The American Economy Isn’t as Bad as You Might Think

I'm Natasha Serin, I'm a professor at Yale Law School and a co-founder of the Yale Budget Lab. I'm Dan Wong, I'm a research fellow at Stanford University's Hoover Institution. And Dan and I are friends and also colleagues and we've been spending a lot of time thinking about the United States and our economy over the course of the last many years. And particularly of recent of this narrative about the idea that the United States is in some substantial decline, much like the decline of the Roman Empire many moons ago. And last month we had President Trump organizing a big UFC fight on the lawn of the White House, spring to mind gladiatorial combat in the stadium, right? Absolutely so, but I think I'm right in saying that our answer to whether we're witnessing a Roman Empire type of decline is unequivocally no. Is it unequivocally no? Is it probably not? And I should just say now that we're on this Roman theme, like the Roman Empire, like according to the historians decline for like 200 years, so like are we witnessing decline, it's even hard to say. But I definitely agree with you that the United States is still looking pretty sharp among all of the major blocks in the world. And so what we should really try to do is to assess a little bit of how and within these three big blocks, the U.S., China, Europe, how is the U.S. doing? And I think what we are really feeling right now is that the U.S. is sort of the cleanest shirt and the dirty laundry basket. And so let's think a little bit about what are the big strengths and the weaknesses of the American economy. Yeah, I think it's actually a very interesting set of questions, particularly for me since I tend to focus a lot on what's happening in the United States and the nature of our domestic growth and our opportunities and potential. And there I feel like the U.S. is almost like a tale of two cities in that partly what is happening is we are an economy with just like tremendous strength. All of the leading AI labs are in the United States training their models in the United States, contributing meaningfully they hope over the near term to productivity growth that's going to be realized in the United States. SpaceX's IPO just a few weeks ago made many multi-millionaires here in the United States. So really remarkable. A lot of that remarkableness has to do with the fact that you know Dan, you and I are both immigrants to the United States and we are not alone in that a lot of a very substantial number of Fortune 500 companies have been started in this country by immigrants and the children of immigrants and that's because of something that like sounds kind of cheesy I guess but is really deep and true about the nature of the American dream that if you want to innovate, if you want to build, if you're an entrepreneur, you disproportionately are likely to want to come to this country to have access to a network that is interested in sort of mobilizing those types of ideas and frankly dollars that are potentially going to be invested in your opportunities for upward growth, not just for you, but for starting a company that is able to employ thousands or tens of thousands of people like the Googles of the world or like the microns of the world. You're also a system where a lot of those sort of fundamental tenets I feel like about what makes the American economy kind of like great and remarkable, I worry you're under some attack and you see that with like attacks on skilled immigration that are coming in this country at the moment, I'm a law professor, I think a lot about like threats to the rule of law and to institutions and what it means when foreign investors start to get a little bit nervous about the nature of whether they can truly trust that when a court in this country makes a ruling with respect to an important business question, whether that ruling is going to ultimately be respected. And I think all of those questions have always kind of just been assumed, the answer to them was yes, but I worry that the dysfunction and sort of the movement away from a nation that is really like built on the rule of law to a nation that shifts such that it is about deals and deal making with this administration is one that has economic consequence that is really likely to reverberate. A lot of it is pretty scary and when I take a look at a lot of the parts of the economy that are not tech, that are not let's say finance, there's still quite a lot of dysfunctions in a lot of these different places. And so my home is in the state of Michigan, Michigan has been kind of a net loser in manufacturing over basically the last five decades as the Detroit big three automakers have gone steadily away. A lot of the automotive jobs have moved to different parts of the United States. Some of it has moved to Canada and Mexico. There's a lot of manufacturing weakness. And what really struck me with President Trump's announcement of tariffs over liberation day last year was how other countries were able to retaliate, especially China, by withholding key materials from the US and so in the case of China, top leader Xi Jinping decided not to sell rare earth magnets to the US automotive plant started shutting down. And this is when we started discovering that there are all of these critical vulnerabilities, not just with rare earth magnets, but something like a lot of antibiotics are made in China, a lot of cardiovascular drugs are made in China. So is the US a really strong economy? If it is so