2026-11-10 07:01:29
Azeem Azhar of Exponential View is an excellent blogger whom I tend to cite a lot. So it was very fun to call him up and talk to him about the AI boom, and the possibility of an AI bust! The discussion was sparked by this post of mine a few weeks ago:
I don’t think we reached any firm conclusions, but it was fun to mull these issues over. Expect more discussions between me and Azeem in the future!
2026-11-09 15:59:29
Many longtime fans of my Hexapodia podcast with Brad DeLong have been begging us to bring it back. Well, here it is! Hexapodia will now be a series of Substack Live conversations that you can tune in to, and which will be recorded as podcasts and sent out as emails.
Our first episode was a little rocky, as I got the time wrong and ended up arriving 20 minutes late. But Dan and Brad are both brilliant people, so you can watch them talk for a while before I show up! The topic of our discussion was the Anthropic IPO, inspired by my post about it last week:
I give the bull case for Anthropic, while Dan and Brad are both more skeptical. I think this quote sums up my side of the argument:
My bull case [for Anthropic] is not envisioning a world where Anthropic rules all businesses, rules 100% of every industry, or close to it. I’m also not envisioning a case where AI replaces human beings in their jobs.
I’m envisioning a change in the capital structure of the efficiently producing economy. I’m envisioning…a world where in order to succeed in any industry, you must create a tie-up with a frontier AI company that offers you access to an internal proprietary frontier model that will be months ahead of any model distilled from it. And…that doing this will require not purchasing services…at arm’s length from that company, but tying up your capital structure with that company so that you become in some sense a subsidiary of that company. I am envisioning that.
So I’m saying that instead of something where…AI is like oil and everyone has to buy oil or the things made downstream from oil…instead of that sort of arm of length world, I’m envisioning a world in which every company in order to succeed must become a subsidiary of Anthropic, OpenAI, [or] Google…and Anthropic is simply the biggest of those fish in a oligopolistic ecosystem of a few conglomerates competing against each other via their little subsidiaries in every single industry at the same time.
Interestingly, some economists at Google Deepmind just released a paper with a model in which this sort of thing happens. From the abstract of Imas, Koh, and Legg (2026):
When will advances in AI lead to economic transformation? We develop a model of how intelligence…matters for organizations….AI expertise is reproducible while humans’ are in fixed supply, and AIs may not face the same human limits on coordination….When AI is more capable than the average human, organizations of complementary humans can nonetheless outperform AI. Increases in AI competence can change the composition of workers within firms and decrease firm size. As AI coordination improves, however, this can break the Coasean ceiling on firm size and the market structure undergoes a phase transition toward large, concentrated AI-heavy firms. [emphasis mine]
I was envisioning a slightly more complex version, in which humans and AI are complements, where humans have private data that AI is better at using, and where one big conglomerate enters every industry but retains human workers. But I think Imas et al.’s model gets at some of the basic dynamics here.
Financial disclosure: I have no current position in Anthropic, but unless something major changes, I will probably buy Anthropic stock when it IPOs. I own stock in TypeSafe, an Anthropic competitor.
2026-11-08 05:11:43
When I tell people I’m becoming a China bear, they’re often surprised. “Weren’t you already a China bear?” they ask me.
Well, no. I’ve always been a China bull — I’ve always believed that China’s economic growth would be robust, that they would master advanced technologies, and that their geopolitical influence would grow. This is exactly why I was also always a China hawk1 — I recognized the very real possibility that China would become a global hegemon, and I didn’t especially want to live in a world ruled from Beijing. It’s why I advocated so strongly for friend-shoring, for export controls, and for military alliances to balance out China’s awesome and growing power.
This was true even as China began to show visible signs of weakness in the late 2010s and early 2020s. Xi Jinping proved himself less competent than his predecessors, and the country’s real-estate-heavy growth model hit the skids. But despite those stumbling blocks, I still predicted that this would be the Chinese Century. The country had what seemed like unassailable advantages in human capital, market size, and state capacity, even as all of its possible rivals were convulsed by internal division. And the one thing that most people cite as China’s big weakness — demographic decline — never struck me as much of a threat to the country’s power.
Now, however, for the first time I can remember, I’ve found myself becoming actually bearish on China. I still think it will be an immensely powerful country — perhaps the most powerful single country on the planet. I still think it will be at or near the forefront of technology, and that it will generally be a safe, moderately prosperous, and tolerable place for its people to live. But more and more, I’m starting to think that global hegemony of the type the U.S. enjoyed throughout most of the 20th century will be out of reach. I’m also starting to think that China’s bid for technological dominance is weaker than I had believed.
And just as my previous bullishness made me a hawk, my increasing bearishness makes me more of a China dove.2 I still think friend-shoring is important, export controls are good, and we need robust military alliances to make very sure China doesn’t try to conquer Asia. But I no longer feel the same sense of desperate urgency about these prudent measures — they feel more like an insurance policy now.
There are basically three reasons I’m revising my China expectations downward. The biggest reason is AI. China’s system is incredibly optimized for an era of technology and economic production that is very quickly coming to an end. AI will change everything, and modern China is not the kind of country that adapts well when everything changes.
The other reasons are less important but still worth mentioning. China’s new economic model — the government-supported push to capture all of global high-tech manufacturing — is not likely to succeed. And third, the country’s political situation appears to be deteriorating. Just as the Deng/Jiang/Hu era illustrated the strengths of authoritarian political systems, Xi Jinping is giving us a much-needed lesson on the weaknesses of those systems. His spiraling paranoia is turning the country inward, just as his economic policies are running out of steam.
