Hmm, Well, Yes, Expanding Government-Funded Addiction Treatment Does Count As GDP Growth

And more from this week...

In this week’s roundup: the problem with economic piety, a podcast with FTC chair Lina Khan, and even a bonus trade-and-tariff reading list.

But first, a brief announcement.

As you may have seen, American Compass announced on Wednesday the forthcoming launch of Commonplace, a magazine that will focus on what matters in America: the economic, political, and cultural concerns shaping the trajectory of the American experiment and the experiences of average Americans.

Why are doing this? For the same reason we launched American Compass: To do the work of revitalizing conservatism, which legacy institutions have proved themselves incapable of. The conservative media ecosystem faces many of the same challenges that its policy world faced five years ago, still dominated by a set of institutions dedicated to replaying the greatest hits of the 1980s long after the nation had, with good reason, moved on. Legacy publications like the Wall Street Journal’s opinion page and National Review continue to pine for a return of the Bush-Cheney years while new entrants like The Dispatch, The Bulwark, and Fusion distinguish themselves by pining extra hard for a return of the Bush-Cheney years. No home exists for the writers who are debating and developing the future shape of conservatism, and for the readers who want to participate in that process.

Commonplace will be the flagship publication of the coalition now anchoring the right-of-center in American politics. I’m not going to do that thing where I automatically add you all to its mailing list against your will, but I am going to encourage you to go follow @commonplc and subscribe for free to receive launch updates and must-reads. If you enjoy Understanding America, you’ll want to follow and read Commonplace.

Announcement over.

Your one thing to read this week is a New York Times long-read: Opioids Ravaged a Kentucky Town. Then Rehab Became Its Business.

In many ways the story speaks for itself. But the sheer dystopia of it all warrants at least some mention. Here’s a community in eastern Kentucky so decimated by drug addiction that its leading industry is drug addiction treatment. The economic activity is not mediated by a market, because the users have no way to pay for the services they consume. So instead government programs facilitate it, in the process creating what is in effect a company town. The result more closely represents a military base than a functional liberal society.

Unfortunately, this is the logical endpoint of deindustrialization, as communities lose both the opportunity and capacity to produce anything of value for the rest of the world. In The Once and Future Worker, I wrote:

What happens to a community whose economy does not produce anything that the world wants? It has one export that it can always fall back on: need. Every resident enrolled in a program of government benefits entitles the community to more goods and services from the outside world. For instance, a prominent criticism of recent proposals to cut food stamp benefits has been that it would harm not just the individual recipients but also the local economies reliant on the outside income. The U.S. Department of Agriculture promotes food stamp enrollment as a “win-win for local retailers and communities. Each $5 in new SNAP benefits generates almost twice that amount in economic activity for the community.” Food stamp recipients, in effect, are the community’s “exporters.”

Some speak of local health care systems as bright spots in depressed regions, but these industries usually indicate the government’s commitment to health care as the surest way to generate hard currency for these economies. When the retiree on the front porch laments to a reporter, “When I was young we had dances at the community centers. Now they have nothing. No work around here unless you are a nurse, or a doctor, or lawyer,” the list is not of especially productive professions, just those for which some government will pay. A common sight in the most dilapidated town is a sparkling occupational therapy office. The people working there are selling to the nation’s taxpayers their care of the local residents on disability.

The New York Times published a fascinating set of maps back in 2018, shading each U.S. county by the share of its personal income received via government transfers. The 1979 version of the map was a nice peachy-pink, showing 10 to 20 percent dependence on transfers across most of the nation.

The 2014 version, though, was covered in dark red splotches where 40 or even 50+ percent of income now came from government. Eastern Kentucky was purple.

I used to include these maps in my public lectures, showing one fading to the other alongside a rising bar representing GDP . This is what “growing the economic pie” and then having “the winners compensate the losers” looks like. It’s what economists and policymakers said they were trying to do, and what they in fact did. I like to call it Economic Piety. Everyone gets more pie, and who doesn’t like pie?

But is it success or failure to deliver growth and rising living standards through the spreading of ever larger and darker splotches? According to economists, and many of the Americans living in the still-light-beige enclaves on the coasts, it is success, or at least the best possible model, and a direction to push further. Increasingly, our politics is driven by the fact that most other Americans disagree.

BONUS LINK: In September, the Economic Innovation Group did an excellent report updating this county-by-county view.

THIS WEEK AT AMERICAN COMPASS

Trump’s Agencies After Chevron: “Although Loper Bright curtails agencies’ authority when it comes to the law, agencies remain free to change regulatory policy in accordance with the president’s objectives,” explains Catholic University law professor Chad Squitieri. “That means Trump’s agencies will have wide latitude to change regulatory policy in Washington.”

