Category: Current Affairs
The American economy is showing its flexibility
That is the theme of my recent Free Press column on AI. Excerpt:
The more quickly the world changes, the more the quality of our capital markets matters. And the world is indeed changing quickly: AI will soon be present in virtually every job. Many of us already use it informally for legal and medical advice, research, and even companionship.
And to close:
From the point of view of an investor, it matters whether or not we’re in an AI bubble. But if you are seeking to understand long-term social and economic trends, the bubble question is primarily a matter of short-term interest and timing. It will not decide where the economy is headed long-term.
Instead, what we are seeing is that America, at the drop of a hat, can turn on a dime and reallocate capital on an unparalleled scale, to our great and enduring benefit. Unless you were around to witness World War II, none of us have seen anything like this before. Do not expect the ride to be smooth or predictable, but feel free to sit back and enjoy: This is history in the making.
By some estimates, at least three-quarters of the world’s compute is in the United States.
How Cultural Diversity Drives Innovation
It is hardly possible to overrate the value…of placing human beings in contact with persons dissimilar to themselves, and with modes of thought and action unlike those with which they are familiar….Such communication has always been, and is peculiarly in the present age, one of the primary sources of progress.
Mill had in mind the civilizing force of commerce but the idea is far more general. My colleague Jonathan Schulz with Max Posch and Joe Henrich have a novel and important test of the idea in a paper forthcoming in the JPE: How Cultural Diversity Drives Innovation (WP; SSRN). They show that the more diverse a county, as measured by surnames, the more ideas and the more novel ideas were patented in that county.
We show that innovation in U.S. counties from 1850 to 1940 was propelled by shifts in the local social structure, as captured using the diversity of surnames. Leveraging quasi-random variation in counties’ surnames—stemming from the interplay between historical fluctuations in immigration and local factors that attract immigrants—we find that more diverse social structures increased both the quantity and quality of patents, likely because they spurred interactions among individuals with different skills and perspectives. The results suggest that the free flow of information between diverse minds drives innovation and contributed to the emergence of the U.S. as a global innovation hub.
David Brooks on the New Right
Excellent David Brooks column on how the right has adopted the theories and tools of the left:
As so many have noted, MAGA is identity politics for white people. It turns out that identity politics is more effective when your group is in the majority.
…Last year, a writer named James Lindsay cribbed language from “The Communist Manifesto,” changed its valences so that they were right wing and submitted it to a conservative publication called The American Reformer. The editors, unaware of the provenance, were happy to print it. When the hoax was revealed, they were still happy! The right is now eager to embrace the ideas that led to tyranny, the gulag and Mao’s Cultural Revolution. Interestingly, the right didn’t take the leftist ideas that were intended to build something; they took just the ideas intended to destroy.
Read the whole thing.
Time to Privatize U.S. Air Traffic Control—Copy Canada’s Model
Yesterday, the FAA grounded flights at Reagan (DCA) because there weren’t enough air traffic controllers. By mid‑afternoon, thousands of flights were delayed nationwide. The same thing is happening at major airports across the country.
The proximate cause is that the FAA is short about ~3,500 controllers, forcing the rest to work mandatory overtime, six days a week, and now, during the shutdown, sometimes without pay! The more fundamental problem is that we have a poorly incentivized system. It’s absurd that a mission‑critical service is financed by annual appropriations subject to political failure. We need to remove the politics.
Canada fixed this in 1996 by spinning off air navigation services to NAV CANADA, a private, non‑profit utility funded by user fees, not taxes. Safety regulation stayed with the government; operations moved to a professionally governed, bond‑financed utility with multi‑year budgets. NAV Canada has been instrumental in moving Canada to more accurate and safer satellite-based navigation, rather than relying on ground-based radar as in the US.
NAV CANADA – in conjunction with the United Kingdom’s NATS – was the first in the world to deploy space-based ADS-B, by implementing it in 2019 over the North Atlantic, the world’s busiest oceanic airspace.
NAV CANADA was also the first air navigation service provider worldwide to implement space-based ADS-B in its domestic airspace.
Meanwhile, America’s NextGen has delivered a fraction of promised benefits, years late and over budget. As the Office of Inspector General reports:
Lengthy delays and cost growth have been a recurring feature of FAA’s modernization efforts through the course of NextGen’s over 20-year lifespan. FAA faced significant challenges throughout NextGen’s development and implementation phases that resulted in delaying or reducing benefits and delivering fewer capabilities than expected. While NextGen programs and capabilities have delivered some benefits in the form of more efficient air traffic management and reduced flight delays and airline operating costs, as of December 2024, FAA had achieved only about 16 percent of NextGen’s total expected benefits.