Anyway, let’s start with those economic policies. This is an economics blog, after all.
In a nutshell, Xi Jinping’s economic strategy is to dominate manufacturing — to have China be, in the words of Damien Ma, the “make-everything country”. I’m increasingly convinced that this approach is already beginning to backfire.
Going all-in on manufacturing is a strategy you see a lot of developing countries use during their periods of rapid catch-up industrialization. And there are some good reasons for that. When you’re poor, what your people need most aren’t video games or dog-walking services, but houses and cars and refrigerators. Manufactured products are also easy to export, and poor countries don’t have big domestic markets to rely on. It might also be easier to reach the technological frontier in manufacturing, since you can reverse-engineer physical products more easily than services.3
Usually, as countries get rich and their needs evolve from the physical to the ephemeral, they move out of manufacturing and into services to some degree. But Xi Jinping decided that this was a mistake. He reasoned that if China continued to behave like a developing country forever, and promoted manufacturing at the expense of everything else, China could dominate the globe.
This was an interesting hypothesis, and it might have worked — indeed, there’s still some chance it might work. Militaries, after all, depend on manufacturing above all else, so in a big protracted WW2-style war, being the master of manufacturing might give you an automatic win.
And dominating key nodes in global supply chains lets you use export controls to bully other countries without actually bombing them. In fact, China is doing this more and more, using export controls on everything from tunnel-boring machines to rare earths to drones to medicines as bludgeons to force other nations to do its bidding.
In order to make China dominate global manufacturing, Xi unleashed a wave of industrial policy bigger than any the world had ever seen, spending about 4% of GDP per year on subsidizing manufacturing industries — usually through cheap bank loans, but sometimes just by sending cash directly.
For a while, this seemed to be working spectacularly. A 2024 paper by UNIDO got a lot of attention for predicting that China’s share of global manufacturing would be 45% by 2030 — equal to the United States right after World War 2. But cooler heads pointed out that China’s manufacturing share growth had already slowed; more reasonable predictions put its 2030 share at maybe 35-36% — still enormous, but more like America in the 1960s or the early 1920s.
And in U.S. dollar terms, China’s share peaked during the pandemic and has been drifting down since then:
In fact, despite Xi’s push, manufacturing is a shrinking share of China’s economy. China is now less industrial than South Korea, despite being less than half as rich:
The reason is simple, and it’s something I’ve written about many times before. Unlike South Korea, China is a very large country. That means most of China’s manufacturing production is going to have to go to the domestic market. Even if other countries don’t slap big tariffs on your products, export markets will simply saturate. One of the most reliable empirical laws in all of economics is the gravity model of trade, which says that trade volumes drop off rapidly with distance.
Of course, some countries will put tariffs on China. The EU recently forced China to make a deal to limit auto imports, and if that doesn’t work, stronger measures are likely. That will only accelerate the natural saturation of China’s export markets.
And despite everything you’ve read about the “Second China Shock” and the big export boom, China is still far less export-intensive than Korea, and that’s not going to change:
China simply can’t be Giant Korea; it’s so big that its manufacturers need to rely on its domestic market. But that domestic market is becoming saturated even faster than the global market. Profits in the auto sector, the steel sector, the solar sector, and many other manufacturing industries are all collapsing. Weak domestic demand from China’s real estate bust has encountered massive oversupply from government subsidies, and the result is that few companies in China are making much money. That will force lots of businesses to close and consolidate, and it will starve dynamic private-sector companies of R&D budgets, forcing them to rely more on research handed down by the distant, unresponsive, and unaccountable government.
Government subsidies can keep the party going a lot longer than it ought to, but already the limits have probably been reached. Chinese manufacturing indicators are faltering, and manufacturing investment seems to have topped out as well.
In fact, this isn’t even the only example of Xi Jinping taking a developing-country strategy and pushing it far beyond its limits. Infrastructure is another. For many years, China invested huge amounts into building more roads and bridges and high-speed trains than they knew what to do with. But there was a limit to that process, and China has now hit the limit. The Economist reports that China’s infrastructure investment has leveled off:
China’s years-long splurge on bridges, tunnels, expressways, high-speed rail and airports is beginning to tail off…In July this year a senior transport official said China’s main transport network was “91% complete”, and the country would pivot from expanding to upgrading existing infrastructure.
But it isn’t so easy weaning yourself off of infrastructure overinvestment. China built so much infrastructure that it will have to spend a lot of money just to upkeep all those roads, trains, and bridges. That’s the iron logic of depreciation. And since much of China’s infrastructure isn’t really carrying many passengers or much cargo, that means China is stuck spending a significant fraction of its GDP upkeeping stuff that people don’t really need — unless, of course, it chooses to let some of that infrastructure decay into ruin.
All of this means growth will slow. And of course, it’s all happening against the backdrop of weak demand from the continuing, protracted fallout from China’s real estate bust. There are signs that the real economic damage in that sector is only getting started:
Weak domestic demand won’t just be a drag on China’s headline growth — it will also make it harder for China’s manufacturing sector to maintain its 30% global market share, much less expand it to 35% or more. Xi seems to think that China can just sort of pull resources off of real estate development and put them into manufacturing, one for one, like a corporate manager reassigning engineers to a different project. But it doesn’t work like that; demand matters, and China’s manufacturing triumphs in past decades depended heavily on the tailwind that the long property boom had been delivering.
Chinese economists realize this, but Xi seems to have stopped listening to economists, and to have purged his government of anyone who was inclined to listen.
