Colin Read • May 11, 2025
The Climate is A’Changin’- Sunday, May 11, 2025
( graph courtesy of https://polarportal.dk/en/sea-ice-and-icebergs/sea-ice-thickness-and-volume/ )
It’s been a few months since we had a climate change check-in. An overwhelming series of events have happened of late, to the point that life has overshadowed more existential issues. Yet, the climate continues to move in the same unfortunate direction.
Part of our lack of attention is that we, and most of humanity, live in the Northern Hemisphere. It has been winter in most of the world lately (I don’t mean that metaphorically) for one simple reason. Most of the Earth’s land is in the Northern hemisphere, and hence that’s where most of us live. This geological fact explains why there are more humans in the northern half of the globe.
On the other hand, there is more ocean in the Southern Hemisphere. This simple observation matters a lot. Land is green or brown, and it is insulated. These colors don’t absorb quite as much solar energy as does ocean blue, and the insulating effect of soil means that the sun’s energy absorbed doesn’t have very far to go. During the day, land surfaces warm, and in the dark of the evening, those high temperatures are at least partly radiated away into space.
The atmosphere moderates this reradiation, with such greenhouse gases as water vapor, carbon dioxide, and methane holding in some of this radiated heat.
In fact, if there was more land on Earth, this dynamic would cause greater fluctuations in temperature than we experience. The Earth is 70% ocean, though, and most of that is in the Southern Hemisphere.
Why this quirk of geology and geophysics is so significant is that our oceans are powerful energy absorbers. Blue water is a very efficient heat absorber. Oceans are also excellent heat batteries. All this solar energy is warming up one huge blue mass, with this energy mixing for miles of ocean depth. It requires an awful lot more solar energy to raise the temperature of the ocean even a degree Fahrenheit.
The fact that our oceans are warming is ominous. This is not an El Nino year so we should not expect significantly higher ocean temperatures, but nonetheless our oceans’ temperatures are the second highest ever, only slightly below the El Nino of last year, and far higher than any other year.
We see this most profoundly in the Arctic. For most of the year the Arctic Ocean has been somewhat immune to the dynamics discussed above. Ice and snow cover its blue ocean for much of the year, and snow is an excellent insulator. Its white color is also an excellent reflector. These qualities of snow combine to produce the Albedo Effect. If this snow and ice cover diminishes, the Arctic Ocean, bathed with 24-hour sun for a few months of the year, has the potential to become a huge solar battery (no pun intended).
Fortunately, this Albedo Effect has not taken off, until lately. Even though El Nino is well behind ice, nobody told the Arctic. In fact, it has been unusually warm this winter, and its ice cover has become historically shallow. Today’s graph shows that the volume of ice and snow on the Arctic Ocean this spring has never been lower. Not only does the arctic contain less ice than ever before by a very wide margin, but it is also more than a month ahead in melting. Get out your sailboats. I predict one will be able to easily sail ice-free to the North Pole this August or September (in case you are looking for good dates to go).
Historically, the Arctic Ocean has been dominated by old ice. This is ice that never quite melts in the summer, and hence grows and grows every year. This summer will see the end to almost all the old ice, which mostly lingers along Canada’s farthest north coast. This means ocean ice will also be much thinner on average, more fragile, easier to melt away completely, and prone to really significant Albedo Effect warming as the Arctic Ocean will become almost entirely blue this summer.
Then, in the Fall, this marginalized ocean will resist freezing over, which will allow the arctic to absorb more atmospheric and solar energy for longer. This is what sustainability scientists call a positive feedback loop. The warmer the arctic gets, the more receptive it becomes to even greater warming.
Some might argue that such warming won’t affect any but a few Alaskans (hey, I resemble that remark). But, actually, it will profoundly affect us all. While a loss of ocean ice does not raise ocean levels for the same reason melting ice cubes don’t cause a glass to overflow, warmer arctic temperatures accelerates Greenland glacier melting. While resource developers may be licking their chops over prospects of a less iceclad Greenland, melting glaciers do raise ocean levels in places such as Miami and New York City.
In addition, all that melting fresh water disrupts the Atlantic Meridional Overturning Circulation (AMOC) current that we call the Gulf Stream. The AMOC is driven by dense salty arctic water which is shuttled south, warmed, and then returns a lot of equatorial heat to the East Coast of North America and to Europe. More fresh water coming off Greenland clogs up this momentum and is on the verge of arresting a current that moderates East Coast temperatures and keeps Europe much warmer than it should be given that everything north of Paris, France is actually farther north than where most Canadians live. Europeans have been spared Canadian winters primarily due to the AMOC, but perhaps not for much longer.
Some may prefer to avoid these inconvenient truths by noting that one warm winter in the arctic does not a catastrophe make. However, while days this non-El Nino year are not breaking records every day, this year is overall still the second warmest year on record - after last year. These observations are not random. That is why we call them trends.
These warming trends are disturbing. We are reaching and exceeding a number of tipping points, beyond which trends accelerate, even if their root causes could be mitigated. We are probably well beyond mitigation.
We may at least be able to slow the process down a bit, even if we can’t reverse it. That might buy us some time to figure out what to do. The problem is, though, that our dependence on fossil fuels that initiated this process is still waxing rather than waning. I can say quite definitively that our collective promises almost a decade ago to abate fossil fuel usage by 2030 will not be kept. Maybe a nation or two here or there might live up to their promises, but most won’t, and some have given up trying completely.
I wish we did not live in such interesting times.
This week the US Senate passed what they ironically call the Genius Act. A strong majority voted in favor of it, which makes the Act veto-proof. It now goes to the House, where it will likely pass with equivalent bipartisan support. Of course, there is also no possibility of veto, given how the president who once condemned cryptocurrencies is now a huge backer, issuer, and profiteer from the crypto industry, In fact, while Elon Musk may claim he got Trump elected and flipped the Senate, it is far more likely that the many hundreds of millions more pumped into the election (for both sides of the aisle) by the crypto industry was what determined the present political circumstance. The first major payback to the crypto industry for the dollars and crypto bros they brought along is the Genius Act. It will unleash a Wild West in monetary policy, shilling, financial system destabilization, the repeat of FTX-style meltdowns, and mega-wealth for some, along with mega-losses for far more. The U.S. has a history of monetary debasement that most other comparable countries managed to avoid. In the 1800s, there was no central currency nor a Federal Reserve designed to ensure monetary stability. Instead, individual banks issued their own notes, which were really no more than IOUs backed (presumably) by deposits at their branches. These IOUs could be exchanged as tender for purchases, at least for those who believed they could easily convert the IOIUs they accept to something more tangible. Throughout this wild and wooly era, the nation faced waves of bankruptcies, with thousands of banks disappearing, along with any sort of value that underpinned the IOUs trusting citizens held. Eventually, the nation realized that it needed a national currency backed by the full faith and credit of the United States Government rather than faith in the local bank of shaky solvency. This faith in the U.S. dollar underpinned the nation’s ascendancy as the premier economic superpower. Now, the Congress and President is willing to squander this success and threaten its monetary system by embracing cryptocurrencies that are designed to compete with the U.S. dollar. Surely, beyond the digital coins that have been shilled by wannabe crypto billionaires, we should expect many major retailers and financial houses creating their own corporate script. Of course, even a well-compensated (I mean grateful recipient of campaign donations) congressperson needs at least a plausible plan before they vote in favor of reverting back to 1800s monetary policy. The promise is that the new crypto enabled by the Genius Act must be stablecoins. That means for every dollar of crypto coin, there must be a dollar of hard currency (dollars, gold, bonds, perhaps) to ensure their value. Almost 200 years ago, a public skeptical of government encouraged President Jackson to disband the Bank of the United States and the federal currency it wished to administer. The public feared that large financial corporations would co-opt the central bank and instead believed that local banks, and the script they create, is far safer. Well, dozens of bank-failure-induced recessions eventually convinced even the banking industry that it could not be trusted to be the regulator and issuer of a domestic currency. But let’s not let history, nor the waves of bank failures and millions lost by ordinary citizens, get in our way. We are again embarking on a system in which anybody can start a stablecoin, including our President, of course. And, such a stablecoin that has backing of less than ten billion dollars will not even need to face federal oversight or regulation. To put that oversight threshold in perspective, only 3% of banks have assets more than $10 billion, but many times more are regulated by national agencies and insured by the Federal Depository Insurance Corporation. Yet, despite such a lax oversight regime, stablecoin will compete directly for the public’s deposits with the highly regulated domestic banking industry. Even the largest stablecoins, with the most potential to do damage if they fail like their predecessors, will be regulated far more lightly than the banks with which they compete. We have already seen spectacular collapses of stablecoins that promised to back each dollar of coin with a dollar of hard assets. Terra, Basis, Diem and others have failed, leaving those who subscribed to them to lose billions. We witnessed Silicon Valley Bank fail in 2023, with the American public paying the price by having to bail out depositors in a bank that chose to keep crypto on its books. These ventures are run by true believers who do not think that such financial carnage could ever happen to them. I’m sure the owners of Terra and Sam Bankman-Fried of FTX infamy also felt they were safe because they were so much smarter than the usual Wall Street types. What they fail to understand is what banks already know. You can’t earn a rate of return if you must collateralize 100% of your liabilities with low return assets. You can only make billions by taking chances, cooking books, or running Ponzi schemes, as we have witnessed. To now, though, we have let the crypto industry cannibalize itself, with little repercussions on those outside of the crypto bros world. But, with the President now sponsoring crypto, and with a grateful Congress endorsing the idea, (un)stablecoins are now going mainstream in competition for our deposits with the much more regulated banking industry. What could go wrong? It seems that we are determined to turn the clock back to economies of the 1800s, with tariff policies and now with competing currencies cloaked in corruption or incompetency. Greed ruled the Gilded Age, and greed is back. What could go wrong?