Airlines bleed money when planes idle, gates clog, and crews time out. The airlines have every reason to demand reliability, capacity, and modernization—Congress does not. Thus, fund air traffic control with user fees paid by those who depend on performance. Put the airline executives on the board of the non-profit, as in Canada. Give them the power to tax themselves to benefit themselves.
Align power with incentives and performance will follow.
Noah Smith has economic ideas for Japan
Excerpt from the opening:
Fortunately, Japan is in an OK macroeconomic situation right now. Government debt, the country’s thorniest problem, is actually falling as a percent of GDP, thanks in part to higher inflation and in part to rising corporate profits and tax revenues…
The deflation problem that bedeviled Japan for decades has finally been defeated. And at the same time, unemployment in Japan remains very low…
This means that Takaichi and her cabinet don’t need to focus as much energy and attention on macroeconomics, as Abe did. There is no need for further stimulus, monetary or fiscal. Instead, Takaichi is free to concentrate on improving Japan’s underlying economic model, in order to promote productivity and growth.
Noah has six specific ideas of note, starting with improving capital markets. Here is the whole post.
On a possible China deal
Tyler Cowen, Free Press columnist and Holbert L. Harris Chair of Economics at George Mason University:
What do I want from a U.S. trade deal with China? Most of all, stability and predictability. America has a great deal it needs to do to “deal with China.” That might include boosting our own supplies of rare-earth elements, maintaining our lead in generative AI, and making sure that enough high-quality chips come from somewhere other than Taiwan.
Vigorous action is required on all these fronts. While we are at the wish-making stage, how about better fiscal policies for long-term sustainability, improved science funding, a more rapid and effective military procurement system, and an education system with fewer holes?
But here is the thing—none of those will be accomplished through a trade deal with China. Success or failure on those fronts will depend solely on ourselves. The purpose of a trade deal, at this point, should simply be to put U.S.-China relations back on a normal footing. We are not going to stop significant supplies of dangerous drugs from entering the United States, no matter what China does or does not agree to. We are not going to end China’s trade surplus with us, nor should we fear that trade surplus. And we are not going to end the ability of the Chinese government to have some influence over the real value of its currency, just as we have that same ability.
We could and should turn the drama down a notch. Whether that is what you will get from this episode in the reality TV season, however, remains to be seen.
Here are numerous other contributions, including from Dan Wang and Niall Ferguson.
Trump and the Americas
That is the topic of my latest Free Press column, here is one excerpt:
And in this system, where is the dominant American sphere of influence likely to be? North America and Latin America. These regions are removed from the rest of the world by large oceans; they share time zones; and there are plenty of Latin Americans in the United States, creating linguistic, personal, and business ties. America’s connections with Canada are even more obvious. China may buy lots of commodities from Latin American countries, but it is unlikely ever to have comparably close connections, if only for reasons of language, distance, and culture.
And this:
Let’s start with Argentina. Milei is trying to bring freer markets and fiscal responsibility to Argentina. If he succeeds, many in the region will copy his formulas. But if he fails, free markets might end up discredited. So, in the Trumpian view, it is very important to throw him a lifeline. Trump sees the United States’ $20 billion economic support package to Argentina not just as a “bailout,” but as an attempt to shape the entire ideological direction of South America.
The article offers many further specific points.
Agustín Etchebarne on Milei and the election
Passed along to me by the excellent Gonzalo Schwarz, I will not double indent:
“Against all odds, Javier Milei achieved a major national victory, surpassing the expectations of polls that had predicted a technical tie, and doing so in a context where markets were deeply pessimistic and heavily dollarized.
Despite having most of the media against him, the president obtained a resounding 41% of the vote, compared with 24% for Kirchnerism and 9% for the more moderate Peronists.
In total, 75% of Argentines rejected a return to populism and endorsed the path of structural reforms and economic openness.This result anticipates a day of strong market recovery: Argentine bonds and stocks are expected to rise sharply, interest rates in pesos to fall, and the dollar to drop significantly on Monday. The outlook points toward an economic recovery.