(And of course as the years go by, China’s accelerating population decline will reduce its domestic market size by more and more, compounding the pressure on manufacturing. I don’t expect this to be a big factor until at least 2040 or so, but it’s worth mentioning.)
In other words, Xi’s “make-everything country” strategy is likely to see only modest short-term success. It will not let China conquer the world. And the failure of this strategy will come just as a massive new technological revolution upends the global economy — a revolution that China, despite all reports, is not well-prepared to take advantage of.
2026-11-06 14:46:24
Democrats won a historic victory in Tuesday’s election. It was the best possible outcome — Donald Trump has made so many mistakes, engaged in such flagrant corruption, and committed such egregious acts that for his party not to have been punished at the polls would have boded poorly for America’s future. But as it is, I’m cautiously encouraged — normal Americans reasserted control, delivering a rebuke to the extremists who had used a moment of division and chaos to seize the commanding heights of power in our country.
It was the biggest midterm wave in half a century. Obama’s midterm loss in 2010 and Trump’s in 2018 don’t even come close. You have to go all the way back to 1974 and 1976 to find wipeouts like this:
Wait…1974 and 1976? 1974 was the year Nixon resigned due to Watergate, and 1976 was the year Jimmy Carter was elected president. Did either of those election victories herald an era of Democratic dominance in America? No, they did not. In fact, the GOP bounced back shortly afterwards, dominated American politics in the 1980s, and pulled the country to the right for decades.
So before they go patting themselves on the back for winning everything, forever, Democrats should think about that history of brief success followed by long-term failure, and ponder how to avoid a similar outcome this time. After Hannibal won a great victory, one of his generals is said to have told him: “You know how to win a victory, Hannibal; you do not know how to use it.” The Democrats must figure out how to use their victory.
That’s a tricky question. Democrats now control Congress, but that doesn’t mean they’re in power; Trump can and will veto most legislation they pass. With their limited capabilities, the Dems have to do the following, all at once:
Block as many of Trump’s bad policies as possible
Keep the spotlight on Trump even though he’s now a lame duck
Demonstrate a clear ideology and a clear plan to the American people despite not being able to pass much legislation
That’s possible to do, especially if — as seems very likely — Trump keeps being corrupt and making mistakes and alienating the country. The Dems won the 2006 midterms, and went on to put Obama in the White House two years later. Trump seems like he’s on a similar track:
But it doesn’t always happen — the GOP lost to Obama in 2012 after their big midterm wave in 2010, and the Dems barely eked out a victory over Trump in 2020 (with a lot of help from Covid) after winning the midterms in 2018.
If Democrats are going to translate midterm success into presidential victory — to say nothing of long-term partisan dominance — they’re going to have to work hard at rebuilding their brand, their sales pitch, and their policy platform after the disastrous years of 2016-2024.
One important point, which a lot of other people have already made, is that the big Democratic wave was mostly won by moderate Democrats. Here’s the NYT:
For much of the midterm campaign, progressive Democratic insurgents commanded the spotlight…But the path to Democrats’ sweeping victory this week, when they seized control of both chambers of Congress, was paved overwhelmingly by moderates who had spent months persuading voters in Republican-leaning states and competitive congressional districts…
The scale of moderate gains was reflected in the growing ranks of the centrist groups on Capitol Hill. The Blue Dog Coalition, a caucus of moderate and conservative Democrats in the House, announced on Wednesday that it had added at least 14 to its ranks, nearly doubling in size, and other centrist groups including the New Democrats and Problem Solvers strengthened their numbers substantially.
Some of this is purely mechanical. Far-left types tend to win by unseating moderate Dems in primaries in deep-blue districts and states, while moderates tend to win in swing districts and states; thus, when a wave is bigger and the Dems win more swing districts and states, moderates tend to do proportionally better than leftists.
However, there are signs that this election cycle actually represented a broad endorsement of moderate center-leftism. Ballot initiatives have rejected various leftist policies all over the country, and leftist candidates have been losing to center-left ones in deep blue strongholds:
And leftist candidates have generally performed more weakly at the ballot box:
What’s more, many of the most prominent Democrats who won high-profile races this year have explicitly endorsed centrist positions on key issues:
Nor have many prominent Dems done the kind of “woke” cultural signaling that they regularly did in 2020 and 2022.
There are two parts of the basic story here. First, the “woke” cultural wave of the 2010s, which peaked in 2020-21, continues to slowly recede. You can see this in continued voter support for conservative positions on cultural issues like trans sports:
Second, voters have not yet embraced the socialist movement, as demonstrated by the relatively weak performances of Bernie Sanders-endorsed candidates and the failure of the billionaire tax in California.
That means that Democrats understand that this 2026 midterm victory is a contingent and fragile one. Normal Americans have risen from their apathetic torpor and their jaded hyperpartisan paralysis, and are prepared to punish extremists of either party:
The normie uprising has brought center-left Dems to the fore, and it has also forced more progressive Dems to tone down or strategically compromise their more extreme positions.
But moderation itself is neither an ideology nor a policy program, and herein lies the big challenge for the Dems over the next year and a half or so.
Right now, my assessment is that most Democratic voters — including Independents and swing voters who lean toward the Dems — aren’t thinking very hard about how the country ought to be governed or what the future of America should look like. They’re simply thinking short-term thoughts about the immediate threat. They hate Trump and MAGA, and they want them gone, and it’s really as simple as that.