The U.S. House of Representatives has passed to the Senate a bill that will set the budget goals for the coming year. It is perhaps the most profound piece of legislation in a decade, but, to economists, perhaps not in good ways. Notice the distinction I made. I’m sure many people look at the provisions in the bill and say “It’s about time fraud and abuse is curbed” even though economists don’t believe there is significant fraud and abuse. It is certainly true that people have different preferences for what government programs and agencies do, and whether the money is well-spent. We are each somewhere on the spectrum grom a compassionate society with many protections to the other extreme in which people are self-reliant, do not believe government can help in any but a few narrow categories, and prefer to be able to keep earned income rather than have to share it with people perceived to not work so hard for it. Most economists have faith in a free market system, and a growing number are expressing concern that our system is anything but the competitive ideal espoused by Adam Smith a quarter millennium ago. Hence, most economists would agree that there is a role for government to ensure a level playing field. The Big Beautiful Bill does not address the concerns the market is departing too far from the competitive ideal. In fact, of late the economy seems more fragile, more manipulated by politics and oligarchs than any of us could have imagined until recently. These flashing red lights alarming even the traditionally conservative bond traders are increasing economic volatility and hence domestic investment. A budget is designed to accomplish two goals. One is to raise sufficient revenue to provide the level of services only government can fairly administer to ensure that our nation serves all people and keeps each of us engaged in the national dream. The other is to ensure that the burden of these functions is spread fairly among all residents based on our capacity to pay. Again, this notion of fairness ensures we all share in the burden in a way we all agree is fair. Those that benefit the most from the fruits of a productive society hence pay a greater share of their income because they have a greater capacity to pay without dramatically affecting their quality of life. Of course, we have noted in past blogs that while the middle class pays the lion's share of taxes, many of the wealthiest can use loopholes in the tax code to defer or eliminate much of their burden. This year we saw a return to tariffs that were used to raise much of the revenue up to the 1800s before the U.S. instituted a broad-based income tax. An uninformed belief that tariffs force foreigners to pay for our nation's programs has been debunked as we realize now that it's the consumers of imported goods that pay such taxes. Tariffs are a limited consumption tax paid mostly by those who depend on goods consumption because they don't have the income to consume the services (banking, legal, finance, medical, home services, massages, entertainment, maids, restaurant services, etc.) that better-healed households can afford. Hence tariffs are regressive, with the lowest income earners paying the greatest share of their incomes to cover this mercantilist cost to provide for government. In this blog we have discussed some subtleties of foreign trade markets. While all the tariff rhetoric has been about goods, which translates into commodities, agriculture, and manufacturing, this category is not what America does. The U.S. is indeed a goods net importer, but it is a vast services exporter. The U.S. become the economic superpower by shifting away from the low margin industry of goods production because such production either requires abundant excess natural resources or low labor costs. Henry Ford realized that domestic manufacturing cannot be competitive if it can’t afford to pay a wage sufficient for its workers to purchase its products. Domestic manufacturing of inexpensive goods will not support sufficiently low goods prices American consumers demand or wages American workers require. Let Bangladesh and Vietnam make our t-shirts. We’d rather have our children working as professors, doctors, scientists and engineers, and, sometimes, lawyers. The problem is that America adheres to a faith in the private sector only when it is convenient. President Reagan was renowned for his free market principles, but manufacturing began to disappear on his watch because he put little thought into what to do with throngs of people who lose jobs when t-shirt production moves from South Carolina to South Korea. Despite the huge displacements and the generations excluded from the American Dream as a result, there still seems to be little appetite to retrain redundant workers in 21st century skills. The Big Beautiful Bill does not correct this fatal lack of a national economic policy. Indeed, as today’s graph shows, it bleeds the increasingly unemployable even more, while it showers the wealthiest with the biggest income largesse in perhaps ever. The poorest 10% of the population will see resources decline by $1,600 according to Congress’ own estimates, while the wealthiest 10% will see their annual resources grow by $15,000 in the Big, Beautiful Bill. If these manufacturing jobs lost by the poorest Americans are simply not going to return, despite the silly AI- and robotics-denying realities we all know is inevitable, then what are we doing to seed future productivity and affluence? Simply allowing more wealthy people to keep their money does little to promote the middle class dream. President Trump’s personal philosophy of beggar-thy-neighbor policies is fatally flawed, even if some find it satisfying to poke friends and foes, domestic and international, in their eyes with hot sticks. These are not economic wars, as most economists agree. These are culture wars, a focus on decreasing the size of the economic pie but receiving a bigger share, rather than the universal economic goal of increasing the economic pie in the belief that a rising tide lifts all boats. Our allies have somewhat given up on the U.S. and realize they must go it together, without the U.S. The G7 economic superpowers group is now being called the G6+1 in recognition that the U.S. no longer shares the rising tide theory. NATO countries are organizing a European coalition (and Canada) due to lack of faith in American leadership and principles. The improving American trade deficit is fueled by trade among one another rather than with the U.S. This also means that fewer countries rely on the dollar as the global currency, and nations are left with fewer such dollars that they would then reinvest in the U.S. or in its treasury bonds. It is also now U.S. policy to not invest in itself either. More than 80 years ago, America embarked on an experiment never before witnessed that created untold wealth for Americans and cemented its position as the leading global economy. The innovation was the Manhattan Project, ironically enough. It was a project that was so grand, so demanding of every bit of American scientific intellect, and so massive that no oligarch, not even an Elon Musk, could have possibly pulled off. Instead, it was a partnership with society and universities, and heralded an era in which the public invests in basic research, the universities produce innovations that improve our quality of life (well, except maybe the atomic bomb, if you lived in Hiroshima or Nagasaki), and these innovations are spun off into patents that benefit myriad new corporations that would not have existed but for the investments we all made. This system, well-protected by our patent system, worked well until now. For some reason, again related to culture wars, has caused this pipeline of basic research money to dry up at our major research universities. Meanwhile, China is doubling- and trebling-up in their investments in Science, Technology, Engineering, and Mathematics (STEM) infrastructure, and are being rewarded with more patents and products than their American counterparts. This drying up of foreign and domestic investment, instead redirected to the purchase of more and more U.S. bonds at higher and higher interest rates to support ever-growing federal budget deficits, is sucking the vitality out of the U.S. economy when it needs revitalization the most. Meanwhile, federal deficits and debt continue to grow dramatically to afford even greater tax breaks for the wealthy. The economy is not an energizer bunny. It grows in fits and starts. I liken it to training for long distance bicycle racing. A popular training regimen is to take a long ride, perhaps 50 miles, with hard slogging punctuated with sprints for a telephone pole or two. The economy is like that too. We succeed when we push very hard as a united nation, and then regroup for a while before the next investment and innovation wave. We are willing to sacrifice consumption today for more current investment in the promise that we will all share in greater quality of life tomorrow. That is the American promise that held us all together, at least until the culture wars turned our gaze to our differences rather than all we have in common. Now, it’s natural for nations to compete with each other, even if nations recognized and fostered their mutual dependence ever since World War II. This is why free trade is such an embodiment of the rising tide economic theory. But, never in my lifetime have I witnessed Americans looking so askance at each other. While Americans scream domestically, our adversaries are laughing and “tapping us along”. I still harbor some hope that we will recognize the great bounty of working together to produce that better mousetrap, cure cancer, harness AI in a way that helps us all, not just the oligarchs, and demonstrate pride in our respective countries without trying to diminish each other. It begins by showing we care for each other, differences aside, warts and all. Those who don’t want America to succeed will tap us along, poison our social media, sow discontent, and challenge our democracies. They won’t succeed if we think of each other as ourselves rather than others. I know it is possible. Canada had to face an existential threat from President Trump of late, but it created their Manhattan moment. Canada is rebuilding its domestic economy, renewing its relationships with Europe and Asia, and reinvesting in basic research to attract disaffected American academics. Canada is so busy uniting itself that old quarrels between provinces are dissolving away. The Cold War was America’s existential reason to reinvent itself. President Trump is Canada’s reason. I’ll be watching closely Canada’s progress. Meanwhile, what can America do to reestablish its eminence in patentable innovations? It should redouble efforts and investment in basic research at universities for projects that could lead to commercial superiority. These include AI, medical research, next generation semiconductors, quantum computing, and sustainable energy sources. It should not spend money for the sake of investment. Instead, investment must be part of a thoughtful industrial policy with the clear goal of technological innovation and greater economic efficiency through sustainability.
