The new MAGA coalition has officially had its first internal debate, and it’s over H-1b visas. It started when Trump appointed Sriram Krishnan, a former Twitter exec and Andreessen Horowitz partner, to be a senior AI policy advisor. Krishnan has been a vocal supporter of skilled immigration. This angered some right-wing activists, including an anti-immigration group calling itself “US Tech Workers”, as well as Laura Loomer, Charles Haywood, and other MAGA shouters:
Various figures on the Tech Right, including Elon Musk, David Sacks, and Joe Lonsdale, gamely stood up for Krishnan and for the idea of high-skilled immigration in general:
A tremendous fracas ensued on X, which has basically become the in-house conversation room for the American right. Far-right trolls (including the pathetic but persistent “groypers”) jumped in to attack Indians as a group, and Indians jumped in to defend themselves. Meanwhile, more intellectual discussion shifted to the H-1b visa, which — though not the same as the green card issue that Sriram was talking about — has become a focal point of right-wing pushback against high-skilled immigration.
The debates over high-skilled immigration, Indian immigration specifically, and programs like H-1b are closely related — increasingly so, in fact. Most H-1b workers are Indian, and Indians make up a plurality of foreign-born STEM workers. Indian workers have become far more important than Chinese workers to America’s strategic high-tech industries:
And Indian Americans are now influential well beyond STEM and the tech world — for example, in politics. Kash Patel has been nominated to head the FBI, and Vivek Ramaswamy is helping to lead the new Department of Government Efficiency. Even Vice President JD Vance’s wife is Indian! Although Indian Americans still lean a bit toward the Democrats on average, they’re becoming more evenly split between the parties — there are a substantial number of Indians on the right now, despite the presence of another faction of the right that doesn’t particularly like Indians.
So the debate over skilled immigration is actually just part of a broader debate about the fast-growing role of Indian and Indian-American people in the U.S. elite. But first, let’s talk about skilled immigration on its own merits.
H-1b workers are good for American tech workers (and for American workers in general)
First, let’s point out that skilled immigration overall is very important and good for America. Elon Musk is right when he says “If you force the world’s best talent to play for the other side, America will lose.” Here two Noahpinion posts that lay out the case pretty exhaustively:
In fact, the American people pretty strongly agree. A recent Pew poll found that an overwhelming majority of Americans place a priority on letting in highly skilled workers:
But H-1b is a little different. Technically, the H-1b is a “nonimmigrant” visa — you can only work in the U.S. for six years before returning to your home country. In practice, many H-1b workers apply for employment-based green cards while they’re here, which is one reason why people casually refer to H-1b as “immigration”, but it’s really a guest worker program.
The question is whether those guest workers hurt American workers in the tech sector.
The lobby group “US Tech Workers” would certainly have you believe so. That group does not represent any organization of actual U.S. tech workers — it’s an arm of the Institute for Sound Public Policy, a political pressure group set up by Kevin Lynn. Lynn’s experience in the tech industry amounts to about 2.5 years doing business development for a couple of startups in the early 2000s; he doesn’t appear to have ever done the type of job that an H-1b worker might be hired to do. His cofounders have even less experience in the tech industry. So this is just a nativist group that claims to represent a class of workers that it doesn’t actually represent, on the theoretical grounds that the presence of foreign workers hurts American workers.
But does that theory hold any water? The basic idea is that an influx of foreign labor is a positive shock to the supply of tech workers. When supply goes up, price goes down — that’s Econ 101.
Now, I often remind readers that immigration as a wholedoesn’t seem to decrease native-born American wages. And that’s true — immigrants don’t just work, they also buy stuff, and that increase in demand roughly balances out the increase in supply. But in a specific sector, immigration definitely could decrease wages for the native-born. If you let in a ton of STEM workers, they could drive the price of STEM labor down, while their demand for local goods and services drives up wages in other industries. In this case, American labor as a whole wouldn’t be affected, but American STEM workers would get the short end of the stick.
Interestingly, thought, this doesn’t seem to happen in practice! The H-1b program involves a lottery system, so by comparing companies whose applicants win the lottery with those whose applicants lose, we get a very good randomized natural experiment that can teach us how the H-1b program changes the fortunes of companies. On top of that, there have been occasional changes in the total number of H-1b visas, so we can also look at the results of those policy changes on companies that are more dependent or less dependent on H-1b workers.
Any way you slice it, it doesn’t look like H-1b workers hurt the native-born, even when they seem to be in direct competition:
Mayda et al. (2017) found that when national H-1b numbers were restricted, employment for similar native-born workers didn’t rise.
Mahajan et al. (2024) found that companies who won the H-1b lottery didn’t hire fewer “H-1b-like” native-born workers. They conclude that “lottery wins enable firms to scale up without generating large amounts of substitution away from native workers”.
Kerr et al. (2015) find that when companies successfully hire more H-1b workers, they employ more skilled native-born workers than before.
Peri, Shih, and Sparber (2015) look at the city level instead of the company level, and found that “increases in STEM workers are associated with significant wage gains for college-educated natives.” This should help quiet fears that companies that hire H-1b workers are outcompeting companies that hire mostly native-born Americans.
And so on. It is possible to find papers that conclude that H-1b workers displace similar native workers, but they’re few and far between.2
How are these results possible? One possibility, put forward by Mayda et al., is that H-1b workers and native-born workers just do very different jobs, so there’s a “low degree of substitutability”. This is similar to the argument that immigrants take jobs that native-born workers can’t or won’t do.
But I think there’s another force at work here: industrial clustering. It’s a well-known fact that companies in knowledge industries — tech, finance, entertainment, biotech — tend to cluster together in cities. Why? When you have an area with a lot of high-skilled labor, high-tech companies will find it easier to hire everyone they need in that area, so they’ll pour investment into that location. This is why Silicon Valley remains dominant in the IT industry despite the Bay Area’s very high costs and dysfunctional governance — it’s where all the engineers live, so companies want to invest there.
The same is true at the country level. If America weren’t home to so many talented software engineers, for example, the tech industry would be much more reluctant to invest there. Software would be relatively easy to sell from Bangalore or Hyderabad; instead, companies make it in San Francisco and Palo Alto, because of their concentrations of talent.
Thus, H-1b workers could actually be reinforcing America’s overall advantage as the place where high-tech companies want to invest. This increased investment naturally benefits native-born tech workers as well.
In fact, there is some evidence for this theory. Glennon (2023) shows that when companies are prevented from hiring H-1b workers, they start investing in other countries instead:
How do multinational firms respond when artificial constraints, namely policies restricting skilled immigration, are placed on their ability to hire scarce human capital?…[F]irms respond to restrictions on H-1B immigration by increasing foreign affiliate employment…particularly in China, India, and Canada. The most impacted jobs were R&D-intensive ones…[F]or every visa rejection, [multinational companies] hire 0.4 employees abroad.
It would be interesting to see studies like this done at the city level, to see the spillover benefits from more H-1b workers living in an area. But this evidence is strongly suggestive of a “hire them here or hire them there” effect of H-1bs. If investment dollars go overseas instead of staying in the U.S., American tech workers are not going to benefit.
Also, Dimmock et al. (2019) find that startups that manage to hire H-1b workers are a lot more likely to have a successful exit. Startup failures pretty obviously don’t benefit native-born U.S. tech workers. And of course there are plenty of startups that wouldn’t even exist without founders who used H-1bs to get into the country, not to mention the beneficial discoveries that wouldn’t have been made (or at least, not in America) without H-1b researchers.
(Side note: The fact that Elon has been so pugnaciously insistent here, instead of rolling over for the MAGA base like some other tech folks did, should make people a bit less willing to believe in the “Evil Elon” theory. Calling for more skilled immigration, even in the face of right-wing rage, is a very pro-American move.)
