MoreRSS

Noah SmithModify

Economics and other interesting stuff, an economics PhD student at the University of Michigan, an economics columnist for Bloomberg Opinion.
Please copy the RSS to your reader, or quickly subscribe to:

Inoreader Feedly Follow Feedbin Local Reader

Rss preview of Blog of Noah Smith

If you're in Tokyo, come join my hanami this Saturday!

2025-04-02 06:18:28

Just like last year, I’m doing a hanami party in Tokyo, and all Noahpinion readers are invited! It’s this Saturday, April 5th, at 1:00 to 5:00 PM in Yoyogi Park! Here’s the approximate location where we’ll be. Please feel free to bring snacks, drinks, etc. And if you want me to sign your copy of my new book Weeb Economy (now available in Japanese stores and websites), please bring that too!

(For those of you who aren't in Japan — i.e. most of you — a “hanami” is a picnic with cherry blossoms. Anyway, I'm going to do some more meetups back in the U.S., so stay tuned.)

Hope to see you soon!


Share

How Brazil built a world-beating aircraft manufacturer

2025-03-31 21:51:59

Although Donald Trump is hard at work deindustrializing America with tariffs, reindustrializing the country is still a worthy goal, and I’m hoping we can get back to it soon.

A lot of Americans seem to have a despairing attitude about their country’s ability to build anything at all, or to dominate new industries. There’s definitely an inferiority complex with respect to China in particular. There’s also a lot of skepticism toward industrial policy, with a lot of libertarians claiming that it always fails, and MAGA people turning up their nose at it in favor of tariffs.

And yet when I look at the aircraft manufacturing industry, I see that China’s most valuable entrant is at number 12 on the list, while the 7th spot is held by Embraer, a company from Brazil. You usually don’t think of Brazil as a manufacturing powerhouse, and yet it has one of the world’s top jet making companies — ahead of any manufacturer from East Asia.

How the heck did that happen? I was discussing this with Pedro Franco de Campos Pinto, a Brazilian economics lecturer at Musashi University in Tokyo, who’s very interested in the history of his country’s industrial policy. He agreed to write a post for me about how Brazil was able to beat the odds and build a world-class aircraft company. His post is full of potentially valuable lessons for the U.S., as we think about how our country can reindustrialize in the face of Chinese competition.


Latin America (LA) remains something of an understudied area in economics. There is a remarkable number of different experiences and policies LA countries have gone through in the 20th century; e.g., decades long mass immigration, concerted efforts to industrialize via import substitution, hyperinflation… Aside from that, understanding LA’s current state, composed mostly of countries caught in the middle-income trap, could be very important for rising economies in South and Southeast Asia.

Noah’s ongoing interest in Industrial Policy (IP) led me to mention my home country of Brazil’s experiences: the contrasting examples of the Zona Franca of Manaus (ZFM), a special economic zone, and Embraer, a once state-owned,1 now public company. The latter can be considered an exemplary success of IP, but one achieved despite a near collapse in the 90s and not quite the way expected by its originators, whereas the former is arguably one of the most misguided and costly "successes" in IP history and serves as a warning for countries attempting IP without due care. Let’s start with the more negative example of the ZFM and end with the more positive example how Embraer achieved great heights (pun intended) later.

One small caveat, as the military dictatorship in Brazil (1964-1984) played an outsized role in both policies. Both personally and as an economist, I abhor the dictatorship and what it did to Brazil, but I’ve tried to keep my own personal feelings towards that institution aside.

The ZFM and how it came to be…

As the name suggests, the ZFM is a special economic zone with primary effects on a single city, Manaus, where manufacturing firms have lower taxes and some simplified bureaucracy. Although tentatively initiated in the 50s by a democratic government as a part of a larger effort to “develop” the Amazon, it was the military dictatorship’s 1967 law created the ZFM as we know it and endures until now.2 The overarching goal was simple: to develop the Amazon region by industrializing it.

Why Manaus? The city of Manaus is located right in the heart of the Amazon, in the Amazonas state, on the shores of the Amazon River. This is quite important for what follows, because the Amazon River is large enough to handle fairly large container ships.3 Unfortunately, the Amazon basin does not connect Manaus to other major industrial cities directly, meaning that most shipping must navigate the full length of the Amazon River first and then either continue via the ocean or transfer to trucks in Belém, Pará. Manaus itself had experienced a substantial boom and bust due to the rubber boom in the late 19th century/early 20th century; despite the bust, the city had continued to grow and by the 1950s it was among the top 20 largest cities in Brazil and by far the biggest city “inside” the rainforest itself.

Map by ClausHansen via Wikimedia Commons

And why this preoccupation with developing the Amazon? The dictatorship did care about economic growth in general, but that’s likely to be of secondary concern in this case. Instead, the likely biggest reason for these efforts remains one of the silliest in economic history: paranoia that some other country could claim portions of the Brazilian Amazon without a larger population presence there, famously summarized during a 1966 speech by the then dictator Castelo Branco which, loosely translated, was “use it or lose it”.4 To be clear, the Amazon is not a very hospitable place; it was and remains sparsely populated, and it is largely devoid of significant natural resources aside from things like lumber, some agricultural potential and its inherent biological diversity. The notion that any of Brazil’s much smaller Amazon neighbours or, even more ridiculously, the US, is interested in “taking” the Amazon is self-evidently not very credible, but somehow remains(!) popular in some Brazilian circles, at least until recently.

Returning to the ZFM, in a very real sense, these tax incentives worked. If the goal was to populate Manaus, then the simple fact is that it went from a small city of around 100kin the 1950s to 2m nowadays, growing 4x faster than the total Brazilian average. It is striking that there is a large industrial complex in a metropolis quite literally surrounded by the Amazon forest and River.

Photo by Portal da Copa via Wikimedia Commons

How much is this attributable to the ZFM? To reference the most comprehensive data-driven study (which I will come back to many times) I could find, Holland et al., the fact that similar states and cities that did not benefit from the ZFM and did not grow nearly as much is fairly conclusive in its own right.

More direct evidence comes, again via Holland et al., by looking at Manaus’s GDP in terms of industrial activity, which went from somewhere between 40% just before the ZFM passed to a peak above 60% in the 1980s, before returning to around 40% again in the mid-90s, around the time of the liberalization and end of the Brazilian hyperinflation. Although the number varies depending on economic activity, around 100k workers are currently directly employed in the ZFM and there’s a good case to be made that, per Enrico Moretti’s research, there are substantial local multipliers resulting from the industries located in the ZFM. It’s very hard not to conclude that the ZFM accomplished the goal of getting people to live in Manaus due to the factories located there.

The consequences of misguided IP

At this point, you’re waiting for the other shoe to drop and, indeed, I could and will list a bunch of things showing why this isn’t worth the cost. But let’s take one step before this and ask ourselves a fundamental question: does the ZFM make any sense?

Why are manufacturing industries located where they are? E.g., why did Detroit have the automobile industry, why does China have its manufacturing hubs on the coast, etc.? A full answer would take much more than a simple column to answer, but clustering effects (i.e., being close to other companies and workers is helpful), the presence of a well-educated workforce and low transportation costs are important parts of the answer and on all three counts, the ZFM makes no sense whatsoever. Fundamentally, you don’t want to locate your manufacturing away from industrial clusters, with a poorly-educated workforce and far away from where your products are going to end up; that’s a recipe for wildly inefficient production.

In terms of clustering, despite the deindustrialization of the 90s and 00s, Brazil still has quite a few manufacturing clusters in the South-Eastern and Southern states. Not surprisingly, these were also the biggest and most industrialized states before the ZFM. The creation of the ZFM resulted in deagglomeration of some industries (electronic goods and motorbikes are two clear examples) as manufacturing plants moved to Manaus. As we know now, this almost certainly made it harder for these and related industries to take advantage of clustering effects, which are typically considered very important in manufacturing.

In terms of educated workforces, I have to be a bit speculative here. Holland et al. claims there’s no data before the 1980s that would give us an idea of how well-educated workers were in Manaus vis-à-vis other areas and I’m inclined to believe them.5 Still, there was a large disparity of GDP per capita in the 1950s and 60s between the Amazon state and more developed states: São Paulo and Rio de Janeiro had something like 7x more GDP per capita.

