The tragedy of American wealth

“Pay them off,” he said. Over two decades ago, that was the plan for globalization’s losers coughed up by a junior priest of the Washington Consensus then teaching at one of America’s august indoctrination asylums.

What he meant was that the gains from globalization would be immense – more than enough to compensate Ohio factory workers whose jobs would be outsourced to China.  

This junior priest founded a consulting company, rode the globalization wave to its peak, reversed course with perfect timing and now advises American companies and state organs as a China hawk, ascending to high priest status in the New Washington Consensus.

“Pay them off.” We all bought it then. So simple, so elegant, so logical, so easy. Democracy and capitalism would surely figure out a mechanism. It wasn’t our problem. Our problem was getting past round one of the Goldman Sachs interview.

Of course, we now know that there was not going to be a pay-them-off mechanism. The winners of globalization – those who passed rounds two and three – were going to fight tooth and nail for every last cent the Washington Consensus threw our way.

If we really sat down and thought about it, it should have been patently ridiculous from the get-go. Pay them off? Like with welfare checks and food stamps? Or teach them computers? Unfortunately, nobody actually sat down and thought these things through.

In the end, globalization’s losers in America were kept afloat – just barely – by debt and lower inflation for consumer products while the shock troops of the Washington Consensus hoarded vast sums of newly created lucre. And I mean vast.

So here we are. There is a New Washington Consensus and its tenets are just as well thought through as “pay them off.” You might not be interested in industrial policy, but industrial policy is interested in you.

This new catchphrase is meant to drive home the point that we all have to grow up – America especially. The era of industrial policy is now upon us.

Because China has been an enthusiastic practitioner of industrial policy, free trade puts open economies like the US at her mercy. Yes, Japan, Germany, Korea and Taiwan have practiced industrial policy for decades but given China’s scale and ambition, the economic distortions threaten to swamp the world, if they haven’t already.

That’s the story, anyway. While nobody’s hands are clean, let us, for argument’s sake, accept the gist of the story – China has been subsidizing manufacturers at the expense of households for decades, simultaneously suppressing consumption while juicing production – all of which ultimately results in China’s exports flooding global markets, deindustrializing America through recalcitrant trade deficits.

So far, American efforts to tame China’s exports while stimulating domestic manufacturing have yet to be effective. China’s exports have grown some 50% since the Trump tariffs of 2018. While vast sums are being spent on the CHIPS Act and the Inflation Reduction Act, early signs have not been promising.

Output from TSMC Arizona has been delayed at least a year to 2025 amidst reports of hiring challenges and culture clashes between Taiwanese management and American workers.

Intel’s implosion is much more disturbing. From the looks of it, the CHIPS Act played a significant role in the company’s current crisis – which may prove existential.

Seduced by ambitious industrial policy – which seemingly anointed Intel as America’s semiconductor national champion with a promised US$8.5 billion in grants and $11 billion in loans – Pat Gelsinger, Intel’s CEO, bet on his company’s ability to quickly challenge TSMC’s foundry dominance. Unfortunately, it is proving more difficult than hoped, with Intel’s foundry business reporting higher-than-expected losses.

The company is now caught in a farcical Catch 22. The Department of Commerce has delayed the disbursement of CHIPS Act funds because Intel failed to meet performance milestones. Intel based its strategy on CHIPS Act funding, while the Department of Commerce has seemingly lost confidence in the company’s ability to deliver.

Without industrial policy promises, Gelsinger would never have thrown everything at the foundry business. Without having royally screwed up those efforts, the company would not be in crisis and the Department of Commerce would not be delaying disbursement of earmarked funds.

The Inflation Reduction Act is also caught in a contradictory Catch 22. The bill’s focus is on lowering energy prices by expanding renewables capacity. Unfortunately, the only way for renewable companies to survive in the US is to close off the American market to China’s producers.

The US increased tariffs on China’s EVs from 27.5% to 102.5% and solar cells from 25% to 50%. While the act has protectionist merit, its inflation reduction potential is far less certain.

The tragedy, unfortunately, is that America’s basic asset endowment is at the root of trade imbalances, not China’s industrial policy. China is merely reacting to the state of play rather than creating an imbalance.  

