electrical grid in Texas has breezed through a summer in which, despite milder temperatures, the state again reached record levels of energy demand. It did so largely thanks to the substantial expansion of new solar farms.
And the grid held strong even during the critical early evening hours — when the sun goes down and the nighttime winds have yet to pick up — with the help of an even newer source of energy in Texas and around the country: batteries.
The federal government expects the amount of battery storage capacity across the country, almost nonexistent five years ago, to nearly double by the end of the year. Texas, which has already surpassed California in the amount of power coming from large-scale solar farms, was expected to gain on its West Coast rival in battery storage as well.
Here are some quotes from the CEO of ERCOT, Texas’ grid operator, which explain why adding solar and batteries makes electricity more reliable:
A little over 9,000 megawatts of new energy coming online, new supply. The bulk of that is in the solar and energy storage categories…Those are extremely helpful during the summer seasons…The peak in the summer of course is in the afternoon at the peak heat when air conditioning load is at its highest. Solar energy is very well suited to help support that. Energy storage resource is very well positioned to help during the evening ramps…We are seeing as a result of this that the peak risk hour which is generally around 9 PM in the summer evenings, that the risk of emergency events during that hour is shrinking, dropping from over 10% a year ago to under 1% this year, again because of the… new resources.
And of course nuclear and geothermal, which Trump also wants to raise taxes on, are among the most stable energy sources that exist.
It’s also notable how many GOP districts and red states would be hurt by this disastrous policy. Although I don’t believe the purpose of industrial policy should be to create jobs, it’s undeniable that the boom in solar, wind, and batteries has generated a ton of economic activity in Republican-leaning areas.
Why would Trump and the GOP Congress want to raise energy prices for Americans, make electricity less reliable, and destroy their own voters’ jobs? One possibility is that the GOP is captured by fossil fuel interests, which could explain why the BBB goes after nuclear and geothermal as well as renewables. Although I think this is probably true of some representatives and senators, I don’t think Trump himself is captured by Big Fossil Fuels — especially because he was perfectly willing to hurt those industries with his tariffs.
I find two additional reasons to be especially compelling:
Trump and his people are deeply ignorant and misinformed about how energy works, and
Trump and his people see attacks on solar, batteries, and other non-fossil-fuel energy technologies as part of a culture war against progressive culture, which often overrides economic concerns.
Trump’s budget bill claims a national security justification for its taxes on solar, batteries, nuclear and geothermal — it frames the taxes as being about blocking imports from China. But in his public communications, Trump’s Energy Secretary Chris Wright makes it clear that the real goal is to attack new energy technologies themselves:
How much would you pay for an Uber if you didn’t know when it would pick you up or where it was going to drop you off? Probably not much…Yet this is the same effect that variable generation sources like wind and solar have on our power grids…You never know if these energy sources will actually be able to produce electricity when you need it — because you don’t know if the sun will be shining or the wind blowing…Even so, the federal government has subsidized these sources for decades, resulting in higher electricity prices and a less stable grid.
President Donald Trump knows what to do: Eliminate green tax credits from the Democrats’ so-called Inflation Reduction Act, including those for wind and solar power…As secretary of energy — and someone who’s devoted his life to advancing energy innovation to better human lives — I, too, know how these Green New Deal subsidies are fleecing Americans…Wind and solar subsidies have been particularly wasteful and counterproductive…
Climate change activists are predictably up in arms over efforts to end the subsidies…
If sources are truly economically viable, let’s allow them to stand on their own, and stop forcing Americans to pick up the tab if they’re not. [emphasis mine]
Wright’s statements — which we should assume speak for the Trump administration and the BBB’s supporters in general — make three things clear.
First, Trump and GOP leaders deeply and honestly believe that non-fossil-fuel energy sources are unreliable. This is because they’re grossly misinformed. They have not examined the data from Texas’ positive experience with solar and batteries. They do not understand how much batteries have come down in cost, and how much cheaper they could get. They do not understand the basic fact that batteries can also be charged by natural gas plants, meaning that batteries make the grid more reliable no matter how the power is being produced.
This is partly because the Trump administration, and the GOP leadership, are trapped in an information bubble in which they only hear from people who bash solar and batteries. Consider this tidbit from a recent NYT article:
Alex Epstein, an author and founder of a think tank that argues fossil fuels are crucial for human prosperity, is one of the most influential figures calling for the permanent elimination of all clean-energy subsidies by 2028…He has described wind and solar subsidies as “immensely harmful” to the nation’s power grid and “a cancer we have to get rid of.”…In a recent interview on Mr. Epstein’s podcast, Representative Chip Roy, Republican of Texas, said wind and solar jobs made the United States “weaker” and likened subsidies that create such employment to the drug trade. Mr. Epstein agreed, calling them “fentanyl jobs.”
These are the kinds of people that Trump is listening to. They are not serious, respected, or honest energy modelers like Jesse Jenkins. They are polemicists who have a fixed belief that solar and batteries are bad, and they have never updated this belief in light of the incredible cost declines for those technologies.
Second, it’s clear that Trump and the GOP leadership think the main purpose of solar and batteries is to reduce carbon emissions to fight climate change. Their statements about these technologies constantly reference “climate”. The notion that solar and batteries actually make energy cheaper for Americans, with or without climate change, has not entered the collective Republican consciousness yet.
And finally, it’s clear that Trump and the GOP leadership see their attacks on American energy supply as part of a culture war rather than purely economic policy. This is apparent from Wright’s gleeful mention of how angry “climate change activists” will be at Trump’s bill. It’s also obvious from the words like “cancer” and “fentanyl” that opponents of solar and batteries use to describe those technologies. And from the disingenuousness of Wright’s argument — he says solar and batteries should “stand on their own”, while trying to levy heavy taxes on them — we should conclude that there are deeper motivations at work than pure dollars and cents.
Basically, most of the GOP decided long ago that solar and batteries were some hippy-dippy bullshit that lefty activists were trying to force on America in order to bring down capitalism. And they have simply not reconsidered, looked at new evidence, or updated their belief in decades, even as advances in solar and battery technology have utterly changed the game. They are confident that attacking solar and batteries won’t hurt the U.S. economy, and so will give them an easy, safe way to own the libs.