Source: Wikipedia

It seems very improbable that education in the Amazon state was even close to that of other states, especially as access to education at the time was very low in all of Brazil, with only around 30% of under 20s attending school. The quality of education was also quite low. I.e., Manaus likely had subpar educational outcomes at a time when Brazil was doing a very poor job of educating its people. It is true that the state of Amazonas and city of Manaus now have significantly better educated populace compared to similar, less developed states/cities (one of Holland et. al’s best arguments in favour of the ZFM), but Manaus is not a paragon of education in Brazil and it does not have many good universities either.6

Finally, in terms of transportation costs. As you might expect, a significant portion of the manufacturing done in the ZFM is sent to other Brazilian states, maybe around 30%; that is, a big portion of this manufacturing ends up being sold in other, more populous and richer states.7 The ZFM also imports a lot of input goods, as discussed below. Hence, the baffling issue of having a large manufacturing base in a location that adds at the very least 12-14 days of shipping8 to your logistics, increasing costs significantly, both in terms of time and money.

So why do firms do it? Why manufacture in Manaus at all? Because the tax incentives are not just large, but they have become de facto permanent for all practical purposes. The original project envisioned the tax incentives to finish in the 1990s but this is Brazil we’re talking about: whenever a certain privilege is granted by government to a group, that group will fight tooth and nail to keep it. In this case, after multiple extensions, the current deadline for ending the tax incentives is 2073. And this is not a decision from the dictatorship either; these extensions took place after Brazil’s return to democracy, showing how this IP resulted in a natural and powerful lobby group.

How much does this cost the government? Coming back to Holland et al, even in their most generous analyses,9 conclude that each job created by the ZFM costs the government (in 2018) around R$25k, very close to the R$33k of Brazil’s GDP per capita at that date; I would be willing to guess that it’s likely that the actual cost of each job is higher than Brazil’s GDP per capita, which is quite astounding. Another way of looking at things is that the amount of tax foresworn corresponds to around 0.4% of GDP, an incredible amount for a single city that has 0.9% of Brazil’s population.

There’s one last, important topic to consider here. Has this at least resulted in technological development of the industries of Manaus? This is an area I’m less confident about, but what evidence I can find isn’t great. Manufacturing in Manaus was initially largely last-step assembly stage, where components of goods where mostly imported from elsewhere. This is, of course, a common step when developing local industries, but because of all the factors listed above, including the lack of larger clusters and better universities, the logistics costs, etc., as best as I can tell, there’s been some, but overall small development of local suppliers or new technologies. For one thing, a World Bank report stated that the ZFM is “losing competitiveness and is finding ever harder to attract new companies”, which is not exactly a great sign.

So, let’s turn to a case study instead. Honda, which has over 75% of the motorbike market in Brazil, boasts of its manufacturing of motorbikes in the ZFM. Although it does the final assembly in the ZFM to take advantage of the tax incentives, 72% of suppliers are located in São Paulo state (2600km away as the crow flies, at least 9 days by boat, one way), 20% in Manaus proper, meaning there are claims that there are more manufacturing jobs in São Paulo state for motorbikes assembled in Manaus.I don’t need to point out the insanity of this logistical arrangement, stemming from all the factors listed above.

Photo by Jose Serra via Wikimedia Commons

Another way to see this is that, according to Holland et. al, the ZFM imports around $7.4b of inputs from other countries (and $4.5b from other states) and exports a piddling $0.48b back into the world.10 This is not the sign of a competitive, cutting-edge industry, but one which seems largely stuck at the assembly-stage of manufacturing, over 50 years after its creation. Indeed, given that import tariffs for most manufactured goods are high in Brazil, I’ve heard many argue that this is a very coddled industry.

I could add here a discussion about the environmental impacts, but this analysis has already become too long; suffice to say, the little evidence there is shows little impact either way. Not too surprising, since most of the cutting down of the Amazon stems from demand for cattle raising in other states. But this also means there’s little reason to claim that the ZFM is a positive thing for the Amazon forest, and, indeed, I suspect that on net it’s had a negative effect.

Finally, and to return to the bigger picture, even the strongest defences towards the ZFM end up being rather weak; claims about how the cost of taxes isn’t too high or the educational system may be a bit better than other places in Brazil simply isn’t good enough to justify the ZFM.11 And perhaps no better argument against the ZFM is the fact that manufacturing in Manaus would likely wither without the incredibly generous tax incentives that it receives.

Let’s summarize. More than 50 years after its creation, the ZFM has achieved the goal of populating the Amazon or, at least, of growing the city of Manaus. It may have had some positive effects, but overall, it remains a hugely expensive “success”, both in terms of foregone taxes and the creation of completely illogical logistics and the declustering of industries.

Pretty shocking stuff. And not surprising: the goal of this IP was never to create a world-class industry and it shows. Good IP should be about targeting industries where you temporarily give certain advantages, e.g., as tariffs and subsidies, and maybe offer longer term support in other ways (such as infrastructure and government assistance in diverse ways for technological development) but with the goal of exposing these industries to market competition, sooner than later. Protection should only last until the sector is ready. And the IP should be done in places that might be able to develop themselves fully, whether by some natural advantage or continued support in other ways (e.g., education). As we can see, the ZFM pretty much does the opposite of all of this in nearly every respect.

In Brazil itself, the ZFM is a perpetual object of discussion. Critics have attacked the ZFM since close to its inception, but the built-in lobbying from firms has proved quite strong. Yet it’s such a hugely costly blunder for Brazil as a whole, one that actively hinders the development of better manufacturing capacity. Not to say that the ZFM should be ended immediately, given that around 100k jobs directly depend on its existence, but some kind of phasing out of the ZFM and/or change in the policy could potentially have big, positive effects in Brazil as a whole in the long-run.

Embraer’s teammates: ITA and DCTA

So! After looking at the costly “success” that ZFM is for Brazil, it follows logically to ask ourselves, can a country like Brazil get IP right? There is at least one striking example where that happened, for aircraft manufacturer Embraer, which is widely lauded as a stunning example of manufacturing prowess in Brazil. The example of Embraer is a good illustration of the ups and downs that even successful IP can have and how a focus on some key aspects, research support, exports, among others, seems to have played a role in its current success.

To understand Embraer, we need to first begin with the foundation of the Aeronautics Technological Institute and the Department of Aerospace Science and Technology. The first of these is a public but military-run university, much better known by its Portuguese acronym, ITA; the second, also better known by its acronym DCTA, is an aeronautics research centre and is also military-run. Both were founded by a rather interesting figure, Casimiro Montenegro Filho.

As a brief aside, although not well known even in Brazil, Casimiro was a bit of an aviation pioneer, having founded and flown the first airmail flights in Brazil in the 1930s and moving from the army to the air force at a relatively high rank12 when the latter was founded in the 1940s, which allotted him the influence needed for what comes next. He visited the US in the mid-40s and took a great interest in MIT and how effective it was as a technological institute. Despite Brazil being a much poorer country at the time,13 he wanted to try to create a similar institution in Brazil and even convinced a MIT professor, Richard Habert Smith, to be the first rector of the DCTA. After extensive lobbying of successive governments, he succeeded in spearheading the creation of the CTA (as it was known at the time) and assisted in the creation of ITA.14

We need to focus on both ITA and DCTA right from the start as their joint role in Embraer’s success should not be underestimated. Both were created with the goal of achieving a high degree of excellence in aeronautics engineering and seem to have largely succeeded in this respect. Why they were successful, unlike many other Brazilian attempts to create high quality educational institutions, is an interesting conundrum, one that is useful to speculate a bit on.

Part of the reason may be as military-run institutions, I suspect that neither has had funding issues comparable to other Brazilian higher education and research institutes,15 although I wasn’t able to find any direct evidence of this. They also seem to have largely kept to their original goals throughout their history, of developing engineering talent and knowhow for use in Brazil, both military and civilian. The city they are located in, São José dos Campos, was deliberately chosen to be within driving distance of both São Paulo and Rio de Janeiro, the megacities of Brazil, allowing ITA, in particular, to more easily attract students and engineers from both cities.

Both were successful in attracting talented engineers from abroad in their early years and have managed to sustain and develop links abroad. ITA itself has a fearsome reputation, no doubt helping to attract good students; its entrance examinations are famous in Brazil for probably being the hardest in the nation and covering topics well outside of the Brazilian high school system. This reputation, in particular, is important, because although Brazil’s primary and secondary education systems are quite poor, Brazil is large enough that there always will be outstanding students every year which will be attracted to elite institutions like ITA.