Nate Silver calls this “Heather Cox Richardsonism”, after the extremely popular Substack politics-and-history blogger Heather Cox Richardson:
Silver wrote:
The third faction [of the Dems is] Richardsonism or a term I’ll treat as synonymous with it: #Resistance Libs. They’re older, with extremely high educational attainment, predominantly female, and very highly politically engaged. This is the audience for a cluster of political activism encompassing things such as the No Kings protests and some highly popular anti-Trump Substacksalong with certain prominent podcasts and much of Bluesky.
Nate has a bunch of criticisms of “Heather Cox Richardsonism”, most of which I disagree with. I like Heather Cox Richardson. I like suburban moms who listen to NPR all day and who feel physically ill when they see Donald Trump on a screen. Their instincts are good. Trump is an extremely bad president — and not just bad, but uniquely bad, in ways that are degrading the long-term stability and effectiveness of the United States itself. It’s eminently reasonable and understandable to be mad about this, even to the exclusion of all other political viewpoints and causes. As for the No Kings protests, they seem to line up perfectly with — and probably contributed to — this week’s midterm results.
And for most regular people, being mad about Trump is enough. Most citizens are not political philosophers or movement leaders or intellectuals. It’s not reasonable to ask them to think about where the country should go after Trump, or what ideologies and ideas should guide us in the absence of such imminent threats.
But someone has to think about those things. Otherwise Democrats will prove just as unable to govern as Trump was — well, maybe 70% as unable to govern, which will be bad enough. And our politics will continue to be an endless series of backlash-to-the-backlash-to-the-backlash, as each party focuses all its energy on getting to the day of the revolution and none of its energy on what happens the next morning.
Right now, the problem with Resistance Liberalism is that it’s headless. In Trump’s first term, the Resistance was animated by various identity movements, unified by the idea of a struggle against structural racism, misogyny, and so on. Hillary Clinton made a conscious choice to frame her 2016 campaign as a battle of antiracism versus Trumpian racism, Kamala Harris did something similar in 2020, and Joe Biden quietly let his administration push what would have previously been considered extreme versions of various identitarian social causes.
In fact, the American public still thought those versions were extreme, and punished Democrats in the polls accordingly. The end of the woke revolution lopped the head off of the Resistance — it left them with all of the same rage, but without a vision of a future America.
As I see it, there are basically three factions vying to replace identity politics as the guiding ethos of the Resistance. These are:
The leftists — Abdul El-Sayed, Zohran Mamdani, Bernie Sanders, and so on
The Warrenite progressive intellectuals
The Abundance movement
Each of these has deep flaws that I think will end up basically disqualifying it.
The leftists are organized, purposeful, disciplined, and driven, and they probably want the job of leadership more than the other factions. But their movement has some fatal weaknesses that make it a bad choice to lead the Dems. First of all, the leftists are intensely factional, focusing relentlessly on knifing the Democratic establishment rather than building a big tent.
Second, their policies tend to be so extreme that they overreach and backfire. The failure of the California billionaire tax is a case in point. Americans want to tax the rich more, but the billionaire tax was so extreme and poorly designed that voters didn’t just reject it — they approved a competing ballot proposition forbidding such taxes in the future.
Third, leftists instinctively ally themselves with bad people and bad causes. Leftist streamer Hasan Piker has praised terrorists and supported Vladimir Putin’s seizure of Crimea, incoming leftist congresswoman Darializa Avila Chevalier founded a group claiming to be dedicated to “the total eradication of Western Civilization”, and so on.
And fourth, although leftism is sometimes viewed as an alternative to wokeness, leftists themselves tend to be very woke. Just for fun, check out the famous footage from the 2019 DSA convention, or watch this widely mocked display from Representative Ro Khanna:
These shortcomings ought to prove fatal to the leftists’ chances of taking over the American left — and they probably will.
The second faction vying to take over the Resistance are the Warrenite intellectuals, who are laser-focused on attacking the rich — specifically, the rich people in the tech industry. Although Warren failed to catch fire in 2019, her faction had great success putting its people into positions of power during the Biden years.
But it kind of backfired. The New Antitrust movement got little done in a practical sense, and more fundamentally it failed to advance any kind of rewrite for our antitrust law. Years of frothing with rage against Mark Zuckerberg and the old FAANG companies just ended up looking silly when AI came along and disrupted their business models. The intellectual movement to “steer” the development of AI toward more pro-worker technologies (whatever that would even look like) is going nowhere.
In addition to being composed primarily of a bunch of egghead intellectuals who routinely fail to catch fire with voters, the Warrenites have a fatal flaw — they’ve chosen the wrong target. Democrats are entirely focused on hating Trump, while the Warrenites are focused on hating Mark Zuckerberg and Jeff Bezos. Americans just fundamentally aren’t that mad at the fact that Zuckerberg and Bezos are rich. They generally despise Elon Musk, but only for his right-wing activities and his online attitude — when he was just a businessman selling electric cars and reusable rockets, they didn’t mind his billions.
The Warrenites are simply never going to convince the nation that the billionaire techbros, rather than the rightists of MAGA, are the biggest threat to our way of life.
Anyway, the third faction is Abundance. Of the three, this would definitely be my choice if I had to pick, since I really like what the Abundance movement stands for. Abundance policies, like the bipartisan permitting reform bill now making its way through Congress, are both smarter and more politically feasible than almost all of what the leftists and Warrenites want to do.
The problem with Abundance is that it’s primarily an intellectual movement, not a political one. It’s all about policy — about whispering in the ears of princes, rather than marching in the streets. Abundance’s leaders are nice guys like Ezra Klein and Derek Thompson who just want to see everybody be happy and get a puppy.