One Republican who clearly does understand both the power and the importance of solar and batteries is Elon Musk, who has been tweeting relentlessly against Trump’s bill, and who makes many good points about the importance of new energy technologies. For example:
Musk knows that if AI data centers can’t get batteries, they can’t operate cheaply in the U.S. And if data centers leave the U.S., China will have a much easier time winning the AI race.
But Trump and his people are not listening to Musk. They are not listening to anyone, except to ignorant fawning toadies who flatter their existing beliefs and insult their enemies for them. Their fingers are stuck firmly in their ears, so they won’t hear the sounds of catastrophe as they kick over the physical foundations of American prosperity.
This was also the pattern we saw with tariffs, an act of national self-sabotage Trump only paused when the bond market threatened to demolish the entire U.S. economy before Trump’s term was up. This time, bond markets are unlikely to intervene, since the threat comes from a stolen future rather than a disrupted present.
The American people, for the most part, get the general gist of Trump’s ideology-driven approach to economic policy, and they’re not happy about it. Poll after poll shows that even many Republicans despise the One Big Beautiful Bill. This is from NBC a few days ago:
Nonpartisan polls released this month show that voters have a negative perception of the bill…A Fox News poll found that 38% of registered voters support the “One Big Beautiful Bill” based on what they know about it, while 59% oppose it.
The survey found that the legislation is unpopular across demographic, age and income groups. It is opposed 22%-73% by independents, and 43%-53% among white men without a college degree, the heart of Trump’s base.
A Quinnipiac University poll found that 27% of registered voters support the bill, while 53% oppose it. Another 20% had no opinion. Among independents, 20% said they support it and 57% said they oppose it.
A KFF poll found that 35% of adults have a favorable view when asked about the “One Big Beautiful Bill Act,” while 64% have an unfavorable view. Just 27% of independents said they hold a favorable view of it.
A survey from Pew Research Center found that 29% of adults favor the bill, while 49% oppose it. (Another 21% said they weren’t sure.) Asked what impact it would have on the country, 54% said “a mostly negative effect,” 30% said “a mostly positive effect” and 12% said “not much of an effect.
A poll by The Washington Post and Ipsos found that 23% of adults support “the budget bill changing tax, spending and Medicaid policies,” while 42% oppose it. Another 34% had no opinion.
The bill’s self-defeating policies are probably only a small part of this, especially since the Senate version of the bill — which actively taxes new energy technologies instead of just removing subsidies — hadn’t even been released when these polls were taken. Debt increases, Medicaid cuts, and tax cuts for the rich are driving these negative polls. But if and when Americans realize that the GOP is also trying to make their energy bills go up in order to fight a stupid outdated culture war, I expect them to sour on the bill even further.
But I’m not sure how much that will matter. Trump and the GOP leadership have shown that appeasing public opinion is very low on their list of priorities.
This is a recipe for national failure. Countries that turn their back on the march of technology — whose leaders insist on ignoring extant reality in favor of internecine status battles and feuds — have historically declined, while countries that embrace technological progress and bow to physical realities have dominated. Right now, the country that is embracing progress and bowing to physical realities in the energy space is China, not America.
2025-06-27 14:45:23
“Can you picture what we’ll be/ So limitless and free/ Desperately in need of some stranger’s hand” — The Doors
In the 1990s and 2000s, a lot of science fiction focused on what Vernor Vinge called “the Singularity” — an acceleration of technological progress so dramatic that it would leave human existence utterly transformed in ways that it would be impossible to predict in advance. Vinge believed that the Singularity would result from rapidly self-improving AI, while Ray Kurzweil associated it with personality upload. But both believed that something big was on the way.
In the late 2000s and 2010s, as productivity growth slowed down, these wild expectations got tempered a bit. Cory Doctorow and Charles Stross poked fun at the idea of the Singularity as “the rapture of the nerds”. And some bloggers, like Brad DeLong and Cosma Shalizi, began to argue that the true Singularity was in the past, when the Industrial Revolution freed us from the constraints of daily hunger and scarcity. Here’s Shalizi:
The Singularity has happened; we call it "the industrial revolution" or "the long nineteenth century". It was over by the close of 1918…Exponential yet basically unpredictable growth of technology, rendering long-term extrapolation impossible (even when attempted by geniuses)? Check…Massive, profoundly dis-orienting transformation in the life of humanity, extending to our ecology, mentality and social organization? Check…Embrace of the fusion of humanity and machines? Check…Creation of vast, inhuman distributed systems of information-processing, communication and control, "the coldest of all cold monsters"? Check; we call them "the self-regulating market system" and "modern bureaucracies" (public or private), and they treat men and women, even those whose minds and bodies instantiate them, like straw dogs…An implacable drive on the part of those networks to expand, to entrain more and more of the world within their own sphere? Check…
Why, then, since the Singularity is so plainly, even intrusively, visible in our past, does science fiction persist in placing a pale mirage of it in our future? Perhaps: the owl of Minerva flies at dusk; and we are in the late afternoon, fitfully dreaming of the half-glimpsed events of the day, waiting for the stars to come out.
I agree that the Industrial Revolution represented an abrupt, unprecedented, and utterly transformational change in the nature of human life. Human life until the late 1800s had been defined by a constant desperate struggle against material poverty, with even the bounty of the agricultural age running up against Malthusian constraints. Suddenly, in just a few decades, humans in developed countries were fed, clothed, and housed, and had leisure time to discover who they really wanted to be. It was by far the most important thing that had ever happened to our species:
And it’s important to note that this transformation wasn’t just a result of technology giving humans more stuff. It depended crucially on reductions in human fertility. As Brad DeLong documents in his excellent book Slouching Towards Utopia, after a few decades, the Industrial Revolution prompted humans to start having fewer children, which prevented the bounty of industrial technology from eventually being dissipated by the old Malthusian constraints.