Regardless of how they’ve managed to achieve this, both institutions were and remain fundamental in creating and sustaining Embraer, by providing qualified personnel, expertise and projects throughout the years. The closeness of the three institutions is quite literal, all three within a 10-minute drive from each other. Indeed, it’s a fairly safe bet that the existence of all three is why São José dos Campos is such a successful city in Brazil; they likely became anchors that helped attract relatively high-tech manufacturing and technological development in the area. Directly and indirectly, it’s a safe bet that they helped transform the small and sleepy town of around 50,000 in 1950 into a city of 700,000 (a growth of 14x compared to 4x for Brazil as a whole), with a GDP per capita amongst the highest in Brazil, 50% above average.

The rise of Embraer

Let’s now return to Embraer itself. It was founded by a former student at ITA in 1969/70, as a result of a successful, simple aeroplane prototype developed at the DCTA, with the goal of commercialising the prototype. Brazil had had some success with commercial aeroplane manufacturers before and during WWII, producing at its peak over 250 planes per year, but this was largely driven by military demand and these companies quickly collapsed after the war, with only a couple of smaller producers operating in Brazil before Embraer’s success eclipsed them.

Embraer was founded as a majority owned state company, with its founders coming from both ITA and DCTA. The company understood early on that it would need to focus on a niche product and said initial product would be the EMB-110, a small commuter plane for both military and civilian use that could operate well in areas with poor infrastructure, as was the case in Brazil. Embraer’s focus in the first 20 years or so was in similar types of aircraft (i.e., small airplanes) and in that respect, it worked: in its first peak in 1989, Embraer was selling nearly USD1b (in 2000 dollars) with half being exports and it had around 2500 employees. Given its focus on a relatively niche product, this was clearly a successful company. Note, however, that I called this the first peak… we’ll get back to this.

How did Embraer achieve this success? We’re already explored one hugely important factor, the general and high-quality expertise provided by ITA and DCTA, but several other factors also played a big role, many of them quite typical in IP. Firstly, as a state-owned company, the government provided the substantial initial investment required, not a trivial issue given the relatively underdeveloped capital markets of Brazil in the 60s, and continued to fund projects in the first 2 decades or so. Secondly, the military was an important source of orders throughout its early history, providing it with a steady flow of orders. Thirdly, the company, jointly or separately from ITA and DCTA, kept close links with foreign aeroplane manufacturers, having created partnerships as early as the 70s.16 Fourthly and in a similar vein, relatively early on Embraer was already exporting substantial amounts of its planes and this focus on exports remained throughout its history.

This, in particular, is an important point. As I discussed briefly above, Brazil had implemented an import substitution program that focused on industrialization as early as the 1930s, but things really took off starting in the 1950s and such programs lasted until around the late 1980s, early 1990s. In a way, similar to the case of the ZFM, these programs were successful in getting Brazil to both grow and industrialise rapidly; indeed, Brazil’s growth from 1950 to 1980 was around 7% a year and was likely only behind Japan amongst major economies as the fastest growing, allowing Brazil to reach middle-income status sometime in the 1970s.

But as the name suggested, this was an IP to create industries focused on selling to local markets, not export markets. This was achieved through various means, but one key focus was to incentivize FDI by having high import tariffs and tax incentives, as well as investing substantially in infrastructure. Having exports not be a big part of this IP was likely a big mistake and a major factor leading to the lost decade of the 1980s. I believe that a substantial part of Brazil’s growth woes ever since stem from this too.17 The reason why is, in short, without the discipline of markets (such as exports), manufacturing firms in Brazil simply didn’t continue to invest and push to become as efficient as they were after their initial FDI. Why should they? Protected from competition and with a big internal market, there was no need to do so. One way to see this is how TFP growth in Brazil has been mostly very low since around 1980.

Embraer, happily, never had this issue and it always seemed to be at least trying to keep up with the aeronautical engineering frontiers. Given how important exports were and remain for it, it has pretty much always faced market competition to discipline it and has largely been able to keep pace with other aeronautical companies in similar niches.

Finally, one surprising factor that likely contributed significantly to Embraer’s growth is the success of the agriculture sector in Brazil, in two ways.18 Firstly, there was the enormous expansion of the agricultural frontier of Brazil that took place from the 1970s and onwards, as you can see below; a lot of this expansion took place in the first decades of Embraer and, particularly in the regions of the 1980s onwards, these were areas that had exceedingly poor infrastructure, incentivizing the use of commuter planes. Secondly, in areas outside of the frontier, there was a push to mechanise farms, which included the use of agriculture planes, a type of plane that Embraer also makes and has always had significant sales with. I should add that in this vein and as others have suggested, the sheer size of Brazil always meant it was going to have significant demand for planes to connect the country, although I should also note that the major Brazilian airlines of the time were mostly flying American planes.

The fall and rise again of Embraer

Let’s return to the issue of the first peak, as things turned for the worse in the early 1990s. This was a very tough period for Brazil, as it endured the pinnacle of hyperinflation and had low/negative GDP growth. World GPD growth fell dramatically around that time and the US in particular, a major market for Embraer’s planes, went into recession. Finally, Embraer made a big bet to create a new plane with an Argentine aircraft manufacturer, FMA, that unlike other foreign partnerships, was unsuccessful and the resulting plane was too costly for the market. Overall Embraer sales would collapse to around 25% the level of 1989 and the firm was in a dire situation, as the government itself was incapable of providing significant funds at the time.

With a more liberal, in the classic sense, government in power and despite protests, only one path forward seemed viable and Embraer was privatised in 1994. This was a significant decision in allowing Embraer to flourish, as it injected capital into a company desperately needing some and, by most accounts, the increased freedom allowed Embraer to seek out more international partnerships which greatly reduced R&D costs and transformed it from a vertically integrated company into one that outsources a lot of its components, allowing for greater efficiency. Embraer also benefited from significant export subsidies at that time, probably the only way the government could still help out.19

Embraer also took a big bet around that time that paid off exceedingly well: it decided to start manufacturing regional jets in addition to its previous focuses.20 Again, this was a smart bet on a niche product, as the US market, the biggest market for regional planes, was dominated by inefficient turboprop planes in the early 90s and fuel-efficient jets were primed to take over. Indeed, the Canadian manufacturer Bombardier was first to take the plunge and was very successful in the beginning.

This leads to a long story of the competition between Embraer vs Bombardier. To keep things brief, despite or perhaps because of Bombardier’s initial head start in the area, Embraer was able to quickly catch up, leading to a competitive duopoly that lasted for around 10 years. However, thanks to its less expensive aeroplanes21 and a huge strategic blunder by Bombardier of trying to manufacture larger planes, Embraer was able to take the reins definitely by the mid-2000s.22

And this is where things more or less lie to this day. Embraer is now the biggest regional jet manufacturer in the world and is by far the most technologically advanced manufacturer in Brazil. Indeed, with Boeing’s current woes, there’s been a lot of discussion of whether Embraer might take the plunge itself and try to enter the larger jet market. Personally, I doubt that it will or should, given what happened to Bombardier and how the company perpetually chooses to focus on more niche products, but who knows?

Let’s get back to economics. The “moral of the story” is that Embraer is a good example of a very successful IP that, in many ways, followed the classic path as (I understand it) recommended by the literature for IP. That is, Embraer had strong initial government support/intervention in different ways, but a lot of this was eventually reduced; it always had a strong focus on exports; there was always a focus on keeping up with the technological frontier via foreign partnerships and via the important indirect, government support for technology and skilled labour via ITA and DCTA; it chose niche products where it could compete from the very start. It also benefited from being privatised and being given more freedom, meaning it was successful in a way that was not at all envisioned when founded as a state-owned company. Compared to other cases of IP in Brazil, Embraer’s privatization and its strong focus on exports from the start likely played key roles in its current success.

The broader picture of IP in LA

To end things, let me address something at Noah’s request. One of my sources for this column, the Odd-Lots podcast, had an episode about Embraer and although they get most things about Embraer itself right, I think it’s worth pointing out their broader picture of Brazil does not conform to my understanding at all! That is, unless there’s been a big change in economic consensus that I’m unaware of, their claims about import substitution policies are very much not what mainstream Brazilian economists believe in. In brief, the success of these policies in the 50s to 70s cannot be used to justify the subsequent lost decade of the 80s (more like 15 years in reality), nor the tepid growth (in GDP and TFP terms) since then. This is not meant as a broad stroke against all IP, but specifically against how these policies were pursued in LA.