This is a remarkable week. The debt clock displayed prominently in Manhattan, on the Bank of America Tower between 6th and 7th Ave. and 42nd and 43rd St., is within days of clicking over to $37,000,000,000,000. That’s a lot of zeroes. But it means nothing to many, perhaps most people. Its relevance is only revealed when one divides it by the population of the United States, 341,817,979 residents or 112,888,022 taxpayers, to understand that we each owe $108,275 as our individual share of the national debt, while each taxpayer owes $327,758. Many people have zero-aversion. I don’t get through the week without hearing some announcer or reporter confusing millions, billions and trillions. After all, that’s too many zeroes. Physicists deal with numbers large and small in a very simple way. $37 trillion is just 3.7 times 10,000,000,000,000. And that very large number 10,000,000,000,000 is just 1 followed by 13 zeroes. Same with the U.S. population. That’s just 3.4 times 100,000,000, or 3.4 times 1 followed by 8 zeroes. People would be less confused if we stopped talking millions, billions, and trillions, and talked zeroes. I can easily divide 3.7 by 3.4 to get 1.08, and I can then subtract 8 zeroes from 13 zeroes to get 5 zeroes. That’s how I know the per-capita share of debt is 1.08 times 1 followed by 5 zeroes, or $108,000. That's the way we used to calculate when we relied on slide rules rather than calculators. Ever since then, we have dummied-down by relying first on four-function calculators, then on PCs, and now on AI. Technology has encouraged the Great Dumbing Down, ironically enough. We don't do math anymore because few of us have to. I know, understanding numbers very large and very small is tedious, but it is very simple once we understand a number followed by 13 zeroes or 8 zeroes or 5 zeroes is a big number. And while only Elon Musk can relate to a wealth of $300,000,000,000, we can all relate to a national debt per person of $108,000, for some the price of a house, and for others the price of a car. So, it bothers me when I see commentators joke that they were never good at math, or it makes their head hurt, or they failed high school algebra. To me, that says they are bored or confused by the world around them, in all its immenseness, or the scale of wealth or poverty, human aspiration or destruction. Numbers mean something, and while we all aspire to avoid being illiterate, few harbor such qualms about being innumerate. The problem is that even one who is illiterate can get the gist of a relevant discussion, but one who is innumerate simply gives up any attempt to understand large numbers. The innumerate among us simply trust those on television to interpret the scale of numbers for them, in what sometimes becomes the innumerate leading the innumerate. It’s scary stuff when we give up on understanding the depth of our national debt, the number dying of starvation in Haiti, Mali, South Sudan, Sudan, and the Occupied Palestinian Territories, or that flying in a commercial jet is 200 times safer than taking the same journey by car. We can’t make sense of the world around us without basic competency in math, regardless of how proficient we may be with the English language. We can’t convey to others relevant numbers or statistics if our mind shuts down from zero disease. The quality of our public discourse is not the only reason why we must overcome our fear of mathematics. Our economic future depends on it. The 25 best-paying college majors are all STEM - based on Science, Technology, Engineering, and Mathematics. And yet, there is a growing shortage of graduates in the areas that have traditionally fueled economic growth. Professors Hanushek and Wößmann of the University of Munich, in a recent paper entitled. "Education and economic growth," the authors show the dramatic effect of an improvement in K-12 test scores, especially in mathematics. Even a modest improvement in test scores, through additional investment in K-12 education and an increase in expectations, results in profound improvements in national GDP that is almost double the necessary educational investments. They show that a single generation (20-year) education reform package produces lasting benefits and increases a nation’s GDP by 36% over the remainder of the century. Given that China’s GDP is about a third lower than that of the US, such a difference in growth is the difference between which nation will hold the mantle of the largest economy in the world. And yet, since Hanushek and Wößmann’s study was performed, math test scores have dropped dramatically in the U.S., especially following COVID. Meanwhile, the U.S. Department of Education is being disbanded, with a commensurate drop in billions of dollars of annual education investment. This is when every dollar of education investment produces two dollars of economic growth. Now is the time to destigmatize mathematics, and turn our nerds into superheroes, much like the attitude that prevailed in the 1950s and 1960s when the West was shocked by the success of Russian engineers in first sending satellites and humans into space. Even today, Russia produces four times the engineering grads, while China produces eight times more than the U.S. Don't get me wrong, though. Our citizenry must be literate, just as we must be comfortable with at least basic algebra. Nobody would admit they are comfortable with illiteracy. Nor should we be content to leave the understanding of numbers to others. Literacy allows us to communicate and exchange ideas. Mathematics allows us to comprehend the physical, medical, political, and economic world around us. Both qualities are essential for a well-informed society, and neither should be devalued. By the way, what country scores the highest in the internationally administered K-12 math scores? China. No surprise. We don’t need to look much further than math attainment to imagine which economies will grow the quickest. Education investment worked well when the U.S. was in its period of ascendancy, but not so much for our disinvestment in its period of descendancy.