American Compass policy advisor Mark DiPlacido debates National Review’s Dominic Pino on free trade at the 2024 Freedom & Progress Conference. Pino begins his opening remarks with “countries don’t trade with each other, people trade with each other” and concludes his final comment with “if Trump wants to make a free trade zone... and exclude the countries that we don’t like, I'm all for it,” so that’s how things went for him. But the journey between those two points is an interesting one, and represents well the decline of market fundamentalism on the Right.

And, on the American Compass Podcast this week, Federal Trade Commission chairwoman Lina Khan joins me for a discussion that goes beyond the details of antitrust enforcement to the big questions of what afflicts our economy, why we care about competition, and what role public policy should play.

WHAT ELSE SHOULD YOU BE READING?

New Numbers Show Falling Standards in American High Schools | The Economist

High school graduation rates have risen dramatically in the United States, from 74% in 2007 to 86% last year. But over the same period, objective measures of academic attainment have stayed flat or fallen. In urban districts like the one highlighted by The Economist, the apparent gains are plainly fraudulent. For all intents and purposes, then, we still have more than one-quarter of young Americans reaching adulthood without attaining a meaningful high school diploma. That’s higher than the share of young Americans who earn a bachelor’s degree and move into a job classified as typically requiring one.

Bonus Link: Meanwhile, The Bottom Is Falling Out for U.S. Test Scores, especially for lower performing students, especially since the pandemic.

The Secret Weapon Helping Businesses Get Results From AI: Humans | Christopher Mims, Wall Street Journal

The technologist-philosopher-kings continue to speculate about AI conquering humanity in the coming months, but Mims went out into the world to see how real businesses are deploying real technology in the real world and found the story largely repeats past waves of innovation. “What seems to be happening, at least among the half-dozen companies I spoke with,” he writes, “is something economists have observed in countless tech revolutions past. A new form of automation is simultaneously eradicating some jobs, and rapidly creating new ones.” And he quotes Microsoft CEO Satya Nadella, “What Lean did for manufacturing, AI will do for knowledge work.” Sounds good to me.

The GOP’s 2025 Reconciliation Fight | Editorial Board, Wall Street Journal

Republicans Can Kiss Their House Majority Goodbye If They Delay Trump’s Tax Cuts | Grover Norquist, Daily Caller

As loyal U/A readers know, The Coming Tax Fight Will Not Be What You're Expecting. The latest evidence comes from anti-tax activist Grover Norquist’s angry break from the Wall Street Journal’s editorial board on the seemingly mundane question of whether Congress should pursue extension of the Tax Cuts and Jobs Act (TCJA) through an initial reconciliation bill that also includes immigration and energy policy, or do a smaller non-tax reconciliation first and then come back to taxes in the fall.

Why does this matter? Because behind the brave faces, they all realize they’re unlikely to get what they want. The Journal wants to wait because they know negotiations are going to drag on until the drop-dead deadline and they’d like to keep that window as narrow as possible. Norquist wants to move quickly because he knows there’s no chance of holding the GOP conference together on taxes unless immigration and energy are in the same package.

Suffice to say, if they thought they had the votes for their tax cuts, the procedural fight wouldn’t be a big deal. But they don’t, so it is.

Recent Immigration Surge Has Been Largest in U.S. History | David Leonhardt, New York Times

A rare voice of sanity on the immigration question at the New York Times, this is a tour de force from Leonhardt on the reality that his colleagues insist on denying. Previous editions of U/A have covered both the absurd effort to portray Biden and Harris as border hawks and the intentional obfuscation of migrant labor’s effect on low-wage American workers. Leonhardt lowers the boom.

On policy:

Several factors caused the surge, starting with President Biden’s welcoming immigration policy during his first three years in office. Offended by Donald J. Trump’s harsh policies — including the separation of families at the border — Mr. Biden and other Democrats promised a different approach. “We’re a nation that says, ‘If you want to flee, and you’re fleeing oppression, you should come,’” Mr. Biden said during his 2020 presidential campaign.

After taking office, his administration loosened the rules on asylum and other immigration policies, making it easier for people to enter the United States. Some have received temporary legal status while their cases wend through backlogged immigration courts. Others have remained without legal permission.

On wages:

But high levels of immigration do have downsides, including the pressure on social services and increased competition for jobs. The Congressional Budget Office has concluded that wage growth for Americans who did not attend college will be lower than it otherwise would have been for the next few years because of the recent surge. On the flip side, higher immigration can reduce the cost of services and help Americans, many with higher incomes, who do not compete for jobs with immigrants

Bernard Yaros Jr., a lead U.S. economist at Oxford Economics, a research firm, described the recent increases as “something that we really haven’t seen in recent memory.” Mr. Yaros said that they had “helped cool wage growth.”