Furthermore, the podcast raises questions about whether the liberalization of the 80s and 90s was “premature” and why there’s been a lack of clear IP since then. The latter, together with the more general question of how Brazil can become developed, is worthy of a serious discussion (and perhaps another column!), but I’d seriously question how “premature” this liberalization was. Taking the 50s as a starting point until the opening up of the 80s/90s (which reduced tariffs and allowed previously restricted imports, such as cars), that gives us 30/40 years(!) for an industry to be ready to compete with imports.23 To cite one example the podcast highlights, the fact that native Brazilian automotive companies such as Gurgel failed despite decades of protection (27 years of existence, in Gurgel’s case), is indicative of why import substitution is considered, in the long-run, a failure.

To end this rather long digression, there’s a couple of points the podcast claims, in particular, that I believe are plain wrong, no matter how you feel about import substitution in general. For example, in its defence of import substitution, it states there were “ambiguous failures which as in [sic] like nuclear power and computers in Brazil”. As far as I understand things, the attempt made during the 1980s to create a computer chip industry in Brazil by raising import tariffs to extraordinary high levels despite, among many, many other things, lack of engineering talent or a significant pipeline to develop it, remains one of most criticized episodes of IP that I am aware of.24

The podcast also states that firms created by this policy, such as Embraer, Petrobras and Vale, “took decades and loads of failures before any of these companies became profitable.” To focus on just Embraer, it’s true that in some ways, one can argue that Embraer only truly became “successful” after it entered the regional jet business (i.e., over 25 years after its foundation, 45 years if one focuses on foundation of DCTA), which would suggest that IP can take a very long time before it works… but that’s arguably not the case. Embraer saw significant success (and profits!) before its crisis of the early 1990s and most of the factors that would lead it becoming the even bigger success that it is today, i.e., ITA and DCTA, the foreign partnerships, the focus on exports, etc., were already present then. Many cases of IP do take a long time to happen, but you should be able to see things working well before a quarter-century has passed!

And as a truly very last point about both the ZFM and Embraer, note that there’s a strong irony at play here. Both policies were (essentially) military projects, but with differing goals and methods, and both can be said to have accomplished said goals, but with vastly different consequences for Brazil as a whole.


Subscribe now

Share

1

Majority state owned, to be clear.

2

Holland, Márcio, et al. "Zona Franca de Manaus: impactos, efetividade e oportunidades." FGV, available at: http://site. suframa. gov. br. Acesso em 11 (2019). https://eesp.fgv.br/sites/eesp.fgv.br/files/estudos_fgv_zonafranca_manaus_abril_2019v2.pdf

3

The current record being seems to be Post-Panamax sized ship of 5500 TEU (https://www.revistaportuaria.com.br/noticia/19966).

4

Integrar para não entregar, i.e., integrate the Amazon region with rest of Brazil or it will be handed (lit delivered) to others.

5

The lack of more and better data is likely the biggest reason why LA is understudied in economics.

6

https://ruf.folha.uol.com.br/2023/ranking-de-universidades/principal/ is a fairly comprehensive ranking and only 2 of the top 100 Brazilian universities are in Amazonas, compared to 16 in the state of São Paulo.

7

Holand et al. presents data that allows us to get a very rough estimate that maybe around $25b of $80b is sent to other states, but I wish I had been able to find clearer data on this.

8

https://www.transamazonas.com.br/travessia-de-balsa-belem-manaus-transporte-fluvial-de-carga-carro-moto-caminhao-picape/ estimates this as the time to transport merchandise to and from Belem, the big port city at the edge of the Amazon. From there, merchandise can be transported by trucks or boats. Given the inefficiencies involved, in practice, this is very much an underestimate.

9

Using generous local job multipliers and taking into account tax intakes, i.e., using net taxes.

10

There are some studies claiming that some goods are re-exported from other states and should be counted as exports from the ZFM, but this just highlights the insane logistics of the ZFM.

11

If you can read Portuguese and are willing to go over Holland et. al, you’ll see that the very best arguments they can make still paint a fairly damning picture of the ZFM, if only by virtue of how weak the defense is.

12

Either Major or Lt Colonel, it’s not quite clear.

13

Having around 10% of GDP per capita of the US at that time.

14

And other military commanders of the time, to be clear, this was not a solo effort. The exact nature of his contribution for ITA itself is unclear, but there’s several sources attributing to him some merit in getting ITA to function.

15

To be clear, like virtually all Brazilian institutions, they’ve faced significant budget cuts/swings in the past. This is me guessing, but I’d imagine that they probably have not had the dramatic swings that other research institutions have faced and they’ve probably been able to budget themselves better; both consequences of being military-run, which helps protect their funding both during and after the dictatorship. Money from Embraer projects itself has probably helped significantly too.

16

Two important early partners consisted were Piper and Aermacchi, both relatively successful small aeroplane manufacturers.

17

But certainly not the sole explanation. The litany of problems that Brazil’s economy has are myriad, to list just a few: poor educational systems, poor infrastructure, myriad difficulties stopping companies from scaling up, a truly insane tax system, heavily government directed investments, incompetent and sometimes corrupt bureaucracies, excessive regulations, slow and capricious law systems, etc.

18

As another aside, note that, to my best of my knowledge, the agriculture sector in Brazil had a much lighter touch compared to the industrial sector in that time period, allowing for significantly more “exposure to market forces”; the implications are quite obvious. Not to say that there were not important contributions from the government, the state-run research institute Embrapa has played an outsized role in both expanding the frontier and increasing Brazilian agriculture productivity, for example, but overall, agriculture faced less direct and indirect government intervention.

19

Many other aircraft manufacturers were also receiving subsidies at that time, such as Bombardier.

20

Regional planes are smaller planes, usually under 100 passengers, that are used more or less exclusively for short-haul flights, particularly connecting lower traffic airports to bigger ones.

21

Bombardier’s business planes were adapted to become regional jets, whereas Embraer’s were designed as such. This is in addition to the efficiencies achieved post-privatization as explained.

22

Bombardier decided to compete directly with Boeing and Airbus in manufacturing a narrow-body jet, one step above regional jets. Cost overruns and manufacturing delays ended up costing Bombardier so much that it was forced to sell off many of its assets, including its own regional jet line. Bombardier now only manufactures business jets.

23

I should point out the opening was not as complete as is sometimes portrayed, as tariffs remained (and remain) relatively high overall: https://portalibre.fgv.br/sites/default/files/2021-03/artigo-centro-de-estudos-do-setor-externo_agosto2010.pdf

24

The nuclear power program, although slightly more successful, is also probably a misguided effort, given both the potential and actual success of renewable energy in Brazil.

The latest episode of Mad King Trump

2025-03-30 12:15:55

Art by Hieronymus Bosch

I do not believe that Donald Trump is secretly a Russian plant, hired by the Kremlin to destroy America’s economy and global influence. But frustratingly, Trump’s actions are often indistinguishable from what he might do if he were a foreign agent bent on destruction. Let’s take stock of some of his latest moves.

First, there’s yet another round of tariffs, this time on the auto industry. This time Trump is putting 25% tariffs on imported cars and car parts. Since many U.S. cars use foreign parts, and U.S.-made parts are often assembled into full cars across the border, these tariffs will disrupt the entire U.S. auto supply chain (the Cato Institute has a great explainer on how this works, if you’re interested.) Prices will go up for American consumers, and costs will go up for U.S. manufacturers. Predictably, American automakers saw big declines in their stock prices:

Many of Trump’s followers, of course, believe that the pain is only temporary — that after a period of adjustment, U.S. auto manufacturers will invest more in America and ultimately benefit from the lack of foreign competition. But stock prices are forward-looking — when GM and Ford see their stocks decline, it means that investors expect them to suffer not just in the short term, but over the long term as well. In other words, investors are not buying the “short-term pain for long-term gain” thesis.

The auto tariffs will have ramifications all throughout the supply chain. Auto insurance rates will probably go up too. And upstream industries that supply the auto industry, such as American steelmakers, will be hurt as well:

More than 600 Iron Range steelworkers will be out of a job as mines that supply the struggling auto industry go offline…Cleveland-Cliffs will temporarily idle two Minnesota operations…The Ohio-based company, North America’s largest producer of flat-rolled steel, has notified the state of the upcoming layoffs…[N]ew tariffs on imported goods from Canada, Mexico and China are throwing a wrench in the American auto industry[.]

Trump’s tariffs are hurting all the industries that they’re theoretically intended to protect.

The oil industry — a long-time bastion of Republican support — will be hurt as well, because of the increased cost of drilling equipment. Here’s Tracy Alloway in Bloomberg:

[W]e’ve got to talk about the latest energy survey from the Dallas Fed, whose turf covers a lot of the US oil patch…To sum it up, the survey is bad. It’s really worth reading the whole thing but to sum it up, it’s full of anonymous energy executives complaining about how the new Trump administration is creating massive uncertainty for their business viz the back-and-forth on tariffs.