Of course, none of this means that the H-1b program is perfect. In fact, there are at least two reforms that basically everyone realizes would be good. The first is to make H-1b visas more easily transferable, so that foreign workers could hop from job to job more easily without losing their visas. But this probably isn’t nearly as severe as people think. Mithas and Lucas (2010) find that once you control for observable determinants of skills, H-1b workers actually get paid more than similar American workers, not less. That means they’re generally not being forced to do the same job as a native-born worker for lower cost, as some allege.
The second and more important reform is to implement a minimum salary for the H-1b. Right now, some of the available visas get snapped up by low-productivity service-outsourcing companies for low-level employees, instead of being used to hire very high-productivity engineers, managers, etc. That needs to stop, and the way to do this is to only offer H-1bs to workers who will be paid high salaries.
Of course, raising the overall cap on H-1bs would also help this problem a lot. Somehow I don’t think the rabid critics of that H-1b program would like to do that.
Anyway, the overall point here is that the H-1b program is good on the economic merits — not just for U.S. companies, but for their high-skilled employees as well. But after reading multiple days of right-wing social media backlash against skilled immigration, I’m not so sure the economic merits of the program, or even the economic fortunes of the United States of America, are really what they have in mind. Tweets like this one have been sadly common:
As so often happens, I think what we’re dealing with here is a battle over America’s cultural and racial identity, which some people only feel comfortable talking about in terms of its economic impacts.
The MAGA backlash against Indians is very bad
Over the past two days, I have seen a lot of tweets like this from right-wing X users:
Of course as you can imagine, the comments from pseudonymous rightists were more vicious toward Indians.
The animosity toward Indian immigrants in particular is something I’ve seen with increasing frequency on the nativist right over the past few years. Here’s what University of Pennsylvania law professor Amy Wax said in 2022:
“Here’s the problem,” she said. “They are taught that they are better than everybody else because they are Brahmin elites and yet on some level, their country is a s—hole. ... They’ve realized that we’ve outgunned and outclassed them in every way. ... They feel anger. They feel envy. They feel shame. ... It creates ingratitude of the most monstrous kind.”
And these bigoted attitudes could be spilling over somewhat into everyday society:
We find that 31 percent of Indian Americans believe that discrimination against people of Indian origin is a major problem in the United States — while 53 percent think it’s a minor problem. Measuring respondents’ lived experiences with discrimination reveals that 1 in 2 Indian Americans reports being subjected to some form of discrimination over the previous 12 months.
The rightists who denounce Indian Americans on social media believe that we face a choice between a cohesive nation, with rich social ties cemented by bonds of common heritage, and an atomized nation where cohesion is sacrificed on the altar of higher GDP. They believe that by excluding people who aren’t of America’s noble founding stock, we can restore civic trust, stop people from “bowling alone”, and so on.
This is abject fantasy. Perhaps in a nation like Japan or Sweden, where a sense of homogeneity has been cemented over centuries, and big waves of immigration are relatively recent, something like this could make sense. But the United States has been an immigration-fueled polyglot since its very founding.
No sooner had British Americans created the country than it was inundated by Irish Catholic immigrants, causing vast anti-Catholic backlashes and efforts at large-scale deportation. These had barely died down when tensions began to rise in the late 19th century over the arrival of Italians, Poles, Jews, and other East and South Europeans en masse. Today’s anti-immigrant freakout is the third since the founding.
So if you decide to try to strip down America’s population to its founding stock, who will you include? Do the Italians get to stay? How about the Vietnamese refugees who came in the 70s? Are the Irish part of America’s core population, or papist interlopers? What about a Mexican American whose ancestors came in the 1930s? Where do you draw the line? What about someone who looks entirely Asian but who has one ancestor who sailed in on the Mayflower?
Searching for an ethnicity that represents the “true” or “core” American stock is like peeling back the layers of an onion — when you get to the center there’s nothing left.
In practice, any effort to ethnically purify America will just turn the nation against itself — the battles over Indian immigration on X this week will become a template for our daily lives. If you think dealing with woke people calling you a white supremacist at work in 2018 was annoying, imagine spending all day wondering if the U.S. government will declare your ethnicity peripheral to the American national project. Naturally, you would spend a lot of your time fighting to make sure your ethnicity ended up inside the circle that the purifiers ended up drawing. Daily life would thus be reduced to racial conflict.
Americans do not want this. Yes, a majority voted for Trump, but it was not because they thought he would racially purify the nation. In fact, his victory was driven pretty much entirely by defections of Latinos and Asians from the Democratic coalition. It’s doubtful that those swing voters imagine Trump as an ethnic cleanser.
And I predict, pretty confidently, that Trump won’t be an ethnic cleanser in his second term. He flirted slightly with the idea with his “Muslim ban”, but ultimately backed off. There was, and is, simply no national appetite for converting America to an ethnostate. It’s just a few right-wing activists screeching about their Indian coworkers on social media.
In the old days, when I was growing up, we used to simply call that sort of thing “racism”, and thus exile it from polite society. Behind that taboo were centuries of history of contentious nation-building and self-definition. We learned from experience that a polyglot nation can’t constantly think about who are the country’s true “sons of the soil”, or it paralyzes itself with conflict.
Now, after the 2010s, “racist” is such an overused insult that it’s applied toward basically anything. Social media created a zone of opportunism where anonymous teenagers clawed for status by constantly finding new innocuous things to call “racist”, while progressive activists devalued the term by trying to apply it too broadly. This robbed the word of its power to righteously condemn the kind of people who go on social media and declare that Indian doctors and CEOs are a bunch of third-world mud people who will pollute the blood of our nation. So yes, all the racism against Indians now pouring out of right-wing circles is very racistly racist racism from a bunch of racist racists, but saying that fact is no longer sufficient to make it go away.
But at least some people on the new Tech Right are now realizing what kind of tiger — or perhaps, leopard — they’ve chosen to ride. The Trump movement of 2016 had a reputation for being full of racial-nationalist bigotry for a reason — it might have been exaggerated, but it wasn’t just a progressive fantasy cooked up by newsroom staffers at the New York Times. Now, if you’re a tech founder who supports Trump and spends all day posting on X, your daily life involves your so-called political allies denouncing your Indian friends and cofounders and employees and calling for their mass deportation.
Well, such is politics. Meanwhile, in the real world, Indian immigrants and their descendants are hard at work making America an even better place, and I would very much like them to continue.
It’s also not too hard to write down a theoretical model in which H-1b workers displace the native-born. But these models are only as good as the assumptions that go into them, and they don’t tend to include things like clustering effects. In general, when you have theory vs. high-quality data in economics, go with the latter.
The other day, Samo Burja noted that while Europe has a lower per capita GDP than America, Japan’s is even lower:
Now, Samo makes what I think is a major mistake here — using GDP at market exchange rates rather than at purchasing power parity. If only imports mattered for living standards, we could use market exchange rate GDP here, since that reflects how many imports you can afford. But because most of what people buy — rent, health care, transportation, and so on — is produced domestically, you really need to account for those prices when you measure living standards. If people can get cheaper rent, health care, and transportation, they are richer. This is what PPP tries to do. And when we look at the PPP numbers1 for the U.S., Austria, and Japan, they’re a lot closer together than the numbers Samo quoted:
In fact, Japanese people aren’t actually less than half as rich as Americans. They’re about two-thirds as rich.
But there are a number of people who think even that difference is greatly exaggerated. They point out that Japan has a very safe society with high life expectancy and functional public transit, while America is a comparatively dangerous society with much lower life expectancy and poor public transit. Here are a few examples of replies I got when I pointed out that Japanese living standards are significantly lower than Americans’:
To answer East Bay Ray’s question, I have lived in Japan for four years, so I think I have a decently good perspective on how Japanese people live. I think what’s going on here is that Ray lived in Japan a while ago, and Japan and the U.S. used to be a lot closer to each other in terms of living standards:
In 1991, Japan’s per capita GDP (PPP) was about 85% of America’s. Today it’s about 65%. That’s a big difference! Even when I first lived in Japan in the mid-2000s, it was around 70%. Japan’s living standards have been growing only very slowly for decades, while America’s have improved significantly faster. Exactly why that has happened is a topic for another day — it’s a combination of population aging, inefficiencies in the Japanese economy, and trade diversion by China, in rough order of importance. But the point is that Japan is no longer the Japan of the 1990s, or even of the 2000s.