Even the U.S. Treasury—which invested in peso-denominated instruments under the management of Scott Bessent—will likely make a profit, as the appreciation of the peso will increase the value of those assets.
The message from the ballot box is clear: Argentines support a president who aims to move toward a modern capitalist economy, with the goal of placing the country among those with the highest levels of economic freedom in the world.
Election Results
• La Libertad Avanza swept the country with 40.7% of the vote, compared with 32% for Fuerza Patria (the Kirchnerist coalition), 7.1% for Provincias Unidas—which failed to win in any district—and 4.6% for the six local ruling parties.
• Milei gained 10 points compared with 2023 (when he obtained 30%), while Kirchnerism fell from 36% to 24%.
• LLA won in 16 districts, standing out in Buenos Aires City (Senate) and Mendoza with more than 50%, in Santa Fe and Córdoba with over 40%, and especially in Buenos Aires Province, where Santilli overturned a 13-point deficit from the September 7 election and won with 41.5%.
• Voters also reaffirmed the strategic alliance with the United States, which is now the most explicit in recent history.
• Unlike what happened in 2017 with Macri—when a similar victory was quickly followed by a loss of support—this time the outlook suggests a sustained economic recovery, driven by lower interest rates and accelerated investment.
New Balance of Power in Congress
• In the Chamber of Deputies (house of representatives), the LLA + PRO alliance becomes the largest bloc with 110 seats, followed by Fuerza Patria (the Kirchnerist coalition) + the Left with 100 and the dialogist bloc with 47.
The government will need to negotiate with 19 of the 47 dialogists to pass legislation (127 votes for a simple majority), but it already holds a guaranteed veto power with 85 deputies.
• In the Senate, Fuerza Patria (the Kirchnerist coalition) remains the largest minority, though it loses 7 seats and drops to 26; LLA and PRO reach 24 senators, obtaining the one-third threshold needed to block initiatives.
The dialogists, with 22 seats, retain negotiating power: the government must reach agreements with 13 senators for a quorum and 12 for a simple majority.
Outlook and Political Message
Milei’s post-victory speech was conciliatory and strategic.
He renewed his call for governors and rational political forces to discuss a package of key structural reforms—labor, pension, and tax—and invited them to revive the May Pact as a meeting point for a new institutional contract.
La Libertad Avanza thus emerges stronger than ever, positioned to build the majorities needed to advance the comprehensive modernization of the state and the economy, consolidating a new stage of growth, stability, and individual freedom.”
Here is the author, here is Gonzalo Schwarz.
The evolution of Albanian AI governance
Albania’s AI-generated minister, Diella, is “pregnant,” Prime Minister Edi Rama has announced. He revealed plans to create “83 children”, or assistants, one for each Socialist Party member of parliament.
“We took quite a risk today with Diella here and we did very well. So for the first time Diella is pregnant and with 83 children,” he said at the Global Dialogue (BGD) in Berlin. Rama said the “children,” or assistants, will record everything that happens in parliament and keep legislators informed about discussions or events they miss.
“Each one…will serve as an assistant for them who will participate in parliamentary sessions, and will keep a record of everything that happens and will suggest members of parliament. These children will have the knowledge of their mother,” Rama said.
Here is the full story, bizarre throughout. At least you cannot say they are anti-natalist.
Are new data centers boosting electricity prices?
But a new study from researchers at Lawrence Berkeley National Laboratory and the consulting group Brattle suggests that, counterintuitively, more electricity demand can actually lower prices. Between 2019 and 2024, the researchers calculated, states with spikes in electricity demand saw lower prices overall. Instead, they found that the biggest factors behind rising rates were the cost of poles, wires and other electrical equipment — as well as the cost of safeguarding that infrastructure against future disasters.
“It’s contrary to what we’re seeing in the headlines today,” said Ryan Hledik, principal at Brattle and a member of the research team. “This is a much more nuanced issue than just, ‘We have a new data center, so rates will go up.’”
North Dakota, for example, which experienced an almost 40 percent increase in electricity demand thanks in part to an explosion of data centers, saw inflation-adjusted prices fall by around 3 cents per kilowatt-hour. Virginia, one of the country’s data center hubs, had a 14 percent increase in demand and a price drop of 1 cent per kilowatt-hour. California, on the other hand, which lost a few percentage points in demand, saw prices rise by more than 6 cents per kilowatt-hour.
Here is the full story, via Cliff Winston.
Are the ACA exchanges unraveling?