Oil rig counts are flat; “drill, baby, drill” is a distant memory.

Trump and his people simply have no idea how manufacturing, mining, drilling, and other industries actually work. It’s all theory, no actual knowledge. And when reality doesn’t cooperate, Trump himself doesn’t even notice or care; instead, he simply lets the American people suffer for his theory’s failures.

Even Trump’s inner circle (except for his his economic guru Peter Navarro) is starting to feel mystified. Here’s some reporting by Politico:

Just days out from Trump’s April 2 announcement of global tariffs, which he has hailed as “Liberation Day,” even those closest to the president…have privately indicated that they’re unsure exactly what the boss will do…“No one knows what the fuck is going on,” said one White House ally close to Trump’s inner circle, granted anonymity to speak freely…[T]he president continues to throw curveballs at businesses — and even his own team…

The problem Trump’s own advisers and Hill Republicans face is that the president doesn’t share their alarm…Trump really believes in the protectionist policies pushed by aides like Navarro, the longtime trade adviser whom Republicans almost universally distrust. The president also believes that his tariffs are popular with voters…

“The president isn’t looking at it like they are,” said one of the people close to Trump’s inner circle of the president’s advisers. “For [him], if the economy tanks, then fine, the economy tanks — because the president truly believes that it will rebound and the countries will give in because they can’t withstand the pressure from the U.S.”

As for political blowback, this person continued: “No. 1, the president is not running for reelection — so where this may have been a political concern in his first term, it’s not a political concern now. ... And No. 2, we’re probably gonna lose the House in the midterms.”

The auto tariff move — which comes in advance of another huge wave of tariffs that’s expected to be announced on April 2 — will only add to a growing attitude of economic pessimism. The broader stock market declined after the announcement. Sentiment is falling among rich and poor alike:

Crucially, this isn’t just “vibes” — Americans’ expectations for their own financial situation is approaching the lows of 2022, when the post-pandemic inflation was causing real incomes to plummet:

It’s not just that people expect tariffs to put them out of a job or put pressure on their wages. They also think the tariffs are going to result in higher inflation, despite the destruction of aggregate demand. Market-based 5-year inflation expectations are creeping back up, and survey-based expectations are spiking:

And expectations might just be following reality here. The latest inflation numbers look pretty worrying:

And here’s a table with a bunch of different inflation measures, which have all risen to over 3% when measured only over the months since Trump’s election:

What does Trump plan to do about this? The Politico article suggests that he basically plans to do nothing, because he’s not running for reelection and his wacky theory and his one trusted economic advisor (Peter Navarro) tell him that the long-term consequences will be good.

That’s one possibility. Another is that he’ll turn to the playbook that quasi-authoritarian leaders typically use when inflation threatens: price controls. During the Biden administration, it looked as if Biden might try to use price controls to suppress inflation, on the advice of the Warrrenite progressives. But to his credit, he never did. Now Trump is making similar noises:

When President Trump convened CEOs of some of the country’s top automakers for a call earlier this month, he issued a warning: They better not raise car prices because of tariffs…Trump told the executives that the White House would look unfavorably on such a move, leaving some of them rattled and worried they would face punishment if they increased prices, people with knowledge of the call said.

Trump’s “warnings” and commands carry a lot more weight than Biden’s, because Trump is a lot more willing to use executive power to punish individual companies he doesn’t like. Real price controls would put the country in danger of a catastrophic spiral of shortages, hoarding, “anti-hoarding” measures, and inflation.

And of course, all this comes against a backdrop of insane moves in the international arena. Trump continues to threaten to invade and conquer Greenland, with JD Vance especially pressing for this move. To those who are still desperately looking for alternatives to the Mad King theory, this additional piece of evidence should come as a disappointment.

Anyway, although Trump’s apparatchiks are still bellowing that his tariffs will reindustrialize America, the country’s business community is beginning to realize that the country has elected a Mad King:

They expected a replay of the laissez-faire policies of Trump’s first term — a lot of bombastic rhetoric but few real policy changes and a lot of small, quiet deregulatory moves. Instead, they got a very different Trump this time — one who’s intent on breaking the American economy in the service of ideology.

People on the Tech Right are quietly starting to come to a similar conclusion. Here’s my friend Brian Chau, who is more frank and honest than most:

So far, there has not been a preference cascade within the American business community. Trump’s willingness to target and punish individual businesses or rich people who speak out against him is probably preventing anyone from sticking their neck out. And the memory of the Biden administration’s anti-business rhetoric, and the continued anti-business rhetoric emanating from both the Warrenite and Bernie wings of the Democrats, are probably still a deterrent as well.

It will still be a while before things get bad enough for the business community to flip to the Democrats. But if the Mad King’s madness continues to intensify, and things continue to get worse, what other choice will businesses have? In any case, center-left Democrats who care about winning elections should be working feverishly to welcome businesses (and rich people) into their big tent. I hope that the new embrace of Abundance liberalism represents the beginning of the end of the class-warfare rhetoric of the past decade.

The sooner that switch happens, the sooner conditions in America will stabilize. Hopefully the damage to our prosperity can still be limited. Business is not the only important group that needs to abandon Trump, and welcoming business is not the only coalition-broadening move the Democrats need to make. But it’s an important piece of the puzzle.


Subscribe now

Share

Understanding America's New Right

2025-03-28 09:25:55

“Now we are not outnumbered! Now WE have an army!” — Thorin

This post is going to be something a little different than usual. Most of my posts try to explain the facts of the world; today I’m going to try to explain an ideology.

You can’t really understand policymaking without ideology. This is something most commentators intuitively grasp, but many academics don’t. If you sold tax cuts in 1981 as “Keynesian demand stimulus”, you wouldn’t have gotten anywhere, but “supply-side” arguments won the day. Ideology is the way most leaders, advisors, and commentators organize their thinking about policy; it serves as a coordination mechanism to make sure that a bunch of people are basically on the same page about what they ought to do.

Here’s an example. In the recent Signal group-chat incident, JD Vance seemed obsessed with the idea of not helping Europe:

"I think we are making a mistake," Vance wrote in the Signal group with Cabinet secretaries and senior White House officials, arguing that the Houthis were more Europe's problem than America's…In the text messages, Vance said of the planned bombings: "I am not sure the president is aware how inconsistent this is with his message on Europe right now."

Why was not helping Europe even more important to the Vice President than accomplishing the operation’s actual military objectives? The only possible answer is “ideology”.

In fact, I’ve found myself using ideology as my explanation for much of what the Trump administration has done in the two months since it came to power. I explained Trump’s tariffs as an ideologically driven attempt to isolate America from foreign dependency and ape the country’s “glory days” of the pre-WW2 period. And I explained Elon Musk’s DOGE as an attempt to purge “woke” progressivism from the U.S. government and other institutions.

These aren’t all quite the same ideology. Vance, Trump, and Musk have worldviews that differ in important and consequential ways. Yet they’re all recognizably affiliated — subsets of one category that we might broadly call the New Right.

Understanding the New Right is sort of a gestalt exercise — you’re basically acting like an LLM. Listen to leaders like Vance, and mainstream media figures like Joe Rogan who have drifted to the right in recent years. Then read a bunch of people on the right and pattern-match to figure out which thought leaders folks like Vance and Rogan sound like. You’ll probably end up with influencers like Charlie Kirk and Jack Posobiec and Tucker Carlson and Auron MacIntyre, and blogs like Aporia and The Upheaval. Then try to isolate some common themes and big ideas, and see if you can use those to parsimoniously explain the attitudes and actions of leaders like Vance.1

Anyway, here’s what I’ve come up with. This post is not an attempt to pass an “ideological Turing test” — to prove to members of the New Right that I understand them.2 Nor am I trying to be judgmental here; this is neither a jeremiad against the New Right, nor an apologia for it (though some commenters will inevitably accuse it of being both of those things). There will be plenty of time for that in other posts.

Instead, in this post, I want to try to explain the New Right to people who aren’t part of it, in a way that they can productively understand.

Once this basic understanding is in place, I think a lot of the Trump administration’s seemingly boneheaded, overly risky, or counterproductive actions become less mysterious. That doesn’t mean the Trump administration isn’t incompetent, or that everything is proceeding according to some grand plan. But I think it helps clarify some of the goals the MAGA folks are trying to accomplish with things like tariffs, abandoning Europe, embracing Russia, purging the government, amassing executive power, kicking out immigrants, and so on.