In the 1980s, the great America’s Cup skipper Dennis Conner earned an unprecedented string of victories piloting the most advanced America’s Cup sailboats. Back then, and ever since Queen Victoria exclaimed “It’s America’s Cup Now,” U.S. sailing teams won the cup repeatedly by designing the best boats, assembling the best crews, developing the best strategies, and running the best races in the history of 12-meter sailboat racing. When asked to summarize his winning strategy, Conner offered a simple motto. “There’s No Excuse to Lose.” To not win meant one did not plan enough, work hard enough, execute well enough, or bring to the game every last bit of competitive spirit. Excellence was in Conner’s control, and he was not prepared to relinquish his success to the hands of others. And if he did not prevail in a race, no excuse to lose means there is no explanation, no finger pointing or blame. There was simply an acknowledgement that he was bested and he’d have to be better next time. That is the second stage of success. Of course, the first stage is simply acknowledging that winning is within the realm of the possible. At sixty-five years of age, I’m not going to earn a spot on the Olympic downhill ski team or swim team. But, there are younger, highly skilled and motivated, and ambitious enough athletes to vie to win at the highest level. They have ascended to the second stage, the realm in which winning is possible. Conner knew what all elite athletes embrace. Winning is within their control, and depends on their conditioning, will to win, endurance, and competitiveness. That’s the amazing thing about the competitive model of economics. If each participant strives to be the best, the energy and innovation of each ends up motivating all others. Conner grew up in the period of American exceptionalism when an entire nation believed just about anything was possible. Following the First World War, also known as the war to end all wars, the U.S. built up a military industrial complex that supplied its allies before the U.S. itself joined the war in its latter months. With oceans distancing it from its adversaries, the U.S. was left intact. As the last nation still standing, it enjoyed more than most the opportunity to capitalize on civilian uses for military innovations - factories to design and build new cars, new airplanes, new armaments, and new innovations in radio, television, electricity, and mass production. The U.S. immediately surpassed Great Britain as the economic superpower. Its position was cemented when it repeated the exercise a generation later in World War II. While other nations had to rebuild after WWII, the U.S. could further consolidate its manufacturing base into another wave of economic superiority. It had no peers, or at least that is what America thought. This is the world of Conner’s formative years. Born in 1942, he was a business school student when America had its Sputnik moment. It was not the first to orbit a satellite nor the first to send someone to space. Yet, America did not claim the USSR was competing unfairly, using trickery, or stealing its ideas. Instead, it redoubled its efforts, with President Kennedy proclaiming "We choose to go to the Moon in this decade and do the other things, not because they are easy, but because they are hard." With the same sort of no excuse to lose spirit that motivated Conner, Kennedy vaulted the U.S. into space, and secured its economic superpower status for another generation. With America undoubtedly at the apex of economic superiority well into the 1970s, and with President Reagan aspiring to keep America “the shining city on the hill,” American exceptionalism was at its apex as well. What comes next seems almost inevitable. As I described in my 2010 book “The Rise and Fall of an Economic Empire,” the third stage of economic success transcends from innovation into consolidation. Success breeds complacency and entitlement. With Machiavellian enthusiasm, the winners get to make the rules, and these rules are destined to preserve rather than advance the status quo. More energy is devoted to preventing others from innovating than from innovating ourselves. In the antithesis of “No Excuse to Lose,” others are blamed for the economic regression by the apex nation. To prevent those competitors wishing to someday reach the apex themselves, in sailboat racing or in nation-building, the apex entity enlists its allies to help hold back its enemies. Even in America’s Cup racing, victors attempting to hold onto the cup were accused of tipping the playing field in their own favor rather than building a better boat. And if one’s allies are unwilling to play unfairly, the apex entity may even turn on them and try to translate their fleeting might into concessions from all, designed solely to savor victory and ascendancy for just a moment longer. That third phase of consolidation cannot last long though. While ascendancy can prevail for decades, other competitors grow weary of other’s consolidation of power rather quickly. This may induce a victor to commit ever greater efforts to tip the playing field in their favor to the point others don’t want to compete with them anymore and instead cooperate to compete amongst themselves instead. People tire of hitmen kneecapping Nancy Kerrigan, elite athletes doping, a rival runner recently hitting a competitor with a baton, or Ayrton Senna taking out Alain Prost to ensure the title of the 1980 Formula One Championship. Competition should always bring out the best of us, not the worst. Now, one can always cry foul and claim they are on the verge of losing their apex position because someone else cheated. Such arguments might hold sway for awhile, but as hard as one tries to penalize another, humankind cannot hold back innovation and will not long tolerate consolidation. That is why the third phase of success can’t last long, even as it becomes increasingly desperate. Either it generates into the fourth phase, one of complete irrelevancy, or it reverts back to a renewed competitive drive that led to its successes in the first place. Even Dennis Conner eventually lost his competitive edge. The difference between a sailboat racer and a nation, though, is that a nation can produce another wave of innovators every generation. The key is to continue to look inward to discover the best of ourselves rather than constantly cry foul outward and attempt to punish others for their better mousetraps. In other words, there is no excuse to lose.
Since the onset of the Industrial Revolution, economies have enjoyed spurts of innovation and dramatic growth that rapidly transformed agrarian economies of the previous thirty millennia into economic engines of growth unparalleled in human history. Large power sources such as steam or water, urban assembly lines, internal combustion engines, electronics, the digital world and the Internet, and biochemistry have all revolutionized global economies. What’s next to continue the innovation revolutions? I distinguish here between evolution and revolution. For instance, some evolutions allow us to do the same things more efficiently. Others completely revolutionize how we do things. The microwave oven, solar panels, electric cars, personal computers, the jet airplane, color televisions and streaming services, smartphones, and other such innovations certainly made our lives easier. But they only improved what we had done previously with lower technology solutions. They are not transformational in the same ways as mass power, factories, automobiles, and other economic innovations that changed entirely what we do, where we live, and how we earn a living. There are many evolutions ahead, in the areas of better medical procedures, enhanced agricultural production, electric vehicles with improved range, faster Internet, and more efficient supply chains. These innovations will not change the pattern of human enjoyment, but may well reduce our toil and increase prosperity, at least for a few generations, unless we find a more sustainable economic path. Many of these innovations originated in the labs and minds of academic researchers, most often employed by major research universities and institutions. These institutions are waning as the seed investment by taxpayers is drying up rapidly and as some major universities are under siege for political reasons. As the mammoth American research engine wanes, so does one of the greatest exports in our history. These exports are in products for which the U.S. once dominated, or for the ideas that originate in the minds of researchers and benefit people everywhere. This week I ask whether the model of such economic innovation is outdated. It certainly provided for unparalleled growth in economic activity in the U.S. and worldwide, but that growth may have been because there was equivalent organized effort of a size that could compete with American innovation. The American model has a few basic aspects. Ideas originate among scientists and engineers employed at places like Harvard, MIT, and Caltech. These ideas, for new semiconductors, drugs, industrial processes, and the like, are then spun off into new speculative ventures and patents. The private sector then capitalizes on our public investment as we are prepared to pay more for better drugs and products to line their pockets. This system has conferred huge profits for firms who bring innovations to market, and no country has benefited from this process than the U.S. This system is losing steam though, as diminishing returns and the cost of new innovations is becoming much more expensive. Is there another economic model that may replace one we’ve enjoyed for over a century? Let us first ask what will be the next wave of innovations that will transform human economic existence. They are innovations in medicine, efficient and cheaper batteries, more capable robotics and automation, and artificial intelligence. The first, innovations in medicine, may impose strains on our economy as they will mostly aid those who are retired and hence no longer take part in production. Such innovations worsen our dependency ratio, an economic measure of those who consume society’s production but are too young or old to contribute to production relative to those who produce. Hence, innovations that enhance longevity actually amplify economic strains rather than alleviate them, unless of course we begin to require healthy eighty year olds to go back to work. Even so, there is tremendous research in new pharmaceuticals. Much of this work and these patents are now earned in China as part of a four-prong wave of public investment and global patents in critical innovation arenas. China is now the major drug manufacturer and is advancing rapidly in other areas of medical research. The second prong of China’s investment is in battery technology. Their dramatic innovations of late are filling the gap that has held back solar and wind power. Batteries must be affordable and sufficiently efficient and powerful to allow sustainable energy to outcompete fossil fuels. Innovations in organic flow and sodium ion batteries are now coming to market and will over the next decade revolutionize any economy willing to adopt new ways of producing and distributing power. It is here that the U.S. has a disadvantage, even if some of the earliest work that enabled such innovations came from U.S. labs. The U.S. has made a policy of late of moving away from sustainable energy and doubling up on fossil fuels and antiquated electrical grids. After all, since the U.S. first developed these sources of power, it has more invested than other nations in preserving this obsolete status quo. California is an exception, but even there it must buck resistance from the federal government to further invest in battery technology that allows wind and solar to work even when the wind dies and the sun goes down. China is the unambiguous world leader in battery technology, and we will see them earn huge efficiency improvements and dividends as a consequence. The U.S. may not enjoy such benefits because of tariffs imposed on their innovations, but China and the rest of the world will benefit from this transformational battery technology. China is also investing more than any other nation in automation. Already, its factories are far more modern and automated than their American counterparts, and they continue to develop even further. If industry in China is brought to the U.S. in the recent reshoring effort, we should expect lots of new robots crossing the Pacific, but very few jobs generated. Automation is what makes things these days, not laborers and our clumsy fingers. Again, China is leading the way. Finally, China is determined to lead the world in artificial intelligence, and already invests more, publishes more, and receives more patents in AI than any other nation. As the US slows such investments, China is redoubling theirs. They know the economic potential of AI, as well as the ability to use AI as a political tool, and they are willing to invest in it. China’s model disrupts the prevailing American approach that relies much more on the private sector to mobilize investment and bring products to market. While American politicians abhor public investment, China embraces a large public role in enterprise. Americans may cry foul, but China and those who wish to hook their buggy to China’s horse are willing to embrace the benefits that follow. Perhaps it is time for us to reevaluate whether it is unfair or brilliant for great nations to invest directly in their economies through public/private partnerships rather than expect the private sector to broaden their approach beyond quick payback of investments and short term profits. Gone are the days of innovation from 1% inspiration and 99% perspiration. Now, innovation is risky and expensive, and is only middlingly pursued by the risk-averse private sector. Call them all the names we want, but those nations who invest in the next big thing through taxpayer dollars to benefit their taxpayers will increasingly dominate 21st century commerce, as disturbing to the old world order as that may be. We can stomp our feet all we want. If we don't like change, how do we think irrelevancy will work for us?
