Manufacturing Went South
Excellent piece by Gary Winslett in the Washington Post. As I pointed out in my piece on Manufacturing and Trade, the US is a manufacturing powerhouse. So why did the rust belt rust? Because manufacturing went South.
The Rust Belt’s manufacturing decline isn’t primarily about jobs going to Mexico. It’s about jobs going to Alabama, South Carolina, Georgia and Tennessee…In 1970, the Rust Belt was responsible for nearly half of all manufacturing exports while the South produced less than a quarter. Today, the roles are reversed, it is the Rust Belt that hosts less than one-fourth of all manufactured exports and the South that exports twice what the Rust Belt does.
Why the move? Better policies:
Economic research suggests that labor conflict drove much of the decline of the Rust Belt. Right-to-work laws in the South, by contrast, created more operational flexibility and attracted capital. The average unionization rate in the Rust Belt is 13.3 percent; in the South, it’s 4.3 percent. Southern states’ political leaders are quite open about how they see right-to-work as foundational to their competitiveness.
But that’s far from the only factor. The South offers cheaper electricity, a critical input for energy-intensive manufacturing. Ten states in the South have industrial electricity rates under 8 cents per kilowatt-hour; zero states in the Rust Belt do. Ohio has some of the country’s most restrictive wind-energy setback regulations. You know who doesn’t? Texas.
Despite the economic growth, Southern states have built so much housing that they kept costs from becoming unaffordable. Last year, both North Carolina and South Carolina each built more than four times as much new housing per capita as Massachusetts, according to U.S. census data. Florida, Georgia, Texas, Tennessee, South Carolina and North Carolina, all built more housing per capita than all of Illinois, Ohio, Michigan, Pennsylvania, California, New York and Massachusetts. That is not just a 2024 dynamic. That is true for every single year going all the way back to 1993. Comparatively low-cost housing makes it easier to attract and retain workers, which further attracts capital, which adds yet more investment and jobs, and the virtuous cycle spins upward.
…Immigration helps a lot, as well. More immigrants live in the South than any other region of the country. The region with the fewest immigrants? The Midwest. Immigrants promote growth, makes the workforce more robust, and create the goods and services that support manufacturing.
Right-to-work laws, cheap energy, affordable housing, low-cost land, fast permitting, low taxes, immigration. That’s a powerful combination…
Neither party wants to face these realities. The Republicans are mired in victimology and don’t see that the South’s success is built on exporting and immigration, both of which they are cutting. The Democrats don’t want to acknowledge right to work laws, cheap energy and low taxes.
Both parties prefer simple villains, whether it’s China or greedy corporations. But what’s needed isn’t more warm fuzzies about the way things used to be or globalization scapegoating. It is a clear-eyed approach that understands why companies choose Alabama over Ohio and that embraces the choices made by Southern states. That means leaning into globalization, right-to-work, all-of-the-above energy policy, permitting reform, immigration and low taxes. America’s economic future depends on embracing this reality rather than in indulging in turn-back-the-clock fictions.
Early evidence on human + Ai in accounting
Here is part of the abstract:
Using a multi-method approach, we first identify heterogeneous adoption patterns, perceived benefits, and key concerns through panel survey data from 277 accountants. We then formalize these survey-based insights using a stylized theoretical model to generate corroborating predictions. Finally, partnering with a technology firm that provides AI-based accounting software, we analyze unique field data from 79 small-and mid-sized firms, covering hundreds of thousands of transactions. We document significant productivity gains among AI adopters, including a 55% increase in weekly client support and a reallocation of approximately 8.5% of accountant time from routine data entry toward high-value tasks such as business communication and quality assurance. AI usage further corresponds to improved financial reporting quality, evidenced by a 12% increase in general ledger granularity and a 7.5-day reduction in monthly close time.
By Jung Ho Choi and Chloe Xie, via the excellent Kevin Lewis.
Noah on cultural stagnation
Fast-forward to the 2020s, and the artistic community has been largely disintermediated. If you want to be a successful commercial creator, the way to get started now is not first to struggle to prove yourself in the closed and cosseted artistic community — it’s to simply throw your work up online and see if it goes viral. If it does, you’re in.
This means that any creator whose goal is to sell out can do so without spending years making art that impresses artists. Of course, some creators still just intrinsically want to impress other artists. But if the money-motivated creators have left the community, there are just fewer people in that community left to impress. It becomes more and more niche and hipster. And there are fewer crossovers from the art world to mass culture, because the people left in the art world are the ones who don’t really care if they get famous and rich.
…But that’s the basic principle — if you want more novelty, I think you’ve got to make the artists work for each other more. How you do that, in a world where technology has made artists irrelevant as gatekeepers, is not something I have a concrete answer for. We may simply be in for a long period of artistic stagnation in America.
