Welcome to another roundup of interesting news and events from around the econosphere, from my traditional, 100% handcrafted human-written blog.
First, here’s an episode of Econ 102 for you! As regular readers know, Econ 102’s regular run has ended due to my co-host getting extremely busy with his new job. But we will still come out with an episode every now and then. This episode is about how cameras can improve public safety — and whether they should:
Anyway, on to this week’s list of interesting things.
1. Fixing public spaces is actually pretty easy
The Bay Area Rapid Transit system (BART) is in a parlous state. Ridership has plummeted in recent years; it did not even come close to fully bouncing back after the pandemic.
If BART doesn’t get bailed out with higher taxes, it will have to close stations, reduce service, and lay off workers.
Why did so many people stop riding BART? It’s possible that the pandemic permanently shifted people’s tastes; maybe people just got used to taking Uber or driving instead of using the train. But it’s also possible that the general increase in public disorder in the Bay Area just made BART unacceptable as a mode of transportation. It seemed like every train had its share of shady characters, drug users, vagrants, and the mentally ill.
For a long time, everyone talked about this, but no one had the hard evidence to prove it. Well, now we do. After BART installed fare gates last year at many of its stations, crime on the trains plummeted by 54% in a single year.1 What’s more, the amount of time that BART employees have to spend on “patron related Corrective Maintenance” — i.e., fixing or cleaning up things that riders break or defile — went from huge amounts to almost nothing:
It turns out that just a few riders were causing most of the disorder on the BART — and those riders were mostly not paying their fares, since the fare gates were effective in stopping them.
This demonstrates a general principle: You only have to restrain a very small number of people in order to maintain public order.
Progressives often argue against measures like fare gates, labeling them “carceral” and “racist”. This demonstrates a principle that I call anarchyfare — the idea that eliminating society’s rules serves as a kind of welfare benefit for marginalized people. But in fact, most poor and marginalized people are just peace-loving people who need to ride the train to get to work. They are the chief victims of the tiny number of chaotic individuals who destroy the commons and make public spaces and public services unusable.
BART’s lesson should be applied throughout much of our society. Restraining a very few uncontrollable and chaotic individuals makes life much better for the poor and working class.
2. Is AI taking our jobs yet?
As agentic coding apps wow the world, it’s time for yet another round of “Is AI taking our jobs yet?”. Most of the attention has been focused on young college grads. The story here is that so far, AI primarily automates knowledge work — software engineering, legal services, and so on — and so impacts white-collar entry-level hiring more than other types of hiring.
As you can see, people without college degrees who are 22-27 more or less track exactly what we’d expect given the labor market slowdown. But young college is much higher than our trendline we’d expect from the slowdown.
To be clear: college-educated unemployment is still lower than non-college unemployment, and everyone’s unemployment is up…What’s unusual is the gap between where college unemployment should be historically and where it actually is today…[Y]oung people have higher unemployment than we’d expect at 4.4% overall unemployment. It’s especially higher at its peak and throughout their 20s for people with a college degree. Their recent unemployment rate is historically a surprise. The bad kind of surprise.
He doesn’t claim that we know it’s AI causing the change in the historical pattern, but it’s heavily implied.
But Adam Ozimek points out that this story depends on using unemployment rates. If you look at employment rates instead, the picture looks very different:
You’d think employment rates and unemployment rates would just measure the same thing, right? But they don’t. The way our government calculates things, the employment rate is the percentage of people who have a job. The unemployment rate is the percentage of people who don’t have a job but are looking for a job. In other words, the unemployment rate depends on who says “I’m looking for a job right now”. The employment rate does not depend on this.
In fact, as Ozimek shows, recent college grads have shown pretty constant labor force participation (i.e. they’re all still trying to find jobs), while a number of non-college people of the same age have stopped looking entirely. This shows up as higher unemployment for the college grads, even though the gap in terms of “who has a job” has actually widened since the release of ChatGPT.
This simple observation throws a lot of cold water on the idea that AI is taking jobs from young college graduates. As if that isn’t enough, Zanna Iscenko has a good post that casts even more doubt on the thesis. Iscenko points out that the jobs that are typically reckoned to be more “AI exposed” also tend to be more sensitive to macroeconomic swings:
“AI exposure” and “interest rate sensitivity” are deeply correlated variables…[O]ccupations in the top quintile of AI exposure are overwhelmingly concentrated in…the most AI-exposed quintile…These are precisely the sectors most sensitive to capital costs and broad economic uncertainty. This finding is supported by existing economic literature, such as research by Gregor Zens, Maximilian Böck, and Thomas O. [Zörner] (2020), which found that workers in tasks that are easily automated are also disproportionately affected by conventional monetary policy shocks.
Further supporting the interpretation that AI exposure is correlated with sensitivity to macroeconomic shocks is the fact that we also see more pronounced drops in job postings for “AI-exposed” occupations during the hiring slowdown in early 2020…when Generative AI could not even theoretically be the explanation for the difference.
It still looks to me as if the slowdown in new-grad hiring is not a great example of AI taking jobs. I understand why everyone is worried about this, and I do think it’s plausible that many people will have to find new jobs in the age of AI. On top of that, it seems easily possible that uncertainty about the effects of AI could slow hiring, even if people don’t end up being replaced.
But I just don’t think there’s good evidence that it’s happening yet. Perhaps this year will be the year.
3. Are tariffs reducing America’s trade imbalances?
Tariffs aren’t creating a wave of manufacturing jobs for Americans; in fact, manufacturing jobs are decreasing. But it’s also worth asking whether tariffs are even having an effect on America’s overall trade deficit. Recall that Trump thinks trade deficits are bad in and of themselves — a sign of American “defeat” in a global competition, and a way in which America is dependent on foreigners.
The effect of the tariffs on trade deficits doesn’t appear for a little while. At first, everyone tries to front-run the tariffs by importing as much as they can before the tariffs go into effect, leading to a giant temporary spike in the trade deficit. But after that temporary effect abated, it looked like U.S. trade deficits were shrinking:
The November data throws a bit of cold water on that idea. Imports soared and exports fell. November might turn out to be an anomaly, but so far, it doesn’t look like tariffs have done much to trim America’s trade deficit.
But the U.S. bilateral trade deficit with China has come down a lot. The percentage of U.S. imports that come from China has been falling since the pandemic, but it absolutely fell off a cliff after Trump’s big tariffs were announced. America used to get more than a fifth of its imports from China; now it gets less than a thirteenth:
Some people claim that China is just shipping more goods to America indirectly, through third countries like Vietnam. But Gerard DiPippo looked at which goods China has started selling more of to third countries, and found that transshipment to America can’t be very high:
By comparing the decline in China’s exports of specific goods to the United States with the increase in its exports of those same goods to other markets, we can approximate how much of China’s exports are being diverted. By this method, about 82 percent of China’s lost exports to the United States found alternative markets in the second quarter…The top destinations for those diverted exports are Southeast Asia and Europe. Comparing those trade diversion estimates with the increased U.S. imports of those same goods from those regions, we can estimate a maximum for potential transshipment into the U.S. market. By that metric, Southeast Asia is the top potential source of transshipped goods. Overall, potentially transshipped goods during the second quarter equal 23 percent of China’s diverted trade, suggesting that Chinese exporters have, at least so far, mostly found alternative markets.
True transshipment is likely lower than the 23% number that DiPippo cites as an upper bound.
What’s more plausible is that China is shipping intermediate goods — parts, materials, etc. — to countries like Vietnam, who assemble the inputs into consumer goods and sell them to the U.S. But while this means that the U.S. is still dependent on China for some types of technology, the actual manufacturing base is migrating out of China — which is good for the rest of the world, since it’ll help other countries industrialize. Also, having assembly outside China reduces America’s geopolitical vulnerability somewhat.
So while tariffs haven’t clobbered the trade deficit or led to a manufacturing renaissance, they do appear to be working to decouple the world’s two largest economies. Recall that the tariff rate on China is still much bigger than the rate on other countries:
If you view import dependence on China as a geopolitical risk, then this is a positive result for tariffs.
4. Why is Jon Stewart attacking economics?
Jon Stewart was my favorite political comedian when I was younger. He didn’t always get everything right, but he could almost always make you laugh, and it was clear that his heart was in the right place. He just wanted to see America succeed and Americans be happy.
But in recent years, this admirable desire has slowly morphed into a kind of lazy centrist populism. One of Stewart’s occasional targets is the economics profession — a favorite punching bag of left-populists everywhere. But because Stewart doesn’t know much about the field of economics, or what economists do, or what economics is about, or what economics research actually says, his critiques often feel uninformed and fall flat.