(graph from https://www.cbpp.org/blog/how-house-republican-agenda-boosts-the-wealthy-does-little-or-worse-for-low-income-families) I read the funniest article today. You may have seen similar reporting lately. Income tax cuts seem to be politically popular these days, on both sides of the US-Canada border. The U.S. cuts are the most laughable because U.S. government debt is far worse than the more manageable debt accumulated in Canada. The impact of proposed tax cuts in the U.S. is negligible for the lowest 20% of American households. “Savings” of $90 won’t even cover a cup of coffee once a week for the bottom quintile of income earners. Savings for the next quintile will save them about $540, enough for a few cups of coffee each week. Middle income households fare a bit better. Those in the middle quintile will save about $1,290 per year for a reduction in their tax rate of 1.9%. That might cover a couple of car payments. Those who live comfortably, better than 60% of households but not as well as the top quintile, will save $4,500 a year. These “savings” are nothing compared to the top 1%, who take home $64,770 from a 4.3% reduction in their tax rates, while all in the top ten percent except for the wealthiest 1% bank $10,960 more on average from a reduction in their tax rate of 4.2%. As you can see, almost all the benefits, in dollar terms and in tax rate reductions, go to the wealthiest Americans. That should not be too surprising. After all, the wealthiest Americans also made the largest bribes, I mean political donations, to ensure those elected will return the favor in the form of lower taxes for them. Now, I don’t think I’ve ever met anybody who claimed they enjoy paying taxes. But, many of us recognize that we are purchasing government service, with those more able to pay covering a greater share of such services as police and the court system. After all, the wealthiest have the most to protect, and also benefit the most from the rule of law, patent and corporate protections, a well-ordered society, and defence. We are all more comfortable sharing these burdens if we feel government services are efficiently provided. That might be one of the only things that unite Americans right now. Government must be run more efficiently. But, let’s get back to the notion of tax “savings”. We all recognize that our elected officials seem to separate raising of their revenue with spending. We rarely hear questions of where the money will come from if government expands spending. More than 200 years ago, perhaps the most brilliant amateur economist ever, David Ricardo asked in 1820 if war should be funded from government revenue or by issuing government bonds. Ricardo was a successful businessman who bought a seat in the British Parliament for £4,000 in 1818, equivalent to about $500,000 today. He entered parliament as an economic reformer. He’d hoped to translate his extensive business experience and his leadership over the London Stock Exchange to educate his newfound political colleagues. His Ricardian Equivalence concept was just one of many profound insights he made. Ricardo reasoned that if we were to raise the tax rate to pay for government spending, that would merely take away from household savings, or force households to borrow more to pay for the tax burden. Alternately, if government issues bonds to pay for spending, households will have to pay those loans back with interest. In other words, no matter how government pays for their spending, households are ultimately obliged to pay. If government faces the same interest rate as households, either forms of funding are equivalent. This works in reverse as well. If government spending is a decision separate from the tax rate, a reduction in the tax rate simply shifts the burden from now to the future, with interest. If I buy a car, I don’t save money by taking out a car loan. In fact, if I borrow, it will cost me more. And nor does anybody save money because of a tax rate reduction. Just like the old Midas Muffler commercials, you can pay me now or you can pay me (more) later. Of course, if a future does not exist beyond the next election cycle, our representatives seem quite willing to kick the can down the road with such giveaways as reductions in taxes that force government to ratchet up the national debt. Or, perhaps it is the taxpayer’s hope that they will die before the debt is ever repaid, and that our children and grandchildren will pay for our folly instead. Either scenario does not reflect well for humanity and economic responsibility. I might be asking too much to expect politicians and journalists to banish the word “saving” when discussing tax rates. Even used car dealers don’t argue with a straight face that financing a purchase instead of pay-as-you-go is somehow a savings. But, as you know, my hope springs eternal that economic education makes for better public policy. So, I won’t be sad. I’ll just laugh at the P.T. Barnum school of public policy. There’s a fool born every minute. Of course, we can't fool the markets though. The third shoe just dropped. Moody's did not follow the lead of Fitch and Standard and Poor's in lowering the rating for U.S. Treasury bonds, until now. For the first time, no longer is U.S. debt given the highest rating. The agencies explained that simplistic and self-serving economic policies, mounting debt, and political dysfunction meant that U.S. government borrowing no longer deserves the world's highest rating, an honor it held since 1919. Fortunately, Canada still maintains its AAA rating, as does ten other nations with borrowing considered less risky than that of the U.S.
(graph courtesy of https://ssti.org/blog/overview-bachelors-and-stem-degrees-awarded-field-1970-2017) We live in a world that is certainly more complex than ever before, and, unfortunately, increasingly more divided. There’s a reason for the growing gap. Throughout my life, I've been inspired by science. In grade school I loved reading Encyclopedia Brown - The Boy Detective, who used science and logic to solve his cases. By the fifth or sixth grades I discovered Albert Einstein and Sigmund Freud. Already by then I had decided that someday I would be a scientist who would use logic and mathematics to understand the world around me. This was an era during the 1960s that was much simpler than the one we suffer today. We marveled at science, aspired to be engineers, and thought anything was possible and the future was bright. Our glorious optimism has since been replaced by a fear of new technologies such as Artificial Intelligence that may dramatically increase the risks we all face and reverse the fortunes of working-class families, while untolled riches are diverted to the wealthy. And, while scientists do not ultimately control what societies and economies do with their discoveries, science ambassadors increasingly suffer blame and hostility. Those who study sustainability and climate adaptation are accused of politics, and those who argue for such public health measures as vaccinations or disease prevention are fired or derided. The net result is that the virtues of a college education is waning and enrollment is declining, following its peak in 2010. At the same time, as today’s graph shows, most sciences, especially the hard sciences of physics and mathematics, have been wavering as a share of Science Technology, Engineering, and Mathematics (STEM) graduates. STEM overall as a share of college studies would also be declining if it were not for the incredible growth of computer science enrollment. Economics, also considered a STEM major, is likewise declining as a major, from its peak two decades ago. Meanwhile, students are increasingly studying law. These trends are telling and reflect a shift in societal values. We are abandoning economic and societal progress based on analytics, modeling, and discovery, and replacing the scientific method with the adversarial model that is the basis for the law and politics and, increasingly, the primary mode for human interaction. Science and economics are disciplines without equivocation. The scientific method does not rank discoveries or predictions based on popularity. I’ve met some arrogant scientists and policymakers before but that does not at all diminish their insights. Good science is not at all a popularity contest, and scientists do not make the ad-hominem attacks that have become de rigueur in politics. Theories are judged objectively. Among scientists, the only test is whether a theory is incorrect, and hence should be discarded, or correct for now, until a better theory comes along. It does not matter whether the purveyors of predictions are articulate or charismatic or not, or express popular views, or not. What only matters is the logic of one’s argument. Yet the logical studies are dwindling, based both on the number of graduates and their esteem in the public sphere. Replacing them are advocacy and the determination of relevancy by popular vote. We have moved into an era in which scientific discoveries have been degraded to mere opinions that have no more authority in our democracy than any other opinion, no matter how half-baked are the alternative viewpoints. Scientists have been reduced to one side of an adversarial debate, and public opinion now determines the truth. There are no more any truths based on scientific analysis, just more opinions, take them or leave them. That explains why the study of law continues to grow, and why elected officials are often lawyers. In science, superior science is relatively conclusive, but in courts of law and public opinion, science is merely persuasive. Unlike in science, right or wrong is less important than the powers of persuasion, strategy, and tactics in politics and the law. In these realms, it is win or lose, not correct or incorrect. The innocent with a poor defense can be convicted, the guilty can go free, and a populist politician can garner enough support to put any policy in place, regardless of whether policies make any analytic sense. Oh, and might makes right. Scientists draw conclusions, while justices issue opinions. In their winner-take-all world, participants are pacified as if the stakes are low. We increasingly focus on the drama rather than the outcome. Many people have given up on news broadcasts altogether to preserve their mental health. Public discourse is no longer a search for truth. It has become a game for some and war for others, rather than an effort to enhance our collective long-run interests. We seem to live in a world where we talk across each other rather than with each other, perhaps convinced that the stakes are low. If one loses one