To sum up, I sort of believe that cultural stagnation is real, but I also think the root of the problem is probably technological — and therefore very hard to expunge.
Here is the full essay. One question is how much stagnation we have, and I will not address that at this moment. Another is what is the source of that degree of stagnation. I am perhaps more inclined to blame the current quality of audience taste today. In the past, audience taste often did very well, for instance in supporting the Beatles or Motown, or many earlier Hollywood movies, even when critical or artistic taste was mixed. Mozart too was popular with his audiences. Still Noah’s hypothesis is an interesting one.
Addendum: Alex and I wrote a paper on closely related issues, An Economic Theory of Avant-Garde and Popular Art.
My honorary degree at Francisco Marroquin
I am greatly honored to have received an honorary professorship in social science at the Universidad Francisco Marroquin, in Guatemala City (there are branches in Panama and Madrid as well).
The Guatemala City branch is an excellent, highly selective school with about 3,000 students. It is also explicitly classical liberal in orientation. One interesting feature of the place is that it has kept this emphasis since its founding in 1971, a rarity for non-profits, which often suffer from mission drift or Conquest’s Second Law. You even can see an Atlas Shrugged sculpture attached to one of the main buildings. Many rooms and university services are named after classical liberal heroes, for instance Michael Polanyi. If a photo is taken, instead of saying “cheese,” people say “Mises.”
The students have excellent English and are very attentive. The graduation ceremony I attended was beautiful and heartfelt, not ironic and I did not see people looking down at their phones.
The on-campus museum of Guatemalan textiles is first-rate and very well presented. Their campus is perhaps the single nicest spot in Guatemala City.
Might it be the best university in Central America?
If you ever have the chance to visit or teach at Marroquin, I definitely recommend it. I very much thank my hosts for a wonderful few days. They even arranged genuine and truly tasty chicken tamales for me.
Wednesday assorted links
Glow in the Dark Flowers!
I love these glow-in-the-dark petunias. Aside from the novelty, they speak to science and progress! The petunias were genetically modified to incorporate genes from a bioluminescent mushroom.
Should gdp include defense spending?
Maybe not, isn’t that a form of double counting? After all, defense spending is there to enable the production of other goods and services, it is not useful per se. Chandler S. Reilly and Vincent Geloso recalculate the history of U.S. economic growth using this new method:
In fact, our corrections applied to the entire period from 1790 to today show new key facts. Our corrected GDP series reveals that the first half of the 20th century, rather than showcasing robust growth, emerges as a prolonged period of stagnation interrupted by crises. The economy, which had grown at an exceptional pace from 1865 to 1913, gradually deviated from this path between 1913 and 1950. Many claim that this deviation only occurred during the Great Depression and that it ended during the Thirty Glorious years after. But our corrected series show that America never returned to its exceptional growth path.
Finally, pairing our corrected GDP with historical income distribution (i.e., inequality) data reshapes the narrative of the “Great Leveling” during the mid-twentieth century and particularly during wartime years. The leveling, traditionally celebrated as a period of diminishing inequality, actually coincided with declining living standards for everyone — even the wealthy.
Recommended, read it here, of real importance.
How will AI change what it means to be human?
That is the topic of my latest piece at The Free Press, co-authored with Avital Balwit. Here is a segment written by Avital:
I was Claude pre-Claude. I once prided myself on how quickly I could write well. Memos, strategy documents, talking points—you name it. I could churn out 2,000 words an hour.
That skill is now obsolete. I can still write better than the models, but their speed far outmatches mine. And I know their quality will soon catch up—and then surpass—my own.
Every time I use Claude to do a task at work, I feel conflicted. I am both impressed by our product and humbled by how easily it does what used to make me feel uniquely valuable.
It’s not just an issue at work. Claude has injected itself into my home life, too. My partner is brilliant—it’s a huge reason we are together. But now, sometimes when I have a tough question, I’ll think, Should I ask my partner, or the model? And sometimes I choose the model. It’s eerie and uncomfortable to see this tool move into a domain that used to be filled by someone I love.
And a related bit written by me:
I have a tenured job at a state university, and I am not personally worried about my future—not at age 63. But I do ask myself every day how I will stay relevant, and how I will avoid being someone who is riding off the slow decay of a system that cannot last.
It amazes me how many people do not much ponder these questions. “Oh, it hallucinates!” is the fool’s trap of 2025, I am sorry to say.
The piece is about 4,000 words and has many interesting points throughout. Note that Avital is the Chief of Staff to the CEO at Anthropic, but her views do not reflect those of her company.
Tuesday assorted links
1. “On Thursday, researchers at Carnegie Mellon University unveiled LegoGPT, an AI model that creates physically stable Lego structures from text prompts.” Link here.