“Western Civilization” is the key to the New Right

The New Right, I believe, emerged from a profound identity crisis in America. It’s an attempt to answer the basic question Samuel Huntington asked in 2005, in his book Who Are We?: The Challenges to America's National Identity. Two decades ago, immigration, globalization, and the internet were already causing Americans to question their old assumptions about the cultural, historical, and racial basis of their civilization.

When social media arrived in the early 2010s, that process went into overdrive — instead of interacting mainly with people located near them in physical space, Americans suddenly spent all their time sorting into like-minded communities online (or engaging in combat with opponents). A society already beginning to wonder if it was really a nation suddenly began to wonder if it was even a place.

The New Right was one of the rocks that some people clung to in that dizzying maelstrom. To a large-ish number of Americans, it told a coherent story about who they were, where they came from, and what commonalities tied them together. The story it told was about “Western civilization”.

Read more

If and when you live in a dictatorship, how will you know?

2025-03-26 23:59:57

There hasn’t been any particularly catastrophic economic news for over a week now, so I’ve been taking a bit of a break from bashing the Trump administration. But that doesn’t mean the administration wasn’t doing anything awful during that time. There was! It just wasn’t in the economic sphere. Instead, it was a bunch of human rights abuses and assertions of unchecked executive power.

So although officially this is an economics blog, I guess I might as well take a little detour and talk about whether Trump is about to become a dictator.

The word “dictatorship” is a fraught one, a bit like “terrorism”, or “tyranny” back in the 18th century. Officially, a dictator is just a ruler with unchecked power, not subject to things like elections, the rule of law, or oversight by a legislature. But in practice, almost no ruler has absolutely zero checks on his power, and there’s no hard and fast rule for where to draw the line. As a result, there tend to be a lot of arguments over whether particular rulers — Turkey’s Erdogan, Hungary’s Orban, or even Ukraine’s Zelensky — is a “dictator”.

These debates over whether a leader is a “dictator” can be fierce, because the word carries a powerful pejorative implication. Very few people will admit to liking the idea of a dictator, even if many people want a dictator in practice. In addition to unchecked power, “dictator” carries the implication of illiberalism and oppression — the word invokes things like secret torture dungeons, disappearances of political enemies, pervasive censorship of speech, vast networks of prisons, and so on. (An all-powerful benevolent liberal philosopher-king would technically be a dictator, but few people would think of him as such.)

Only Trump’s most florid and hyperbolic opponents would claim that as of March 2025, our President is a dictator. But over the past couple of weeks, the Trump administration has done or said a number of things that sort of pattern-match to the stuff dictators usually do. And this is causing reasonable people to worry that Trump is slowly, carefully trying to push in the direction of a dictatorship.

To take just one small example, Trump claimed that it’s illegal for news outlets to report stories that influence the opinions of judges:

President Trump railed against the media…suggesting some of the actions of the press be deemed illegal and should be investigated…[He] said he views CNN and MSNBC as corrupt.

“I believe that CNN and MS-DNC, who literally write 97.6 percent bad about me, are political arms of the Democrat Party and in my opinion, they’re really corrupt and they’re illegal, what do they do is illegal,” Trump said…He also claimed the media outlets work in coordination and that their reporting is able to influence the opinions of judges…“And it has to stop, it has to be illegal, it’s influencing judges and it’s really changing law, and it just cannot be legal. I don’t believe it’s legal, and they do it in total coordination with each other,” he added.

Some Trump defenders might say this is just empty bluster; Some Trump opponents will probably say that this rhetoric means the press is no longer free in America. But it’s hard to dispute that if Trump really did manage to punish news outlets for criticizing him, it would be pretty dictatorial.

Trump has also issued executive orders targeting specific law firms that he doesn’t like:

The administration has stripped security clearances at a trio of firms…The orders for Perkins Coie and Paul, Weiss additionally barred their attorneys from entering federal buildings, which could include places like courthouses…The chair of Paul, Weiss said the move “could easily have destroyed our firm,”…

President Trump [also] signed another executive order critics say will have a chilling effect on those taking on litigation against the administration — encouraging the attorney general to refer attorneys for disciplinary action if it is determined they have filed “frivolous, unreasonable, and vexatious litigation”.

Although it’s likely that the law firms could sue and stop these executive orders, they could still be hurt by the perception that the administration is out to get them. Since these firms deal with cases involving the government, that could be fatal to their businesses. Law firms have already started refusing to represent Trump’s opponents, fearing executive retaliation.

Once again, Trump defenders will claim that this is just playing hardball, while Trump opponents will say that fundamental freedoms have been abrogated. But what’s unambiguous is that Trump’s action goes in the direction of greater executive power and fewer institutional checks and balances. It’s notable that no American President has ever targeted lawyers in this fashion, but the presidents of Russia, Turkey, and Hungary have done similar things.

A third example is when Trump may or may not have defied a court order to halt a deportation flight:

The Trump administration says it ignored a Saturday court order to turn around two planeloads of alleged Venezuelan gang members because the flights were over international waters and therefore the ruling didn't apply…A second administration official said Trump was not defying the judge whose ruling came too late for the planes to change course: "Very important that people understand we are not actively defying court orders."

Again, notice the ambiguity. Trump’s people have been very careful to stick to the gray zone of legality and leave room for multiple interpretations of the President’s actions.

But these are not the scariest or most dictatorial things Trump has done. I saved the two worst examples for last.

The Trump administration has been trying to deport people for participating in Palestine protests. The first high-profile case was that of Mahmoud Khalil:

The Eternally Radical Idea
Five things to remember as the Mahmoud Khalil case develops
If you’ve been paying attention to the news the last week, you’ll know that all eyes are currently on Columbia University (again…
Read more

Khalil is a Syrian exchange student who led a bunch of Palestine protests at Columbia University. Some of those protests turned violent, possibly with Khalil’s encouragement. And Khalil almost certainly participated in illegal behavior, like taking over campus buildings.

Thus, Khalil’s case seems like a gray zone. The legality of the deportation is questionable; we’ll see if it ends up going through. The morality is also pretty murky. Khalil seems like a fairly bad guy, who abused the privilege of studying in the United States to attack his institution and intimidate innocent Americans. But it’s also a bad look for the President to single out and deport people for protesting.

But if the Khalil case is ambiguous, the case of Yunseo Chung is not. Chung is a U.S. permanent resident, who has lived in America since age 7. She took part in the Palestine protests at Columbia and was arrested, but wasn’t a protest leader. Now, Trump’s immigration enforcers have been tracking her down and trying to kick her out of the country. A judge has blocked her deportation for now, but if Trump eventually succeeds in banishing her from the country, Chung will be forced to move to a country where she hasn’t lived since she was a small child.

As readers of this blog know, I’m no fan of the Palestine protests — I think they support a fundamentally irredentist and illiberal ideology, and are often antisemitic. But freedom of speech doesn’t only apply to U.S. citizens; it applies to anyone in the country. Fundamentally, the President shouldn’t be able to dictate the speech of anyone in the country. And if the President can threaten to deport someone to a country they haven’t lived in since age 7 if they say something he doesn’t like, that’s a serious degradation of the American freedom we grew up with. The mere fact that Trump is trying to deport Yunseo Chung is bad news.

But the worst human rights abuse by the Trump administration so far is almost certainly the deportation of hundreds of men to prisons in El Salvador. Trump invoked the Alien Enemies Act, passed in 1798, to deport people that he suspected of being members of a Venezuelan gang called Tren de Aragua. Some were in the country illegally, but some were refugees that had been admitted to America legally. Most were under Temporary Protected Status, a form of legal immigration that Biden granted and Trump revoked.

That’s questionable enough already. But instead of holding hearings or any other due process to determine if any of these guys was actually a member of Tren de Aragua, the Trump administration simply checked to see if they had tattoos. If they did, the administration declared they were members of Tren de Aragua, and immediately sent them to El Salvador, whose president, Nayib Bukele, promptly threw them in prison.

As you might expect, simply grabbing any Venezuelan-looking guy with a tattoo turned out not to be a very good way of identifying members of a foreign gang. Lots of people have tattoos for other reasons, and the Trump administration probably deported lots of total innocents, with zero due process.

And when these random innocent people arrived in El Salvador, this was the treatment that was waiting for them:

The intake began with slaps. One young man sobbed when a guard pushed him to the floor. He said, “I’m not a gang member. I’m gay. I’m a barber.” I believed him. But maybe it’s only because he didn’t look like what I had expected—he wasn’t a tattooed monster.