Jerusalem Demsas saw a recent Stewart interview with behavioral economist Richard Thaler, and decided she had finally had it with the former Daily Show host:
Stewart interjected…“But that’s not economics, economics doesn’t take into account what’s best for society!”…“The goal of economics in a capitalist system is to make the most amount of money for your shareholders. So my point is, since when is economics about improving the human condition and not just making money for the companies that are extracting the fossil fuels from the earth?”
At this point it became clear that Stewart has conflated the entire field of economics with a half-remembered, left-wing caricature of capitalism…Throughout the interview, Stewart seemed to believe that economics is just a sophisticated justification for letting rich people and corporations do whatever they want. And this total lack of basic understanding renders him an inept translator of politics and an ineffective force for the very policies he says he supports.
Demsas noted a hilarious moment in the interview in which Stewart rejects the notion that economists have anything useful to say about climate change, and then immediately endorses a cap-and-trade scheme — something economists invented. It’s as if a talk show host rejected the science of physics by saying we didn’t need physics equations to land on the moon.
Jason Furman, an incredibly mild-mannered and affable guy, was nevertheless willing to vent about his own interview with Stewart:
Meanwhile, in order to get some backup for his newfound crusade against the economics profession, Stewart has recruited Oren Cass, a Trump supporter and big fan of tariffs who spends much of his time yelling about how economists don’t know anything. I have written in the past about the utter vapidity of Cass’ critiques of economics. Every time I see a story about how U.S. manufacturing employment keeps falling and falling, I tweet to him and ask him whether he has revised his belief that tariffs help manufacturing. He never answers.
Anyway, the point here is that although Jon Stewart’s style of comedy is great for making fun of American politics, it’s not an effective or interesting way to address economic policy challenges. Unfortunately, the “econ is fake” meme has given a lot of people permission to treat those challenges as if they’re a simple matter of common sense. They are not.
5. Hire them here or hire them there
Trump and the MAGA movement aren’t just going after illegal immigrants; they’re also opposed to high-skilled legal immigration. The administration’s main target on that front has been the H-1B visa, which brings smart people to work in U.S. tech companies. Most H-1B recipients are from nonwhite countries, with India taking by far the biggest share. Trump has implemented a huge fee for hiring H-1Bs, and other GOP politicians are also trying to curb use of the visas.
Proponents of skilled immigration, such as Yours Truly, have long warned that if companies can’t get talent to come to America, they’ll simply set up overseas offices and take advantage of talent there. In fact, Glennon (2023) has evidence that this is exactly what happens:
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.
Alphabet Inc. is plotting to dramatically expand its presence in India, with the possibility of taking millions of square feet in new office space in Bangalore, India’s tech hub…
US President Donald Trump’s visa restrictions have made it harder to bring foreign talent to America, prompting some companies to recruit more staff overseas. India has become an increasingly important place for US companies to hire, particularly in the race to dominate artificial intelligence…
Google rivals including OpenAI and Anthropic PBC have recently set up shop in the country…
For US tech giants, India offers a strategic workaround to Washington’s tightening immigration regime. The Trump administration has moved to sharply hike the fees for H-1B work visas — potentially to $100,000 per application — making it harder for companies to bring Indian engineers to the US.
This shift is fueling the growth of so-called global capability centers, or technology hubs operated by multinational corporations across sectors from software and retail to finance. Many of these centers are now focused on building AI products and infrastructure. Nasscom, India’s IT industry trade group, estimates such centers will employ 2.5 million people by 2030, up from 1.9 million today.
If those jobs were in America, the Indians who are working at those jobs would be spending their money on American doctors and dentists, American tax preparers and financial advisers, American restaurants and shops. Now, instead, thanks to Trump, that money is being spent in India.
6. Japan, the giant hedge fund
As I noted in my last post, Japan has a huge national debt. Even once you net out the portions of the debt that are held by other branches of the government, debt is only around 119% of GDP — about the same as in the U.S., which is highly indebted. But a recent post by Toby Nangle shows how Japan’s government has managed to reduce the impact of that debt by basically acting as a giant hedge fund, making huge profits on various macroeconomic “trades”:
[I]f the Japanese government had raised a bazillion yen on the bond market and funnelled it all into, say, a successful forex trading operation and a long-only stock portfolio which has gone to the moon, maybe we should consider these assets too when trying to work out what sort of parlous state Japan is actually in?…
[Japan] has enjoyed spectacular returns on its monster macro punts over the past few years…They’ve scored healthy profits on its FX interventions since 1991, which we reckon could be worth around eight per cent of GDP…The Bank of Japan’s most outlandish version of QQE has involved building a huge position in stocks, and we estimate the unrealised P&L could be worth 11 per cent of GDP…And that’s before we chalk up jumps in the value of GPIF, Japan’s $1.8tn public pension reserve fund that is maintained to help the government pay pensions. This has benefitted bigly from a combination of a slide in the yen and booming stocks…
Beyond these three, there are a host of other such trades. But pretty much all of them come down to one core basket of positions: short yen vs US dollars, and long stocks. And this trade has been wildly successful.
Nangle plays with some numbers from Fed economist YiLi Chien for Japan’s various government trading positions, and finds that they shrink Japan’s debt by around half:
The U.S. has not done anything of the sort. If George Bush had implemented his Social Security scheme in 2005, we’d be reaping many of the same benefits Japan is now enjoying…but we did not. Japan is acting like a giant — and very successful — macro hedge fund, while the U.S. keeps its money in cash under the mattress.
Japan is a parliamentary democracy; they have a Prime Minister rather than a President. So when Takaichi Sanae became Prime Minister last October, it was because she won an internal party election, not because she received the mandate of the people. This was a problem for her, because her party — the Liberal Democratic Party (also known as Jiminto or the LDP), which is usually in power in Japan — didn’t actually have that strong of a majority. When their long-time coalition partner, a smaller party called Komeito, ditched the LDP after Takaichi came to power, some people thought Takaichi’s tenure in office might be cut short, or hamstrung by a lack of votes.
So Takaichi did the smart but risky thing, which was to call a nationwide election. That election took place yesterday. The LDP proceeded to stomp all over the opposition, winning in a massive landslide. Takaichi’s party won 68% of the seats in the lower house, giving the LDP a 2/3 majority all by itself. That’s the biggest majority the LDP has ever had in its 71 years of existence — and when you add in its new coalition partner, the Japan Innovation Party, it’s now 76%. That means Takaichi can easily push through essentially any legislation she wants, except for a constitutional amendment (and those aren’t off the table either).1 The Takaichi Era has now begun for real.
Americans have taken a bit more of an interest in Japanese politics and society lately, probably because of the tourism boom. So I thought I’d try to explain what this all means.
First, there’s the question of why the LDP always seems to win in Japan. Except for two brief periods out of power — in 1993 and 2009-2012 — the LDP has ruled Japan for the entire time since it came into existence in 1955. This almost unbroken run of victories has some people wondering if Japan is some kind of fake democracy or one-party state.
It’s not. The best book about this that I’ve ever found is Ethan Scheiner’s Democracy without Competition in Japan: Opposition Failure in a One-Party Dominant State. According to Scheiner, there are basically two reasons why the LDP stays on top. The first is that until the mid-2000s, there were some structural quirks of Japan’s electoral system that made it easier for one party to retain dominance — basically by identifying who voted for the party, and sending government funds directly to them. This is called clientelism, and it happens to some degree in most countries — think of Trump trying to starve blue states of federal government funding — but in late 20th century Japan it was easier to do. Being able to pay off reliable voter blocs — like rural construction workers — made it easier for the LDP to stay in power.
But the bigger reason that the LDP stays in power is a lot simpler and more democratic — the party is just really responsive to voters’ concerns. In the 1970s, when anger about corruption, environmental problems, and slowing economic growth almost led the Socialist Party to topple the LDP, the ruling party changed tack. It became much more environmentalist and implemented policies that helped lead to a revival of growth in the 80s.
When the bursting of the big asset bubble in the 90s led the LDP to briefly lose power, they responded with a big program of fiscal stimulus (which is one reason Japan now has so much government debt). When more scandals and the global financial crisis got the LDP kicked out in 2009, the LDP responded in 2012 by bringing in Abe Shinzo and his pro-growth economic program, which got the country working again.
In other words, the LDP simply does what any rational ruling party should do in a functioning democracy — it gives the people what they want. And the people respond by usually sticking with the known quantity, as long as it keeps being responsive. This is perfectly democratic; there’s no reason “democracy” needs to mean alternating parties in power, as long as the ruling party takes elections seriously, abides by their results, and stays in power by giving the people what they want.
This time, what Japanese people mainly wanted was security in an increasingly dangerous world. And Takaichi was the person who arose to give it to them.