moment, well, maybe better luck next time. The media increasingly plays into this daytime soap opera in their failure to fully explore the ramifications of poor decisions. No longer is the populace educated. Instead, we are entertained. We don’t listen to the scientists. Instead, paraded around are advocates from both extremes of any special interest. We are left with the conclusion that either the side we like the most is right, or perhaps worse, the correct answer is precisely in the middle. I recall once when my daughter, who was about five years old at the time, was convinced to follow the lead of an older friend to go outside without permission. When I tracked them down outside, the older friend admitted it was her idea. Out of my misguided sense of equanimity, I punished them equally with identical time-outs. That was the easy Solomonic splitting of the baby that allowed me to avoid the hard work to actually determine right from wrong. I invoked careless justice, and I am reminded of that often, a quarter century later. The stakes are rarely so low as we pretend they are. We do the same with the dueling extremists paraded in front of us on many television analyses. We view their positions, carefully chosen because they are diametrically-opposed to each other, but neither we nor the journalists probe sufficiently to allow us to gain insights on who is correct. In our effort to be balanced, we forsake good science on climate change, health on vaccine strategies, and economics on tariffs when we don’t employ critical thinking to determine which position is correct. Such intellectual laziness, which often devolves into populism, makes for cynicism and poor decision-making. Our misguided equivocation when arguments on either side are not equally compelling has instead created divisiveness. Such lack of scientific probity affords us an easy out to side with those position consistent with our self-interest rather than society’s interest. Equanimity and inadequate rigor or analysis devolve into divisiveness and class warfare. We fall into camps rather than the interest of society as a whole. In the end, we all suffer as we disband good science and public policy that might threaten our increasingly simplistic view of a growingly complex world. Open discourse and open minds, as uncomfortable as they may be at times, is how learning and progress occurs. There is no learning in an echo chamber, and we can all benefit from better analytics, even if it makes my brain hurt at times. No pain, no gain. I personally prefer a more analytic world with a healthy respect for good science. But even good science can produce bad policy if politicians turn to populism. Democracy cannot determine scientific truths. Nor do scientists have ultimate control over how their discoveries are used or abused. For that we need a far healthier public discourse than we have suffered since the invention of - well - cable news and social media, perhaps. I long for the days when scientists were revered geniuses, not beleaguered technocrats. Give me Einstein over Orban any day.
(Graph courtesy of the Federal Reserve - https://www.stlouisfed.org/about-us/resources/why-fed-is-well-designed-central-bank/central-bank-independence-inflation) It’s been another wild ride on Wall Street, with every major index in correction territory, and the S&P 500 dropping as much as 1000 points since the election. With all that bad news, politicians look for scapegoats. Federal Reserve Chair Jerome Powell, you’re it! Now, regular readers of my blog know that I was critical of the Fed’s original inflation theory back in 2020 through 2022. They argued (hoped?) inflation was just a temporary response to shortages following COVID. I agreed that the inflation we suffered was initiated by supply chain constraints. But I, and many other economists, also attached greater weight than the Fed to the poorly-timed fiscal spending increases by Presidents Trump and Biden to increase demand (and hence their political popularity). Such windfalls of manna from heaven are not helpful if there is insufficient supply to match the resulting demand. This was the first of compounding errors our presidents made. Most economists would predict inflation would result from their fiscal folly. But when inflation gets sufficiently out of hand, we go down the path of expecting inflation, which makes inflation much much harder to expunge from the economy. The Fed properly had judged the initial supply chain risk but did not put sufficient weight on how two presidents might compound the problem with very poorly executed fiscal policy. The economy was in a skid, and the Fed felt it safest just to keep an even hand on the steering wheel rather than react more actively by responding to the skid. That was a judgment call for which I was critical. Their failure to respond was frustrating, but it was not malpractice, unless, of course, one has a crystal ball. I have not heard Presidents Trump or Biden express great criticism of the Fed or Chair Powell until recently. Of course, in his first term, President Trump wished the Fed would have lowered interest rates. Every politician is willing to run the risk of inflation for short term popularity at the polls which comes from economic growth. The only difference with President Trump in his first term is that he verbalized his demands that the Fed lower interest rates, while most other leaders keep such thoughts to themselves. But, when the sky (or the market) is falling, suddenly the myriad self-inflicted economic wounds of 2025 have become Powell’s fault in Trump’s eyes. I disagree. Let’s take a closer look at the Fed’s role to see if they are acting prudently. I’m sure it won’t erase the unrelenting criticism he is enduring, but at least we might better understand precisely why the Fed is an independent regulatory agency, not one under the thumb of any president. There are some things that are too important for politics. The protections afforded by constitutions for free speech, freedom of spirituality and of the press, due process, and other rights that permit us to pursue life, liberty, and happiness, are considered so fundamental in civilized society that we do not permit political leaders to abridge them. And, we value supreme courts to protect these rights from those who would like to take them away in pursuit of their own power. We place a firewall between the political branches of government and the Supreme Court to ensure these protections do not become politicized (well, at least in theory). Those justices charged with protecting our rights are insulated from prying politicians by the granting of lifetime tenure. The responsibility of the Federal Reserve and of all central banks in the most developed nations is no less important than our fundamental rights. In fact, citizens of the second largest economy of the world are even willing to have abridged some fundamental rights in return for economic prosperity. A cynic might even proclaim you can mess with our politics and rights, but don’t lay a finger on one’s wallet. For these reasons, an independent Fed that will do what’s in the long term best interest of the economy, despite the constant refrain from politicians to lower interest rates, is precisely what adults in the room should do. There is one quality shared by the world’s most prosperous nations with the highest functioning markets and economies.They all have independent central banks that ignore the whining of political leaders. Today’s graph shows a strong correlation between more independent central banks and lower inflation. This ability to do the right thing in the long run can be frustrating, though. Come rain or shine, governments would prefer to spend more, and leave our bills for our children to pay. But, sound economic policy requires the discipline to save for a rainy day so we have some capacity to stimulate the economy only when unavoidable (and not self-induced) shocks impinge on economic stability. Central banks do this without even the great power of the purse that governments often use and sometimes abuse. The monetary policy of central banks instead steers the banking industry toward making more loans (and hence expanding the money supply) when the Fed deems we need more economic stimulation and when such stimulus will not be gobbled up by an increase in inflation. The Fed also induces our banks to reduce credit issued when the economy is inflationary. Central banks do so by influencing the ratio of cash held by banks relative to their lent assets. Well-developed economies need very smart central bankers, a well-functioning banking system that is integrated into the pocketbooks of the public, and articles of faith by the public that the Fed is looking after our long-term self-interest. When these ingredients are in place, the Fed is able to affect interest rates and hence influence the degree to which consumers and investors will borrow to meet our needs and sow the seed of a prosperous future. When politicians erode the trust we have in the Fed, markets take note. In the past few months, market volatility has climbed dramatically, and major indexes have corrected significantly because the use of tariff policy as a weapon for political purposes and threats of political meddling with the Federal Reserve, have all shaken the public’s confidence in sound economic management. Markets have memories. While the economy could be viewed simplistically as a mere set of transactions, what distinguishes a productive economy is our willingness to transact repeatedly. We recognize that a modicum of trust is necessary. The Fed is charged with maintaining that trust. This is the reason that, as convenient as it may be to make a scapegoat out of the Fed, the erosion of our faith in our institutions is very dangerous. Our prosperity is based on the belief that the Fed is keeping a steady hand on the economic till, especially when waters are the choppiest. Equally important is the need to foster faith among trading partners that each is valued as an opportunity for economic diversity, not derided as entities aspiring to unfair practices. The sooner we recognize that our economic institutions are designed to maintain such faith and trust, and the sooner we expunge any transactional mentalities, the better able we will be to weather economic storms and build strong economies, here and around the world. Personally, I want that adult in the room when our economic future is at stake, even if the short-term medicine is painful at times. I have been critical of Fed policy on occasion, but I also hope that the Fed can maintain its head when all about it are losing theirs.