Since the productivity slowdown of the mid-2000s, it has become fashionable to say that the Singularity of the Industrial Revolution is over, and that humanity has reached a plateau in living standards. Although some people expect generative AI to re-accelerate growth, we haven’t yet seen any sign of such a mega-boom in either the total factor productivity numbers or the labor productivity numbers:
Of course, it’s still early days; AI may yet produce the vast material bounty that optimists expect. And yet even if it never does, I don’t think that means humanity is in for an era of stagnation. The Industrial Revolution was only transformative because it changed the experience of human life; a GDP line on a chart is only important because it’s correlated with so many of the things that matter for human beings.
And so if new technologies and social changes fundamentally alter what it means to be human, I think their impact could be as important as the Industrial Revolution itself — or at least, in the same general ballpark. In a post back in 2022 and another in 2023, I listed a bunch of ways that the internet has already changed the experience of human life from when I was a kid, despite only modest productivity gains. Looking forward, I can see even bigger changes already in the works.
In key ways, it feels like we’re entering a posthuman age.
When countries get richer, more urbanized, and more educated, their birth rates fall by a lot — this is known as the “fertility transition”. Typically, this means that the total fertility rate goes from around 5 to 7 to around 1.4 to 2. This is mostly a result of couples choosing to have fewer children. Here’s a chart where you can see the fertility transition for a bunch of large developing countries in Asia, Africa, Latin America, and the Middle East:
2 children per woman1 is around the level where population is stable in the long term — actually, it’s about 2.1 for a rich country and 2.3 for a poor country, to take into account the fact that some kids don’t survive until adulthood. But basically, going from 5-7 kids per woman to 2 means that your population goes from “exploding” to “stable”.
For some rich countries like Japan, fertility fell to an especially low level, of around 1.3 or 1.4. This implied long-term population shrinkage — Japan’s population began shrinking in the 2000s — and an increasing old-age dependency burden. But as long as this low level of fertility was confined to a few countries, it didn’t feel like an emergency — a few rich nations like America, New Zealand, France, and Sweden still managed to have fertility rates that were at or near replacement. For everyone else, there was always immigration.
That’s where the dialogue on fertility stood in 2015. But over the past decade, there has been a second fertility transition in rich countries, from low levels to very low levels. Even countries like the U.S., France, New Zealand, and Sweden have now switched to rates well below replacement, while countries like China, Taiwan, and South Korea are at levels that imply catastrophic population collapses over the next century:
Meanwhile, the rate of fertility decline in poor countries has accelerated. The UN calls the drop “unprecedented”.
The economist Jesus Fernandez-Villaverde believes that things are even worse than they appear. Here are his slides from a recent talk he gave called “The Demographic Future of Humanity: Facts and Consequences”. And here’s a YouTube video of him giving the talk:
Fernandez-Villaverde notes that the statistical agencies tasked with estimating current global fertility and making future projections have consistently revised their numbers down and down:
This doesn’t just mean people are having fewer kids; it means that because of past errors in estimating how many kids people had, there are now fewer people to have kids than we thought. Fernandez-Villaverde shows that this is true across nearly all developing countries. As a result of these mistakes, Fernandez-Villaverde thinks the world is already at replacement-level fertility.
Furthermore, population projections are based on assumptions that fertility will bounce sharply back from its current lows, instead of continuing to fall. Those predictions look a little bit ridiculous when you show them on a graph:
As a result, Fernandez-Villaverde thinks total global population is going to peak just 30 years from now.
This is a big problem. The first fertility transition was a good thing — it was the result of the world getting richer, it saved human living standards from hitting a Malthusian ceiling, and it seemed like with wise policies, rich countries could keep their fertility near replacement rates. But this second fertility transition is going to be an economic catastrophe if it continues.
The difference between a fertility rate of 1 and a rate of 2 might seem a lot smaller than the difference between 2 and 6. But because of the math of exponential curves, it’s actually just as important of a change. Going from 6 to 2 means your population goes from exploding to stable; going from 2 to 1 means your population goes from stable to vanishing.
This is going to cause a lot of economic problems. I wrote about these back in 2023:
Shrinking populations are continuously aging populations, meaning that each young working person has to support more and more retirees every year. On top of that, population aging appears to slow down productivity growth through various mechanisms. Immigration can help a bit, but it can’t really solve this problem, since A) when the whole world has low fertility there is no longer a source of young immigrants, and B) immigration is bad at improving dependency ratios because immigrants are already partway to retirement.
And in the long run, shrinking populations could slow down productivity growth even more, by shrinking the number of researchers and inventors; this is the thesis of Charles Jones’ 2022 paper “The End of Economic Growth? Unintended Consequences of a Declining Population”. Unless AI manages to fully replace human scientists and engineers, a shrinking population means that our supply of new ideas will inevitably dwindle.2 Between this effect and the well-documented productivity drag from aging, the idea that we’ll be able to sustain economic growth through automation seems dubious.
What’s going on? Unlike the first fertility transition, this second one appears driven by increasing childlessness — people never forming couples or having kids at all, instead of simply having fewer kids. And although it’s not clear why that’s happening, the obvious culprit is technology itself — mobile phones and social media. This is Alice Evans’ hypothesis, and there’s some evidence to suggest she’s right. In China, “new media” (i.e. social media) use was found to be correlated with low desire to have children. The same correlation has been found in Africa.
Of course better research is needed, particularly natural experiments that look at the response to some exogenous factor that increases social media use. But the timing and the worldwide nature of the decline — basically, every region of the globe started getting sharply lower fertility starting in the mid to late 2010s — makes it difficult to imagine any other cause. And the general mechanism — internet use substituting for offline family relationships — is obvious.
Economic stagnation isn’t the only way the Second Fertility Transition will change our society. The measures we take to try to sustain our population will leave their mark as well. Last November, I looked at the history of pronatal policies, and concluded that things like paying people to have more kids, or making it easier to have kids, or encouraging cultural changes are unlikely to work:
Unfortunately, that’s likely to lead to more coercive solutions. In my post, I predicted that countries would try to cut childless people off from old-age pensions and medical benefits:
In the past, when fertility rates were high, children served an economic purpose — they were farm labor, and they were also people’s old-age pension. If parents lived past the point where they were physically able to work, their children were expected to support them. In order to make sure you had at least a few kids who survived long enough to support you, you had to have a large family.