For the entire time since World War 2, Japan could count on the unwavering military protection of the United States, which was the most powerful country in the world. That is no longer the case. Donald Trump is returning the U.S. to an isolationist stance; he has acted aggressively toward allies in Europe, raised tariff barriers against allies, and cozied up to Russia (which is Japan’s traditional enemy). Trump has so far continued to promise to defend Japan, and seems to really like Takaichi, but by now the whole world has learned that the mercurial U.S. leader can turn on his allies in a split second.
On top of that, a U.S. security guarantee isn’t worth what it once was. Even if America tried to defend Japan from China, it’s not clear that it could. The U.S.’ war production capability is now far inferior to China’s, and China is geographically much nearer to Japan than the U.S. is. And even if America could defend Japan against direct attack, Japan is very dependent on imports of food and fuel, and China’s submarines and missiles could potentially blockade Japan into starvation and poverty.
What can Japan do in this suddenly terrifying international environment? Most importantly, it needs to remilitarize. It needs to raise the percent of its economy spent on defense, and it needs to bring its military up to cutting-edge technology levels across the board. This will be very difficult, for reasons I’ll explain in a bit.
But it also won’t be enough. China is more than 10 times Japan’s size, and has built itself into a manufacturing juggernaut; Japan has little hope of resisting that power by itself, unless it develops nuclear weapons.2 Thus, Japan also needs to court allies to bolster its defense — not just the wavering United States, but also India, South Korea, Europe, and so on. That will take diplomatic skill of a kind that Japan is not used to summoning.
And while doing all this, Japan will need to avoid major pitfalls that could hamstring it at a critical moment. That includes economic collapse, of course. But it will also have to avoid the kind of internal social and political divisions that resulted in the election of Trump in America and have led to a rising rightist challenge in much of Europe.
Takaichi has promised to do all three of these things, and so far, she looks like she has a decent shot at pulling them off. She’s a well-known hawk on defense, and in November, she declared that Japan would act to defend Taiwan if China attacked it. China responded in rage, making various threats of war against Japan, curbing tourism, and launching a campaign to diplomatically isolate Japan by accusing it of militarism.
But China’s blitz had the opposite of the intended effect. Nobody except a smattering of online leftists and some gullible American journalists actually believed that Japan was threatening China; everyone realized it was the other way around. South Korea, recognizing the magnitude of the regional threat, and also realizing that Trump’s America wouldn’t be a reliable partner, immediately started trying to draw closer to Japan. South Korean President Lee Jae Myung went to Japan and played an impromptu drum set with Takaichi, covering some K-pop songs and producing this epic photograph:
Photo by 内閣広報室 / Cabinet Public Affairs Office, CC BY 4.0.
This is an incredible diplomatic coup, especially for two countries that were at each other’s throats just a decade ago over wartime history, colonization, and a territorial dispute. Korean and Japanese people themselves have become much warmer toward each other in recent years, but for the two countries’ leaders to be so openly chummy shows how committed they are to the partnership.
Meanwhile, China’s aggressive bullying campaign united Japanese society behind Takaichi. Various recent polls have her approval rating anywhere from the low 60s to the high 70s:
And these polls find even greater support among young Japanese voters, with some logging over 92% approval. That’s absolutely wild. There have been many articles written about why young Japanese people love Takaichi so much, but I think one reason is simply that she offers them the promise of security in a scary world.
Takaichi is also known as a conservative on the issue of immigration. But she’s no Trump. She has promised to improve immigration screening, toughen requirements for naturalization (which were very easy), make some visa requirements a bit tougher, etc. This is very measured stuff, especially compared to an anti-foreign minor party called Sanseito that cropped up last year. That party looks downright Trumpian, and siphoned votes from the LDP last year.
But by triangulating the immigration issue and convincing the Japanese people that the government wasn’t deaf to their complaints about misbehaving foreigners (who are mostly tourists, not immigrants), Takaichi took the wind right out of Sanseito’s sails.3 Despite what you may hear from certain hysterical online individuals,4 Japan is going to chart a moderate course on immigration, continuing inflows to alleviate labor shortages and attract capital, while learning from Europe’s mistakes and being more selective about which people they take in.
So Takaichi rode to a record victory because she promises to stand up for Japan internationally and hold Japanese society together domestically. Now the big question is whether she can actually deliver.
First, let’s talk about remilitarization. The main obstacle to doing this is actually not the constitution’s Article 9, which formally forbids Japan from having an army. That constitutional article was “reinterpreted” in 2014 to remove almost all legal constraints on a military buildup. A bigger obstacle is that many decades of quasi-pacifism, combined with a long fiscal crunch, have atrophied Japan’s military-industrial complex.
The situation is not as dire as you might think, since Japanese companies do lots of “dual-use” manufacturing that could be shifted to war production in a crisis, and since Japan tends to have more complete internal manufacturing supply chains than America does (making it less vulnerable to a cutoff of Chinese supplies). I recommend the following post by Jesper Koll:
So the situation isn’t hopeless, but there’s a lot of work to be done, and it’s going to be very tough.
The difficulty is going to be exacerbated by Japan’s fiscal difficulties. The government has a large pile of outstanding debt, even after you account for the portion that’s held by various branches of the government itself. It has to pay interest on that debt. For a long time, interest rates in Japan were kept extremely low, which was possible because inflation was low. So paying interest on the debt wasn’t a big problem. But now inflationary pressure has returned, with inflation above 2% in recent years:
In order to prevent this inflation from spiraling upward, the Bank of Japan has to raise short-term interest rates. But that makes the government’s debt much more expensive, meaning the country has to divert a large amount of revenue toward interest payments every year. Of course, the government can just borrow to cover those interest payments, but then this drives up the debt, and raises doubts that it’ll ever be paid off. You can probably see those doubts starting to appear; rates on long-term Japanese government bonds have begun to soar:
This just makes it harder for Japan to repay its existing debt. It also threatens to hurt the economy, which would hurt tax revenue, and thus compound the problem.
Japan is in a real fiscal bind. The only way it will really be able to pay for expanded defense spending is to cut government spending in other areas — which, most of all, means benefits for the country’s burgeoning masses of elderly people. Cutting off grandma to build missiles doesn’t usually make for very good politics, but if anyone can persuade Japan’s people to accept the sacrifice, it’s probably Takaichi.
Fortunately, defense spending offers Japan some economic advantages beyond simply countering China. First of all, it offers the government the perfect excuse to wind down other, more inefficient forms of stimulus spending, like bailouts for failing companies. The Japanese economy doesn’t need stimulus at all at this point, of course, but some Japanese people will be afraid that growth will crater if spending drops. Diverting money from bailouts to defense will be good for productivity.
More importantly, defense spending will help revive Japan’s manufacturing sector, which has been under extreme pressure from Chinese competition in recent decades. Defense spending gives manufacturers a cushion from China’s export flood, and stimulates investment throughout the supply chain.
The defense imperative may also help bring Japan up from its position as a technological laggard. Japan has fallen behind, partly due to its weakness in software, partly due to the fact that most of Japan’s R&D is incremental stuff, performed by risk-averse corporations. Defense spending will allow Japan’s government to get into the game, funding bolder research efforts that benefit many companies instead of just one. It will also spur faster adoption of AI technology — out of sheer necessity — that will probably solve Japan’s software problems.
Finally, defense will be a great area for Japan to solicit greenfield investment — a big missing piece of Japan’s economy. American defense companies looking for places to make drones, ships, and missiles unencumbered by the U.S.’ legalistic regulatory state would be well-advised to build some factories in Japan, which can set them up quickly and easily, and where supply chains, labor quality, and infrastructure are all very good.
So while Takaichi has some big challenges ahead of her, she also has some big opportunities. It’s sad that Japan is being forced to leave behind its long pacifist moment. But with the right leadership, this necessary change could end up helping the country escape economic stagnation as well.
In fact, Japan should develop nuclear weapons, as quickly as possible. But this will be politically very challenging, given the country’s history of suffering at the hands of nuclear weapons in WW2.
These days it seems like the only things to write about are politics and AI. I wrote about AI last time, so today I’ll write about politics.
Here is my basic theory of American politics in the 2020s: The United States is a nation of moderates ruled by a fringe of extremists. The extremists rule because they are more engaged than the moderates — they spend more time thinking about politics and doing political activism. In Martin Gurri’s terms, the extremists are the “public” and the moderates are the “populace”.
There are several reasons why American politics is dominated by extremists. The well-known one is the closed-primary party system. Republicans win primaries not by aligning with the median voter, but by aligning with the median Republican voter — usually in an area that’s already right-leaning to begin with. The same is true of Democrats.
But that has been true for a while. The fundamental reason why American politics is more extremist-dominated than in the past is technological. Modern social media bypasses traditional hierarchies and institutions and gathers together communities of like-minded extremists who then create challenges to traditional institutions; it also provides these extremists a platform in which their emotionally charged messages are more likely to go viral than messages of positivity and reason.