The men were pulled from the buses…Chained at their ankles and wrists, they stumbled and fell, some guards falling to the ground with them. With each fall came a kick, a slap, a shove. The guards grabbed necks and pushed bodies into the sides of the buses as they forced the detainees forward…The guy who claimed to be a barber began to whimper, folding his hands in prayer as his hair fell. He was slapped. The man asked for his mother, then buried his face in his chained hands and cried as he was slapped again…After being shaved, the detainees were stripped naked. More of them began to whimper…

They entered their cold cells, 80 men per cell, with steel planks for bunks, no mats, no sheets, no pillow. No television. No books. No talking. No phone calls and no visitors.

So to sum up: Trump rounded up a bunch of random Hispanic guys with tattoos, and with zero due process, put them on a plane and shipped them to a hellish dungeon in El Salvador.

That is certainly not the worst thing a U.S. President has ever done. In fact, that sort of thing used to be a lot more common — consider the Trail of Tears, the Japanese internment, or the deportation of a vast number of Mexican Americans in the Depression. But the motivation seems different. Trump seems to be doing these things in order to deliberately test his limits — to see how far he can push the bounds of the law and of public opinion.

In fact, this deliberate caution has been a hallmark of Trump’s battles with American institutions since his first term. When Trump attempted to overturn the 2020 election result, he did it with lawsuits and with pressure campaigns on GOP officials; he didn’t simply declare that he was still President. Even the January 6th rioters who stormed Congress in an attempt to prevent the certification of Biden’s election did so without guns.

Trump’s authoritarianism is like a liquid, pressing slowly at the cracks in America’s institutions, always searching for weak points. The pressure is higher in his second term than in his first, but the basic approach is the same.

During Trump’s first term, his opponents were fond of saying “The cruelty is the point”, meaning they thought Trump was motivated mainly by a desire to make liberals angry. This time, however, I think it’s more accurate to say that “The power is the point” — Trump’s actions all seem geared toward finding out what he can get away with, pushing the boundaries of institutional constraints in order to give himself a more free hand in the future.

There are a couple of ways you can interpret this. If you’re a Trump supporter, you probably think that America’s problems — wokeness, immigration, etc. — are so severe and pressing that we need a President who’s a little bit more like a dictator in order to fight them, and Trump is just being cautious because he wants to strike the right balance.

If you’re a Trump opponent, on the other hand, you may think that Trump’s goal is a true dictatorship — he basically wants to dismantle American democracy as quickly as he can, like Hitler did to the Weimar Republic — and that he’s only going slow because America’s institutions and democratic traditions are so strong that Trump can only erode them gradually over time.

One rather disturbing piece of evidence for the latter interpretation is that many of the MAGA movement people are openly advocating for Trump to assert truly dictatorial powers. For example, Sebastian Gorka claims that Trump has personal power over all immigration:

And Trump’s “border czar” Tom Homan, when asked if deportees should get due process, basically said no. His justification was that Laken Riley, a woman murdered by an illegal immigrant, didn’t get due process:

Obviously this is a ridiculous justification — of course crime victims don’t get due process, that’s one reason it’s called “crime” — but the more important point here is that Homan is calling for collective group punishment. In his eyes, any immigrant he would rather not be in the country is personally responsible for Laken Riley’s death and should be punished as such.

Trump’s former National Security Adviser Michael Flynn, meanwhile, is calling for Trump to declare a national emergency and assume truly dictatorial powers.1 And Sean Davis, co-founder of The Federalist, thinks Trump should simply openly defy judicial rulings and do whatever he wants:

These cowardly morons don’t seem to understand that all their power and authority is little more than a figment of the political imagination—once the desire to believe in the judicial tooth fairy is gone, it is gone forever, and nothing will bring it back.

Wiser men with far stronger backbones understood this for centuries—they knew their power as an institution was entirely one of perception, given the institution’s lack of any real power to enforce its rulings against the two far more powerful branches of the federal government. The Supreme Court controls no army and no bank account. Its police can barely keep people out of its own building or away from the homes of its members. How on earth will it enforce rulings without the force of money or arms?

The simple truth is it cannot, and its smarter members—until recently, at least—understood the court’s unique challenge: how to enforce rulings against two institutions despite any real power to do so. Those with brains and no fear of their own shadows knew this was only possible if the politicians and the people believed the courts had the necessary credibility and reputation to produce long-term deference to its decisions.

We are rapidly approaching the point where that is no longer the case.

That’s not encouraging. It means that if Trump doesn’t push to become a true dictator, it’ll only be because he and his subordinates choose to defy the desires of their activist base. And that’s not something I’m particularly comfortable betting the future of the country on.

Another important question here is: Why? To what end are Trump and his subordinates relentlessly trying to arrogate executive power to themselves? What do they want to do with that power?

Trump himself is near the end of his life, and he’s reached the top; there’s no real scope for further personal ambition. Instead, he seems to be motivated by a combination of rage and nostalgia. He wants revenge on the people who insult him in the media, and who worked to stop his attempted coup in 2020. And he genuinely wants to return America to the 1920s version of the nation that exists in myth and memory, mixed with an isolationist Lindberghian America that never was — pattern-matching to an era when America felt truly great.

As for Trump’s subordinates, that topic deserves a longer post. But the short version is that I think their motivation is ideological — they see themselves as defending Western Civilization from overthrow by an alliance of Islam and a quasi-communist woke movement.

Both of those visions require a deep remaking of America, involving major demographic, economic, institutional, and cultural changes. It’s a task to which Trump’s movement is particularly unsuited — it’s not a true mass movement like communism or Nazism, but more of an online fandom. That means the deep changes Trump and his people envision can’t be accomplished from the bottom up; they’ll have to be imposed from the top down. Which means Trump himself will have to amass ever more power in order to make it work.

This sort of arrogant ideological project is one of the main reasons dictatorships tend to fail (the others being rash decision-making, and internal power struggles). It’s very hard to pull off, and most people don’t really like it, and it requires you to ignore a lot of important stuff like economics. So no matter how much power Trump manages to seize, I don’t see him achieving his big goals; the main question is how much chaos he’ll produce in the attempt.

Trump is not a dictator yet. In his first term, his opponents often warned that he was trying to become one; when he didn’t, it seemed like they had been crying wolf. But one thing people seem to forget about that story is that at the end, the wolf actually comes.


Share

Subscribe now

1

In fact, the original meaning of the word “dictator”, from Roman times, was a leader who assumed absolute power in a time of war or emergency.

Blue states don't build. Red states do.

2025-03-25 23:00:08

The debate over abundance liberalism unleashed by Ezra Klein and Derek Thompson’s book has, so far, been pretty lopsided. On one hand, you have the abundance liberals themselves, who walk on eggshells to avoid offending the sensibilities of people to their left, in the hope of building a big tent. On the other side, you have a collection of Warrenite progressives and Bernie-faction leftists who simply assume that the abundance liberals are just a bunch of deregulators, and excoriate them for being corporatists and ignoring the dangers of billionaires and oligarchy and such.

Many things frustrate me about this debate. One is that most of the progressive critics of the abundance idea appear not to have actually read Klein and Thompson’s book; they lazily assume it’s all about deregulation, when in fact Klein and Thompson spend more time calling for building up state capacity and the power of the bureaucracy. Another frustrating thing is that the progressive critics seem to assume that their preferred ideas — such as antitrust — are alternatives to abundance, when in fact they usually don’t conflict, and sometimes complement each other.

But what frustrates me most is that by insisting on degrowth over abundance, progressives are hurting themselves much more than they’re hurting any billionaires, oligarchs, or conservatives. Most development policy is set at the city and state level, not at the federal level. Which means by embracing degrowth, progressives are only stifling development in blue states and progressive cities — places like California and Massachusetts. Meanwhile, red states like Texas just keep growing, because progressives can’t tell them what to do.

There are many ways in which this process ends up hurting progressives. Degrowth means blue states lose population, pushing them out with high housing costs. Degrowth means progressive cities become dysfunctional, making life worse for their progressive residents. Degrowth discredits progressive policies at the national level, helping people like Donald Trump win the presidency and Congress.

Back in 2023, I wrote a post called “Blue states don’t build”, about how America’s more conservatively governed states (especially Texas) are better at building housing and green energy than their progressive counterparts (especially California). That post is, if anything, even more relevant today. Even as progressives revile abundance liberals as corporate stooges, degrowth policies are hamstringing progressive politics and progressive communities.