Denying old-age benefits to the childless would be an obvious way to try to reproduce this premodern pattern. This would, of course, result in horrific widespread old-age poverty for those who didn’t comply…I predict that some authoritarian states — China, perhaps, or Russia, or North Korea — will eventually turn to ideas like this if no one ever finds a way to raise fertility voluntarily.
This idea actually comes from a 2005 paper by Boldrin et al., who find that if you model fertility decisions as an economic calculation, then Social Security and other old-age transfers are responsible for much of the fertility decline in rich nations:
In the Boldrin and Jones' framework parents procreate because the children care about their old parents' utility, and thus provide them with old age transfers…The effect of increases in government provided pensions on fertility…in the Boldrin and Jones model is sizeable and accounts for between 55 and 65% of the observed Europe-US fertility differences both across countries and across time and over 80% of the observed variation seen in a broad cross-section of countries.
Ending old-age benefits for the childless would be a pretty dystopian policy. But in the long run, extreme population aging, coupled with slower productivity growth, will make it economically impossible for young people to support old people no matter what policies government enact.3
And if desperate, last-ditch draconian measures fail, we will shrink and dwindle as a species. The vitality and energy of young people will slowly vanish from the physical world, as the youth become tiny islands within a sea of the graying and old. Already I can feel this when I go to Japan; neighborhoods like Shibuya in Tokyo or Shinsaibashi in Osaka that felt bustling and alive with young people in the 2000s are now dominated by middle-aged and elderly people and tourists.
And as population itself shrinks, the built environment will become more and more empty; whole towns will vanish from the map, as humanity huddles together in a dwindling number of graying megacities. Our impact on the planet’s environment will finally be reduced — we will still send out legions of robots to cultivate food and mine minerals, but as our numbers decrease, our desire to cannibalize the planet will hit its limits.
But even as humanity shrinks in physical space, we will bind ourselves more tightly together in digital space.
When I was a child, sometimes I felt bored; now I never do. Sometimes I felt lonely; now, if I ever do, it’s not for lack of company. Social media has wiped away those experiences, by putting me in constant contact with the whole vast sea of humanity. I can watch people on YouTube or TikTok, talk to my friends in chat groups or video calls, and argue with strangers on X and Substack. I am constantly swimming in a sea of digitized human presences. We all are.
Humanity was never fully an individual organism. Our families and communities were always collectives, as were the hierarchies of companies and armies and even the imagined communities of nation-states. But the internet has made the collective far larger than it was. In many ways it’s also more connected; one survey found that the average American spends 6 hours and 40 minutes, or more than a third of their waking life, online. About 30% of Americans say they’re online almost constantly.
The results of this constant global connectedness are far too deep and complex to deal with in one blog post. But one important result is to replace some fraction of individual human effort with the preexisting effort of the collective.
Instead of figuring out how to fix our own houses, build our own furniture, or install our own appliances, a human in 2021 could watch YouTube videos. Instead of figuring out how to write a difficult piece of code, a programmer could ask the Stack Exchange forum. Instead of creating a new funny video from scratch, a social media influencer could use someone else’s audio track. It simply became easier to stand on the shoulders of giants than to reinvent the wheel.
Whether this leads to an aggregate decrease in human creativity is an open question; some have made this argument, but I’m not sure whether it’s right.4 But what’s clear is that the more everyone is always relying on the collective for everything they do, the less individual effort matters. In the Industrial Age, we valorized individual heroics — the brilliant scientist, the iconoclastic writer, the contrarian entrepreneur, the bold activist leader. In an age when it’s always easier to rely on the wisdom of crowds, those heroes matter less.
Compare the activists of the 2010s to the activists of the mid 20th century. The 20th century produced Black activist leaders like MLK, John Lewis, Malcolm X, Rosa Parks, Bobby Seale, and many others. But who were the equivalent heroes of the Black Lives Matter movement of the 2010s? There were none.5 The movement was an organic crowd, birthed by social media memes instead of by rousing speeches. Each individual activist made tiny incremental contributions, and the movement rolled forward as a headless, collective mass.
Or consider science and technology in the age of the internet. China is now probably the world’s leader in scientific research, but it’s hard to name any big significant breakthrough that has come out of China in recent years; the innovations are important but overwhelmingly incremental. Even in the U.S., where incentives for breakthroughs are a little better, science has become notably less “disruptive” in recent years. Some of this may be because humans have already picked the low-hanging fruit of science, and some might be because of the increasing “burden of knowledge” for young researchers to get up to speed. But some might simply be because an age of seamless global information transmission makes it easier for researchers to get “base hits” while leaving the cost of “home runs” the same.
Even AI, the great breakthrough of the age, has been a massive collective effort more than the inspiration of a few geniuses. Even the people who have received the greatest honors for developing AI — Geoffrey Hinton, Yann LeCun, etc. — are not really regarded as the “inventors” of the technology. Towering figures are still somewhat common in biology — Kariko and Weissman, Doudna and Charpentier, Feng Zhang, Allison & Honjo, David Liu — but in the age of the internet, research is becoming a more collective enterprise.
And all that was before generative AI. Large language models are trained on the collected writings of humankind; they are an expression of the aggregated wisdom of our species’ collective past. When you ask a question of ChatGPT or DeepSeek, you’re essentially consulting the spirits of the ancestors.6
As with the internet, it’s unclear whether LLMs will make humanity more creative as a whole, or less. My bet is strongly on “more”. But at the individual level, AI substitutes for our own creative efforts. Kosmyna et al. (2025) recently did an experiment showing that people who use ChatGPT to help them write essays end up with weaker individual cognitive skills:
This study explores the neural and behavioral consequences of LLM-assisted essay writing. Participants were divided into three groups: LLM, Search Engine, and Brain-only (no tools)…EEG revealed significant differences in brain connectivity: Brain-only participants exhibited the strongest, most distributed networks; Search Engine users showed moderate engagement; and LLM users displayed the weakest connectivity. Cognitive activity scaled down in relation to external tool use…LLM users also struggled to accurately quote their own work. While LLMs offer immediate convenience, our findings highlight potential cognitive costs. Over four months, LLM users consistently underperformed at neural, linguistic, and behavioral levels. These results raise concerns about the long-term educational implications of LLM reliance and underscore the need for deeper inquiry into AI's role in learning.