The moderate majority increasingly avoids the politically charged, extremist-dominated online spaces. That gives lots of Americans more peace of mind, but it also means that online spaces become more and more extremist as moderates leave.1 This is the conclusion of Törnberg (2025):
Using nationally representative data from the 2020 and 2024 American National Election Studies (ANES), this paper traces how the U.S. social media landscape has shifted…Overall platform use has declined, with the youngest and oldest Americans increasingly abstaining from social media altogether. Facebook, YouTube, and Twitter/X have lost ground, while TikTok and Reddit have grown modestly, reflecting a more fragmented digital public sphere….Across platforms, political posting remains tightly linked to affective polarization, as the most partisan users are also the most active. As casual users disengage and polarized partisans remain vocal, the online public sphere grows smaller, sharper, and more ideologically extreme. [emphasis mine]
In case you like charts, here’s one from the paper showing that extremists post more than moderates:
If extremists remained online, shouting at each other or shouting into the void, this would be a good and healthy process for a nation weary of culture wars. But the people who dominate real-world politics are increasingly drawn from this pool of online extremists. I am talking not about elected politicians themselves, but about the activists who create and promulgate political ideologies, the think tankers who translate those ideologies into policy ideas, the lobbyists who promote those policy ideas to politicians, and the staffers politicians hire to decide which ideas to embrace, and how.
Let’s talk about those staffers for a moment. Staffers write legislation, advise elected officials on policy, and handle lots of public communications. While politicians are out fundraising, pressing the flesh, or giving speeches to increasingly outdated TV news networks, their staffers are busy with the business of running the country. These staffers are much younger than the politicians they ostensibly serve — the typical Congressional staffer is in their late 20s, while the typical Congressperson is in their late 50s.
This means staffers are more online, and thus spend their days lost in the extremist maelstrom of social media, mainlining rightist conspiracy theories on X and leftist tropes on TikTok. Staffers are also unelected, which means they don’t have to cater to regular voters; they are free to pursue radical ideologies, support radical movements, and put out extremist messaging unless their bosses explicitly act to rein them in.2 There are plenty of anecdotes about how staffers in both the Democratic Party and the Republican Party are more extremist than the politicians they serve — to say nothing of the country as a whole.
For a concrete example of this, take the recent contretemps over one of Donald Trump’s racist social media posts. Trump’s Truth Social account posted a video depicting Barack and Michelle Obama as apes:
After a general outcry, the racist video was taken down. A White House official stated — and Trump later confirmed — that the video was posted not by Trump himself, but by a staffer. Trump refused to apologize for the video, demonstrating how extremist staffers can essentially force the politicians who employ them to take more radical positions.
These 28-year-old extremely online radicals — along with the larger network of think tankers, lobbyists, and activists with whom they are deeply enmeshed — are a key part of America’s ruling class, invisible and unaccountable and unelected and more powerful than almost anyone realizes.
Anyway, regular Americans sense this and are distinctly unhappy with it. Majorities say both parties are too extreme:
But although this is a very natural way to express disapproval with the two parties, it ends up exacerbating extremism, just like when moderates abandon social media. Independents can’t vote in closed primaries, so the people who remain registered as Democrats and Republicans are going to end up nominating even more extremist candidates, forcing regular Americans to choose between two even more polarized extremes — and simply increasing their frustration and disaffection.
This is all very bad for America, and I don’t have a way to fix it, other than A) transitioning to open primaries and B) bringing back the Fairness Doctrine and applying it to social media — two things that nobody is going to do. But watching the behavior of America’s two extremist movements, I don’t think either of them is going to be durable and successful.
I think this is true for many reasons. American voters are unlikely to keep either party in power for long at the national level, and instead will more likely ping-pong back and forth between them as they grow disgusted with the performance of each. Social media activism and memes will push both parties toward unworkably extreme policies — stupid tariffs, unchecked government borrowing, and so on. Online spaces will make it ever harder for real leaders to emerge on either side, as reasonable moderates are quickly “cancelled” by mobs hunting for the smallest peccadillo.
But on top of that, I see some core tendencies that are particular to the American right and left — the MAGA movement and the progressive movement — that strike me as maladaptive and seem to portend long-term weakness.
On the right, a big problem is that the MAGA movement is relentlessly focused on shrinking its coalition. Winning coalitions in politics are built by gathering together various groups and aligning them toward shared goals. Trump did a good job of that in 2024, assembling a startlingly diverse, broad-based electoral majority. But MAGA insists on attacking every group it could bring into its tent.
As an example, just look at that video Trump’s staffer just posted — and which Trump defended, even though some Republicans condemned it. One way that Trump enlarged his coalition in 2024 was to persuade some Black voters to switch sides:
In 2024, Trump won 15 percent of Black voters — according to Pew Research’s widely cited validated voter survey — an increase from the 8 percent he won four years earlier. A pre-election Pew poll found that the economy and health care were the most important issues for the voting bloc[.]
15 percent doesn’t sound like much, but an 8 percentage point shift is big, and every vote counts. Does Trump think posting videos showing prominent Black people as apes will help him solidify that small Black conservative contingent as part of an enduring GOP coalition? It doesn’t seem like he cares.
Nor is this an isolated incident. James Fishback, a Republican primary candidate for governor of Florida, recently referenced “goy slop” — an antisemitic conspiracy theory that says that Jews are forcing gentiles to consume low-quality goods. This is just one example of a rising tide of antisemitism in the GOP, which party leaders like Ted Cruz have acknowledged. That will probably prevent a major exodus of Jewish voters from an increasingly anti-Israel Democratic Party.
Meanwhile, ICE’s racial profiling and raids on Hispanic-owned businesses are starting to drive away Hispanics who were a crucial part of Trump’s winning coalition in 2024. MAGA has not explicitly demonized Hispanics as a group, and many who voted for Trump believed that he would distinguish between citizens, legal residents, and illegal immigrants. But like every other big U.S. deportation effort since 1930, Trump’s current crackdown involves a significant degree of enforcers simply grabbing people who look Mexican and holding them on suspicion of being illegal.
And MAGA is attacking Indian immigration as well. A wave of anti-Indian sentiment among online Trump supporters has spilled over into the real world. Texas’ Governor Greg Abbott has stopped public universities and the state government from hiring H-1B workers (most of whom are Indian). This will hurt the state economy, which depends on Indian doctors and other professionals for essential services. Whether it will hurt the GOP with Indian-American voters remains to be seen, but I doubt it will help.
There are also signs that MAGA is starting to turn against East Asians. A couple of years ago, affirmative action in college admissions was struck down by SCOTUS after a MAGA-aligned group sued Harvard for discriminating against Asians. That raised the possibility that MAGA’s ostensible defense of meritocracy might win over some Asian voters to the GOP. But then right-wing commentator Helen Andrews went on a multi-day tirade against Asian immigrant culture, alleging that Asians threaten the American way of life by working too hard in school and succeeding too much, while also claiming (rather farcically) that Asians benefit from workplace DEI programs:
The idea that Asians are going to destroy American culture by working too hard is ridiculous — an obviously ad-hoc fabricated excuse to attack a minority group that succeeds financially, comes in legally, and tends to commit very little crime. It also happens to be wrong (Asian “grind culture” is simply another case of immigrant striver culture, which tends to fade by later generations). And if the rest of MAGA takes up this line, it seems likely to alienate the Asian voters who shifted toward the GOP in 2024, many of whom were alarmed at Democrats’ attacks on educational meritocracy.
It’s hard to think of a group of Americans — other than White Protestants — that the MAGA movement has not turned its outrage machine on. Indeed, the whole movement has come to resemble a roving Eye of Sauron that constantly looks around for a new racial enemy to attack, switching targets every year or so.
This is not a way to build an electoral coalition. There are far too few White Protestants to form an electoral majority in America, no matter how many people ICE deports or how many visa-seekers and refugees Trump turns away. Instead, Trump’s movement will simply drive away one ally or potential ally after another, shrinking the tent as they go.
My sense is that this is structural. MAGA leaders — politicians, pundits, and so on — energize their base by stirring up fear of racial “others”, but then back off when they receive sufficient pushback and accusations of racism. So they have to keep cycling through targets, so they can keep stirring up their core voters’ anxieties without having any one particular minority become the focus for liberals’ defensive efforts.
As a result, they just end up alienating everyone, one by one. At its core, MAGA is a xenophobic movement that gains a lot of its power from the fear of racial enemies; this is a poor long-term strategy in a diverse democracy.
As for progressive extremism, I think this will also fail, but for a very different reason.