dependent on other countries for a lot of these critical big technologies. So I want to ask you a little bit more about what worries you most about the economy as such Natasha, not just the broader issues of rule of law, not just the broader issues of erosion of democracy, but the economy as it is, how's our physical capacity doing and how is the US able to maneuver through all of these issues around that and deficits? Yeah, let's like define some of the issues maybe to start. If you think about the deficits that the US government runs, what that essentially means is that we spend more each year than we are bringing in. That's both because we're spending a fair amount and by the way that spending is going to go up over the course of the next many years somewhat mechanically as our population ages and for example, we're paying out more beneficiaries of social security. On the flip side, the United States is an incredibly low tax country. We are like number 31 out of 38 OECD countries with respect to how much revenue we bring in every year for the country through tax collection. And so what you have is you have a delta between what we spend and what we bring in and that difference is growing pretty sizably over time. Right now it's something like 6% of GDP. It is going to increase over the next decade to something like 8% or 9% of GDP. And that's over a trillion dollars already right now, right? So our deficit every year, the amount that's going up to debt, that is going to rise higher and higher. Yeah, though like, and sometimes people say as they're trying to make the case for why we need to be more fiscally responsible, they say things like no parent would let their child run these sorts of credit card bills, you know, would say it's okay that they're spending so much more than they're allowance if they're young or then they're making as young adults. That's not exactly the right way to think about it from the perspective of the US government, of course, because we print our own currency. So we like print the dollars that we're spending. And so you might think well, so why should I care that much about like, you know, trillions of dollars here, trillions of dollars here, who really cares? And can't we just print more money? And there's those funny memes. I'm sure you've seen like money printer go burr. Go burr, yeah. So that's like this genre of argument. And I've never been that sympathetic with this genre of argument in part because we know that there are really substantial costs for the economy associated with running really large deficits. One of the costs is that it turns out you spend a lot of your dollars on servicing your existing debt. What's also true when you're running really high deficits is you're in a situation where that type of expenditure leads to higher interest rates because it means that there's more debt outstanding for the US government. So our borrowers are going to say, well, I'm going to charge you more maybe because I'm less certain you're going to pay me back or just maybe because the existing amount of debt that we have outstanding is like quite significant. And that means higher interest rates, not just for the US government, but also for all of us as we're looking to buy houses or by cars. So I worry that these costs are pretty significant and that's even outside of the idea that we get into some sort of crisis where we're dragging down our economy's capacity as a result of the checks that we've already paid out that we're having trouble financing. We started this conversation with the question of where are we in the United States vis-a-vis other countries and potentially vis-a-vis our own economic decline. You are a China expert who spent the last few weeks actually in the country and I'm kind of curious, like having been there, having spent time there. what's the view on the ground and particularly how competitive do you feel like to you vis-a-vis the United States? Well, maybe the United States is not facing in Rome and style decline, but the Chinese have their own form of decline. So it's my first time back essentially in three years. I used to live for six years in China between Hong Kong, Beijing, and Shanghai. And what I was really struck by with being in China right now is how wonderful and livable a lot of the cities are, you know, the city of Shanghai grows ever better. It was partially built by the French. It's full of these leafy boulevards and has become a quieter city since I've lived there. All of the cars are honking a little bit less. All of the fleet has been electrified and the coffees are getting increasingly amazing. So 20 years ago, there were not that many Starbucks in China, but now you have all of these amazing coffee creations. At the same time, I also saw that China's economy is remarkably weak in many, many ways. The property bubble has burst. Youth unemployment is really high. Even though Shanghai is a really amazing city, people aren't really having kids. And so the sort of startling contrast that I feel in China right now is that people are living in this sort of serene discontent in which their lives are pretty good. If you're a young person, you can expect really amazing bowls of noodles that are really cheap. You can charge your electric vehicle in a pretty cheap way. There's all sorts of beautiful things that you get to see. But yet, people are kind of discontented because there's all of these problems that are with the Chinese economy right now. And people don't necessarily have a tremendous amount of