Working Families First: Senator-elect Jim Banks’ Policy Vision for the 119th Congress

The coming years will see fierce competition within the GOP to blaze the best path forward for the multi-ethnic, working-class conservatism that the 2024 election results confirmed as the party’s future. Indiana Congressman and Senator-elect Jim Banks is out of the gate quickly with an especially strong effort worth reading in full. Note in particular what gets emphasized in just the first two items:

• An outright rejection of traditional GOP supply-side tax and trade policy, insisting that the interests of working families rather than “job creators” be the focus.

• An overt emphasis on non-college pathways, the message that American Compass polling always finds most popular across the political spectrum.

• A full-throated commitment to industrial policy: “a detailed strategy to incentivize domestic investment—especially in advanced manufacturing and other highly productive industries.”

WHAT ELSE SHOULD YOU BE READING? SPECIAL TARIFF EDITION

China Abused Its U.S. Trade Relationship. Trump Can Fix It. | Rep. John Moolenaar and Sen. Tom Cotton, Fox News

Everyone is waiting to see what Trump does Day 1 on tariffs, but keep an eye on Capitol Hill too. Revoking “Permanent Normal Trade Relations” with China is one of the most dramatic steps the United States can take, it requires action by Congress, and Congress is making the right noises. Not only was the idea in the GOP platform, but also it is a bipartisan recommendation of both the House Select Committee on the Chinese Communist Party and the U.S.-China Economic and Security Review Commission. Senator Tom Cotton led development in the Senate of very strong legislation on the issue, which he introduced with Senators Rubio and Hawley (one of whom will soon be Secretary of State), and which Rep. John Moolenaar, who chairs the Select Committee, has now introduced in the House. What Moolenaar and Cotton say about it at Fox News bears watching closely.

Bonus Link: Alongside introduction of the Senate legislation, American Compass published the definitive white paper on the topic, with full background on the issue, careful analysis of all the relevant considerations, and a comprehensive policy proposal.

We Are All Mercantilists Now | Greg Jensen, Wall Street Journal

I honestly wasn’t sure I’d ever see the day that the Journal’s op-ed page ran a piece like this, complete with illustration of Uncle Sam riding on a mercantilist T-Rex. Jensen, co–chief investment officer at Bridgewater Associates, does a nice job presenting the case that the free-trade model only works when nations agree to play by its rules. Your desire for mutually beneficial free trade with China is worth little if China has different ideas. And no, China hasn’t become the world’s industrial superpower by embracing free markets. It accomplished the feat with mercantilism.

The U.S. has no choice but to respond in kind. Crucially, Jensen notes, countries with large deficits have the upper hand in trade wars. This is an obvious point that economists go to great lengths to avoid admitting. But in the current global context, the U.S. should and will protect its domestic market and pursue industrial policy.

Bonus Link: We’ve come a long way in the ten years since I published “Fight the Dragon” at National Review, describing the prisoner’s dilemma of free trade with China, and AEI’s Michael Strain and Ramesh Ponnuru responded that “Cass himself is prisoner to a misconception, for he does not understand the model he is criticizing. That model does not ignore the possibility of a prisoner’s dilemma but rather denies that it exists. After all, the classical case for free trade was developed in a mercantilist world, and it argued that free trade almost always benefits the country adopting it, regardless of the trade policies of other nations.” I reflected on the debate’s evolution here.

Tariffs Are a Misunderstood Tool | Michael Pettis, Financial Times

Pettis, a Compass Advisor, cuts sharply through the ideological haze in which economists are operating. “Rather than treat tariffs as a species of evil that must always be resisted,” he writes, “economists should instead debate the conditions under which they are likely to be harmful versus those under which they are likely to be beneficial. For now, however, not enough economists are willing to engage in a serious discussion on tariffs. That is probably why trade has become the most important economic issue about which neither the Republicans nor the Democrats pay much attention to mainstream economists.”

Reindustrialization: A Strategy for American Sovereignty and Security | Nadia Schadlow, Hudson Institute

This is a thoughtful and thorough report on reindustrialization from Schadlow, who served on the National Security Council during the first Trump administration. It even mentions Hamilton’s Report on Manufactures! It’s very encouraging to see Trump alumni promoting thinking along these lines at institutions like the Hudson Institute. Schadlow’s Hudson colleague, Alex Wong, is headed into the new administration to occupy the position she previously held as deputy national security adviser.

Bonus Link: Speaking of reindustrialization, congratulations to CEO Austin Bishop and Chairman of the Board Julius Krein on the public launch of the New American Industrial Alliance. The presence of an influential new industry group dedicated to building in America is a phenomenally exciting and important development. NAIA is going to be a force to be reckoned with in its own right, and a force multiplier for everyone working on these issues.

Enjoy the weekend!