Is GDP the right metric for measuring living standards, though? Many people think it’s not, and the people who replied to my tweet definitely think other factors that don’t appear in GDP are equally important. But when we see a gap as big as the one between the U.S. and Japan has become, it’s definitely going to be real.
Unmeasured quality-of-life factors cut both ways
So let me say, first of all, that the commenters who point out areas where Japan has a quality-of-life advantage over America in areas like safety, longevity, and urbanism are quite correct. There are definitely some ways in which life in Japan is still superior to life in America. Back in the mid-2000s, I judged life in Japan to be about as good as life in America, once these things were taken into account. They do make a big difference.
Let’s go over what these are. As many people note, safety is the most obvious huge difference between Japan and the U.S. America’s murder rate is about 25 times as high as Japan’s.2 Other violent crimes are far lower as well. As I pointed out in my last post, it’s not just murder and violence that are lower in Japan — it’s also public disorder. Japanese cities are so safe that kids can walk around in them alone at night. The TV show Old Enough!, where little kids go on errands alone, might not quite be realistic (there is a camera crew of adults following the kids around), but it’s not too far off the mark either. I have personally witnessed elementary school students walking alone on the streets of Japanese city centers very late at night; they were in no danger except from the occasional car.
It’s this safety, along with high-quality public transit, reasonable zoning laws, good urban design, and support for small business, that allows Japan to have some of the nicest cities on planet Earth. The beautiful, clean public spaces packed with huge numbers of interesting shops and restaurants are probably without parallel in the world. The convenience of suburban neighborhoods, filled with plentiful parks and shops within easy walking distance, makes daily life much nicer.
Japan is also a much healthier place than the U.S. Low levels of violence, drug use, and obesity lead to longer life expectancy and less need to use the health care system. In fact, the life expectancy gap with the U.S. has increased from 3.6 years in 1990 to 5.4 years in 2023.
Public safety, good urbanism, and healthier lifestyles are real, important factors that improve living standards in Japan. These “amenity values”, as economists call them, are not generally reflected in rents or other local prices — it’s difficult to move from country to country, so countries with generally worse health and safety don’t have to raise rents much in order to keep people from moving overseas. Thus, these things really do shrink the actual gap in living standards between the U.S. and Japan, relative to the measured GDP numbers.
There are some other things that shrink the gap as well.3 Japanese people probably do a bit more unpaid eldercare than Americans. Multigenerational households are more common in Japan than in the U.S., and Japan has a higher proportion of old people, meaning that people spend more time taking care of their aged parents in their off hours. That represents real service production (which economists call “home production”) that goes uncounted in GDP.
But here’s the thing — those aren’t the only unmeasured factors that affect GDP. There are plenty of ways where America quietly comes out ahead.
Most important of these is leisure. GDP only measures the value of things that actually get produced — the value of time you spend enjoying your life is not counted in GDP, even though it surely contributes to living standards. Americans are famous for working a lot, and Europeans’ greater leisure time is often cited as an unmeasured advantage in living standards. With the U.S. and Japan, though, this works in the opposite direction.
First of all, despite Japan’s greater fraction of elderly people, a significantly higher percentage of Japanese work than Americans. This was not always true, but since around 2010, essentially everyone in Japan has a job — women, the elderly, teenagers, etc.
Officially, Japanese people work the same number of hours per year as Americans — about 1750. But this statistic is deceptive, because it includes all of the part-time marginal workers (elderly, teenagers, part-time housewives, etc.) who have shifted into the labor force since 2010. Full-time Japanese workers are still working more than their American counterparts.
Also, although apples-to-apples comparisons are hard to find in the data, Japanese people probably do more unpaid overtime. This was definitely true back when I lived there. Substantial progress has been made in reducing this over the last decade — the era of “death from overwork” is mostly over, and companies that make their employees stay in the office all night have been stigmatized. But my bet is that Japan still edges out America in this regard.
(And although I can’t prove it, I’m reasonably sure that most Japanese people have a much higher percentage of “time on task” during their working hours, as opposed to reading Substack articles and scrolling Instagram.)
Japanese people tend to take far fewer vacation days than they’re entitled to, for cultural reasons. Surveys find that the average Japanese worker takes 8.8 days of vacation per year, while Americans take about twice as many. And Japanese people spend a longer time commuting — a 2015 survey showed their average commute was 50 minutes a day, compared to 25 minutes in America. That translates to more than 100 extra hours of commuting time per year.
Finally, all that unpaid eldercare in Japan reduces actual leisure time. In fact, since this eldercare is a “labor of love” (or perhaps a labor of obligation) that would command only a low wage if it were paid, the unmeasured boost to Japan’s GDP from eldercare is probably more than cancelled out by the unmeasured reduction in leisure. Even as unpaid overtime at work has fallen, home eldercare has increased, due to Japan’s rapidly aging population. Even accounting for America’s greater number of children per household, Japan has a significantly higher number of dependents per worker:
Add this all up, and Japanese people exist in a world of toil. That unmeasured lack of leisure time at least partly cancels out the unmeasured quality-of-life improvements from public safety, health, and urbanism.
Americans who go to Japan as tourists only see the good stuff and not the bad, because they aren’t working. They shop and play in the beautiful safe cities all day long, while the Japanese people who keep those cities running are stuck in dingy open-plan offices until all hours of the night.
The point here is not that Japanese lifestyles are horrible compared to American lifestyles — that’s partly a matter of taste. Nor am I claiming that long hours of toil and drudgery are necessary for long lives and safe beautiful cities. I do not believe they are; I don’t think there’s actually a tradeoff here. But if you want to include unmeasured amenities in comparisons of living standards, you should include all of them, or at least as many as you can.
Money matters
If the non-monetary differences between Japanese and American lifestyles are a bit ambiguous, the monetary differences are incredibly clear.
Let’s start with salaries. The Japanese government takes surveys of starting salaries, and the good folks at RealEstateJapan have a handy table breaking down the 2019 numbers for us:
The starting salary for a college graduate just before the pandemic was 210,200 yen per month. At current exchange rates, that’s $1338.23 per month, or just about $16,000 per year.
That’s incredibly low. That’s barely above the poverty line for a single individual in the United States, and it’s below the poverty line for a family. And that is the starting salary of a college graduate.
It’s actually not quite that horrible, for two reasons. First, Japanese companies also pay semiannual bonuses. For workers in their early 20s, these add up to somewhere around 300,000 yen a year; for workers in their late 20s, closer to 800,000 yen a year. At current exchange rates, that would correspond to about $1900 for an early-20s worker and $5000 for a late-20s worker.
But including those bonuses still leaves starting salaries for college graduates in Japan at somewhere between $18,000 and $21,000. Those are still poverty wages!
There’s a second factor we need to take into account here, which is that Japanese prices are lower — $18,000 goes farther in Japan than it does in America. This is why we like to use PPP to compare living standards. The World Bank’s PPP conversion factor for Japan is about 1.5. So after taking prices into account, an early 20s college grad in Japan can expect to make about the equivalent of An American making $27,000 a year.
For reference, American college graduates made about $51,500 in 2019. That’s almost twice as much as their counterparts in Japan, after you take local consumer price differences into account.
This difference gets a bit less as workers get older — Japanese companies tend to pay based on seniority, while American companies tend to pay more based on performance, so Japanese full-time employees usually get to enjoy a more steady, predictable upward career path (part-time employees and contract workers are, on the other hand, kind of screwed). But the tradeoff there is that the Japanese full-time workers have a lot less motivation to stand out, take risks, learn new skills, or come up with new ideas, because their promotions and raises will depend on seniority more than on their own personal accomplishments. And in any case, even when Japanese workers reach the peak of their careers, their American equivalents still get paid a lot more than they do, even if it’s no longer twice as much.