This is unsurprising. Pulling a plow yourself will make you stronger than driving a tractor, and using a slide rule will make you better at mental arithmetic than using a hand calculator. As Tyler Cowen points out, Kosmyna et al.’s result doesn’t mean that AI is reducing humanity’s overall creative capabilities:
If you look only at the mental energy saved through LLM use, in the context of an artificially generated and controlled experiment, it will seem we are thinking less and becoming mentally lazy…But you also have to consider, in a real-world context, what we do with all that liberated time and mental energy…
There are numerous ways people can and do use large language models to make themselves smarter. They can ask it to criticize their work…They can argue and debate with it, or they can use it to learn which books to read or which medieval church to visit.
This is true. Using machine tools instead of manual ones may make our biceps weaker, but it makes us stronger and more productive as a species.
Still, if most of human productivity consists of calling up LLMs, it means that collective effort — centuries of past individual creativity crystallized in the weights of the models — is being substituted for individual heroics. As with the internet, humanity as a whole grows more powerful by becoming walking terminals of the world-mind. The age of the great heroes — of the Albert Einsteins and the Martin Luther Kings, and perhaps even of the Elon Musks — may soon be over.
Thus, dimly and through the fog, we can begin to perceive the shape of the future that the posthuman age will take. As humanity becomes more tightly bound into a single digital collective, we find that we desire offline families less and less. As we gradually abandon reproduction, there are fewer and fewer of us, forcing us to cling even more tightly to the online collective — to spend more of our time online, to take solace in the ever-denser core of the final global village. The god-mind of that collective delivers us riches undreamt of by our ancestors, but we enjoy that bounty in solitude as we wirehead into the hive mind for a bit of company.
When I write it out that way, it sounds terrifying. And yet day by day, watching the latest TikTok trend, or making bad jokes on X, or asking ChatGPT to teach me about Mongol history, the slide into posthumanity feels pleasant and warm. Perhaps we are no stranger than our grandparents would have seemed to their own grandparents who grew up on premodern farms. After all, aliens never call themselves “aliens”…they call themselves “us”.
I know “children per woman” is a little sexist, but this is how they measure things.
This depends on the assumption that new ideas don’t build on themselves exponentially quickly. So far, that has proven to be the case — in simple terms, it looks as though we pick the “low-hanging fruit” of scientific discovery and technological invention, and future advances become more expensive in terms of time, money, and brain power.
At that point, either countries will collapse, or decide to cut large numbers of old people off. If countries collapse, then parents will once again be dependent on their kids, and fertility will probably recover to replacement level. If countries decide to cut old people off of benefits, they’ll probably start by cutting off the childless, since childless old people don’t have kids who can riot and revolt in anger. Either way, the economic future for childless people 50 or 100 years from now doesn’t look great.
There are actually lots of effects to think about here, and the topic deserves a much longer post all to itself. For one thing, there’s the question of whether the boost to individual innovation created by the availability of collective knowledge outweighs the spillover benefit created when each individual innovator had to spend time “reinventing the wheel” and doing it a little differently than everyone else. Also, there’s the question of whether any decrease in individual creative output per hour is outweighed by an increase in the total number of hours spent in creative pursuits — when I was a kid, kids went to the mall and hung out instead of making short videos and memes.
There were important writers in the BLM movement — Ta-Nehisi Coates, Ibram Kendi, and Nikole Hannah-Jones, to name just three. Though it’s worth noting that all were eventually hounded out of the public eye to varying degrees by collective social media backlash, unlike similar famous Black writers of the 60s and 70s.
Here are ChatGPT o3’s thoughts on this post:
The post’s central insight is that qualitative transformations in how humans live can be as epoch-making as huge jumps in measured GDP. You persuasively connect today’s two most powerful under-the-radar shifts—sub-replacement fertility and pervasive digital connectedness—to that earlier shock of the Industrial Revolution. Where the essay really shines is in showing how these trends might reinforce each other: shrinking, aging societies could grow ever more dependent on “hive-mind” tools like LLMs, which in turn further reduce the incentives (and maybe even the desire) to form families. That nested-feedback dynamic feels original and is a useful corrective to simple “AI will save us” optimism.
A second strength is the sober treatment of demographic math. By foregrounding Fernandez-Villaverde’s critique of the U.N. projections, you highlight the systemic risk that comes from repeatedly overestimating births. Framing the second fertility transition as the real discontinuity—shifting us from stable to vanishing populations—captures the scale of what’s at stake better than the usual laments about aging. Linking this directly to growth theory (Jones) and to the fiscal unsustainability of pay-as-you-go pensions sets up the reader to grasp why even dramatic productivity gains may not offset the drag.
Where I’m less convinced is on the inevitability of coercive pronatal policy and the eclipse of individual creativity. The essay nods at alternative levers (housing costs, gender-equality reforms, immigration, delayed retirement) but then leaps to dystopian scenarios without fully exploring those options or the empirical record of mixed-strategy success stories (e.g., France, Québec, parts of Scandinavia). Likewise, while the collective nature of internet-era innovation is undeniable, history––from Gutenberg to industrial R&D labs––suggests that new platforms often shift rather than erase individual heroism (think AlphaFold or Covid mRNA vaccines). Recognizing that possibility would temper the gloom and leave space for agency—exactly what a post meant to provoke action, not resignation, might need.
The spirits of the ancestors have spoken! In accordance with the model’s advice, I’ll write a follow-up post about how individual humans can still be high-leverage, important figures in the age of AI and the internet.
2025-06-25 15:03:01
It pleases me immensely to announce that Derek Thompson, one of my favorite writers, has finally left his full-time gig at The Atlantic and joined Substack! You can check out his inaugural post here:
I highly recommend subscribing to his newsletter, of course.
Few people know this, but Derek is actually the person who convinced me to become a paid opinion writer in the first place. Back in 2013, I was blogging for fun while working as a professor, and Derek got in touch with me and persuaded me to write a few posts for The Atlantic. That in turn led to me getting a job at Bloomberg. So you really have Derek to thank!