hope for the future. And that is kind of always when I'm trying to grapple with in China now. One of the things I think about based a lot on your work, Dan, about China is just like its capacity to build. And I think about that sort of dynamism a lot as we're thinking about this artificial intelligence revolution and the ways in which China is playing an incredibly prominent role. And I wonder if like you can actually see that in some sense in China presently, like as you're walking around or as you're having conversations with people, like does it feel like the economy is dynamic and evolving in ways that are kind of revolutionary as a result of artificial intelligence? There's all sorts of ways in which China still feels like it is building the future. So the subway lines are still expanding and a lot of cities. The air pollution has dropped pretty substantially. Now every one in two cars sold in China is electric and it's much closer to one in ten cars sold in the US here. And so there's all sorts of ways in which there's more robots on the roads too. There's people nervous and excited about AI as well. And there's all sorts of of ways in which there's been a new phenomenon in the US called China Maxing. Have you heard of this Natasha? No, what is China Maxing? China Maxing is mostly a social media phantasm. But a lot of people have been looking at these videos of the skyline of Shanghai or the skyline of Chongqing, which is really amazing. There's these drone shows out there and people are feeling like, oh, you know, you're meeting me at a very Chinese time of my life. You're drinking tea more. You're like wearing slippers inside the house. People are playing Matty on more. Maybe you're a student. Oh, not a lot of my students, my mother is obsessed with Matty on it. They have a club. They play every week. I'll play with her. She's China Maxing as well. She's China Maxing too. And it's attracting some more people, including young people who feel like they haven't been able to see China for quite a while and more people, more Americans are starting to visit China and have a good time there. You know, I think it's not just China in that I feel like you're seeing American citizens sort of moving abroad in record numbers. I have conversations all the time with people who are thinking about whether or not they can get citizenship in other countries. Maybe that's a result of the ways in which they're viewing our political dysfunction and wanting some sort of alternative. And so I feel like that is kind of at the forefront of at least parts of the American ethos at the moment. And I kind of wonder like what's driving that? This is kind of the contradiction with the US. We can take a look at this situation with the US inequality, how narrow the cone of growth is with data center spending and quite a lot of tech. And we can see all of these problems on the horizon. You know, what is going to happen with rule of law? What is going to happen with demographics? What is going to happen with, you know, sort of our research universities and everything else? But my feeling is still that when I'm in the US, this country has all of these amazing advantages that other regions don't. And I think it is often immigrants who are able to see America the most clearly. Some people who are, let's say, on the right side of the political spectrum don't really want to acknowledge any issues with the United States. And then sometimes people on the left side of the political spectrum can only acknowledge the problems and all of the you know, many terrible things, let's say, that is a very real and valid that the United States has not yet corrected. And so when I'm walking around in Europe and I spend quite a lot of time there, one of the things I'm telling the Europeans is that, you know, I think that Europe is amazing. And all sorts of ways. I was just in Switzerland. There's amazing croissants. All sorts of really good things. But what Europe doesn't seem like it has relative to the United States is first, as deep capital markets that are really able to muster enough capital to bet the farm on transformative new technologies. Okay, but why do capital markets matter relative to croissants? Yeah, well, the croissants matter quite a lot as well. But the capital markets also do. When we have a lot of savings, when we have these really big important technologies, whether these were, let's say semi-conductors in the past, or telecommunications equipment, or AI, or kind of named your pick of, you know, really big new sources of growth, not the five-century-old croissants, we need to be able to muster enough effort really to try to make these a reality and to try to spread these benefits and control their risks and really try to push forward our standards of living. And the Europeans haven't really been able to do quite a lot of that. They're mostly buyers of American technologies. They're not really able to produce a lot of these leading new technologies. It really is true that they're much, much more regulated in which they have to spend a lot more time focused on regulatory reviews and license approvals. And you know, the other big thing that Europe doesn't have is elites that are able to renew themselves through immigration. And Europe certainly has had a lot of refugees show up at its source step. And these people have been able to integrate somewhat into the European economy but not really into the ranks of the elites and not without triggering some sort of a broader backlash among the native