So Japanese people are out there working long hours for wages that would make Americans rebel. Think about it — in your 20s, after graduating from your university, how would you have liked to go nose-to-the-grindstone day after day for the same salary that a McDonald’s fry cook makes in America? (Of course, blue-collar wages in Japan are even lower, as the table above demonstrates.)
Those monetary differences translate into real differences in consumption. Let’s take housing, which is the biggest item in both Japanese and American budgets. Japanese houses are actually average by rich-country standards, but still much smaller than American ones. Here’s residential floor space per capita:
Similarly, in terms of residential rooms per person, Japan scores a very respectable 1.9, but Americans come in at 2.4.
Japan has come a long way since the tiny “rabbit hutches” of the 1980s, but a typical one-person apartment in urban Japan now looks like the one at the top of this post, except less stylish and elegant, and with less natural light. Americans walking through the beautiful metropolis of Tokyo, sampling its well-appointed boutiques and restaurants, have no idea of the kind of private domestic spaces the people around them are returning to at night — small tenements similar to what you’d find in New York City, except much less well-furnished. I certainly didn’t mind living in places like that when I was 23 years old, because being in Japan was an adventure — but most Americans would balk at that.
As for the single-family homes that Japanese families prefer, those look like this:
This is very far from a shack, but it’s also far from what a middle-class American would aspire to. There’s no yard, the facade is plain and cheap-looking, and the size isn’t very impressive.
Besides housing, what else can Japanese people buy less of? Vacations, for one, since as I mentioned, Japanese people take much less time off. Also, food. Americans who go to Japan and eat out at the nice restaurants there don’t realize how rarely the average Japanese person can afford to eat at places like that.
Appliances, too — Japanese clothes dryers don’t really dry your clothes, and central AC is a rarity. As incomes have diverged between America and Japan over the last two decades, I’ve noticed Americans buying all kinds of new modern conveniences — air fryers, Instant Pots, projectors, sound systems, and so on. As far as I can tell, most of these are still rare in Japan.4
A fourth example is pet care — Japanese rabbit keepers will tell you that a pet rabbit’s expected lifespan is 6 to 8 years, while American rabbit keepers will tell you it’s 10 to 14, because of the differences in veterinary care. A fifth example is transportation — a $2 train ride is nothing to an American tourist, but middle-class Japanese people are sensitive about their travel budgets.
Basically, the answer to what Japanese people can’t buy as much of is “almost everything”. They can actually buy about the same amount of health care, since prices are tightly controlled. But otherwise, Japanese people just live with a bit less of everything.
Japan has a relatively high number of poor people for an advanced country. Defined by the percentage of the population earning less than half of the median national income, Japan’s poverty rate is more than 15% -- a little lower than the U.S., but considerably higher than countries such as Germany, Canada or Australia:
Japanese poverty is a quiet affair. There are almost no slums or shantytowns. The streets are generally clean and well-kept. Homeless people sleep out of sight. So-called evaporated people leave their homes and families and eke out meager, anonymous existences. Single people live in tiny bare apartments little larger than a closet. Elderly people who never recovered from the economic bust of the 1990s suffer in the shadows. Many shop at 100-yen stores (similar to dollar stores) just to survive.
Children are going hungry too. Almost 14% of kids, or some 3.5 million in all, are estimated to live in poverty -- and that’s already down from a peak of more than 16% in 2012. To combat the problem, local governments around the country are opening thousands of cafeterias where children can eat for free.
And in 2020, Bloomberg’s Marika Katanuma wrote about how women often bear the brunt of this poverty:
According to government data, the monthly cost of living for a Japanese household with more than two people is 287,315 yen ($2,650). Some 15.7% of Japanese households live below the poverty line, which is about $937 per month.
More than 40% of part-time working women earn 1 million yen ($9,100) or less a year, according to Japan’s Internal Affairs and Communications Ministry. The lack of benefits, job security and opportunity for advancement—hallmarks of full-time employment in Japan—make such women financially vulnerable, particularly if they don’t have a partner to share expenses with.
Americans typically just don’t see this when they travel to Japan. Poverty in the country is hidden — city parks used to have sections where homeless people could pitch their tents, but the need to cater to the tourism boom has done away with that custom. Japanese people’s economic struggles occur in private spaces, between their apartments and their workplaces.
When American tourists go to the urbanist Disneyland that is Tokyo, they’re going there on an American salary. What’s more, they’re going at a time when the yen is incredibly weak against the dollar. When I lived in Japan for the first time in the 2000s, a dollar could buy between 105 and 120 yen — now, it’s close to 160. That means Americans can live very high on the hog on their trips to the Land of the Rising Sun. The country feels rich to them because in that country, they are rich. A lot richer than most of the people they see on the street.
The purpose of this post is not to bash or shame Japan — the stagnant economy is simply a huge challenge that needs to be overcome, and in fact I have a few ideas for how to do this. I’ll write more about that later. But the purpose of this post is to remind Americans how good they actually have it. Declaring America to be a third-world shithole has become fashionable on all parts of the political spectrum these days, and sure, America has plenty of problems that need to be solved. But just for once, I wish Americans would realize how ahead of the pack their country is in so many regards.
Note that “international dollars” is another name for PPP, and “nominal” is a word that’s sometimes used to mean “market exchange rate GDP”. Confusing, I know. Also, the U.S.’ GDP is supposed to be the same in terms of market exchange rates and PPP, but you can see above that there’s a difference between the World Bank’s PPP number for the U.S. and Samo’s number. This is mainly because they’re two different data sources — Samo is citing IMF. It’s also a little bit due to the different year (2022 vs. 2024).
Although Black Americans are famously more likely to get murdered than White Americans, White Americans are about 10 times as likely to get murdered as Japanese people. That’s still a huge difference.
Another of these might be quality differences, but it’s hard to tell which way this goes. PPP comparisons are supposed to take differences in the quality of goods and services into account — if hairstylists in the U.S. give crappy haircuts, and hairstylists in Japan give great haircuts, you should take that difference into account instead of just comparing “the price of a haircut” between the two countries. In reality, this is very, very hard to do, and so lots of real quality differences end up getting ignored in the PPP measurements. People who have lived in Japan know that many local goods and services are just a little higher quality than their equivalents in America. Japanese milk tastes a little bit better than milk in the U.S. At Starbucks in America, tables are typically covered in crumbs and detritus; in Japan, employees wipe the tables down frequently. Roads in Japan have fewer potholes, windows are cleaner, waiters won’t get your order wrong. And so on. Then again, Japanese furniture tends to be low-quality, so I guess it’s hard to draw a general conclusion one way or another. This is also true of the housing stock. Japan’s urban apartments are generally better than America’s, because Japan knocks down old apartments and builds new ones at a famously high rate. This gives them better insulation, better soundproofing, less accumulated crap in the air vents, and a hundred other things that make new apartments better than old ones. On the other hand, America’s single-family homes tend to be much nicer, featuring central AC systems, kitchen islands, and all sorts of other amenities. It’s unlikely that PPP is catching all of those differences, but I don’t know which way they change the headline numbers.
There are a few devices Japanese people tend to have more of, like rice cookers. Most of these were things that Japanese companies like Panasonic produced back in the 1980s, 90s, and 00s, when Japan’s economy was growing more quickly.
Note: I apologize for slightly sparse posting this week — I sliced my thumb very badly the other day while opening a box, and it has been difficult to type. Regular posting will now resume.
Anyone who reads this blog knows that I’m a huge fan of dense, walkable cities. Much of my enthusiasm comes from living in Japan for several years, and I’ve written a bunch of posts about why Japanese cities are so especially great. Here was the most relevant one for today’s post:
Back home in America, I’ve called for a bunch of changes to make our cities better places to live. Most importantly, we need more housing density and better transit. These are the two main goals of the YIMBY movement. I also want more commercial density — lots of shops in walkable downtown areas — which is something YIMBYs should focus on more than they do. I don’t think American cities are going to become like Tokyo — or Paris, or Singapore, etc. — anytime soon. But I think places like San Francisco, Los Angeles, Seattle, Houston, Miami, and Philadelphia can move enough in that direction to make a big difference in America’s quality of life, and probably in our economic productivity as well.