2. Learn all about New York’s judges.
3. Abi Olvera on limiting U.S. traffic fatalities.
4. In defense of YIMBY estimates.
5. No mass shootings so far this year in America.
6. One account of the Conclave (NYT).
New AI and economics podcast
From Andrey Fradkin:
Seth Benzell and I have been working on a podcast about the economics of AI called Justified Posteriors, which may be of interest to you and your readers. We have episodes on topics such as the “The Simple Macroeconomics of AI” and the Anthropic Economic Index. The format is that we state our priors, read a paper, discuss it on the pod, and then update our priors.
Econ 101 is Underrated: Pharma Price Controls
Econ 101 is often dismissed as too simplistic. Yet recent events suggest that Econ 101 is underrated. Take the tariff debate: understanding that a tariff is a tax, that prices represent opportunity costs, that a bilateral trade deficit is largely meaningless, that a so-called trade “deficit” is equally a goods surplus or an investment surplus—these are Econ 101 ideas. Simple but important.
Today’s example is Trump’s Executive Order on pharmaceutical pricing. It builds on the Biden Administration’s Inflation Reduction Act, which I’ve criticized as failing the marshmallow test. Now Trump is trying to go further—threatening antitrust action and even drug delistings unless pharmaceutical firms equalize prices globally. Tyler and I explored exactly this type of policy in our Econ 101 textbook, Modern Principles of Economics.
In our chapter on price discrimination, we first show that pharmaceutical firms will want to charge different prices in different markets depending on the elasticity of demand. In order to do so, they must prevent arbitrage. Hence the opening to that chapter:
After months of investigation, police from Interpol swooped down on an international drug syndicate operating out of Antwerp, Belgium. The syndicate had been smuggling drugs from Kenya, Uganda, and Tanzania into the port of Antwerp for distribution throughout Europe. Smuggling had netted the syndicate millions of dollars in profit. The drug being smuggled? Heroin? Cocaine? No, something more valuable: Combivir. Why was Combivir, the anti-AIDS drug we introduced in Chapter 13 , being illegally smuggled from Africa to Europe when Combivir was manufactured in Europe and could be bought there legally?
The answer is that Combivir was priced at $12.50 per pill in Europe and, much closer to cost, about 50 cents per pill in Africa. Smugglers who bought Combivir in Africa and sold it in Europe could make approximately $12 per pill, and they were smuggling millions of pills. But this raises another question. Why was GlaxoSmithKline (GSK) selling Combivir at a much lower price in Africa than in Europe? Remember from Chapter 13 that GSK owned the patent on Combivir and thus has some market power over pricing. In part, GSK reduced the price of Combivir in Africa for humanitarian reasons, but lowering prices in poor countries can also increase profit. In this chapter, we explain how a firm with market power can use price discrimination—selling the same product at different prices to different customers—to increase profit.
Later in the Thinking and Problem Solving section we ask:
As we saw in this chapter, drug companies often charge much more for the same drug in the United States than in other countries. Congress often considers passing laws to make it easier to import drugs from these low-price countries (it also considers passing laws to make it illegal to import these drugs, but that’s another story).
If one of these laws passes, and it becomes effortless to buy AIDS drugs from Africa or antibiotics from Latin America—drugs that are made by the same companies and have essentially the same quality controls as the drugs here in the United States—how will drug companies change the prices they charge in Latin America and Africa? Why?
That, in essence, is the Trump policy. So what’s the likely outcome? Prices will fall in the U.S. and rise in poorer countries—but not equally. AIDS drugs, for example, save lives in Africa but generate little profit. If firms can’t prevent arbitrage, they’ll raise African prices closer to U.S. levels and lower U.S. prices only modestly.
The result is that importation will end up hurting patients in low-income countries while delivering minimal gains to Americans. Worse, by reducing pharmaceutical profits overall, it weakens incentives to develop new drugs. In fact, in the long-run U.S. consumers are better off when poorer countries pay lower prices—just as airline price discrimination makes more routes viable for both economy and first-class passengers.
The reference pricing envisaged in Trump’s EO focuses on developed countries but Dubois, Gandhi and Vasserman run the numbers in a fully-specified model and reach similar conclusions:
Using our estimates of consumer preferences, marginal costs, and bargaining parameters, we assess the impact of a counterfactual in which US pharmaceutical prices are subject to international reference pricing with respect to Canada or an average of several similar countries….Our results suggest that international reference pricing on its own is unlikely to produce dramatic savings to US consumers. Overall, reference pricing induces a substantial increase in the prices charged in reference countries but only a modest decrease in the prices charged in the US.
It’s also the case that countries that pay less for pharmaceuticals get them later than countries that pay more. Most importantly, such launch delays (and here) tend to reduce life expectancy.
Thus, Econ 101 provides a critical foundation for understanding current debates.