born and let's say France and Germany where the right populist parties are outpolling of the incumbent parties now. And so when we are taking a look at the American economy, what we're seeing is that the US dollar is still really important. Still plenty of people want to buy American debt, which is able to fund some of our deficits and not be able to allow us to do all the things that we want to do. And it's not really clear to me that in spite of America's problems, people are really moving all of their assets out of the U.S. to let's say buy German bonds instead. So Europe is not necessarily doing super well. Europe's chair of American GDP has been kind of stuck at around 70 percent of America's levels for quite a long time. And it didn't recover as well from the pandemic, right? There's all sorts of ways in which Europe cannot recover very well. It cannot pursue new opportunities. And they can't even fix their conditioning. They can't even get the air conditioning in France when it's so hot. Is that a cultural thing or is that a wealth thing? Like, I am just I am struck by it as well. Yeah. And kind of curious about like what explains it? I think a lot of this is that Europeans have the self-conception that they know how to deal with heat. Know the Italians know that they keep out the sun in the afternoon. I do not know how to deal with heat. And I'm Indian. So I guess I should, but I do not. And I might, you know, my personal interest in this is that my mother-in-law lives in Austria. She's Austrian. And in order for her to get an air conditioning unit in her building, you need to have unanimous approval from all of the other Austrian residents inside the building. And when are you going to get a bunch? I am sure we have versions of that with like our co-op boards and all that it's just that air conditioning is like normalized in a way that everyone has it. Well, maybe New York City co-op boards are America's answer to European stagnation. I have long said about the United States and part of the reason why you've seen all of this over the course of the last two years. You've seen us initiate trade wars that have driven up the effective terror freight to levels we haven't seen in this country in the last century. You've seen us start conflicts be they, you know, um, seizing the president of another sovereign nation or in Venezuela or this conflict that we're seeing in Iran where the nature of the United States is like a stable hand in the world and kind of a trusted ally has really disintegrated pretty meaningfully. And yet you haven't actually seen much impact on a lot of indicators of how much other countries and frankly investors trust the United States, right? Dollars are still flowing into this economy. The stock market is booming. We're in a situation where it's relatively easy to find people to finance are very large stock of both public debt from the government and private debt that's coming from a lot of these booming AI companies. And so why is that? And I think part of the explanation is a little bit what you're describing, like where else are the dollars to go? They're not gonna go to China where foreign investment has basically fallen off as a result of real concerns about rule of law, about the tendency of an authoritarian government to inflate the economic picture that it presents the world. And frankly, they're not gonna go to Europe because it has its own type of dysfunction. It's own problems with respect to its debt, which are more significant in meaningful ways than the United States is. - Yes, and this is the really striking thing that when I was just in China over the past month, taking a look at sort of the heavy hand of the government and trying to control a lot of elements of society and the economy, I'm still seeing so many of these shock tactics that the government has done, that has really hurt the confidence of a lot of people. So Natasha, when you bring up some of the issues with the transactionalism of the Trump administration, I'm still thinking that, well, the only thing worse than transactionalism is sort of just running rough shots through the lives of the people with things like the Zero COVID policy, which is still traumatized, the big city like Shanghai, in which something like 25 million people were unable to leave their home for roughly 10 weeks in the spring of 2022. Xi Jinping has also triggered a really big property correction. So the Communist Party has decided that property values are too high in China. And so they try to prick this bubble, that ruined a lot of developers and property prices have fallen by roughly one-third since their peak about five years ago and when so many Chinese households have most of their savings in the property market and the value of that falls by one-third, people are really feeling a lot poor. And when I'm taking a look at China, I see all of these amazing products. Yes, much better electric vehicles, much better-- Much better, much cheaper. Much cheaper. And I spend a lot of time talking about how much Chinese developers, as well as the Chinese state, have built energy in China. So last year, China built 300 gigawatts of solar power. What that really translates to is that when a Chinese consumer charges their electric vehicle to a full range, it costs them on the order of about $13, essentially, to have a full tank of gas. And that's what enormous amounts of energy investments are really, really mean. So they're getting better electric vehicles. They're getting better coffees. They're even