Progressivism lost at the polls in 2024, but still dominates in many big cities and some states, and has had a chance to prove itself as a governing ideology over the last 10 to 15 years. It has failed. I highly recommend this article about the decay and decline of Portland, revered as a progressive mecca in the previous decade. Some key excerpts:
Last fall, after the city acquired a reputation for crime, homelessness, and dysfunction, Oregon politicians rushed to media outlets to assure the nation that the city was not literally on fire…[But] Portland is constantly on fire. In the year following July 2024, Portland had 6,268 fire-related incidents – and 40% of the fires in the city are a direct result of Portland’s out-of-control vagrancy…
[Jeff] Eager says one key reason why the city’s massive crime problem goes unaddressed is that it’s largely self-inflicted and driven by ideology. “Hard core progressivism has destroyed what old school Oregon liberals built – farmers markets, parks, walkable communities, transit, and all the good kind of Portlandia-era liberal lifestyle stuff,” said Eager. “This brand of progressivism is just so against the rule of law, it’s ruined all those institutions that made Portland a cool, trendy, quirky place. It's not really quirky anymore. It's dangerous.”
Portland now has the second-highest crime rate of any city in America, behind Memphis. About one out of every 16 people in the city is the victim of a crime every year…The lack of law enforcement became obvious to everyone during the summer of 2020…As part of the Defund the Police movement that year, Portland’s leftist city council cut $15 million from the city’s law enforcement budget, eliminating 84 jobs in the police department – with predictable results. By November 2021, [the mayor] acknowledged “many Portlanders no longer feel safe,” and the city council began the process of restoring some funding to the department – though the police are at loggerheads with local politicians and the department remains chronically understaffed. [emphasis mine]
Portland’s plight is especially notable because it contrasts with a pretty epic nationwide decline in crime. It’s obvious that progressive extremist ideas about tolerant approaches toward crime have prevented Portland from fully participating in that happy trend — murders fell in 2025, but property crime remained sky-high.
Another likely example of this is the epidemic of copper theft in Los Angeles, that is literally turning lights off across the city.3 The main impetus for the theft wave, of course, is the rising price of copper, which makes it more valuable to steal. But California has a pandemic-era law saying that theft of under $950 worth of goods is a misdemeanor, not a felony. That law has now been watered down, and some exceptions added, but it still makes it hard to prosecute petty thieves.
When a swarm of petty thieves is crawling all over your city stripping out the wires, prosecuting and penalizing petty crime is exactly what you need to do. But a progressive criminal-justice “reform” back in 2014 made that harder.
The frequent failure of progressive cities to crack down on crime — and the progressive movement to make America more tolerant of criminals in general — undermine the entire left. This can be added to a litany of other progressive local and state government failures — not building enough housing, bankrupting cities through excessive spending, outsourcing government functions to NGOs, spending way too much on transit projects, and so on.
In all of these cases, what progressivism is doing is parasitizing the liberal institutions that allowed progressivism to exist in the first place. Liberals built the public libraries; progressives are destroying them by turning them into ad-hoc homeless shelters. Liberals built trains, but now people don’t want to ride the train because of crime and disorder, requiring big bailouts from the state of California. Progressive tolerance of bad behavior by the few — open drug use and sales, theft, street harassment — has turned parks, streets, and other types of urban commons into no-go zones for the bulk of the citizenry.
The pattern repeats itself: Liberals build, progressives come in and demand more and more from the system liberals built, until the system collapses. As yet, liberalism seems to have evolved no defense against this; for at least a decade, nobody seems to be able to say no to progressive demands.
This is why I believe that both the American right and the American left will fail — and indeed, are already failing wherever they gain power. Extremist ideas are generally bad at actually governing, but good at winning hearts and minds in online chat groups. Of course, this provides cold comfort for those of us who will suffer from America’s two flavors of bad governance. A country with two broken ideological programs is a deeply dysfunctional country.
Software stocks crashed today. It’s never possible to be sure why something like that happens — this selloff may even be irrational — but everyone seems to agree that it’s being driven by the fear that AI is rendering a bunch of software business models obsolete. Here’s Bloomberg:
In the span of two days, hundreds of billions of dollars were wiped off the value of stocks, bonds and loans of companies big and small across Silicon Valley. Software stocks were at the epicenter, plunging so much that the value of those tracked in an iShares ETF has now dropped almost $1 trillion over the past seven days…
[T]his drubbing…was triggered [by] concern that AI is on the verge of supplanting the business models of a wide swathe of companies that doomsayers have long predicted were at risk…
AI startup Anthropic PBC released a new tool for legal work, like reviewing contracts…The latest developments raise the specter that AI leaders will overtake established industry players in innovation.
[I]t took a wave of disappointing earnings reports, some improvements in AI models, and the release of a seemingly innocuous add-on from AI startupAnthropic to suddenly wake up investors en masse to the threat. The result has been the biggest stock selloff driven by the fear of AI displacement that markets have seen. And no stocks are hurting more than those of software-as-a-service (SaaS) companies…Few in the software and data spaces have been spared…Shares of software companies including Microsoft, Salesforce, Oracle, Intuit Inc. and AppLovin Corp. tumbled, dragging down the technology sector and weighing on the broader stock market.
Essentially, modern software companies have a stable of human software engineers who implement some sort of task for a client — keeping track of their sales leads, or helping with tax preparation, etc. The client pays the software company a fee to maintain access to that stable of human engineers. They are experts — master craftsmen who draw on a mix of esoteric knowledge, hard-won experience, raw IQ, and access to a vast community of other experts. They are the master weavers, the master potters, the artisan blacksmiths of the modern age.
And like those predecessors 200 years ago, their skills are in the process of being rendered obsolete by automation. Just as a power loom allowed an unskilled peasant to make cloth almost as good as what a master weaver would make — and at a fraction of the price — new AI coding tools are making it possible for relatively unskilled workers to turn out vast reams of software that’s almost as good, and far cheaper, than what a master software engineer would make.
This is “vibe coding”. At first, AI served as a kind of fancy autocomplete for people who already knew how to write code. But with the release of more and more powerful tools like Anthropic’s Claude Code — which assigns an AI “agent” access to your files and lets it keep repeating its efforts until it achieves high-quality results — it’s now possible for complete novices to learn how to make functional applications in hours, simply by telling AIs what they want in English. As these tools continue to improve, the amount of detail and technical knowledge that a user will have to have in order to create a working application will approach zero; software will be conjured up rather than crafted. Executives are already talking about creating software businesses with zero software developers.
Given the latest lift in LLM coding capability, like many others I rapidly went from about 80% manual+autocomplete coding and 20% agents in November to 80% agent coding and 20% edits+touchups in December. i.e. I really am mostly programming in English now, a bit sheepishly telling the LLM what code to write... in words. It hurts the ego a bit but the power to operate over software in large "code actions" is just too net useful, especially once you adapt to it, configure it, learn to use it, and wrap your head around what it can and cannot do. This is easily the biggest change to my basic coding workflow in ~2 decades of programming and it happened over the course of a few weeks.
Karpathy notes that vibe coding helped him realize how much drudgery is involved in traditional software engineering. Dina Bass noted the same thing in a recent post:
But a lot of modern coding is repetitive and time-consuming work that isn’t creative at all, he said. “Engineering isn’t always beautiful code. It’s drudgery,” [Jeff] Sandquist [of Walmart Global Tech] said. “If we can get that off people’s plates, there won’t be nostalgia for that.”
In other words, software engineering was probably less of a “creative class” job than we had allowed ourselves to believe, and more of a “routine cognitive” task — the kind that’s especially vulnerable to automation.
This does not mean there will be no work for people with expertise in software, or no role for businesses that provide software. Code created purely by vibes will usually still have weaknesses, because the humans telling the AIs what they want don’t understand enough to make proper requests. Their software will have security flaws, tech debt, etc. Humans who understand these concepts — who have a detailed, nuanced understanding of what software is supposed to do — will probably be somewhere in the loop to fix problems, maintain code bases, and provide advice to vibe coders (all using AI tools as well, of course). But what they do will simply be different from what software engineers did until just a few months ago. It will be much less of a craft, and much more like setting up and maintaining a factory full of machines.
A great deal of ink has been spilled over the question of whether AI will render human workers obsolete en masse. This question is both catastrophic and unknowable, which is why it’s such a favorite topic. But no one disputes that a new technology can render existing stocks of human capital — the reservoirs of skills and expertise that certain highly paid workers have built up painstakingly over their whole careers — obsolete overnight. It has happened before, and it is happening again now.
Whether AI will do the same to every engineering and scientific discipline is still very much up in the air. We may soon have “vibe physics theory”, “vibe electronics”, “vibe airframes”, and so on — or we may not, if AI hits technological limitations that are as poorly understood as its explosive rise. But it seems certain that although software is particularly amenable to automation by AI1, the current technological revolution is not done upending the lives of various types of technical experts.