Anyway, here’s my post from 2023. If this isn’t a wake-up call for progressives to abandon degrowth and embrace abundance, I don’t know what would be.


Here’s some bad news for the Democratic Party:

This map shows the number of seats each state is forecast to gain or lose in the House of Representatives by 2030. As you can see, the states losing seats are pretty much all blue states, while the states gaining seats are pretty much all red states.

This is because House seats are reapportioned based on population changes. Blue states are losing seats because they are losing people relative to the U.S. average, while red states are gaining people relative to the average. Here, for example, are the population changes in California and New York (blue states) vs. Texas and Florida (red states) over the past two decades:

Some of this is due to differences in state fertility rates — the Plains states and parts of the South tend to have more kids — but the main driver is simply migration. Americans are moving from blue states to red states:

Why is this happening? It’s obviously not just about the weather, given the moves away from sunny California and into frigid Idaho and Montana. Conservatives will tend to blame the trends on high taxes and progressive social policies in the blue states. But housing costs are far more important, financially, than taxes for most of the people who move from place to place.

Blue states like California and New York have high housing costs in part because these states tend to house “superstar” industry clusters like Silicon Valley, Hollywood, and Wall Street. These clusters draw in high-earning knowledge workers and price out lower-income and middle-income people. But California is losing population at all income levels, with high earners actually more likely to leave. And more importantly, if they wanted, blue states could just build more houses for the lower-income and middle-income people, canceling out the effect of increased demand.

They don’t. With the exception of Washington state (which, you’ll notice, is not forecast to lose any Congressional seats!), blue states tend to be much more restrictive in terms of how much housing they build:

Source: Census via u/born_in_cyberspace

I’m not going to rehash the evidence that allowing more housing supply holds down housing costs. It does. California and New York are driving people out of the state by refusing to build enough housing, while Texas and Florida are welcoming new people with new cheap houses.

In fact, blue states’ failure to allow development is a pervasive feature of their political cultures. Housing scarcity doesn’t just cause population loss — it’s also the primary cause of the wave of homelessness that has swamped California and New York. Progressives’ professed concern for the unhoused is entirely undone by their refusal to allow the creation of new homes near where they live. Nor is housing the only thing that blue states fail to build — anti-development politics is preventing blue states from adopting solar and wind, while red states power ahead. And red states’ willingness to build new factories means that progressive industrial policy is actually benefitting them more.

If blue states are going to thrive in the 21st century, they need to relearn how to build, build, build.

Why red states are winning the green energy race

Texan politicians tend to bash renewable energy in their rhetoric. This is not surprising, given the strength of the oil and gas industry in the state. But if you look at what Texas is actually building, it’s clear that renewables are winning. Solar and wind now power 31% of the entire Texas electrical grid, and if you add nuclear, the proportion rises to 41%:

Source: ERCOT via Brian Bartholomew

Wind dominates, but Texas has been building out solar incredibly rapidly — far more rapidly than California, for all of the latter’s policies to encourage the industry.

Source: Nat Bullard

Florida is installing solar very rapidly as well, while New York State and Illinois, despite some plans to catch up, are still lagging severely.

Part of this is because southern states are sunnier. But this doesn’t explain why Texas is outpacing California. Nor does it explain why windy red states like Iowa, Oklahoma, and Kansas have built so much more wind energy than windy blue states like Minnesota, Illinois, and Michigan, despite having less land area and less total electricity demand.

Overall, this means that red states have been beating blue states in the renewables race for years now:

A 2019 top ten ranking of US states’ share of wind and solar power generation as a percentage of overall electricity consumption is dominated by red states…Red states held the top four slots, led by Kansas (53.7%), and followed by Iowa (53.4%), North Dakota (51.1%) and Oklahoma (45.4%).

Why is this happening? Why does Texas, a state dominated by pro-oil politics and conservative culture, have more solar power than sunny California? One answer that observers typically cite is land use permitting:

In Texas, solar permitting is uncomplicated. Connecting projects to the electric grid is straightforward. Then there’s cheap labor, homegrown energy expertise, plenty of sunshine and an anything-goes ethos. “There’s no ‘Mother, may I?’ here,” says Doug Lewin, who worked in the Texas Legislature on energy policy and now advises power companies. “In Texas, it’s just easier to get things done.”

In California, meanwhile, “citizen voice” in the form of anti-development lawsuits is allowing local NIMBYs to block solar projects. This NIMBYism is often facilitated by environmental laws like California’s CEQA, and local NIMBYs often ally with — or even masquerade as — conservation groups. NIMBYism exists in red states too, but strict land-use laws are much more common in blue states, and solar and (especially) wind take up a lot of land.

Another factor is tax policy. Red states tend to have lower taxes in general, but they also give tax incentives for energy projects that will ultimately return more than they cost in terms of tax revenue.

This is why blue states, for all their subsidies and mandates and other policies to promote green energy, are falling behind in the renewables race.

Blue states are swamped with homelessness because they don’t build housing

News stories are filled with apocalyptic tales of homelessness swamping American cities. Oddly, you never seem to hear these stories about Houston or Miami or Dallas or Atlanta. In fact, the homelessness problem in America is almost entirely concentrated in just two states: California and New York.

In my roundup this week I included a chart that showed that the U.S. other than California saw a big drop in homelessness since we started keeping statistics in 2007. But New York is just as bad (and in per capita terms, even worse). Here are the top ten and bottom ten states in terms of the change in homelessness from 2007 to 2023, along with the U.S. total:

It’s not a perfect correlation, but you can clearly see a divide between the blue states and the red ones. The same pattern holds if you look at cities. Here’s an analysis by Philip Bump from 2020:

Is homelessness caused by high housing costs? Yes. Back in March, Aaron Carr wrote an excellent guest post for Noahpinion that brought together a large amount of data showing that housing costs were a far bigger factor than drug addiction, mental health, weather, or progressive policy when it came to explaining homelessness:

Plenty of other analyses tend to back this up. (Blaming California’s nice weather for an influx of homeless people is my favorite excuse, given that Texas and Florida have reduced homelessness massively, while snowy New York has seen a huge increase!)

The difference is obvious just from looking at cities in California and Texas. Austin has seen rents decline despite a big influx of tech workers, because they went on a home-building spree. Houston has had a massive population boom, but its inflation-adjusted house prices are lower than they were in the 1980s. Unsurprisingly, Los Angeles has 10 times as many homeless people as Houston, despite both cities being sunny and car-centric.

I very strongly recommend Ezra Klein’s recent podcast interview of Jerusalem Demsas. Both writers have been really excellent on covering housing issues, and their discussion strongly backs up what I’m saying.

I’m not going to claim that building housing is entirely without costs. Despite YIMBYs’ love for building taller buildings, urban sprawl is also generally part of the equation — and for red states, urban sprawl explains most of their housing construction advantage. Sprawl is not without its costs, especially in terms of destroying natural habitats — the kind of thing that NEPA and CEQA were intended to prevent. But the pendulum in blue states has simply swung too far toward “build absolutely nothing”, and the result is that they’re losing political clout, economic vitality, and the future of America to the red states.

Industrial policy isn’t helping the states that voted for it

I should also mention one more thing that red states build more of: factories. Many analyses show that Biden’s industrial policies — the IRA for green energy and the CHIPS Act for semiconductors — will send a disproportionate amount of subsidies to red states. This is partly because Biden wants to court voters in those states, and partly because of cheaper labor costs, but mainly because those are the states that are willing to build more solar plants, transmission lines, and factories.

The red-state boom is a good thing. Red states tend to be poorer, so they need the boost more; it’s good to spread jobs out across the country instead of sending them all to traditional superstar clusters like San Francisco or Boston. But the fact that blue states largely resist building factories and energy infrastructure is holding back the nation’s economy as a whole. It makes little economic sense to have almost zero new manufacturing investments on either the West Coast or New England:

California, New York, and other blue states like Illinois and Massachusetts are, to put it mildly, important parts of the United States. The fact that they’ve been mired in stasis for decades is a big part of the reason the United States has become the Build-Nothing Country.

Yes, it’s important not to destroy natural habitats. Yes, it’s possible for some development projects to disrupt communities. But come on, folks. This has gone way too far. The hordes of people sleeping on the street, the steady drumbeat of people leaving the blue states, and the slowdown of decarbonization are all clear signs that the costs blue states’ love of stasis have become overwhelming. It’s time for them to learn how to build again.


Subscribe now

Share