getting better croissants, which I have enjoyed in Shanghai, as well. But what you're also seeing is kind of a skittish consumer that isn't really able to spend. They have all of these big uncertainties about the value of their investments. The Chinese stock market has not boomed as much. The Chinese AI labs, which are kind of the only peers in the world, relative to the American labs, they're able to deploy about 10% roughly of the capital of the American AI labs, in part because of American export controls, in part because the environment is a little bit more uncertain over there. And what's really striking to me with China right now is how few people are having kids. So according to the official statistics in China, China's total fertility rate is about 1.0. So an average number of children that a family can expect to have is 1. By comparison, in the US, it's roughly 1.6, 1.7. Also declining pretty substantially, but not nearly as substantially as China. And not nearly as substantially as China. And you know what, China also doesn't have many immigrants. There's this Irish writer, who is named Sam and Wright, who put out this really astonishing calculation to me that the country of Ireland, a country of 6 million people, has about just as many immigrants as the country of the people's Republic of China, 1.4 billion. That's wild. Both of them have about 1 million foreign people. That's wild. Isn't that crazy? So there's all sorts of ways in which-- But can you connect that to the autocracy and to zero COVID and to all of the skittishness of the consumer? Do you think those are drivers to why people aren't immigrating to China? Why-- I mean, you said we're all China maxing. So why aren't people immigrating there? But also, why aren't dollars flowing there? Because a real worry that I have is like we made a lot of choices in the 90s to open the world to have China join the world trade organization. And the hope was that China would look more like the United States at this moment in time. And what I worry we've seen in recent years is that the United States is starting to look more like China. And in that world, I should be worried in the future about exactly what you're describing coming to the US. I should be worried about the skittishness of our consumers and the lack of foreign investment and the lack of immigrants. And you're already starting to see anecdotal evidence, at least, that some of that is happening. You know, one of these exercises I did recently was I pulled out the list of statements that President Trump has made about President Xi. And President Trump said that President Xi is brilliant, so smart, comes almost out of central casting. I have a hard time parsing what that last bit means. It's as if Xi Jinping says handsome as Tom Cruise or something. But I think what is really scary is that Trump is also emulating Xi and maybe taking an equity stake in a company here and there. It's exactly, it's moving in the direction of state-based capitalism. That's kind of the description of the plan. That was the description with Intel. That's description of a lot of, if you listen to what David Sachs is saying about some of these AI labs and the idea that the government should take an equity stake in them, that sort of is quite similar to the Chinese model in ways that I feel like are pretty concerning. State capitalism with American characteristics, in which the White House, as well as the Department of Defense, have already taken equity stakes in companies like Intel, companies like MP materials, and that is very, very real. And so when I'm thinking through some of these issues, I think that it's definitely the case that we have a lot to worry about, that the Trump administration and a lot of ways seem very intent on throwing away a lot of America's best advantages. How can it possibly be a bad thing that so many of the world's most ambitious people want to move to the United States and build their families and build their companies right here? Why should we possibly try some of them into the arms of China? Because there are so many of these AI researchers that are of Chinese descent, that have attended Chinese universities, that are Chinese nationals. And isn't it better that all of these amazing AI researchers are creating companies in Silicon Valley, rather than in Beijing or in Xinjiang or Shanghai? But I think the autocracy of China is still kind of a limiting factor for what, how far China can go. There are all sorts of problems with, tomography with a political system there. Next year, Xi Jinping is going to give himself another five-year term at the 21st Party Congress. He'll be in charge for 20 years. And at that point, Xi Jinping is still kind of a young man. In 10 more years, he'll be old enough to run for US president. So, you know, there's all sorts of ways in which, you know, Xi is aging. I think it's going to be self-destructive. And when you take a look at all of these economic issues, confidence issues, demographic issues, you know, China seems to me to be losing its position. But I think when investors, whom you and I speak to on a pretty regular basis, when they're taking a look at everywhere else, you know, it doesn't really seem like any other major block is going to be a really amazing, challenging to the United States. Yeah, and it's something I actually, it's both like this like great blessing, right? That if you think about the 20-year trajectory of countries in Europe that we've been talking about of China, we haven't talked that