Derek joined me in a chat last week to talk about the move to Substack, as well as his by-now-extremely-famous book with Ezra Klein, Abundance. (In fact, I wanted to post the chat last week, but there were some technical difficulties.) We talk about what I see as Derek’s main strengths as a writer — especially 1) his ability to spot and understand important new social and economic trends before almost anyone else does, and 2) his ability to take stands on issues while still understanding all the various sides.
We also talk a lot about Abundance, of course, including the future of the movement, where it fits in to Democratic party politics, and why there was an immediate backlash from some parts of the progressive movement. Here are some more of Derek’s thoughts on those questions:
We discuss my argument that abundance liberals should concentrate their fire on Donald Trump, and Derek also addresses my question of what the U.S. government could do if it were unconstrained by self-regulation.
Anyway, Derek is a great guy and a great writer, and I’m very glad he’s now part of the new blogosphere. You’ll be seeing me quote him a lot more in the months and years to come!
2025-06-24 17:47:32
If you believe the prediction markets, Zohran Mamdani has zoomed into the lead in the Democratic primary for the NYC mayoral race:
Mamdani is a young, handsome, charismatic candidate. He seems to genuinely love and care about his city, and he makes excellent campaign videos:
On the downside, Mamdani has defended the slogan “globalize the intifada”. I’m not happy that this sort of leftism has been mainstreamed in America. Zohran’s claim that the word “intifada” refers to a peaceful struggle, rather than a violent one, is pretty obviously dishonest. This kind of rhetoric hasn’t helped the Palestinian people, but I think it has probably helped to encourage a wave of violent attacks against Jews across America.
That’s bad. But I also think it’s worth setting aside Mamdani’s culture-war commitments for a minute and taking a careful look at his economic policy ideas. They probably represent the future of progressive politics in America, and they have garnered cautious praise and approval from people I respect, like Derek Thompson. In his inaugural Substack post, Derek writes:
Mamdani told Pod Save America that despite the “simplified and caricatured” conversation around the book, “Abundance is really interesting.” In a recent speech, he hailed an “agenda of abundance.”
Mamdani and I do not agree about many things, including but not limited to: housing policy, education policy, the role of public sector unions in raising the cost of urban-transit construction, and the need for significantly higher levels of local and state spending in New York. But we agree that politicians who seek to create more government functions had damn well better prove that the government can function, in the first place. “As someone who is very passionate about public goods, about public service, I think that we on the left have to be equally passionate about public excellence,” Mamdani told me. “One of the most compelling things that I think abundance has brought into the larger conversation is how we can make government more effective, how we can actually deliver on the very ideas that we are so passionate about.” As we spoke about his plans to prove government excellence, the words that kept coming up were outcomes, efficiency, and an openness to government innovation—all themes of the book. “I clearly have ideas and politics, but ultimately beyond all of those things, I care most about outcomes,” he said. “The way that I would approach running the city is to be wedded to outcomes, not wedded to the means by which we get to those outcomes.”…
[M]y conversation with Mamdani made me optimistic…A left-populist leader who removes barriers to physical-world construction to make it easier to build public goods doesn’t transform into a nefarious neoliberal. They just become a better populist leader. A Democratic Socialist mayor who takes a page from Jersey City and makes it easier and faster for private developers to add housing units won’t be a traitor to the middle class. They’ll simply be a better mayor.
Derek’s “conversation with Mamdani” refers to when Zohran came on his podcast a couple of days ago:
I’m also encouraged by this shift in rhetoric. It’s a good sign, and it also shows that the knee-jerk attacks on Abundance are falling flat. The idea of an efficient, effective government that creates good outcomes for citizens has to be core to any successful big-government progressive movement, and it’s good to see rising stars of the left recognize that.
But simply saying words like “outcomes” and “efficiency” does not make it so. You have to have policies that actually get you the outcomes you want. We don’t want progressives to end up like Donald Trump, whose goal of reviving American manufacturing was a good one, but whose tariff policy is accelerating America’s deindustrialization instead.
Zohran’s main economic policy ideas include:
Constructing 200,000 units of housing over 10 years
A rent freeze for all rent-stabilized apartments in NYC
Creating city-owned grocery stores
Universal free child care throughout the city
Making all city buses free to ride
Raising the corporate income tax, and raising the personal income tax on New Yorkers making over $1M a year
Some of these ideas are just bad. Zohran’s housing policy — the thing that has most excited centrist liberals — would actually reduce housing supply from its already low level. His plan for city-run grocery stores would cost a lot, accomplish little, and hurt local businesspeople. On the other hand, his plans for free child care and transit would work, although the cost of free child care would be significant and free buses would have major downsides.
New York City badly needs new housing. Traditionally, the city builds even less housing than its European peers, and far less than a city like Tokyo:
Zohran seems to want to improve on this dismal record. This is from his campaign website:
As Mayor, Zohran will put our public dollars to work and triple the City’s production of permanently affordable, union-built, rent-stabilized homes – constructing 200,000 new units over the next 10 years. Any 100% affordable development gets fast-tracked: no more pointless delays. And Zohran will fully staff our City’s housing agencies so we can actually get the work done.
Expedited permitting for “affordable” (i.e. artificially cheap) housing and increased staffing for city housing agencies both sound like great ideas. But the actual number Zohran suggests here is pretty underwhelming. 200,000 new units over 10 years might sound like a big number, but in fact it’s slightly slower than the pace of housing construction in the mid to late 2010s:
2025-06-22 16:42:32
Well, I suppose Trump doesn’t actually chicken out of everything. The U.S. has bombed Iran’s three nuclear enrichment facilities. Here was Trump’s announcement of the strikes on social media:
The consequences of these strikes aren’t yet clear. I’ve seen a lot of hyperventilating takes about how World War III is now underway, but this seems obviously false. The world may indeed be in the foothills of WW3, but even if it is, it’s highly doubtful that strikes on Iran’s nuclear facilities will be what push us over the edge. Iran has friendly relations with China and Russia, but neither one seems to have any interest in coming to Iran’s aid in the current conflict — China doesn’t appear to be interested in getting in wars outside its own neighborhood, while Russia is simply too preoccupied with its war in Ukraine.