It occurs to me that this represents something momentous — the end of an economic age. My entire life has been lived within a well-known story arc — the relentless rise, in both wealth and status, of a broad social class of technical professionals. That rainbow may now be at an end. The economic changes — not just on careers, education, and the distribution of wealth, but on the entire way our cities and national economies are organized — could be profound.
The human capital economy was the Revenge of the Nerds
“All of this wealth attracted a dragon” — The Hobbit
This is progress (at least if you dislike unaccountable secret police, race wars, warrantless searches, summary executions of protesters, and so on…which I do). But it’s possible that Democrats — and especially progressives — will take the wrong message from their first small victories in the battle against autocracy.
For one thing, the Minnesota anti-ICE protests are starting to show some signs of being taken over by the same kind of radicals who made the 2020 BLM protests go overboard in Seattle, Portland, and a few other cities. Some protesters in Minneapolis are setting up illegal checkpoints to stop vehicles and screen them for ICE. Others have been harassing various people. Some leftist protesters have even denounced progressive activist Will Stancil, who was recently punched in the face.
Obviously, if this kind of thing continues, all Trump and Stephen Miller and ICE will have to do is to back off and not kill any protesters for a while, and watch as the more extreme street activists reenact the ill-fated CHAZ from Seattle 2020. That would sap some (but not all) of the momentum from the backlash to the recent ICE killings.
But the other danger is that Dems will take a midterm victory as a sign that they don’t need to recalibrate their position on the immigration issue. In a post two weeks ago, I pointed out that although they hate Trump’s heavy-handed tactics, Americans still don’t support the permissive immigration policies of the Biden years.
Recent polls confirm this. For example, a recent Fox News poll found that Americans still favor the Republican Party over the Democratic Party on immigration in general, and on border security in particular:
The same poll found that although the public now disapproves of Trump’s overall immigration approach by a substantial margin, he’s at +5 on border security specifically.
In a Wall Street Journal poll taken after Good’s killing, voters said that the Republican Party was “better equipped” to handle immigration than the Democrats by an 11-point margin…Apparently, the only thing more unpopular than a nakedly authoritarian immigration policy is a Democratic one.
This is a big red flashing warning sign for Dems. Watching Trump’s ICE in action has reminded Americans of the danger of authoritarianism, but it hasn’t changed their basic idea of what immigration policy ought to be.
Right now, Democrats and progressives are primarily reacting to ICE’s brutality and Trump’s authoritarianism. That’s fine, but it’s not enough. Democrats need to proactively think about what kind of immigration policy they want — not just because they’ll need a plan if and when they get back into power, but because they need to credibly promise the American public that they’re going to do something about the public’s legitimate concerns. If voters think Dems are just going to snap right back to the permissive Biden-era immigration policies that everyone hated, it will be a lot harder for Dems to win in 2028 — and it’ll give Trump much more of a free hand to pursue his authoritarian policies.
Thus, Dems should be thinking about what a liberal immigration policy would look like. Here are some of my own suggestions.
Don’t delegitimize America with “stolen land” rhetoric
Donald Trump and the MAGA movement want to delegitimize immigrants as a group — to say that people who choose America are fundamentally less American than those who have ancestral blood ties to the land. It’s natural to sort of kick out against that idea by trying to turn the tables, and delegitimize the MAGA people themselves. This, I think, is why progressives often respond to anti-immigrant movements by saying that America itself is “stolen land”:
The idea here is that if America itself has no rightful claim to the land on which it sits, then the claim of any MAGA supporter to belong on this land is no better than the claim of any immigrant — legal or otherwise.
There are three problems with this. The first is that no one cares. Those who are inclined to welcome immigrants will become no more welcoming upon hearing that “no one is illegal on stolen land”. And those who believe that America is the legitimate owner of its land will not be persuaded to change their beliefs simply by a reminder that the land once belonged to Native Americans. Trust me, they already know.
The second and bigger problem is that “stolen land” rhetoric makes it look as if progressives don’t believe that America is a legitimate country at all. If you don’t think that American citizens have the right to collectively, democratically decide who gets into the country and who doesn’t, you’re telling American voters that their democratic will is illegitimate. And that’s not going to sit well with voters outside of the most progressive circles. Matt Yglesias makes this argument succinctly and powerfully:
The third problem with “stolen land” rhetoric is that it’s immoral. It’s an attempt to counter blood-and-soil racial nationalism with an invocation of another kind of blood-and-soil racial nationalism:
The Democratic Party shouldn’t go anywhere near this sort of atavistic moral reasoning. The land acknowledgements need to disappear from the Democratic Party platform, from Democratic Party events, and from progressive rhetoric and culture in general.
Instead, Democrats and progressives should focus exclusively on rhetoric that stresses the ways that immigrants contribute to the United States, and on the American culture that unifies us all as a nation. This sort of rhetoric makes it extremely explicit that Democrats see the U.S. as a legitimate entity, worthy of enhancing and strengthening. It rules out the possibility that progressives see immigration as an act of “decolonization”. And it emphasizes that the purpose of immigration is to benefit American citizens.
Deport all illegal immigrants (not just criminal ones), but humanely
When criticizing ICE’s raids, many Democrats and progressives complain that ICE is arresting people with no criminal records in the U.S.:
And Democratic proposals on the topic of illegal immigration center on refocusing enforcement on those who commit crimes in America.
It’s true that Americans would probably like to see more of ICE’s focus on illegal immigrants who commit crimes. But Democrats need to acknowledge that criminality isn’t the only reason that Americans don’t like illegal immigration. Some polls still show majority support for deporting all illegal immigrants, not just those with criminal records. Here’s a recent example:
Other polls show only a substantial minority in support. But these results suggest that criminal behavior isn’t the only concern that Americans have about illegal immigration. Some are undoubtedly worried about the strains on local government finances, others think immigrants compete with locals for jobs and housing, and still others are fearful of the cultural changes that immigration brings. But after years of reading the polls, I think many Americans are simply mad at the act of illegal immigration itself. When people cross the border illegally, they may not have hurt anyone, but they have flouted the American people’s democratic will:
If anyone on the planet is allowed to enter America and remain here as long as they don’t commit any other crimes, that is an open borders policy. And most Americans do not want open borders. Nor, I think, would most Democrats like to be associated with the idea of open borders. And yet that is exactly where the rhetoric of deporting only criminal illegal immigrants immediately leads.
Thus, Democrats need to remind the American public that illegal immigration is not to be tolerated, even when the people who come illegally are well-behaved. Bill Clinton did this in 1995:
But at the same time, Americans don’t support a policy of forcible mass deportation, of the type ICE is currently trying to do. Nor should they. So Democrats need to come up with a humane alternative for getting illegal immigrants out of the country.
There are basically two ways to do this:
Enforce laws against companies hiring undocumented workers.
Change the law on asylum-seeking.
We know that almost all illegal immigrants come to America for job opportunities — even those who try to stay in the country by claiming asylum. It’s natural to want to come work in a rich country! When there are few or no jobs to be had, illegal immigrants leave, as they did during the Great Recession:
Obviously we don’t want to create a recession just to make undocumented immigrants leave! But if we have the government investigate and fine companies that employ them, then companies will become much more averse to hiring people who are in the country illegally. That will decimate demand for undocumented labor, and there will be a big flood of illegal immigrants out of the country — without any detention centers, arrests, etc.1
The second thing Democrats can do is to close the asylum loophole that allows illegal immigrants to become legal residents simply by requesting asylum. Recently, Boston’s Mayor Michelle Wu took some heat for saying that “Every single human being has the legal right to come to the United States and seek shelter”. But in fact, she’s correct. Anyone on the planet can show up at a U.S. port of entry and request asylum. That’s a good law, and we should keep it. In addition, anyone who simply takes a plane to America on a tourist visa can request asylum once inside the country. That’s fine.
What’s far more problematic is that anyone who crosses the border illegally is entitled to request asylum without any discrimination against their application due to the fact that they entered illegally! I explained this back in 2024, and argued that we should change the law so that this is no longer possible:
[T]he U.S. wrote its asylum law to follow the 1967 version of the UN Convention on the Status of Refugees, which states that people who cross the border illegally are entitled to asylum hearings. These asylum seekers exist in a gray zone between “legal” and “illegal” immigration — they’re illegal when they cross the border and turn themselves in, then they’re legal while they await their asylum hearing, then if they get denied asylum (as most do) and stay in the country anyway they’re illegal again.