Ninety days into a new world order, we mere people are increasingly apoplectic about the rate of return in the stock market. If this 15% drop in the stock market is extrapolated over an entire year, our 401Ks will become 201Ks or maybe even 101Ks. At the same time, the wave of automation that caused entire manufacturing sectors in the U.S. rust belt to evaporate into thin air are now coming for those with college degrees. Global automation can probably do little additional harm to those without college educations, but now A.I. has the college educated in its sights. These various factor got me to thinking about rates of return. Today’s graph demonstrates how the value of a college education has evolved over time. I’m particularly interested in the return to a public university education, which remains the predominant model in Canada and the U.S. alike, and especially in the skills we instill in business schools within which I teach. In the 1960s and 1970s, good manufacturing jobs in the U.S. and Canada were plentiful. However, they were the first casualties of the automation first pioneered in Japan (using American intellectual property) and, in the 2000s migrated also to China. Until automation and lower wages found a home in those two nations, many a high school graduate aspired to a job at the company factory, as had their fathers and grandfathers. But, by the 1980s, we saw a significant shift of demand for such lesser-skilled labor and a greater demand for the skills a college degree could guarantee. As a result, salaries rose for college educated graduates, including those who graduated from business schools, while wages were depressed for manufacturing jobs. By the mid-1990s, the U.S. had essentially relinquished low skill jobs to Japan and then China while the American economies converted to service industries - medicine, law, the FIRE services (finance, insurance, real estate), the creative industries, research and development, and education. North America became the bastion of higher education and attracted millions of students from the world over to learn its techniques and perhaps immigrate here upon graduation, or take these skills home with them to ensure higher standards of living elsewhere too and hence also a greater appreciation for and reliance on the western model. The net result was a movement of exports from manufacturing and into services, a great growth in domestic Gross Domestic Product, and a premium paid for jobs taht required a college degree relative to those that did not. An economist would then ask the question - what is the return on investment from a college education? Now, I have worked at Harvard in my post-doc days, and certainly appreciate what it has to offer the world, but that model is rarified. I’m more interested in the return on investment to those who pursue a public university education as that is the most common type of post-high school training most of us receive. The College Board publishes a Trends in College Pricing and Student Aid that provides good data on how much it costs to earn a public university education. In addition, groups such as Coursera (Business Degree Salary: 2025 Guide | Coursera) document how a business degree offers a premium above the typical earnings of a college graduate. When I run the numbers, I can make some interesting observations. First, as we would expect, the value of a college education, especially from a business school, increased dramatically as our economy converted from manufacturing to services in the 1990s. The more surprising observation is what happened after that, though. I model a college education as an investment. This investment certainly includes tuition and fees but does not include room and board because one must shelter themselves whether we attend college or work a local job. But the larger cost of investing in higher education, especially for those who attend lower tuition public schools, is the sacrificed income from those jobs one must sacrifice right out of high school if we are college-bound. Using the data described above and from additional data provided by National Center for Education Statistics Digest and an article by two Federal Reserve economists named Jaison R. Abel and Richard Deitz entitled “Is College Still Worth It?”, I could compare the investment in education to its return. I then calculate the return on investment as would any financial investment. What is the Internal Rate of Return for a typical career to social security retirement based on the premium one enjoys from a college business degree relative to the investment. Formalities aside, we see a great flattening of returns. These returns are strong for those who can complete their course of study, but they peaked at almost a 25% return in the mid-1990s, levelled off but held their own through the 2000s, but started to taper off in the 2010s. The decline even accelerated in the 2020s, even before the influence of Artificial Intelligence. Now, a rate of return above 20% is still great, but the trend is trickling downward. In addition, it is this sector of somewhat analytic skills that are also most easily replaced by artificial intelligence. As AI replaces some accounting, auditing, financial analyst, social media, supply chain, and management skills, it may be difficult to attain the premium we have long enjoyed in the analytic fields. Other creative fields may suffer too as machines write our reports or our screenplays, AI performs our legal research, and computers author our books and articles. If so, we may see an eroding of wages in these sectors as demand falls, and hence a decline in the rate of return of good paying jobs relative to the cost of education. Also worsening this trend is the steady increase in higher education costs since the late 1990s. Of course, these displacements will most quickly and likely affect entry level positions. As one garners experience and if one keeps up with leading edge techniques, we will always need our most skilled to oversee our artificial intelligence machines. And, with the rate of return for higher education still well over 20%, there is not another investment that earns such a return but without the risk that has roiled financial markets three times since 2008 - over the Great Recession of 2008, the Great COVID pandemic of 2020, and the Great Shooting Oneself in the Foot of 2025. It will be interesting to see the extent to which we reup our great education investment. After all, rates of return, while flagging a bit, still remain strong. Education also provides other non-monetary quality of life benefits that enrich our civic life. Now is the time to up our game in the quality of education. We must also develop industrial policies that encourage and reward even greater degrees of workforce expertise and sophistication so we can remain one step ahead of the AI machines bent on replacing we humans. And, we must make it easier to attract the best and the brightest to our institutes of higher education, including foreign students we wish to remain here upon graduation or we wish to trade with as they return home and simultaneously increase prosperity elsewhere. You see, the wealth elsewhere induces greater imports, so if our economic and education system can endear us to those who return home after a fine education here, that allows us to maintain the global relevancy that has maintained our standard of living in the post-WWII era. The United States and Canada can not only accept but also excel in that challenge. That does not imply we will. To also recognize to exceed in a more competitive world requires us to innovate and have a plan for excellence, not take the counterproductive path of tripping others up instead. And, if we are to avoid the discontents by leaving an entire generation behind when we converted from industry to innovation, we must also have a plan for those who fall through the cracks. If we are to transition to a 21st Century economy in a cohesive way, nobody can be left behind - lest we wish to endure the fits and starts of disillusionment that seems to plague some of the world’s most laissez-faire economies.