And all of the Abundance ideas, to a rounding error, are good ones. Many of them are going to get implemented, especially concerning housing and energy. But they will do so because elites — including some leftists and some Republicans — will be intellectually convinced that they are good things to do, not because they have the ability to harness and direct years of pent-up anti-Trump anger. Abundance will win, but it will not win all the things the Democrats would need it to win.
The Democrats need something more than any of these movements has to offer. They need an ethos that both inspires popular passion and has a chance of pragmatically working. They need something that will give regular, normie Americans — the voters who just rose up to throw out the GOP — a reason to believe in the future, and a reason to believe that the Democrats can take them to that future.
That ideology exists. It was harnessed by FDR and his successors a century ago, first to fight the Depression, then to win World War 2, and finally to build the modern society that came after the war. I’m talking about liberal nationalism:
Here’s what I wrote in that post half a year ago:
In the 20th century, America had an ideology that was committed to forging a single national identity from a dizzying array of backgrounds. That ideology was liberal nationalism…
FDR ended forced assimilation policies for Native Americans, and gave them greater autonomy on tribal lands. He maintained a group of Black advisors, created plenty of programs to help Black people economically, created cultural programs to publicize Black achievement, and preserved the testimonials of former slaves. He created campaigns promoting interfaith understanding and cooperation, helping to reduce America’s traditional anti-Catholic prejudice as well as antisemitism. His Federal Writers Project employed writers to document America’s cultural diversity…FDR also strongly promoted the notion of America as a nation of immigrants — an idea that still deeply holds sway over the American psyche, despite rightists’ attempts to get rid of it…
FDR and the liberal nationalists were not modern multicultural progressives. They strongly believed in national unity. This obviously meant patriotism, respect for American institutions, and a shared sense of national purpose during World War 2, but it also meant a lot more. FDR and the New Dealers — and especially the Office of War Information — advanced the notion that America had a unifying culture, set of democratic ideals, sense of history, and way of life that transcended Americans’ different backgrounds. The history of the New Deal is littered with examples of attempts to forge American-ness into a sort of shared civic religion.
The Democrats can have liberal nationalism back if they want. Moderate figures like Jon Ossoff and James Talarico can use Rooseveltian pluralistic patriotism just like Barack Obama did, in order to go beyond good-governance centrism and opposition to Donald Trump. The intellectuals of the Abundance movement can use liberal nationalism to add passion to their policies — after all, isn’t it precisely because we’re Americans that we deserve material abundance?
Right now, Americans hold a bunch of basically Rooseveltian beliefs, and many Democrats still have the Rooseveltian instincts they’ve inherited from their party’s past. But we’re still not to the point where liberal nationalism has filled the vacuum of passion and inspiration left by the demise of “Woke 1.0”. The Democrats have a year and a half to resuscitate that vision.
Doing so will require some clashes — with leftists who believe that America is an evil empire, with Warrenites who want to destroy big tech companies instead of harnessing them to the national purpose, and with identitarian activists who believe that promoting a unified national culture is a form of racist oppression. But if this is not undertaken, the Democrats will either continue to drift aimlessly from backlash to backlash, or fall under the sway of highly suboptimal captains.
There’s also the more pragmatic question of what Dems should actually do over the next two years, while they hold Congress but not the presidency. This is an inherently difficult problem, because Trump can just veto almost any legislation the Dems pass. The usual tactic here is to just obstruct anything the president wants to do, hoping that making the president’s term in office look like a failure will help the opposition in the next election.
But I believe Democrats can do better than this. First of all they can, and should, investigate Trump and his family and friends for corruption. Corruption turned out to be a huge issue in these midterms — even more important than I realized it would be.
Even in opposition, Democrats can shine some sunlight on the Trump administration’s seemingly endless parade of dirty deeds. And in fact, it looks as if this is going to happen:
Corruption topped the list of concerns for voters who ousted Republicans…Now, the newly empowered Democratic Party is putting the issue front and center…Senior Democrats in both chambers of Congress have vowed to marshal the subpoena powers and larger investigative staffs that come with their soon-to-be majorities to probe what they say is the self-enrichment that President Donald Trump and people in his orbit have done at the public’s expense…
House Democrats are preparing a vast oversight agenda to look at how Trump and his family have become wealthier since he returned to office…Garcia, the top Democrat on the Oversight and Government Reform Committee, has outlined five priorities, including Trump family business dealings, the administration's handling of the Jeffrey Epstein investigation and Immigration and Customs Enforcement operations. Rep. Jared Huffman of California, the ranking Democrat on the Natural Resources Committee, said he wants to dig into Trump's White House ballroom and other construction projects, as well as the Trump family's role in mineral deals…In the Senate, Sen. Richard Blumenthal, D-Conn., who is expected to become the chairman of the Homeland Security Committee's Permanent Subcommittee on Investigations, said his panel will want to look into Trump's real estate projects around the nation's capital and his crypto dealings with special envoy Steve Witkoff.
This is great. But other than this, and perhaps some bipartisan deals and some obstruction and oversight of Trump’s worst abuses, what can the Dems in Congress do?
What they can also do is to workshop their economic policy program under low-stakes conditions. America has two big economic challenges looming — the out-of-control national debt, and AI. Dems can start demonstrating — and at the same time, start figuring out — how they’d address both of these challenges if they had the presidency.