Most Americans simply do not understand how that system works. If they did understand, they’d probably vote to change the asylum law to deny hearings to — or at least penalize — people who crossed illegally. Meanwhile, among the few Americans who do understand how this system works — lawyers, policymakers, and various NGOs — there’s little appetite to reform the system. As a result, the American public sort of vaguely senses that its democratic will is being violated, but doesn’t exactly know how. And so general anger builds…
The solution, of course, is for Democrats — and responsible conservatives, and political leaders in general — to change America’s immigration system to make it more congruent with the democratic will. The asylum loophole should be abolished — crossing the border illegally should not be rewarded with the chance to stay in the country while awaiting an asylum hearing. Accepting lots of people into the country legally is fine — I will continue [to] support that, and I think Americans in general will agree with me. But if the American people have decreed that a person should not get in, they should not get in. And Democrats should make it clear to the public, with loud and certain rhetoric, that this is being done.
Enforcing laws against hiring undocumented labor on the corporate side, and changing our asylum law to penalize those who entered illegally, would send illegal immigration into reverse — all without the brutality of ICE.
End “sanctuary cities”, go back to Obama’s first term
Critics of Trump’s immigration crackdown often note that Barack Obama deported large numbers of illegal immigrants, especially during his first term. And this is true — by some measures, Obama deported people at an even faster pace than Trump has. And yes, one of the ways he did it was by focusing deportation efforts on illegal immigrants who commit crimes — just as many Democrats are now promising to do.
But the people who tout this record need to think a little harder about how Obama accomplished this. Much of it was done through ICE’s Secure Communities Program, which was established during the waning days of the Bush administration. Under this program, whenever state and local cops arrested someone, they would send their fingerprints to ICE to check their immigration status. ICE could then deport them if they were in the country illegally.
This program was extremely effective in deporting large numbers of illegal immigrants — who also happened to mostly be people who had committed crimes. But many progressive cities decided that programs like this were bad, and became “sanctuary cities”. Sanctuary cities enacted policies that made it difficult to transfer illegal immigrants from local custody to ICE custody, and which limited cooperation between local law enforcement and ICE in various other ways. This undermined the program. The Trump administration has spent a lot of effort trying to force cities to stop concealing illegal immigrants, and progressives have strongly resisted these efforts.
And yet if Democrats really do want to deport criminal illegal immigrants en masse, it will require cooperation between local law enforcement and ICE in blue cities. That means efforts like the Secure Communities Program under Obama, and it means not using local obstructionism to foil the federal government’s efforts to deport criminal illegal immigrants.
The problem here appears to be that while many Democrats pay lip service to the idea of deporting criminal illegal immigrants, they are unwilling to challenge progressive activists who thwart those efforts. At the grassroots level, many progressives see protecting the undocumented from deportation by hook or by crook, regardless of their criminal status, as a sort of crusade. Democrats at the national level need to tamp down this behavior by condemning this behavior. And Democrats at the local level need to understand that this “crusade” hurts the national party.
So combining all of these elements, we can see the overall contours of a liberal approach to immigration enforcement. It would concentrate on replacing violence and brutality with impersonal economic incentives, while making sure to deport criminals who are in the country illegally. And it would be animated by the idea that America is a good and legitimate country, and that welcoming immigrants is something Americans choose to do for their own benefit.
That, I think, is the kind of program that could present a durable, workable, favorable alternative to Trumpism, and help the Democrats win back power.
As Matt Yglesias explains, you can’t just do this by forcing employers to sign up for an “e-verify” system, because those who employ illegal immigrants simply won’t enter them in the system. But what you can do is investigate, prosecute, and fine companies that hire undocumented workers. This will exert quite a chilling effect.
A week ago I wrote about the possibility that the world would pull its money out of the United States of America:
I noted the rise in the price of gold as a sign that the world might be entering a time of international financial anarchy:
[G]old’s volatility and limited supply might not stop it from becoming the world’s reserve asset once again. In fact, although the dollar is holding its own against other national currencies, its share of global reserves is falling steeply once you bring gold into the picture:
Bloomberg reports that governments and private investors are both buying gold at rapid rates, and that fear of the Trump administration’s policies is a big reason why…[T]he world may be preparing for a time of financial anarchy — an era in which the U.S. is no longer a safe haven and the dollar is no longer the reserve currency, but where China has chosen not to step up to fill the void, and Europe and other powers are unable to do so.
A lot of people asked me whether gold’s rise as a share of reserves was due to people putting their money into gold, or to gold going up in price. In fact, those are the same thing. When demand increases for gold, it means that investors buy more gold, and it also means that the price goes up.1 So basically, this all means that investors have been demanding more gold.
Anyway, I thought that the idea of “international financial anarchy” was worth expanding on. A lot of people have this vague idea that the world’s finances are based on the U.S. dollar, but they don’t really know exactly what that means, and they don’t know what it would mean for the dollar to lose that status. In fact, people are right to be a little confused, because there are basically a few different ways that the dollar matters to the international financial system:
A lot of countries and companies make payments in dollars.
A lot of countries hold dollar-denominated assets (like U.S. government bonds) as reserves.
A lot of banks and other companies use dollars as collateral for lending.
For a long time, the dollar has been predominant in all of these use cases, leading people to think that these are all the same thing. But they’re not. So when we think about “international financial anarchy”, we should think about how the dollar’s role might change for all of these uses.
Anyway, I don’t have one big grand thesis about the direction in which the international financial system is heading. But the events of the past few weeks have provoked a few thoughts.
The goldbugs were partly right, the Bitcoin maximalists were wrong
One clear lesson of the past few weeks — and of the past two years — is that people still view gold as a safe haven in times of international uncertainty. Here’s a chart of gold’s price:
Gold rose in the pandemic, but it didn’t really take off until 2024. This wasn’t because of U.S. inflation, which was coming down rapidly at the time. In fact, we don’t know exactly why gold started going up; we just know that a bunch of central banks started buying it. Maybe they knew something we didn’t.
But we do know that when Donald Trump came back to power and started doing unpredictable stuff — high tariffs, threats to invade Greenland, threatening the independence of the Federal Reserve, running up huge deficits, and so on — a bunch of investors around the world, especially in Asia, started buying a lot of gold. The Economist reports:
In recent years central banks in emerging markets, led by China, fuelled the [gold] rally. Such hyper-conservative investors have fallen back in love with physical gold, which they hope will protect them amid geopolitical turmoil. Yet flows into gold exchange-traded funds (ETFs) suggest a new group of investors are catching the bug, lured by returns and diversification rather than safety…Asian investors are leading the way. In the past two years holdings of gold by Asia-based ETFs have more than tripled…Big funds in Japan and South Korea likewise logged hefty increases.
[A]s an asset without a counterparty, gold doesn’t rely on the success and creditworthiness of a company or state, unlike most financial securities…Soaring government debt around the world has also shaken investors’ trust in sovereign bonds and currencies. In what’s been dubbed thedebasement trade, a large number of investors have flocked to gold, silver and other precious metals, seeking a store of value…as public finances deteriorate…
Investors have been closely watching the outlook for inflation in the US, too, as Trump piles pressure on the Fed to bend to his will and cut interest rates. Gold, which pays no interest, typically becomes more attractive in a lower-rate environment, as the opportunity cost of holding it versus interest-earning assets decreases.
More fundamentally, gold’s value is based on people’s beliefs about gold’s value. A lot of people think that gold will take over the global financial system if people lose confidence in national currencies — possibly because in the past, when nations and their currencies weren’t very strong or dependable, and electronic payments weren’t possible, gold was the best way of making international payments.
So when there’s higher expected inflation, or international turmoil, etc., those people — who we typically call “goldbugs” — buy gold. Other investors buy gold in this situation too, because they anticipate demand from goldbugs.
But why gold? It isn’t the only asset whose use doesn’t depend on national governments. There are a bunch of other metals around (in fact, silver also rose in price along with gold). And then there’s Bitcoin, whose value is backed not by national governments, but by an algorithm and an internationally distributed set of “miners” who spend electricity and computing power on carrying out Bitcoin transactions.
For a long time, Bitcoin proponents — including the “maximalists” or “maxis” who think Bitcoin would take over the entire global financial system — argued that the cryptocurrency had become a form of “digital gold” whose natural scarcity and independence of national governments offered investors a safe haven when fiat currencies looked rocky.
But that story has taken a big hit in recent months. When investors started losing confidence in the U.S. dollar, they also sold Bitcoin, causing the price to plunge:
This probably tells us something about how investors think about gold versus Bitcoin. They probably think of Bitcoin as something that benefits from the success of the American economy — probably because when the U.S. economy does well and Americans are feeling rich, they put some of their money into Bitcoin. Whereas they still think of gold as something that you need when nations as a whole do poorly.
Ultimately, safe-haven assets are a coordination game — people just sort of collectively decide which assets to buy in order to protect themselves from international financial anarchy. So far, they’re still coordinating on gold, not on Bitcoin.