But we’ll need to change a lot about our society in order to get there. Usually, when I talk about urbanism, I talk about land use deregulation, increased transit funding, and transit cost reduction, so that we can build dense housing and transit cheaply and abundantly. And I think those policies are incredibly important. But when I suggest these policies to conservatives, or even just to politically neutral NIMBY types, the response I always get is that Japan and Europe can have nice cities because they have public order. They point out the vast disparities in violent crime between America and the rich nations of Eurasia:
With America’s high crime rates, they say, we could never have cities like that.
And I think the conservatives and NIMBYs are partially right. They’re partially wrong, in that you don’t have to have a city as safe as Tokyo in order to have lots of density and good transit. NYC has a homicide rate of about 4.6 per 100,000 as of 2023, which is about 10 times that of Tokyo and 4 times that of Paris, and yet it’s super dense and very walkable. But they’re partially right. One reason is that, just as they say, low levels of both violence and general public disorder probably make it a much more pleasant experience to walk around a downtown area. In my post about why Japanese cities are such nice places to live, I wrote:
Good public safety makes people feel safer leaving their homes — especially women, and especially at night. This makes neighborhoods more vibrant and increases the feeling of community. And when it’s safe to go outside, living in a small apartment doesn’t feel nearly as confining; no one feels like they have to hide inside their house from muggers, rapists, etc…In fact, there’s a virtuous cycle between public safety and dense walkability — the more people are out walking around, the more “eyes on the street” there are to deter crime, which in turn makes more people feel safe walking around.
In fact, there’s evidence that crime represents a sort of “congestion cost” that makes cities function less efficiently.
But there’s another effect here that’s political in nature. Both violence and general disorder probably discourage locals from supporting both housing density and public transit — in other words, they give rise to NIMBYism. Transit, especially if it’s made free or if fare-jumping is easy, allows both criminals and drugged-up disorderly types1 to reach otherwise peaceful neighborhoods. And since apartment complexes A) are cheaper to live in than single-family houses, and B) usually come with inclusionary zoning requirements that require any new complex to include some poor tenants, they also mean more poor people in the neighborhood. If a city has poor public safety and public order, this means increased danger — or at least increased anxiety — for existing residents.
This turns some people NIMBY out of concern for public safety. And NIMBYs themselves are the main obstacle to building denser cities in America. When NIMBYs tell you that America isn’t safe enough for density, they are describing their own motivations and concerns.
It’s important to note that it barely matters whether NIMBYs are right about the effect of apartment construction and transit on local crime. For example, while there are certainly a number of studies finding that adding transit increases crime near bus stops and train stations, the estimated effects are generally small, and a few studies find no effect.2 But the claim that trains bring crime to safe neighborhoods is incredibly common in American politics. Without a widespread perception of public safety and order, people will keep using NIMBY anti-development policies to try to keep anyone away from them who even might commit a crime or make a scene on the street.
We can try to simply yell at fearful NIMBYs to stop being a bunch of NIMBYs and call them racists and segregationists and petty landed gentry, but this approach historically has poor results. Instead, the country should address their concerns about violence and disorder, in order to build a constituency for urbanism in America. (And of course, needless to say, lowering crime and increasing public safety is good in and of itself.) Europe, Asia, and New York City have all largely figured out how to do this. We can learn from their successes.
Europe, Asia, and NYC put a lot of cops on the street
Art by Grok. Prompt: “Elon Musk, God-Emperor of the United States”
The U.S. political system was designed by its founders to have a system of checks and balances, so that no individual or institution would have absolute power. But that system was designed with only government leaders and government institutions in mind — although the founders did worry about private individuals controlling the government, this wasn’t their prime focus, and they ultimately ended up declining to put institutions in place specifically to guard against economic power. James Madison believed, for example, that the federal system of the U.S. government was protection enough against small cabals of wealthy oligarchs.
In recent decades, especially in the wake of the Supreme Court’s Citizens United decision, many have voiced worries that the U.S. has become an oligarchy, where wealthy individuals are capable of buying power and influence — either by campaign contributions, lobbying, or other means. These concerns came largely from the progressive left, who often claimed that the U.S. has become an oligarchy. But many on the right also worried about the influence of George Soros and other progressive billionaires.
But the research backing up the “oligarchy” claim was very patchy and weak — in fact, most political scientists found that policy in the U.S. tends to align closely with the interests of the middle class. And popular concern was vague and diffuse — Americans will tell you that their economic system “unfairly favors the powerful interests”, but this could mean anything, and most Americans are not concerned about the wealth of billionaires.
And yet in the past week, we have witnessed the spectacle of a single rich man making critical decisions about United States national government policy in real time. In order for the U.S. federal government to spend money, it has to pass “appropriations” bills. There are always big fights over those bills, so sometimes they just pass a “continuing resolution” to keep spending going. If the CR doesn’t pass, the government shuts down, and its employees — including the people in the U.S. Military — stop getting paychecks. Over the past three decades we’ve seen a lot of instances in which this process became an avenue for political brinksmanship, with the party in power threatening to refuse to pass a bill and shut down the government — or, even worse, hit the “debt ceiling” that stops the government from borrowing money.
What was different about the latest CR was the personal influence of Elon Musk, President Trump’s most important donor and political ally, and the owner of one of America’s major social media networks. Musk launched an all-out attack on the resolution:
Musk, who spent more than $250 million getting Trump elected, posted about his opposition to the original spending deal well over 100 times over the past two days, with threats to fund primary challenges to anyone who voted for the plan, which was six weeks in the making.
“Any member of the House or Senate who votes for this outrageous spending bill deserves to be voted out in 2 years!” Musk posted Wednesday afternoon on X.
Later in the day, Trump himself came out against it, making it clear the bill was done.
What’s interesting about this is that everyone seems to agree that it was Musk, not Trump, who torpedoed the CR. Fox News reports:
Some House Republicans are privately fuming after Elon Musk and Vivek Ramaswamy got involved in congressional talks on government funding…
A second GOP lawmaker said, "If Elon and Vivek are freelancing and shooting off the hip without coordination with [President-elect Trump], they are getting dangerously close to undermining the actual 47th President of the United States."
Overheated rhetoric is common, so we shouldn’t take this as gospel. And it’s also worth noting that Musk approved of a modified CR, but that one was torpedoed by conservatives in Congress. Also, Musk’s threat to primary anyone in Congress who voted against the approval of Matt Gaetz wasn’t enough to keep Gaetz from withdrawing. So Musk actually isn’t the all-powerful emperor he’s depicted as in the header image of this post — at least, not yet.
But it’s undeniable that Musk has power that goes far beyond that of any normal super-rich political influencer. He’s not just the owner of X but its poster-in-chief, who manipulates the platform’s algorithm to show everyone his own tweets first and foremost. He’s also the owner of SpaceX, upon which the U.S. government depends for pretty much its entire space program. And he’s more or less the leader of a right-wing faction in the tech industry that has become a key Republican constituency over the last election cycle.
Musk therefore has many enormously powerful levers to personally influence the policies of the United States. He can (and frequently does) threaten to primary any Republican who strays from his personal desires. He can whip up instant right-wing mobs on X to attack any Republican who doesn’t toe his line. He can (and does) dump hundreds of millions into elections. He could probably use SpaceX’s government contracts as leverage as well, if he chose. And with Donald Trump — the oldest President ever elected — now clearly in his twilight years, Elon’s vigor and activity level often allow him to act as the President’s stand-in.
This isn’t just supposition on my part; it’s clear to both foreign and domestic leaders where the power lies in the incoming U.S. regime. House Speaker Mike Johnson called up both Trump and Musk to try to get a CR passed. And Musk now regularly accompanies Trump to his meetings with foreign heads of state. After watching Musk kill the continuing resolution, the American public as a whole is now waking up to this reality.