The debt is actually the much harder piece of this in political terms. Deficit reduction is inherently painful, as it involves some combination of spending cuts and tax increases — both of which tend to be unpopular with the electorate. If Dems submit budgets that go all-out with spending cuts and tax hikes, Trump will just veto those budgets, and Americans — who have not yet been forced to reckon with the need for debt reduction — will praise Trump for it.
Instead, Dems will need to introduce only parts of their ultimate deficit reduction plans. Sunsetting the Trump tax cuts on pass-through businesses is one good idea — there’s basically no reason for people like me to pay lower taxes than Americans with W-2s, just because we’re self-employed.
AI is ultimately the thornier policy challenge, because we really don’t know how AI is going to affect the economy. But putting in place measures to protect human labor from the inevitable disruptions — flexible welfare programs, employment incentives, social wealth funds, and the like — has little downside, and it offers Democrats a way to sell a vision of harnessing the benefits of technology for the public good. The Dems can observe how these ideas go over with the public, and make the popular ones part of their candidate’s platform in 2028.
This midterm blowout was the first step toward building a better country and putting the chaotic, shameful Trump Era behind us. But there’s a lot of work to be done, both on the ideological side and in terms of crafting a policy program. The morning after the revolution is always when the hard work begins.
2026-11-04 18:33:58
The MAGA people appear to have been laboring under a number of delusions.
First, they seem to be genuinely surprised by the fact that they suffered a crushing defeat in the midterm elections. In fact, polls, forecasts, and prediction markets had all been calling a Democratic victory for months now. But a lot of MAGA types appear to have believed that America always has some big hidden reservoir of shy Trump supporters out there that everyone always misses, and that this silent majority would ride to the GOP’s rescue and prove all the pollsters and forecasters wrong, as they did in 2016.
To put it mildly, that did not happen. The election night surprise actually favored the Democrats, who won a far more extensive and decisive victory than almost any of the pollsters and forecasters had anticipated.
Even Trump’s traditional demographic support base — white voters without a college degree — abandoned the GOP in droves this time:
Trump could try to challenge this electoral verdict — to cry that the vote was rigged, to declare a state of emergency and suspend the Constitution, to abuse the powers of the presidency to nullify the popular will. But my gut says that he won’t, and here’s an important reason why:
As long as the MAGA people could tell themselves that Trump’s opponents were a bunch of old people and women, they could fantasize about prevailing in the street confrontation that would erupt in the wake of an autogolpe. But if young men — and especially young white men — aren’t on Trump’s side, then starting some sort of civil war would likely not go well for MAGA.
Anyway, as of this writing, here’s what the Senate election map looks like:
Kansas is colored blue. So is South Carolina. So is Iowa. Mississippi will probably end up blue as well.
And most of all, Texas is blue. Not just the Senate race, either — the GOP governor, Greg Abbott, has been unseated by Democratic challenger Gina Hinojosa. Bo French, who tweeted alarm at seeing Indian American football fans at a University of Texas game two months ago, lost his bid for Texas Railroad Commissioner to Democrat Jon Rosenthal.
The fall of Red Texas is an epochal, era-defining event. Growing up in Texas, I saw Dems win statewide office occasionally, but these were always old-school conservative Southern Democrat types. Yesterday’s election saw Gina Hinojosa and James Talarico, both staunch progressives, win the governorship and one of the Senate seats. In fact, the only Republican now holding a statewide office is…Ted Cruz.
How did that happen? Part of it was bad candidate selection — MAGA primary voters tossed out the popular mainstream Republican Senator John Cornyn for not being slavishly loyal enough to Trump, and replaced him with Ken Paxton, a man who has been repeatedly indicted and investigated for financial crimes and corruption. But Abbott was a popular, mainstream Republican incumbent governor with a strong economic track record, and he still lost to a progressive upstart challenger.
Rightists were simply unprepared for a world in which this was possible. Here was Jonathan Keeperman, whom I recently debated about Indian immigration, just yesterday:1
The only possible interpretation of this huge wave election is that it was a referendum on Donald Trump. Trump is now among the least popular presidents in living memory, rivaled only by George W. Bush at the end of his presidency. I wrote about why most Americans despise Trump, and my analysis hasn’t really changed:
Trump was elected to tame inflation, but he raised taxes on almost everything Americans buy from overseas, and raised gas prices by attacking Iran. When people complained about the cost of living, he told them to buy their daughters fewer dolls. Trump was elected to stay out of Middle Eastern wars, but he plunged us into an expensive quagmire. He has relentlessly promoted the interests of Vladimir Putin, whom normal Americans hate with a passion. His antics — threatening to invade Greenland, trying to bully people into renaming the Gulf of Mexico, Lake Ontario, and artificial intelligence, and so on — seem dangerously unhinged.
Then there’s the corruption. Trump has relentlessly looted the country to fatten the pockets of himself, his family, and his close political allies:
The American people noticed. This is from last week:
Voters are now more concerned about government corruption than any other issue, including high grocery and gas prices, according to the final CNBC All-America Economic Survey before the Nov. 3 midterm election…[T]he results nevertheless align with other recent polls showing corruption has shot to the top of voters’ list of pressing worries…A Fox News poll published last week found 60% of registered voters are extremely concerned about government corruption, surpassing concerns about inflation and high prices. A Washington Post-ABC News-Ipsos poll released Sunday found some two-thirds of respondents think Trump is using the presidency to enrich himself, up 10 percentage points since September 2025. Gallup recently found perceptions of government corruption in the U.S. have hit multi-decade highs. And an August poll from Reuters/Ipsos found nearly 7 in 10 Americans believe Trump’s businesses influence his presidential decisions.