much about India, but India as well. If you kind of compare the US trajectory to like the rest of the world, you should be feeling on a host of dimensions pretty good about where the US sits, with particularly with respect to its ability to sort of harvest the potential for deep increases in productivity and economic growth that are coming on the heels of artificial intelligence, that to be clear is going to create a whole host of problems, potentially, right? Because if like Daru Amadeh who runs Anthropic is right, with the unemployment rate shooting up to 20% is what he said. Even if it's, even if that is a massive exaggeration, getting an unemployment rate, that's at 10%, and massive displacement of white collar work is like a big deal and a big economic problem that this country is going to have to confront at a time when it already has a ton of debt outstanding and needs to figure out how to make new investments. But it still feels like what you're describing is, and I think this is my view too, that the US is sort of best positioned to sort of harness the potential of the next decade or two decades relative to anyone else across the globe. But I worry that that's like a blessing and a curse in that best positioning actually discourages us from doing a lot about a lot of really deep problems that we have, about problems about government spending and deficits that we're running, but also frankly about problems about increasing inequality and the fact that we're in a country where, A lot of people feel like they are being left behind in ways that are showing up in our political outcomes and our discourse, but also in ways that are showing up in the day-to-day lives of people, particularly in the last few months, when they've watched their wages and wage growth be fully eaten away by increases in energy prices associated with this war. - Complacency is always really bad. An implosion is always an option. There's all sorts of ways in which people are very nervous about let's say the remaining two and a half years of the Trump administration. And I think the really scary thing is that confidence is something that's pretty easy to break and nobody ever expects a financial crisis in exactly the same shape that they emerge. And when these financial crises come, they come lighting fast and catches everyone off guard. So it's never okay to be complacent, but it's still, I think, okay to celebrate what the United States has right now. And not really be too fearful yet that the Europeans are gonna solve their growth problems. These people can't even install air conditioning. And I think that we're also not gonna expect the Chinese to solve their problems is China going to transform into a political system that is able to work out political succession very easily. Are they going to be able to install confidence in their entrepreneurs who have been deeply shell shocked by everything that the Communist Party has done in the last couple of years. If the international investors are not, you know, spending too much of their time thinking about the growth and dynamism of the US, I don't think that they're all going to pivot to thinking about China instead. - Yeah, I agree with you. I think we should celebrate. And again, it's our 250th anniversary. So full cause to celebrate the sort of remarkableness of the American economy. But I do think, you know, it took 250 years to build a system where investors trust and want to hold the dollar as the safe asset of the world and believe in our institutional strength and believe that, you know, when a commitment is made by our government to pay back its debt, that commitment will be met. I just worry it takes a lot less time to sort of squander all of that remarkable potential and that you might very well see to your point, like crises happen slowly and then all at once. - Yes. - And so I just think that the tendency is in the direction, if you watch and sort of witness, not just policymakers, but industry leaders kind of talking about growth in the United States, the potential of the United States, talking about these three mega IPOs, including SpaceX and soon to come open AI and in the topic that are on the horizon. There's a lot of sort of like ra, ra about the potential and the growth and the capacity that our economy has. And I just think that there are real threats on the horizon that it doesn't particularly feel like our system is super well equipped to navigate. And by the way, you said this like two and a half years left of the second Trump administration, it's very likely that those two and a half years are gonna coincide with massive technological change, movement towards things like artificial general intelligence where it then becomes hard actually to think about what the regulatory framework is that you put on this technology since it's so advanced relative to the systems that we even have today. And I don't know, it doesn't feel like our political system is sort of super well equipped to navigate that. - So Natasha, we started the conversation by speculating about whether the US is in imperial Roman decline. And I think the answer that we are selling on is probably not. So what are you thinking about on the 250th of the anniversary? - You know, I am thinking about the fact that only in America could I go to Dunkin Donuts and get an actual bucket of iced coffee and what a remarkable place we are. - Did you just say a bucket of iced coffee? - Nothing could be more quintessentially American than that. (upbeat music) [BLANK_AUDIO]