This could have just been because the gold binge was overdone, or because Trump’s reported nomination of Kevin Warsh — a hard-money sort of guy — to lead the Fed after Powell tempered expectations of dollar debasement.
In any case, what gold’s abrupt plunge shows is that an anarchic, gold-based international financial system will probably be inherently less stable than the dollar-based system has been. A lot of people — including the goldbugs — think that gold’s natural scarcity and independence from central bank meddling make a gold-based economy inherently stable. But the fact that no large, trustworthy entity manages the gold price actually means that it’s subject to rapid swings like the one that happened on Friday. And if global payment and collateral systems were based on gold, those price swings would be disruptive to those systems as well.
Goldbugs are thus right about gold’s durable safe-haven status, but they’re not right that this is a good thing. Gold isn’t a superior system — it’s a desperate fallback for a world in which the people who were in charge of the superior system abdicated their duties.
Do dollar payments matter for dollar reserve holdings?
Important changes to the international financial system didn’t start when Trump returned to power. The Ukraine War was also an important event. The return of great-power conflict drove some people to put their money into gold, of course. But in addition, the U.S. and Europe put big financial sanctions on Russia — essentially, cutting Russian banks and other Russian companies out of the international financial system, including the SWIFT payment system. The idea was to make it a lot harder for Russia to pay for imports, thus putting pressure on Putin to end the war.
How much financial sanctions actually succeeded in harming Russia is a matter of debate. But they scared a lot of countries, including China, because those countries realized that their reliance on the dollar-based financial system for their international transactions represented a vulnerability — a pressure point that the U.S. could use on them in the event of a conflict. So they started working on alternative payment systems.
China, for example, accelerated its efforts to develop yuan-based payments systems. The Fed’s Bastian von Beschwitz had a good primer on those efforts. As a result, the share of China’s cross-border payments denominated in yuan started rising:
The question is whether this affects the dollar’s position as the global reserve currency. A lot of people seem to think that the use of the dollar for payments forces a lot of companies around the world to hold a bunch of dollars (or liquid dollar-denominated assets) in order to be able to settle their payments.
But is this really true? In the modern age, it’s not very hard to get dollars on the spot if you need them. If an Indian bank wants to make a payment to a Chinese bank, it’s not too hard for the Indian bank to just go to the international currency market and swap some rupees for dollars and hand them to the Chinese bank, who can easily go right back to the currency market and swap the dollars for yuan. Nobody in this story is really holding dollars for very long. So payments that are settled and denominated in dollars don’t seem like they create much demand for dollars in this day and age.
In fact, before the recent Trump-induced drop in the dollar, the U.S. currency had actually gained in strength since the Russia sanctions sent countries in search of alternative payment systems:
“Not much” dependence of dollar reserves on dollar payments doesn’t mean “zero”, of course. In March 2020 when the Covid panic hit, there was such a disruption in the currency market that for a very short while it became hard to get enough dollars to do international payments. Banks around the world hold a few dollars (or liquid dollar-denominated assets) as a hedge against this happening to them again, which does create a little bit of demand for dollars.
This is why the proliferation of non-dollar payment systems still might represent a kind of preparatory stage for countries around the world to dump the dollar. If you don’t have to go through dollar swaps in order to make payments, you don’t even have to think about whether the sudden lack of dollars in your country’s domestic financial system will disrupt your financial plumbing.
And if a country like China were preparing to try to dethrone the dollar as the reserve currency, it would probably start off with replacing the dollar in its payments systems, simply because it’s easy and relatively non-disruptive to do so. Which is why a lot of people are talking about China’s yuan-based payments as part of an attempt to “dethrone the dollar”.
The “yuan replaces the dollar” scenario
This brings us to the question of whether China is preparing to have the yuan replace the dollar as the world’s reserve currency.
Besides shifting toward yuan-denominated payments, China is also stocking up on a lot of gold. Here’s The Kobeissi Letter:
China continues to stockpile gold behind the scenes…China acquired +10 tonnes of gold in November, ~11 times more than officially reported by the central bank, according to Goldman Sachs estimates…Similarly, in September, estimated purchases reached +15 tonnes, or 10 times more than officially reported…Furthermore, China officially bought an additional 0.9 tonnes in December, pushing the total gold reserves to a record 2,306 tonnes…This also marked the 14th consecutive monthly purchase…Assuming official purchases were 10% of what China is actually buying, this suggests China acquired +270 tonnes of physical gold in 2025.
For now, that looks like part of the general shift toward global financial anarchy. But it could also indicate that China is preparing to replace the dollar-based global system with one based on its own currency.
There would actually be precedent for this. In the early 20th century, the global reserve currency shifted from the British pound to the U.S. dollar. Chitu, Eichengreen, and Mehl (2012) show that this mostly happened before 1929. A big driver was World War I, where the UK was a big borrower and the U.S. was a big lender. This resulted in a big flow of gold from the UK to the U.S. That flow intensified during the Depression and then in World War 2. After the war, the dollar had completely replaced the pound as the reserve currency, as formalized by the Bretton Woods agreement. This coincided with the U.S. owning up to three quarters of the world’s gold.
So if the world goes through a transitory period of financial anarchy, in which the dollar is temporarily replaced by gold, China might conceivably stabilize things by buying up much of the world’s gold and using this to make the yuan the reserve currency — if everyone uses gold and China owns the gold, it’s easier to convince the world that the yuan is as good as gold. China’s vast economic heft would, of course, be another powerful argument.
One problem with this theory, however, is that China has shown absolutely no sign of wanting to do this. In fact, they’ve recently been intervening to make their currency cheaper, which requires selling yuan:
This is almost certainly being done as a way to pump up Chinese exports. China is still struggling with a real estate bust, and the government has decided that exports are a way to cushion the impact on the real economy. But the WSJ’s Peter Landers reports that some Chinese people are having second thoughts about the weak yuan:
Several influential [Chinese] economists have recently argued that a meaningful strengthening of the yuan would turbocharge consumption and get China out of its economic doldrums…Liu Shijin, a longtime top economic adviser to the government, said in a speech this month that the U.K. and U.S. also started out as primarily manufacturing powers with puny currencies but eventually matured beyond that stage…
“We should aim for a basic balance between imports and exports” and push for a strong, globally used currency, Liu said…“Chinese consumers can use the same amount of renminbi to enjoy more high-quality, affordable international products, thereby truly realizing the goal of becoming a strong consumer nation,” he said…His comments echoed those of a former People’s Bank of China official, Sheng Songcheng, who said in November that the correct exchange rate to balance the purchasing power of Chinese and American consumers might be as strong as five or even four yuan to the dollar instead of seven today…
Such views are spreading widely among economists in China but haven’t become official doctrine[.]
Landers suggests that a stronger yuan and a weaker dollar might help the U.S. revitalize its manufacturing industry, by reducing the trade deficit. Trump might embrace that idea. But Paul Krugman is very skeptical that this will help much:
Any way I cut it, the dollar’s reserve currency status is only part of the explanation of U.S. trade deficits. Even more important, trade deficits account for only a small fraction of the decline in manufacturing as a share of our economy…Many people assert that the answer is the dollar’s role as the preeminent reserve currency. But as I tried to argue…this story doesn’t hold up when you look at it closely…[T]rade deficits are, in fact, responsible for only a fairly small fraction of the long-run decline in the manufacturing share…
Germany’s surpluses are much larger as a share of its own GDP than China’s. Yet Germany has also seen a huge long-term decline in the manufacturing share of employment…If Germany’s huge trade surpluses haven’t been enough to avoid a big shift away from manufacturing, even ending U.S. trade deficits (which Trump’s tariffs won’t achieve) wouldn’t make us a manufacturing-centric economy again…
Last year the U.S. ran a manufactures trade deficit of around 4 percent of GDP. Suppose we assume that this deficit subtracted an equal amount from spending on U.S. manufactured goods. In that case what would happen if we somehow eliminated that deficit?…Well, it would raise the share of manufacturing in GDP — currently 10 percent — by less than 4 percentage points, because manufacturing firms buy a lot of services. A rough estimate is that manufacturing value-added would rise by around 60 percent of the change in sales, or 2.5 percentage points, implying that the manufacturing sector would be around a quarter larger than it is[.]
History also doesn’t offer much encouragement here. The UK’s loss of the reserve currency during the World Wars didn’t revitalize its manufacturing sector at all; in fact, the UK became a manufacturing midget, and runs chronic trade deficits driven by huge imports of manufactured goods.
So while the shift to a China-centric global financial system would probably be good for regular Chinese people, it would probably not do much to reindustrialize America. If we want that to happen, we should look to industrial policy rather than to currency policy.
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