And here’s their chart:
Republicans seemed to somehow labor under the delusion that regular Americans were going to just ignore all this. Perhaps they thought that Trump’s charisma, which allowed him to bounce back from the January 6th coup attempt, made him invincible. It’s possible they reasoned that Americans had simply become so jaded about corruption that they would ignore dozens of scandals that each would have ended any other presidency. Perhaps they believed that no matter how bad Trump got, Americans’ dislike of woke culture and progressive governance would always make the Republicans the lesser of two evils.
Maybe they believed that Americans never really cared about inflation in 2024, and that worries about the cost of living were just people’s way of expressing their worries about immigration and wokeness. Or maybe they believed America would blame Dems for the assassination of Charlie Kirk, and reject them at the ballot box accordingly. Perhaps they thought they could scare Americans away from the Democrats by calling them “communists” and screaming about “Western civilization”:
This was MAGA’s greatest delusion — the idea that the average American sees things similarly to the rightists on X. The truth is that the average American does not see “Western civilization” as a fortress under siege. The average American does not spend all day in a state of panic that brown immigrants and their children are invaders bent on subjugating the white race.
One gets the sense that the MAGA people believed that the average American doesn’t even exist. For decades, ideologues and extremists in both parties have shouted — often in direct contradiction of the evidence — that swing voters don’t exist, that polarization rules everything, that moderation and appealing to the center are useless, and that electoral victory goes to whichever party mobilizes their base to come out and vote.
That was always probably wrong, but MAGA seems to have taken this flawed logic one step further, convincing themselves that the country consists only of “the left” and “the right” — that every voter is either a blue-haired trans communist or a chisel-jawed defender of Western Civilization who spends all day posting memes on X about gender-swapped Draco Malfoy. If you have no idea what the heck gender-swapped Draco Malfoy is, or why on Earth anyone would think it’s politically important, rest assured that you’re not alone.
Texas and Kansas and South Carolina have been turned blue by a coalition of voters who aggressively, emphatically neither know nor care about gender-swapped Draco Malfoy, or Anakin Skywalker memes, or any of the other nonsense that bounces around the rightist echo chambers on X and 4chan. It was a coalition that never read Elon’s never-ending stream of tweets about James Talarico wanting to “trans your kids and destroy the border”. It was a coalition that does not know or care whether it’s white French people or brown French people burning down Paris this week.
It turns out that normal Americans do exist — in great numbers, in fact. It’s possible to keep them divided with relentless partisanship. It’s possible to drive them to jaded apathy with relentless he-said-she-said accusations and manufactured scandals. It’s possible to get many of them to stay home on election nights, simply by ignoring their wishes for long enough. But if you push them hard enough — if you step on their face again and again, with corruption and mismanagement and disdain for their daily struggles — they will eventually bestir themselves and rise up and smack you down. They will remind you of who won the Second World War, and why.
So the Democrats, ideologically divided as they are, took a well-deserved victory. The risk now is that they don’t learn their lesson from watching Trump’s implosion. Just as MAGA convinced themselves that the average American was a meme-spouting rightist, Democrats might marinate in their own echo chambers, egged on by leftist activists and progressive pressure groups and Bluesky cancel-culture warriors.
Democrats might convince themselves that what Americans really care about is Palestine rather than the cost of living. They might embark on a borrowing binge in order to throw more money at health care, resulting in rising interest rates and rising prices. They might try to halt inflation with price controls, with predictably terrible results. They might spend their political capital on billionaire taxes of the type that California’s electorate just rejected. They might forget the lessons of 2024 and try to admit as many illegal asylum-seekers as possible.
And if so, I’ll be writing another version of this post in 2030 or 2034, explaining why a Democratic president got hit with a red wave in the midterms.
Update: I’ll add a few tweets here that I think make good points about the election.
“Benito Tortellini” points out that even as Democrats crushed Republicans nationwide, “woke” and leftist ballot initiatives failed in blue districts around the country. This election really was the Revenge of the Normies.
Joe Weisenthal hypothesizes that this is the first election where social media use fell, and hypothesizes that people were talking to AI instead. Both of those hypotheses need to be tested with data, of course. But they are very consistent with my thesis that social media is a uniquely polarizing and radicalizing force in society, and that AI is at least a partial remedy.
In fact, Talarico said that God is “nonbinary”.
2026-11-02 19:03:51
Anthropic recently filed for IPO. At an estimated $1.5 to $2 trillion, it will be one of the biggest IPOs of all time, rivaling SpaceX, and possibly the biggest. For reference, Facebook’s valuation when it had its blockbuster IPO in 2012 was $104 billion, and Google’s valuation in 2004 was $23 billion. Anthropic will instantly become one of the world’s most valuable companies — Google itself is now worth $3.4 trillion, and Nvidia and Apple are both worth around $5 trillion.
This naturally has a lot of people asking: What’s the upside to buying Anthropic? Even if it grew to be as valuable as Apple or Nvidia — in other words, if it became one of the most valuable companies on planet Earth — that would only be a multiple of 2 to 2.5. But if Anthropic stumbles, that lofty valuation could come tumbling down.
There are certainly lots of reasons Anthropic could stumble. Demand for AI could take longer to materialize than people think, perhaps because companies have trouble integrating AI into their existing business models. The U.S. government could decide that Claude’s hacking capabilities represent a national security threat — especially after the recent wave of AI-assisted cyberattacks — and decide to regulate, appropriate, or otherwise restrain the company (the spat with the Department of War might represent the beginnings of that conflict). One company (SpaceX?) might end up monopolizing all of the compute, squeezing Anthropic’s profits. Competition from OpenAI and Google, or Chinese models, might result in a competitive race to the bottom that forces down Anthropic’s margins. And so on.