What does it mean for the country to have so much government power concentrated in the hands of a single unelected private individual? It’s hard to say. There are potentially some historical precedents here — William Randolph Hearst’s control of print media terrified politicians over a century ago, Mark Hanna had a great deal of influence in the McKinley administration. Various industrial-age tycoons wielded a lot of influence in the late 19th and early 20th centuries. Rupert Murdoch created Fox News. But Musk’s clout may eclipse them all — X is a new kind of media, Trump is a different kind of President, and so on.
Many people I know in the tech industry are cheering Elon’s power. But I think for a lot of regular Americans it’s scary, because they won’t be able to trust Elon to do the right thing, in the same way that lots of people in tech do. To see this, let’s do a thought exercise: What if Elon were evil?
Imagining “Evil Elon”
In a post back in October, I wrote that America’s future could hinge on whether Elon Musk decides to play the superhero or the supervillain:
Musk’s friends and confidantes expect the former. They probably know him as a reasonable guy — a Reaganite conservative who was driven to the center-right by the excesses of wokeness, who loves free speech and free enterprise and small government and responsible fiscal and monetary policy and peace between nations, who wants to bring human civilization to Mars and accelerate tech progress and so on.
Let us call this version of Elon “Real Elon”.
But it’s possible to imagine another version of Elon, who exists in the perfervid imaginations of his detractors. Let us call this “Evil Elon”. Regular people, observing Elon’s actions in the public sphere, can’t always tell the difference between Real Elon and this fantasy supervillain.
Whereas Real Elon opposed the CR because of concerns over government spending and legislative complexity, Evil Elon opposed it because it contained national security provisions that would have nixed some of Tesla’s planned investments in China:
Cynics note that the shorter replacement CR, which Elon supported, would have actually spent more money than the CR that Elon killed — the main difference being that the replacement CR didn’t contain restrictions on U.S. investment in China:
In fact, while Real Elon loves capitalism and individual freedoms, Evil Elon is a consistent and dedicated ally of the Chinese Communist Party. When Real Elon calls for Taiwan to become a “special administrative zone” of China, he does it because he wants to avoid World War 3; Evil Elon does it because he likes authoritarian rule, and because the Chinese Communist Party has paid him off.
On Ukraine, similar, Real Elon just wants to end the conflict and stop more Ukrainians from dying. After all, Russia is powerful and determined enough that they’ll almost certainly be able to hold onto a piece of Ukraine at the end of the war; why not just trade land for peace and be done with it?
But Evil Elon wants Putin to triumph, because he sympathizes with authoritarian rulers in general. No one knows what Elon and Putin talked about during their frequent conversations since 2022. But believers in Evil Elon suspect that they conspired to bring about a Russian victory in the war.
When former U.S. Army officer Alex Vindman accused Elon of being used by Putin, Real Elon accused Vindman of treason and threatened him with “the appropriate penalty” because hey, we all get mad on social media and like to punch back at people who attack us. But Evil Elon did it because Vindman was on to something.
In fact, believers in Evil Elon suspect that his support for AfD might also be due to the whiff of Nazi apologia and antisemitism that hang around some of the party’s candidates. Real Elon is a stand-up guy — when he agreed with a tweet about Jewish communities pushing anti-White hatred, he publicly apologized, declaring it the worst tweet he’s ever done, and declaring himself a “philosemite”. And when Real Elon accidentally endorsed a Tucker Carlson interview with a Hitler apologist, he quickly deleted the endorsement once he realized what it actually contained.
But believers in Evil Elon think that these are just the kind of public relations moves that a supervillain would do to cover his tracks. They fear that the massive wave of antisemitism that has swamped X since Elon took over is the result of intentional boosting, rather than simply the inevitable result of more lenient moderation policies combined with the reaction to the Gaza war.1 They do not buy Real Elon’s protests that other platforms have even more antisemitism.
And so on. Essentially, Evil Elon is a somewhat cartoonish supervillain, who wants to set himself up as the ruler of one of three great dictatorships, ruling the world with an iron fist alongside his allies Xi Jinping and Vladimir Putin — a new Metternich System to enshrine right-wing values and crack down on wokeness and progressivism and obstreperous minorities all over the world.
Just for fun, I had Grok draw this new Metternich System, and the result was pretty great, so I feel like I have to post it:
Art by Grok
But anyway, the point here is that when normal Americans look at Elon and his words and deeds, they can’t be 100% certain that he’s not Evil Elon. A few progressives will be very convinced that he is actually evil, but I think most people will simply wonder and be uneasy. Evil Elon will continue to exist in a sort of quantum superposition with Real Elon in their minds — a Schrödinger's oligarch who will probably turn out to have been a good guy all along, but might ultimately turn out to have been very bad from day 1.
And that will scare them. In fact, all powerful people have this same property — even some of the people who voted for them didn’t entirely trust Bill Clinton, George Bush, Barack Obama, and so on. Powerful people are simply inherently untrustworthy, because the consequences of misplacing your trust in them are so grave. But for most of modern American history, there have been checks and balances on these leaders, meaning that if they did turn out to be bad, there would be plenty of institutions and opponents in place to limit the damage.
So who or what can check Elon’s power?
As I said at the beginning of this post, one weakness of the U.S. political system is that there are few institutions in place to check the political power of private actors. This is why some people worry about the U.S. becoming an oligarchy, especially in the years after Citizens United.
Up until now, I believe those worries have been misplaced — rich activists like the Kochs, Soros, or Murdoch have of course been influential, but their powers were limited and to some degree they canceled each other out. But in the age of X, SpaceX, and Trump, we may be looking at a very different situation. Not only has technology evolved, but Musk is a singular figure — he has already proven himself to be the one person who can build big successful new high-tech manufacturing companies in the U.S. He might ultimately prove himself to be the one person who can translate a vast fortune and a corporate empire into effective dominance of U.S. politics.
So who or what could balance out Elon’s power? Congress appears prostrate before his online onslaughts and his primary threats. Trump might have fired and denounced him back in 2017 as he did Steve Bannon, but that Trump seems long gone — this Trump is enfeebled by age, bedeviled by lawsuits, and abandoned by many of his old allies. Democrats are still dealing with the collapse of 2010s-era progressivism, and in a few days they will control zero branches of the federal government.
It’s possible that a bunch of other super-rich people will unite to balance out Musk. The thought of needing oligarchs to stop other oligarchs is not particularly appealing, but it might be better than the alternative. So far, though, even super-rich people who have had rivalries with Musk in the past seem inclined to bend the knee and live as best they can under the new regime.
What about the press? Traditional media — newspapers, TV, and radio — has declined steeply, replaced by social media. Musk owns one of America’s main news platforms (and a second one, TikTok, is effectively controlled by the CCP). Meanwhile, more progressive media outlets still seem to be in a state of paralysis over conflicts with their activist staffers and their subscribers over Gaza, trans issues, and general election-related recriminations.
Ultimately, of course, power resides with the American people. Musk’s power comes from his ownership of capital, but the way he exercises it is fundamentally a democratic one — if he’s able to primary Congressional Republicans, it’s because his primary challengers are able to win votes, and if he’s able to start a rage-mob on X, it’s because people like what he says.
This means that if enough people get tired of Musk’s attempts to influence American politics, he’ll lose his influence. X is somewhat influential, but even with Musk’s algorithmic changes, it’s not a mind-control device, and it’s also not actually that widely used. Musk is America’s most talented entrepreneur and richest man, but even the greatest of men is powerless if he’s rejected by the masses.2 This week’s fracas over the CR is unlikely to win Musk a lot of fans — the American people have never liked shutdown brinksmanship. If Elon pulls a few more such stunts, the first year of Trump’s second term could come to be defined by a widespread backlash against his overreach.
Actually I have a third theory, which is that the antisemitism is mainly driven by Russian and Chinese bots, in order to drive a wedge in American society. I’ve noticed that the antisemitism mostly dried up right after the election. This could have potentially been due to a crackdown by Elon.