After all, that is what economists predicted if the mandate was not tightly enforced. Here is the latest reprt:
Premiums for the most popular types of plans sold on the federal health insurance marketplace Healthcare.gov will spike on average by 30 percent next year, according to final rates approved by the Centers for Medicare and Medicaid Services and shown in documents reviewed by The Washington Post.
The higher prices — affecting up to 17 million Americans who buy coverage on the federal marketplace — reflect the largest annual premium increases by far in recent years.
Here is the full article.
Harvard graduate admissions
The Faculty of Arts and Sciences slashed the number of Ph.D. student admissions slots for the Science division by more than 75 percent and for the Arts & Humanities division by about 60 percent for the next two years.
The scale of reductions in the Social Science division was not immediately clear, though several departments in the division experienced decreases over the coming two years ranging from 50 percent to 70 percent.
The reductions — detailed by five faculty members and in emails obtained by The Crimson — stipulate smaller Ph.D. admissions quotas across dozens of departments. Departments were allowed to choose how they would allocate their limited slots across the next two years.
Here is the full article, via Chris Brunet.
Words of wisdom
Among these changes, the most underrated is not misinformation or kooky conspiracy theories or even populism per se — it’s relentless negativity. One thing that we’ve learned from revealed preferences on the internet is that negativity-inflected stories perform better…
The impact of ultra-negativity is symmetrical in the sense that both sides do it, but it’s asymmetrical in the sense that conservatives outnumber progressives. In practice, oscillating extremism results in a right-wing authoritarian regime, not a left-wing one.
That is from the gated Matt Yglesias. The important thing is to keep a positive, constructive attitude toward what is possible. Content creators who do not do that, no matter what their professed views, are supporting the darker sides of MAGA.
So keep up the good work people!
How the pandemic has changed the world
From Patrick Collison on Twitter:
Maybe a very prosaic observation, but I’ve been reflecting on just how much the pandemic changed the world in ways that are completely unrelated to the pandemic itself. I think I’ve underestimated it ’till now.
In a recent interview, I was struck by the comment that so many of the shops that we associate with the best of France—the poissonneries and the fromageries—closed during the pandemic, to be replaced by take-out pizza shops and the like.
College professors almost uniformly describe big changes in student behavior: lecture attendance and willingness of students to complete reading assignments are both way down.
A UK government official recently told me that British economic statistics have become much less reliable since the pandemic: data on trade, employment, and population is suspect. (The true GDP per capita figures are probably worse than what is indicated by the published data, since the 2021 census is believed to be an undercount.)
In the West, there are far fewer bustling workplaces than there used to be. In recent conversation with a well-traveled friend, he bemoaned how so many cities—places like Madrid, Buenos Aires, and Bali—have lost so much of their erstwhile vibrant nightlife.
Immigration accelerated enormously across many countries, including the US, the UK, Canada, and Australia.
In China, I hear descriptions of how fear, caution, and conservatism have persisted since the COVID lockdowns. (And Western travel to China remains massively depressed.)
Lots of the changes are neutral, or even good. Retail participation in the US stock market almost doubled overnight, say, and has persisted at that elevated rate. Firm creation in the US increased by around 50%, which is probably a very good thing.
Overall, the number of time series (either literal or figurative) that jumped discontinuously during COVID and then didn’t return to baseline is just very striking.
Which are the best historical analogs? Are there any apart from major wars?
I want to read this book!
The median voter model, or the Becker pressure group model?
Or perhaps a game-theoretic model between the President and the Supreme Court? From the WSJ:
President Trump in recent weeks has exempted dozens of products from his so-called reciprocal tariffs and offered to carve out hundreds more goods from farm products to airplane parts when countries strike trade deals with the U.S.
The offer to exempt more products from tariffs reflects a growing sentiment among administration officials that the U.S. should lower levies on goods that it doesn’t domestically produce, say people familiar with administration planning. That notion “has been emerging over time” within the administration, said Everett Eissenstat, deputy director of the National Economic Council in Trump’s first term. “There is definitely that recognition.”
The move comes ahead of a Supreme Court hearing in early November on the reciprocal tariffs—a case that could force the administration to pay back many of the levies if it loses in court. The White House, Commerce Department and U.S. Trade Representative’s office didn’t respond to requests for comment.
I suppose that is good news, but of course it can introduce more cross-product and cross-nation distortions as well.