It’s been a wild ten days. I apologize on behalf of all economists. What has occurred of late has little to do with economics, even if it has profound effects on the economy. Let's try to see the signal through all the noise, distractions, politicking, volatility, and name-calling. I’ll leave to others an explanation for power politics based on the theory that might make right. Instead, I’d like to offer an explanation of the intricacies of international finance so you can better understand the economic forces at play. Hopefully it will allow you to cut through a lot of the bull espoused by more zealotrous commentators. They profess to know much more about the art of the deal, while economists look at things from a longer-term perspective in which participants actually long to interact with each other, both now and in the future. Let’s begin with something that sounds very boring, but is actually critically important, as you shall see. When I speak about the bond market, let’s focus primarily on a single instrument, the 10-year treasury bond that generates the single most important bellwether interest rate on the planet. After all, we are all affected by interest rates, in one way or another. This 10-year treasury bond is actually very simple. It is in essence a loan made to the U.S. government that promises to pay a predetermined sum called its face value upon maturity (ten years after it is issued) and a predetermined “coupon” payment every six months. The actual price one pays for such a bond depends on how we’d value the returns of the bond relative to its perceived risk and the risk and returns of other investments. Such Treasury bonds issued by the United States government are the lifeblood of the global bond market. Anybody with some surplus US dollars the world over can park their dollars into Treasuries and earn a fair and very safe return, so long as they wish to hold investments in U.S. dollars. It is this dynamic that caused the U.S. president to back down from tariff threats and declare a badly needed 90-day pause in tariff imposition. After generations of faith in the U.S. dollar and the sanctity of American promises, investors (nations, institutions, and individuals) the world over lost confidence in U.S. bonds and the U.S. dollar. Such U.S. debt is used to finance federal government budget deficits. Foreign investors are willing to fund such borrowing to maintain federal spending for three reasons. One, they believe their investments are safe and the U.S. will always honor its promises. Second, they believe the twice-yearly coupon payments in U.S. dollars are valuable and reasonable. The third reason is that international investors want to hold U.S. dollar assets (that also pay some interest) because they are confident in the U.S. dollar as the primary international currency that is prized and traded the world over. The single largest holder of U.S. government borrowing is Japan. When the U.S. transitioned from a goods-based economy pre-1970s to a service-based economy since then, Japan filled the gap by providing the manufacturing goods (appliances, textiles, cars) that America shed and its consumers prized. Decades before the rise of China’s manufacturing, Japan reinvented itself from a nation regarded for its inferior goods to Sonys and Lexuses (Lexi ?). It was much less affluent in the 1960s and could not really afford to buy as much from America as Americans clamored to buy from them. That meant they received more American dollars than they returned in purchases. The difference they parked in the purchase of U.S. Treasuries. In 1987 Japanese financial institutions became increasingly concerned about America's capacity to repay the mounting U.S. government debt that was then about $2 trillion. They warned the U.S. government to be more prudent financially, but their concerns were ignored, despite the fact that the largest share of lending to the U.S. government was from Japanese purchases of US treasuries. At one weekly bond sale at the Treasury, the Japanese refused to show up. On that Black Monday, October 19, 1987, global markets lost $1.71 trillion and US stocks fell 23%, the largest daily drop in the history of the S&P 500 index. A chastened U.S. government got the point, even if it continued to rack up debt. What would have happened if the U.S. government instead strived for a balanced budget over time? If it no longer ran a budget deficit, it would no longer need to borrow. And, if it didn’t need to borrow, countries like Japan back then, and China today would have little alternative use for their excess U.S. dollars, except perhaps to invest in the U.S. or buy more U.S. stuff. This reduced desire to hold U.S. dollars would result in a weakened U.S. dollar that equates imports and exports and also require a lower U.S. interest rate because government borrowing would not be necessary. In the end, the U.S. would no longer run a trade deficit. A balanced U.S. budget (neither in deficit or surplus) would roughly induce equally balanced international trade. For instance, the US trade deficit in goods and services in January was about $130 billion, or about $1.56 trillion annually. Meanwhile, the US budget deficit is about $1.8 trillion. These numbers are typically quite close, as today's graph shows. There are a couple of periods in which the budget deficit spurted, during the Great Recession of 2008 and the COVID era. Those two eras saw the Federal Reserve funding much of the budget deficit temporarily through their radical monetary policy of massive bond purchases to ward off recessions. If those two periods are discounted, the correlation between the size of the budget deficit and its implications on the trade deficit (and hence the international capital surplus the US enjoys) are profound. In other words, the US needs to borrow to cover a deficit. This desperation forces the US government to increase interest rates sufficient to repatriate those excess trade dollars that flowed offshore for net imports over exports. Without a budget deficit, exchange rates would adjust to essentially assure no trade deficits either. This is what economists refer to as the "twin deficits". P erennial US. trade deficits keep the US dollar unreasonably high and imports more attractive for Americans than exports from America. The White House is loath to discuss the twin deficits. It would force our leaders to point their thumbs at themselves when they are pointing fingers at other nations. The executive branch does not want to focus too much attention to the US budget deficit as it tries to make permanent its tax breaks for the wealthy. So, what happened in the bond market to force the President to blink, first with a tweet to his followers, and then to the rest of the world? Just like in 1987, foreign bond investors were gravely concerned about US policies and decided to not reinvest their surplus dollars into US bond markets at their regular rate. With fewer buyers of bonds, but still desperate Department of the Treasury sellers needing to raise money to pay for government, the price of new and existing bonds fell dramatically. This also forced up bond interest rates, called yields, because those coupon payments every six months can be purchased by buying a devalued bond. Hence, these cheaper bonds offer a higher “yield”. Now, none of this description denies that there are not some issues to be worked out with America’s trading partners. But, trade will never be balanced so long as the exchange rate simultaneously equates both the flow of trade and the flow of financial capital internationally. And so long as the US government must rely on foreigners to fund its budget deficits, the exchange rate will adjust to perpetuate its trade deficits. If trade deficits are induced in good measure because of federal budget deficits, what's a president to do? Ideally, we'd sit down and negotiate good trade deals that ensures trade as tariff-free and non-tariff-barrier-free as possible. Hopefully we'd do that with some humility that our trade deficit is due to an artificially strong US dollar that is kept strong by higher than necessary interest rates to fuel government borrowing. It appears that an agreement with China is most important because these are the two largest economies in the world. But, that does not mean balanced trade with every nation, only balanced trade on average. As we discussed last week, American will likely have a trade deficit with lower per-capita income nations, such as China, even if there are issues with intellectual property rights, access to markets, and other annoyances that should be worked out. Do I expect President Trump and Chairman Xi will sit down together in the Oval Office? That’s highly unlikely given the Zelensky lashing. And, if so, when President Trump proclaims “you don’t hold any cards,” Xi may respond “au contraire.” China holds some pretty significant cards right now. It owns more US bonds than any nation but Japan, and it purchases US bonds at the highest rate. With the current 145% tariff rate the US imposed on China, and China's retaliatory 125% tariff rate, trade between the two nations is in effect nil. That’s why China said it would not raise its tariff anymore. It doesn’t need to if trade has in essence come to a halt. This means China cannot continue to fuel profligate US government spending. Potentially even more destabilizing is if China begins to sell its huge stock of past US debt and encourages other nations to do the same. That would bring US financial markets to its knees and potentially result in a financial meltdown that is of a scale of the 1987 financial shock and the 2008 Global Financial Meltdown combined. That’s scary stuff. China holds far more cards and has prepared its people to endure more pain than President Trump may have anticipated. Many other nations, including Canada, are angry as well, and are willing to endure pain while it reorients its trade and investment. This is a recipe for potential financial calamity. Should our economy be flown into a downward spiral through incompetent economic policy, it may be difficult to pull out. If nations flee the US dollar, the resulting exchange rate depreciation may be good for exports, but a desperate Congress, unable to balance its budget, will induce ever-upward interest rates to maintain its borrowing fix as international cash becomes scarce. I wonder if the administration has factored in such risks. The market is starting to realize the stakes. Even if this reality becomes enough to sober up President Trump’s trade threats, lasting damage well beyond China is likely already done. President Trump’s treatment of his allies makes them suspicious that any agreement forged with his office will be kept. After all, leaders around the world see what he did with his closest ally of Canada by negating a treaty he negotiated with them in his first term, which he then bragged was “the best treaty ever.” And Trump’s willingness to play fast and loose with on-again and off-again tariffs, with braggadocio and bluster, threats and trolling, offends world leaders. Nations are now in two categories, those who are victims of his taunts, and those who realize they may be someday soon. Neither camp has much trust and confidence, the two ingredients the Treasury relies upon to remain the world's safe haven for investment and the American dollar needs to be considered the world’s reserve currency. Already the US dollar has plunged the most since 2022, and we are only a few days into this drama. It's time for steadier hands. We need to acknowledge that nations may choose to invest with more reliable partners and hold another currency like the Euro or the Renminbi as a shared currency. This regime change would be incredibly costly for the US Treasury and the American people. Of course, the American people can simply pay for government so it doesn't need foreign nations to bail it out. Note, though, that the argument of tariffs as a way to pay for government is lunacy, given the distortions a rejection of free trade creates, just to have Americans pay in the end for government through a tax on the goods and services we buy. That is even worse than the middling solution the U.S. currently employs that hamstrings exports and requires the U.S. to depend on the kindness of foreign savers. Stella! These observations are not political, just plain economics. Maybe America can muscle its way through in various political ploys, but it is facing an intensifying international economic headwind as it tries to maneuver its way out of the current predicament. I sure hope for the sake of preservation of a reasonably highly functioning world trade order that President Trump gets some sound economic advice beyond the peddling of political pablum that occurs in various echo chambers. By the way, what is the cost of our trade deficit? About 3% of our GDP, around $1 trillion. The cost of the recent stock market crash? About $10 trillion. The cost of loss of trust from the international financial system? Priceless.