Bolivia isn’t a country we talk about a lot. It’s a small landlocked South American nation of 12 million people whose economy is dependent on mining and natural gas. Back in 2006, Bolivia elected a socialist leader, Evo Morales. You might assume that Bolivia’s economy would follow the disastrous example of Hugo Chavez’s Venezuela, with which it was closely aligned. But in fact, it didn’t. The Bolivian economy did fine under Morales. Growth was robust, and poverty and inequality declined. I wrote about Bolivia’s apparent socialist success for Bloomberg back in 2019:
By 2017, Bolivia was 42 percent richer than when Morales took office. But for the average Bolivian, the results were even better -- the country’s Gini coefficient, a measure of income inequality, fell by more than 19 percent since Morales took office. Poverty has declined by 25 percent since he was elected. Although Morales has showed some disturbingly authoritarian tendencies, including doing away with presidential term limits, economically he seems to have turned his country around.
But I noted that underneath the surface, trouble was brewing. Drawing on some 2019 research by Kehoe et al., I pointed out that Bolivia’s currency peg and dwindling foreign exchange reserves put it in danger of a classic emerging-market currency crisis:
When there is pressure for the dollar to strengthen -- and thus for the domestic currency to weaken -- the government has to sell dollar-denominated assets…If Bolivia ever runs out of [reserves of] dollar assets, it won’t be able to stop the boliviano from depreciating, resulting in a very rapid crash in the currency’s value…Reserves have now fallen to about half of their peak levels…
A currency plunge is an especially frightening prospect because of Bolivia’s increasing external debt…[T]he amount that Bolivia’s government owes in foreign currencies has approximately quintupled since 2007…If Bolivia is ever forced to abandon the dollar peg and the boliviano drops in value, this foreign-currency debt could become very costly to service. Bolivia could then be forced to choose between two disastrous alternatives -- a sovereign default, or Venezuela-style hyperinflation.
In other words, Bolivia was making the same classic mistakes that resource-dependent countries so often make — trying to keep their people happy by keeping their currency too strong, in order to make imports cheap, setting themselves up for a macroeconomic disaster.
Here’s a brief refresher on how this all works. Regular people in countries like Bolivia depend on imported food and fuel for their daily lives. To import food and fuel you need dollars — or some other international currency like euros or yen or yuan or whatever. Bolivia can get dollars two ways — by selling exports or by selling bonds. If it doesn’t sell enough exports — for example, if gas prices drop and its exports are worth less — it has to sell bonds in order to keep importing.
The country maintains a stockpile of “reserves” — basically, bonds that pay off in dollars — that it can use to buy imports if export revenue temporarily goes down. But if the country tries to maintain an exchange rate peg — basically, declaring that its currency is worth more dollars than it’s really worth, so it can keep buying more imports than it can really afford — then the stockpile of reserves will eventually get used up. At that point there’s no way to stop the country’s currency from crashing in value relative to the dollar, as everyone desperately exchanges more and more of their local currency for dollars in order to keep buying imported food and fuel. This abruptly impoverishes the citizenry, and it tends to lead to either a sovereign default or hyperinflation (for reasons you can read about in my post about Sri Lanka’s crisis back in 2022).
So basically, I predicted that Bolivia’s economy was in danger not from socialism — which seemed to be implemented far more prudently than in Venezuela — but from macroeconomic mistakes. Socialist or not, Bolivia was in danger of the kind of standard, well-known economic crisis that resource-exporting countries tend to stumble into.
Well, fast forward to 2024, and the dangers I warned about have now come to pass.1 Juan Pablo Spinetto tells the tale:
[Bolivia is having] a financial meltdown: an old-fashioned balance of payment crisis triggered by the lack of international reserves to defend an exchange rate fixed to the US dollar since 2011. With international reserves at about a tenth of their $15 billion peak in 2014, the government of President Luis Arce is safekeeping every dollar bill and gram of gold, depressing activity, sparking fuel shortages and stoking social unrest — all in the name of avoiding a devaluation of an untenable 6.9 boliviano-per-dollar peg…
Annual inflation spiked to almost 8% in October, the highest since the implementation of the peg. The lack of dollars led to parallel exchange rates, feverish currency speculation and suppliers demanding payments in hard currency, amounting to the informal dollarization of the economy.
As Spinetto notes, the country’s forex reserves are almost entirely gone now, which is why the crisis came when it did:
There is one difference. I predicted that a currency crisis might be sparked by a drop in the price of natural gas. Instead, what precipitated Bolivia’s slide into crisis appears to have been a drop in natural gas production, along with government policies that spent foreign exchange reserves on imports. Peter Millard and Sergio Mendoza write:
A lack of investment and exploration of gas fields ultimately tanked production, resulting in today’s nationwide diesel shortage…What’s more, fuel subsidies — which make gasoline even cheaper than in Saudi Arabia — have drained foreign reserves…
When Morales overhauled the natural gas industry in 2006, he raised taxes so much that oil majors…simply produced from the wells they had already drilled instead of spending to increase output at existing fields or trying to find others…The government was also using overly optimistic calculations of how much gas it had already discovered and gave little thought to the necessary investments to keep output stable for the coming decades.
So you actually can see some similarities with Venezuela’s downfall here. In both countries, a long-term lack of investment in the main export industry (oil for Venezuela, gas for Bolivia) led to a lack of exports and a shortage of incoming dollars, eventually causing a currency crisis. Both countries lived for the moment, offering their people more government largesse and more cheap imports than they could afford in the long term, and setting themselves up for disaster when the music stopped. In Bolivia’s case I’d call it populism rather than socialism, but that’s splitting hairs.
But the main point here is that bad macroeconomic management spells doom for a ruling regime, whether it’s “socialist”, “capitalist”, or something else. If you maintain an exchange rate peg to support unsustainable levels of imports, you will have a crash. If you take out a ton of loans denominated in foreign currency, a crash will cause you to either default or suffer hyperinflation. No matter how you set up the distribution of power and wealth inside your country, you will have to deal with those macroeconomic laws.
As it turns out, this sort of emerging-market crisis isn’t the only kind of macroeconomic crisis a country can have. There’s another common type: the deflationary depression. That’s the kind of crisis America got itself into in the 1930s and the late 2000s, and Japan got itself into in the 1990s.
This sort of crisis is marked not by inflation, but by disinflation2 or deflation. The causes of these are not as well-understood as the emerging-market currency crisis,3 but the triggering event is usually a financial bubble and crash accompanied by a large amount of private-sector debt. The typical result is years of slow growth and high unemployment, accompanied by low or even negative inflation rates. If you’re an American who’s old enough to remember the period from 2008 to 2012, you’ve experienced one of these.
One of the big problems in this sort of crisis is “debt deflation”. This isn’t actually a type of deflation — it’s the name for the vicious cycle of reinforcement between debt and deflation in a depression-style episode. Basically, deflation exacerbates debt.
In general, interest payments and principal payments on loans and bonds are not adjusted for inflation — if you owe $1000, and suddenly there’s deflation so $1000 is worth a lot more, then you suddenly owe a lot more in real terms (i.e., you owe a lot more relative to your income). When people suddenly owe a lot more, they either A) cut back on consumption, or B) default on their debt. Either of these things reduces aggregate demand — either people buy less stuff in order to pay down their debts, or a wave of defaults hurts the already-wounded banking system. Lower aggregate demand makes deflation worse. And so the vicious cycle continues.
China is experiencing this sort of problem right now, following the burst of its real estate bubble back in 2021-23. Lingling Wei reports:
Over the past week…China’s 10-year sovereign yield kept falling to fresh lows. Now, the yield is around 1.7%, a full percentage-point plunge from a little over a year ago. The return on the 30-year government bond has also dropped below 2%…The sovereign-debt yield still has a ways to go before falling to zero, but the speed of the drop is astonishing. The lower the yield falls, the deeper the market is signaling economic stress…Official statistics show that China’s economy grew at 4.6% in the third quarter and is expected to reach the 5%-or-so target for the full year. In reality, businesses are struggling to keep their lights on, people are having severe difficulty in finding jobs, and municipalities are drowning in debt. Even government employees aren’t getting paid.