In order to balance all that uncertainty and risk on the downside, Anthropic needs to have huge upside. It needs a way that it could be worth a lot more than $2 trillion in the years to come. For comparison, if you bought Google when it IPO’d, your investment would have gone up by over 130 times by today. To equal that performance, Anthropic would have to be worth $200 to $260 trillion by the late 2040s. That’s almost half of the total wealth that exists in the entire world today. For Facebook, the number is around 16x, meaning Anthropic would have to be worth $32 trillion by the early 2040s — still an impressive performance, considering that that’s more than six times the value of the most valuable company in 2026.
How could Anthropic manage that kind of growth? One possibility is that the world economy itself will grow at a very rapid pace, thanks to AI. Some AI researchers think that growth could soon accelerate to fantastically high levels. But most economists bet against that, and even most AI industry insiders expect the growth speedup to be much more modest. Even 7% nominal growth — 4% real growth plus 3% inflation — would only make the economy about 2.75x larger by 2041, and 4.43x larger by 2048.
So in order to have the upside of a Facebook-like outcome — let alone a Google-like outcome — Anthropic probably can’t just ride a wave of economic growth.1 It’ll need to capture a greater fraction of the value that our economy produces.
So far, the company has been doing exactly that — and at an extremely rapid rate. Its revenue has grown faster than any company of similar size in all of history. And despite this explosive growth, the company is now making an operating profit:
Businesses usually have to spend more money to make more money at the outset, but Anthropic’s Claude Code is a product that sells itself — relative to just one year ago, the company is making more than 3 times as many dollars of revenue for each dollar that it spends on compute:
As SemiAnalysis writes, this is “the most efficient scaling of a business in the history of capitalism”. Jeffrey Bussgang has a good breakdown of Anthropic’s recent IPO filing, and it’s full of amazing details — incredible user retention, a broadening base of customers, and so on.
And Anthropic is selling a product whose adoption rate is still very low. As Aaron Levie points out, most big companies are still spending only a pittance on AI, and could afford to spend a lot more:
And yet for this growth to continue, Anthropic must do more than simply make great products. It will need to stave off the competition for decades on end. It will, in Wall Street jargon, need a “moat”.
When I was teaching business economics to MBAs at Stony Brook, I spent lots of time on the question of why companies make profit. This might sound like a stupid question, especially if you’ve been conditioned to think that there’s some kind of magic force called “capitalism” that companies can use to extract money from people and hand it to their shareholders. But in a world of perfect competition, companies should keep trying to undersell each other until their profit goes to zero — or at least, until it goes to a level where companies are just able to pay for their investments. Even if one company has a huge share of the market, the simple threat that new companies might be able to enter the market and compete with them should force them to keep their prices low in order to maintain their market share.
And in fact, lots of industries do work like this. Agriculture, in the absence of farm subsidies or other significant government support, is the most famous example. Solar power is another — energy provides huge value to the world, but solar is so undifferentiated a product that solar producers never end up making big margins.2 Airlines are a third example. Consumers (and workers) benefit from these industries, but shareholders don’t end up making huge returns.
In order to make profits (or “excess profits” above and beyond the cost of investment), companies generally need some sort of a “moat” — a barrier to entry that reduces the threat of competition. This could be a government-sponsored monopoly — cronyism, or intellectual property. It could be a network effect — the natural tendency of everyone to be on the same social network or use the same electric power grid. It could be something as simple as brand loyalty — maybe everyone thinks Louis Vuitton bags are worth paying money for because of the name, or maybe everyone is just very used to using Microsoft Excel and doesn’t want to switch.
These are all reasons why some companies make high profit margins. There are probably more. Investors will tell you that if you want to assess how valuable you think a company is going to be, you should try to evaluate the strength of its moat — in fact, the term “moat” as slang for barriers to entry was coined by Warren Buffett.
Ever since AI companies like Anthropic and OpenAI burst on the scene, I’ve been hearing smart people argue that they have no moat. After all, unlike famously profitable software companies like Facebook or Google, it’s not clear that AI has a network effect — whether I should use Claude Code or Codex doesn’t really depend on whether you use Claude Code or Codex. And brand loyalty to AI is probably pretty low, since coding with Claude Code and coding with Codex is probably a pretty similar experience, and since AI isn’t a prestige good like an iPhone or a Rolex. And logistically speaking, it’s very easy to switch from one company’s AI products to another’s.
What’s more, catch-up in AI models is typically very fast — OpenAI and Google are typically only a little bit behind Anthropic in terms of model capability. In fact, by some measures, Google’s new Gemini 4 Carbon model just took the lead over Anthropic. Obviously this will reverse when Anthropic releases the next blockbuster model it currently has under wraps, but it shows that the other major players are still very much in the race. In terms of market share, OpenAI has been nipping at Anthropic’s heels:
I’ve written previously about the possibility that AI will end up like solar power, or airlines — a cheap utility that lots of companies use to create enormous economic value, but whose producers don’t manage to capture much of that value:
But I think we need to talk more about the opposite scenario — the possibility that AI intrinsically does have a huge moat. I see a distinct possibility that intelligence itself — the ability to outsmart competitors in the arena of business — is a tremendous source of competitive advantage for a company. And in fact, I suspect that this is exactly what Anthropic itself is (quietly) betting on.