What the world has been living through since the 1970s is an America that has been leaning progressively harder into monetizing its abundant assets and other advantages, tapping the productive power of the world for domestic consumption (and global military adventures).

As spending on Great Society welfare programs and the Vietnam War surged in the 1960s-70s, the US unilaterally abandoned the Bretton Woods system with the Nixon Shock on August 15, 1971, which unpegged the US dollar from gold.

Overspending and resultant inflation threatened to drain America’s gold reserves. By floating the dollar, the US could more flexibly leverage its reserve currency with the country’s vast assets, military might and deep financial markets.

There are very good and deserved reasons why the US dollar is the global reserve currency. America is a secure continental landmass with two coasts, solid property rights, low population density and a temperate climate.

The country is a bottomless pit of desirable assets and leveraging this endowment for investment and consumption is not just economically rational but largely unavoidable.

If I captained an oceanographic research vessel (pirate ship) and discover a beautiful tropical island (uninhabited, I swear), is it economically rational for our band of explorers (conquistadors) to develop our discovery by trading coconuts and bananas for building materials and consumer goods?

Or are we better off selling beachfront property to Club Med and Sandals Resorts so that our merry band of real estate moguls (vanquishers) can blitz around tropical paradise in Porsches and Ferraris?

The trade imbalance on our tropical island resulted from a mismatch between assets and labor. Our intrepid explorers (ethnic cleansers) were asset-rich but labor-poor.

Unbalanced trade isn’t unbalanced at all. We are trading assets for goods. And so has the United States since it unilaterally withdrew from Bretton Woods to fund domestic consumption and the Vietnam War – as it should.

And ever since, the US has deepened its ability to harness global productivity by selling claims on its vast assets of ever-growing variety and sophistication. The skills required for these transactions are not trivial.

Consulting, investment banking, law, marketing and real estate employ many of America’s brightest minds. While over-financialization can certainly distort value, at its root the trade is assets for goods and not just conjured up by printing dollars, as some might believe.

This is the Dutch disease – when the discovery of oil withers other industries – on a continental scale. The most valuable products America can sell are the assets it was endowed with.

Once European and East Asian industry got back on their feet after WWII, there really was no point in expanding US manufacturing when foreigners were happy to export in exchange for a little piece of America.

The current clamor to reverse this trade will inevitably reach a “having one’s cake and eating it too” dilemma.

If the US really wants to manufacture solar panels and electric vehicles at reasonable prices, bankers, consultants, lawyers and marketing managers will need to voluntarily take 40-50% pay cuts to become process engineers, factory foremen, technicians and pipe fitters. Is it any wonder Intel and TSMC are having such a hard time?

Economists often rigidly demarcate goods from assets. Trade is considered balanced only when the goods trade nets to zero, implying that Riccardo’s model of comparative advantage only applies to trade in widgets.

A more flexible framing may say that trade is always balanced because distinguishing goods from assets requires too many value judgments and, as such, comparative advantage applies to everything.

Thus, it is perfectly normal for asset-rich America to develop expertise in finance, law, marketing and consulting – all the skills necessary to package assets for sale.

And it is perfectly normal for labor-rich China to develop expertise in manufacturing to exchange for those assets. While it is certainly possible to impede this trade – someone can force our island conquistadors to trade coconuts for supplies – it will exact a cost.

This assets-for-goods trade is, ultimately, the great tragedy of America’s political economy. While it makes perfect economic sense – there are assets galore to monetize – it is problematic politically.

The bankers, consultants, lawyers, marketing managers and real estate agents employed to peddle assets are not running semiconductor fabs, EV factories or solar farms. And, as such, the US also does not employ the semi-skilled labor in those nonexistent semiconductor fabs, EV factories and solar farms.

Those workers either make do in lower rungs of the service sector (i.e. retail, gig work, home health aid) or are not in the labor market entirely.

Reversing globalization would involve a massive derating of US asset prices as sales to foreign buyers are artificially restricted. Effects on GDP could theoretically be contained but the wealthy would have to become poorer in hopes of bringing low-income folks back into the middle class as investment bankers become process engineers and Uber drivers become factory workers.

For a political economy that couldn’t figure out a mechanism to pay-them-off as globalization created immense riches, how likely is it that the immensely rich will willingly stomach becoming significantly poorer?