Beyond Econ 101, it’s worth highlighting how internally inconsistent Trump’s policies are. At the same time, as the administration is raising tariffs worldwide, it wants to greatly reduce restrictions on importing pharmaceuticals! The most charitable interpretation (steel-manning) is that the ultimate goal of the Trump approach is to boost industry profits and incentivize R&D by raising prices in other countries. But it’s hard to square that with reducing prices here. Either the investment is worth it or not. Instead of focusing on investment or efficiency, Trump frames everything as grievance and redistribution: other countries are “ripping us off,” so they must be made to pay. But the pie shrinks when you fixate on dividing it instead of growing it. Moreover, Trump’s belligerent approach is unlikely to succeed because, as with tariffs, it invites retaliation. Instead, we should be pursuing IP protections for pharmaceuticals as part of an overall free trade agreement. We did precisely this, for example, in the Australia–United States Free Trade Agreement (AUSFTA) in 2005. That type of bilateralism and negotiation is anathema to Trump, however, who sees the world in zero-sum terms. As a result, the Biden-Trump policies are likely to lead future Americans to have less access to life-saving and life-improving pharmaceuticals.
Addendum: See also many previous MR posts on pharmaceutical regulation including The US has Low Prices for Most Pharmaceuticals, Pharmaceutical Price Controls and the Marshmallow Test, Update on the supervillains and Frank Lichtenberg and the cost of saving lives through pharmaceuticals as well as many others.
What is the best age to confront AI?
Here is one extra bit from my chat with Jack Clark of Anthropic:
COWEN: For the ongoing AI revolution, what’s the worst age to be?
CLARK: Ooh.
COWEN: Say the best age is just to have been born if you’re going to live to maybe 130. If you’re very old and retired, it probably isn’t going to make you any worse off. It’ll help you in some ways.
CLARK: I feel like people who worked on AI for many years and are now in their 60s might be feeling very shortchanged because they’re like, “I love this technology. I really wanted to make this technology real, but technology is now becoming real, and I’m going to maybe miss some of the most interesting parts of it as it makes its way into the world.” I think that could be galling.
COWEN: But they can retire, right? Say I’m 40, and I did something upper middle-class but fairly routine. It feels a bit old to easily retrain. My guess is people who are 40 are the worst off in relative terms, even though they might live longer.
CLARK: You could be right. I also think that there’s some chance that the worst age to be is maybe 10 or so, because you are now computer literate, you’re sophisticated. You’re going into an education system that is needing to react to this technology. You will be using the technology in a way completely different to your education system, and it might just feel violently confusing. I see that being a really difficult time.
Worth a ponder, no matter what your age.
Mississippi schools are pretty good
…in recent years…Mississippi has become the fastest-improving school system in the country.
You read that right. Mississippi is taking names.
In 2003, only the District of Columbia had more fourth graders in the lowest achievement level on our national reading test (NAEP) than Mississippi. By 2024, only four states had fewer.
When the Urban Institute adjusted national test results for student demographics, this is where Mississippi ranked:
- Fourth grade math: 1st
- Fourth grade reading: 1st
- Eighth grade math: 1st
- Eighth grade reading: 4th
(Here is a great rundown of how the remarkable turnaround was achieved.)
…Black students in Mississippi posted the third-highest fourth grade reading scores in the nation. They walloped their counterparts in better-funded states. The average black student in Mississippi performed about 1.5 grade levels ahead of the average black student in Wisconsin. Just think about that for a moment. Wisconsin spends about 35 percent more per pupil to achieve worse results.
That is from Tim Daly at The Free Press.
Sentences to ponder
In fact, it was the Obama administration that paused funding for high-risk GoF studies in 2014. The ban was lifted by none other than Donald Trump in 2017. At the time, outlets like Scientific American and Science covered the decision, in articles that quoted scientists talking about what could go wrong. Remind yourself of this the next time you see rightists trumpeting some headline showing the media being wrong about something.
That is from Richard Hanania’s Substack.
Who wants impartial news?
The subtitle of the piece is Investigating Determinants of Preferences for Impartiality in 40 Countries, and the authors are Camila Mont’Alverne, Amy Ross A. Arguedas, Sumitra Badrinathan, Benjamin Toff, Richard Fletcher, and Rasmus Kleis Nielsen. Here is part of the abstract:
This article draws on survey data across 40 markets to investigate the factors shaping audience preferences for impartial news. Although most express a preference for impartial news, there are several overlapping groups of people who, probably for different reasons, are more likely to prefer news that shares their point of view: (a) the ideological and politically engaged; (b) young people, especially those who rely mainly on social media for news; (c) women; and (d) less socioeconomically advantaged groups. We find systematic patterns across countries in preferences for alternatives to impartial news with greater support in places where people use more different sources of news and that are ranked lower in terms of quality of their democracies.
Via Glenn Mercer.