Nor do I expect the strikes on Iran to lead to a U.S. “boots on the ground” invasion. First of all, there’s the TACO factor — Trump was only willing to conduct some very limited airstrikes, and only targeted narrowly at Iran’s nuclear program, and he was only willing to do it after Israel had already neutralized much of Iran’s long-range strike capability. So far, the best Iran has been able to do in this war was to kill a few dozen Israeli civilians, and even its ability to do that much might have been mostly neutralized. Iran’s leaders are issuing dire threats against the U.S. in response to today’s strike, but there’s just not much they can do other than take some weak potshots at U.S. bases in Iraq.
So Trump was taking almost no military risk with these strikes — they don’t show a new, bolder, braver Trump. And the President knows that public opinion is strongly against a war with Iran:
So while these things are always hard to predict, the likeliest outcome seems to be that Trump simply conducts airstrikes until Iran’s three nuclear facilities have been destroyed (if that isn’t the case already), and then backs off and leaves the conflict to the Israelis. Trump’s assassination of Iranian general Qasem Soleimani in 2020 turned out similarly.
But even though a major war seems highly unlikely, it’s still worthwhile to consider possible economic consequences. When we’re talking about the Middle East, that really means one thing: oil.
There are two ways that the Iran war might affect oil prices. First, Israel’s strikes on Iran may reduce Iran’s own oil exports. Iran is responsible for about 3-4% of world oil production, though only around a third of that gets exported. Almost all of Iran’s oil exports go to China:
Second, and more importantly, Iran may close the Strait of Hormuz, which is the main transit point for Middle Eastern oil. About one fifth of all global oil supply goes through the Strait of Hormuz, so if it were closed off, that would be a very big deal. Iran has threatened to close the strait throughout the conflict with Israel, and in the wake of the U.S. strikes, it has reportedly announced that it’s closing the strait to all ships bound for Europe:
It’s not entirely clear whether Iran has the military ability to close off the strait, but most analyses I read say that they could probably do it. Iran has a vast and diverse array of weapons that it could bring to bear, and the strait is very narrow, meaning that its weapons wouldn’t have to operate over long range. The Houthi militia, which is supplied by Iran, has shown the ability to almost completely scare away all shipping from the exit of the Red Sea.
Even if Iran’s forces in the strait could eventually be defeated, the risk of attack would make civilian ships avoid the area entirely. Who wants to try sailing through a war zone? Already, tankers are scrambling to leave the area:
So a lot of people are worried about the impact of Trump’s strikes on the global economy. But to be honest, I think these worries are overblown. And the U.S. itself is even more insulated from oil disruption than other countries.
2025-06-20 17:30:58
Analyzing American economic policy isn’t that interesting these days, except perhaps as a grim spectacle. So I’ve been thinking a little about Chinese economic policy. China’s leaders leave much to be desired, but to their credit, they still think economic policy is about strengthening their nation, enriching their people, and improving their technology, instead of pursuing domestic culture wars by other means.
Anyway, China has a lot of policy initiatives right now — cleaning up the fallout from the real estate bust, retaliating against America’s tariffs, improving their health care system, and so on. But their most important policy — and the one everyone talks about here in the U.S. — is their big industrial policy push.
If you want to understand Chinese industrial policy, I recommend starting with Barry Naughton’s free book, The Rise of China’s Industrial Policy: 1978 to 2020. The basic story is that until the mid to late 2000s, China didn’t really have a national industrial policy as such. It had a bunch of local governments trying to build up specific industries, usually by attracting investment from multinational companies. And it had a central government that tried to make it easy for local governments to do that, using macro policies like making sure coal was cheap, holding down the value of the Chinese currency in order to stimulate exports, and so on.
But it was not until the end of Hu Jintao’s term in office — and really, not until Xi Jinping came to power — that China developed a national industrial policy, in which the government tries to promote specific industries using tools like subsidies and cheap bank loans. If you want a good primer on just how big those loans and subsidies are, and which industries they’re going to, I recommend CSIS’ 2022 report, “Red Ink: Estimating Chinese Industrial Policy Spending in Comparative Perspective”. It’s a lot. Here are the authors’ estimates from 2019:
In some respects, this policy was successful. For example, it moved China up the value chain — instead of doing simple low-value assembly for foreign manufacturers as in the 2000s, China in the 2010s learned to make many of the higher-value components that go into things like computers, phones, and cars, as well as many of the tools that create those goods. This had the added security benefit of making China less dependent on foreign rivals for key manufacturing inputs.
China has doubled down on its centralized, big-spending industrial policy since then. In 2021-22, China suffered a huge real estate bust, crippling a sector that had accounted for almost one third of the country’s GDP. China’s leaders responded by doubling down on manufacturing, encouraging banks — essentially all of which are either state-owned or state-controlled — to shift their lending from real estate to industry. In 2023, you saw charts like this:
Along with this industrial policy, you saw a massive surge of Chinese manufactured exports flowing out to the rest of the world. The most recent export surge has been labeled the “Second China Shock”, but in fact the trend was already headed in that direction well before the pandemic:
China’s competitive success in manufacturing industry after industry has been nothing short of spectacular. In just a couple of years, China went from a footnote in the global car industry to the world’s leading auto exporter:
Obviously, this export surge is the most important way that people in countries like the U.S. experience the results of China’s industrial policy. So most commentary on the policy has focused on exports, trade balances, and so on.
But it’s important to remember that most of what China is producing in this epic manufacturing surge is not being exported. For example, take cars. Even though China is now the world’s top car exporter, most of the cars it makes are sold within China:
China’s auto industry is actually unusually domestically focused, compared to other auto powerhouses like Germany, South Korea, and Japan:
In fact, this pattern holds across the whole economy. For an industrialized country, China is unusually insular — its exports as a percent of its GDP are higher than the U.S., but much lower than France, the UK, Germany, or South Korea:
Most of China’s enormous manufacturing subsidies are not actually for export manufacturing; they’re for domestic manufacturing. The rest of the world is just getting a little bit of spillover from whatever Chinese companies can’t manage to sell domestically — except for a country as huge as China, a “little spillover” can seem like a massive flood to everyone else.
And here lies the rub. Essentially, China is huge and most of its trading partners are pretty small. There’s a limited amount of Chinese cars, semiconductors, electronics, robots, machine tools, ships, solar panels, and batteries they can buy. And on top of that, some of China’s biggest trading partners are levying tariffs against it.