“It feels like depression,” a reader in China recently wrote to me.
Note that there are signs that China’s official 4.6% growth rate is still being substantially overstated.
Prices for goods leaving Chinese factories have fallen year-over-year for 26 consecutive months, dropping 2.5% in November from a year earlier, and there is little sign of them turning up again soon. China’s gross domestic product deflator, a broader gauge of price levels across the economy, has been in negative territory for six consecutive quarters, the longest stretch since the late 1990s…The fear is that deflation is becoming ingrained in China. As falling prices sap profitability, companies could postpone investments or shed workers, leading more people to cut back on spending. Others might put off purchases because they think prices will drop even more.
Note that China’s strategy of producing vast amount of industrial goods could easily exacerbate deflation, by causing a glut of overcapacity that forces prices down. Profits are falling at Chinese companies, because the government is pushing companies all over the country to make too much product. This is almost certainly contributing to falling producer prices. If the U.S. and other countries raise tariffs on Chinese goods, it could send Chinese products back to China and make the deflation there even worse.
The generally accepted way a country gets out of debt deflation is to stimulate aggregate demand, with monetary easing and fiscal stimulus.4 This is why everyone is calling on China’s government to unleash massive stimulus. Xi Jinping was very reluctant to do this at first, being a generally conservative sort of guy. Now he’s ramping up stimulus at last, but as Wei reports, the bond markets don’t seem to be encouraged just yet.
Note that the policy responses to the two common types of crises are in some ways exact opposites. In an emerging-market currency crisis you generally want to cut government debt, in order to stabilize the currency. But in a deflationary depression, you want to increase government debt, in order to stimulate aggregate demand. Getting the policy right requires knowing which kind of crisis you’re in. (In 2009-11, some economists who are used to studying emerging-market crises suggested cutting government deficits, but this would have been the wrong medicine.)
In any case, we see that macroeconomics is like a predator that eats foolish regimes, both democratic and authoritarian. Countries that ignore time-honored principles like “Don’t try to keep your currency overvalued with a dollar peg”, “Don’t borrow a ton of money in foreign currency”, or “Don’t respond to deflation with fiscal austerity” are just asking for trouble.
Authoritarian regimes often think they can control the macroeconomy by controlling the microeconomy. Venezuela tried to stop inflation with price controls, and ended up just making the problem worse. Xi Jinping is trying to escape deflation by engineering a massive glut of manufactured products, which is likely making his problems worse. Macro problems have to be solved with macro solutions — austerity for inflation, stimulus for deflation, and so on.
Leader who think they can order around the vast, imponderable forces of macroeconomics the way they order around their domestic constituencies are generally in for a rude awakening.
I would like you to think about this in the context of the United States’ current incoming government. Inflationary pressures have waned somewhat in the U.S. thanks to the rate hikes, but they still exist:
In a pre-election post, I suggested that Trump forcing the Fed to keep rates low, while vastly increasing the deficit with tax cuts, constituted a big inflationary risk. But I also think we should consider the implications of MAGA influencers like Elon Musk sabotaging efforts to keep the government running:
It’s not clear whether on balance these sorts of shenanigans will be deflationary or inflationary. If repeated and intensified over time, these pressure campaigns could cause a crisis of confidence in U.S. economic policy, sparking capital outflows, putting downward pressure on the dollar, and raising the rate of inflation. On the other hand, suddenly no longer paying a ton of government employees (including the U.S. Military!) would be deflationary, since it would reduce consumption and therefore reduce aggregate demand.
So while I don’t know exactly whether our new GOP government is headed toward massive stimulus or punishing austerity, I think there’s a possibility that this new Trump administration could cause some unforced errors and increased economic difficulty. As I like to say, macro will not be mocked.
In brief, the leading theories are A) weakness in the financial system caused by a buildup of bad debts at banks, B) a crisis of consumer confidence (“animal spirits”), and C) a change in consumer behavior toward paying down debt (“balance sheet recession”). These three theories could all be true at once. Debt deflation aggravates (A), (C), and possibly (B) as well.
Some people ask: “How do you solve a debt problem with more debt?”. The answer is: When you shift debt from banks and consumers to the government, you increase bank lending and consumer confidence. Government debt has its own problems — in the long run it fuels inflation. But if you’re in a deflationary depression, fueling inflation probably shouldn’t be your immediate concern. This is why basic Keynesian economics recommends raising government deficits in severe downturns, but counteracting this by enacting austerity when times are good. Often, people who style themselves as “post-Keynesians” forget the second part of this formula.
Art by Grok. Prompt: “Xi Jinping receiving the gift of electric power from Zeus”
If you’re a little older than I am, you might remember a time, just four decades ago, when the Japanese auto industry was riding roughshod over its American competition. How times change. Nissan just announced a possible merger with Honda, which may end up including Mitsubishi Motors as well. As Bloomberg’s Nicholas Takahashi explains, Nissan has been ailing for a while, with management chaos, outdated products, and plummeting profits. But this merger is the canary in the coal mine — The entire Japanese auto industry is getting smashed by Chinese competition in key Asian export markets:
Japan’s share of U.S. sales is falling as well. All of this is driving disappointing earnings for Japan’s Big Three. The tie-up between Honda and Nissan is supposed to fight back, by leveraging economies of scale. But just as when a bunch of Japanese semiconductor companies combined to form Renesas Technologies, the benefits from consolidation in the car industry will probably end up being limited.
The reason is that the Japanese companies’ fundamental problem is technological. For many years, Japan’s automakers ignored the promise of electric vehicles, instead choosing to focus on hydrogen cars — a dead-end technology. Now they realize they need to catch up, but they’re way behind. As the world shifts rapidly to EVs, BYD, Tesla, and various smaller Chinese companies have eaten the hidebound Japanese automakers’ lunch.
This is a five-alarm fire for Japan, which is already suffering a punishing economic stagnation. But it’s also an important warning for the U.S. We’re watching in real time as a country forfeits leadership in the technologies of the future. On the other side of the world, Germany is not doing much better.
Such technological stumbles have geopolitical consequences as well as economic ones. As Paul Kennedy wrote in The Rise and Fall of the Great Powers, the power of nations has historically hinged on their ability to master the key technologies of the day, whether that was gunpowder and sailing ships, modern taxation and bureaucracy, or mass manufacturing.
U.S. leaders know this, of course. With the CHIPS Act, export controls, and various AI-related policies, they’ve recently acted to preserve American supremacy in the crucial mature technology of semiconductors and the crucial emerging technology of AI. If Trump doesn’t cancel those programs at Xi Jinping’s behest, they have a good chance of succeeding. The U.S. is ahead in AI so far, and along with its allies (including Taiwan) it maintains a commanding lead in chip technology too.
But those digital technologies are not the only key emerging technologies that will determine national power — and to a lesser degree, economic prosperity — over the next half century. There is also a key nexus of physical technologies that will govern how well countries, companies, and militaries are able to transform software into physical reality. Those technologies are all related to electricity — they include batteries, electric motors, solar power, and various other instruments of electrification. And in pretty much all of these fields, the U.S. and all of its allies are rapidly losing ground to China.
The root cause, I think, is that Americans on both political sides have essentially agreed to frame emerging electrical technologies as being fundamentally about climate change, instead of about national power and prosperity. This is a dangerous misconception. If we don’t stop pigeonholing electrical technology into the climate discourse, it’ll continue to suffer from partisan polarization and misplaced priorities.
Taking Xi Jinping Thought seriously (about electric technology)
Regular readers of this blog will know that I have a pretty low general opinion of Xi Jinping’s personal competence as a leader. His “Xi Jinping Thought”, which he has forcibly inserted into every corner of Chinese society, seems to be mostly a jumble of rambling vague midwittery. But I’ve seen at least one big idea of Xi’s that I think holds some merit — the idea that the world is in the middle of a technological revolution, caused by the simultaneous emergence of a bunch of game-changing technologies.