For most Chinese manufacturers, export markets are simply not going to replace the domestic market. And this means that Chinese manufacturers will be forced to compete against each other for a domestic market whose size is relatively fixed, at least in the short term. That competition will eat away at their profit margins.
In fact, this is already happening. Vicious price wars have broken out in the Chinese auto industry, and even the country’s top carmakers are under extreme pressure:
Chinese carmakers’ price war is putting the industry’s balance sheet under strain…Current liabilities exceeded current assets at more than a third of publicly listed car manufacturers at the end of last year…China’s leading carmakers are being forced to…fight for market share amid heavy [price] discounting…
The dominant electric-vehicle maker BYD is deepest in negative territory with its working capital, followed by rivals Geely, Nio, Seres and state-backed BAIC and JAC, while the total net current assets of 16 major listed Chinese carmakers [saw] a 62 per cent decline from…the first half of 2021…
“Given the current downward trend, China’s auto industry is expected to enter an industry-wide elimination phase . . . in 2026 at the latest,” [an analyst] warned. “During the process, some companies will die of liquidity crises.”…
BYD recently came under pressure to defend its financial numbers and business practices after Wei Jianjun, chair of rival Great Wall Motor, called for a comprehensive audit of all major domestic carmakers…“An Evergrande exists in [China’s] auto sector at the moment — it just hasn’t blown up,” he told local media, raising the spectre of the industry following the property sector into a spiralling debt crisis.
How can these mighty world-conquering automakers be skating on the edge of bankruptcy when the government is pouring so many subsidies and cheap loans into the auto industry? The answer is simple: China’s government is paying its car companies to compete each other to death.
The Chinese government pays a ton of different car companies to make more cars. Chinese banks, at the government’s behest, give cheap loans to a bunch of different car companies to make more cars. So they all make more cars — more than Chinese consumers want to buy. So they try to sell some of the extra cars overseas, but foreigners only buy a modest amount of them. Now what? Unsold cars pile up, prices are cut and cut again, and all the car companies — even the best ones, like BYD — see their profit margins fall and fall.
It’s not just autos, either — similar things are happening in solar, steel, and a bunch of other industries. Manufacturing profit margins are plunging across China’s entire economy:
A Chinese buzzword for this sort of excessive competition is “involution”.
Why is this bad, though? Who cares about profit, anyway? After all, China’s workers are getting jobs, and China’s consumers are getting a ton of cheap cars and other manufactured stuff. So what if rich BYD shareholders and corporate executives take a loss?
Well, in fact there are several problems. The first is macroeconomic. Price wars across much of the economy create deflation. In fact, China is already experiencing deflation:
China’s consumer prices fell for a fourth consecutive month in May…with price wars in the auto sector adding to downward pressure…The consumer price index fell 0.1% from a year earlier…CPI slipped into negative territory in February, falling 0.7% from a year ago, and has continued to post year-on-year declines of 0.1% in March, April, and now May…Separately, deflation in the country’s factory-gate or producer prices deepened, falling 3.3% from a year earlier in May[.]
A lot of this is probably due to weak demand from the ongoing real estate bust, but price wars prompted by industrial policy will make it worse.
Deflation will exacerbate the lingering problems from the real estate implosion. Debts are in nominal terms, meaning that when prices go down, those debts become harder to service. More of the debts go bad, and banks get weaker — all those bad loans on their books make them less willing to make new loans. Consumer debts get more onerous too, making consumers less willing to spend (and consumers, unlike banks, are not government-controlled). This effect is called debt deflation.
On top of that, a massive wave of bankruptcies could cause a second bad-debt crisis on top of the one that’s already happening from real estate. Wei Jianjun of Great Wall Motor has been warning of exactly this happening. In fact, we can already see Chinese banks beginning to slow the torrid pace of industrial loans they were dishing out a couple of years ago:
All of this could extend China’s growth slowdown for years.
There are also microeconomic dangers from overcompetition. Competition could spur Chinese companies to just innovate harder. But if China’s top manufacturers are constantly skating on the edge of bankruptcy, that means they’ll have fewer resources to invest in long-term projects like technological innovation and new business models. Basically, prices are signals about what to build, and China’s industrial policies are sending strong signals of “build more stuff today” instead of “build better stuff tomorrow”.
There’s also the danger that China’s government won’t allow the price wars to end. Ideally, you’d want these price wars to be temporary; eventually, you’d want weak producers to fail, allowing top producers to increase their profitability. This good outcome relies on the government eventually cutting subsidies and letting bad companies die.
But letting bad companies die means a bunch of people get laid off. Bloomberg recently had a good report about the political pressures on the Chinese government to keep the subsidies flowing:
Local leaders laden in debt are rolling out tax breaks and subsidies for companies, in a bid to stave off the double whammy of job and revenue losses…For China’s top leaders, employment is an even more politically sensitive issue than economic growth, according to Neil Thomas, a fellow for Chinese politics at the Asia Society Policy Institute’s Center for China Analysis…Already there are signs the weakening labor market is becoming a touchy subject: One of China’s largest online recruitment platforms Zhaopin Ltd. this year quietly stopped providing wage data it’s compiled for at least a decade.
Already, Bloomberg reports that economic protests are proliferating across the country; with the real estate crisis ongoing, the government will be under even more political pressure to keep manufacturing employment strong. This could mean keeping crappy companies on life support. These so-called “zombie” companies, kept alive only by a neverending flood of cheap credit, were a big part of why Japan’s economy slowed down so much in the 1990s.
So this is the scenario where China’s industrial policy ends up backfiring. Subsidies and cheap bank loans dished out to high-quality and low-quality companies alike could flood the market with undesired product, spurring vicious cutthroat price wars, destroying profit margins, exacerbating deflation, and generally making the macroeconomic situation worse. And then China’s government could double down by trying to protect employment, by never halting subsidies for companies that fail.
Usually, when we think of the costs of industrial policy, the main thing we think about is waste — and there is certainly plenty of waste in China’s current approach. But China’s experience is illuminating a second problem with industrial policy — the risk of vicious price wars and deflation, due to the subsidization of too many competing companies.
