☀ C'mon, Republicans, this isn't a 'dark moment' for an America 'in decline'

Also: 5 Quick Questions for … economist Martin Baily on productivity, protectionism, and AI

😎 Hello! I’ll keep this short and sweet. Between right now and the end of August, all my wonderful free Faster, Please! subscribers can become annual paid subscribers at a monster 50% discount, or $30, from the regular annual price. I think it’s a really great deal.

With a paid subscription, you get full and timely access to all my essays, podcasts, as well as the great 5 Quick Question Q&As with leading economists, technologists, policy analysts, and other smart people who also want to discover, create, invent, and build a better America and world. (And don’t forget I have a book coming out October 3, The Conservative Futurist: How to Create the Sci-Fi World We Were Promised. You can pre-order now!)

Click the big blue buttons for more details on this great offer!

---

Quote of the Issue

“Never has there been a more exciting time to be alive, a time of rousing wonder and heroic achievement. As they said in the film "Back to the Future," "Where we're going, we don't need roads." - President Ronald Reagan, 1986 State of the Union address

---

The Essay

☀ C'mon, Republicans, this isn't a 'dark moment' for an America 'in decline'

It’s been said there are only two basic story macro-plots: “the hero goes on a journey” and a “stranger comes to town.” Likewise, there might be only two basic political campaign macro-themes: “you’ve never had it so good” and “it’s time for a change.”

So, understanding the latter, I’m not shocked at the downbeat tone of the Republican presidential debate earlier this week. Florida Governor Ron DeSantis, for instance, frequently mentioned America’s supposed “decline,” while businessman Vivek Ramaswamy said we are living in a “dark moment.”

Yet even discounting for the typical harrowing hyperbole of the political challenger, that negativity was all a bit too much. Look, I (still) happily describe myself as a “conservative,” as evidenced by the title of my forthcoming book, The Conservative Futurist, available for pre-order. Among other things, “conservative” means that while a) I value the liberal democratic-market capitalist inheritance of the past and b) I try to create the conditions that will preserve that inheritance and lead to a future of even more opportunity and freedom … c) I also try to achieve an evidence-based understanding of the present. And that understanding suggests to me that the deep pessimism on display Wednesday isn’t just misguided but harmful.

If it’s indeed a sort of “dark moment” in America, it’s also one pregnant with potential. Dark? Glance upward, and you’ll see the streaks of rosy-fingered Dawn are already appearing in the sky from coast to coast. After a half-century of underperforming our vast national potential (“Dude, who stole my flying car — and my fusion reactor, lunar colony, and 120-year healthy lifespan?”), the path forward to a second and even more awesome American Century is becoming clearer by the ever-brighter moment.

That path: Continue to perfect the American free enterprise system (which also includes an important role for limited but effective government) so more than any other country, the United States can cultivate and accelerate the recent burst of technological advances — in computer science, biotechnology, energy, and space — that could constitute the next phase of the Industrial Revolution that began a quarter millennium ago. Oh, and by the way, America is currently leading in all these technological areas.

An America where tech-driven innovation allows the economy to grow at a sustainable 3 percent to 4 percent pace over the next generation looks a lot different than one where it grows at the 1 percent to 2 percent pace currently forecasted by economists on Wall Street and in Washington. It would be an America with far greater ability to turn the dreams of its people into reality. The “widgets” produced by economies, as described in our high school and college economics classes, are really what physicist Cesar Hidalgo terms “crystals of imagination.”

How best to create that growthier economy should have been a key issue in the GOP debate.

America vs. the World

Now, let’s briefly fact-check the notion of American “decline.” The idea lacks needed context. Compared to where America could and should be, it is utterly proper to call the period since the Global Financial Crisis or, really, since the 1973 downshift in US productivity growth, a “long stagnation” or even a “great stagnation.” Still, America today is far better off than the America back then.

Similarly, if I were “drafting” a national economy like an NFL or NBA team drafts college players, the US economy would be the easy top pick even if it isn’t the perfect player or even the player it someday could be. Look at the competition for that top slot. America versus Europe? As a recent Financial Times column, “Europe has fallen behind America and the gap is growing” by Gideon Rachman noted:

• The seven largest tech firms in the world, by market capitalization, are all American with only two European companies in the top 20, ASML and SAP. Rachman: “The development of AI is also likely to be dominated by American and Chinese firms.” (Europe will apparently settle for being a leader in AI regulation.)

• Although Britain has a few top universities, such as Cambridge and Oxford, “the leading universities that feed the pipeline of tech start-ups in the US are lacking in the EU.”

• The US dollar as the world’s reserve currency gives the US easy credit access, deep domestic capital markets offer the same for US companies, and the US economy is powered by cheap and plentiful domestic energy supplies.

• Rachman concludes: “The aggregate figures are shocking. Underpinning them is a picture of a Europe that has fallen behind — sector by sector.”

The Chinese Century? Really?

Then there’s China, the subject of the recent Wall Street Journal piece, “China’s 40-Year Boom Is Over. What Comes Next?” WSJ reporters Lingling Wei and Stella Yifan Xie suggest China is heading for a big slowdown, dragged down by aging population and a clash with the U.S. and its friends, which scares away foreign money and trade. This could spell the end of a long era of economic ascent. “We’re witnessing a change in the most dramatic trajectory in economic history,” Adam Tooze, a Columbia University history professor, is quoted at saying.

The future may look bleak: The IMF forecasts China’s GDP growth below 4 percent in the coming years, less than half of its pace for most of the past four decades. Capital Economics reckons China’s trend growth has slowed to 3 percent from 5 percent in 2019, and will plunge to around 2 percent in 2030. At those rates, China would fail to achieve President Xi Jinping’s target of doubling the economy’s size by 2035. That would make it harder for China to escape the “middle-income trap” and could mean that China never tops the U.S. as the world’s largest economy, its ultimate ambition.

I’ve long said that an authoritarian surveillance state doesn’t create the sort of culture conducive to the creative leaps and imaginative risk-taking that are essential for economies wishing to push forward the technological frontier. China just sounds look a huge bummer to live in, as exemplified in The Economist:

Meanwhile, the relatively open cultural atmosphere of the Hu and Jiang eras has vanished under Mr Xi. He has replaced it with an “empire of tedium”, to borrow a phrase from Geremie Barmé, a noted sinologist. Censorship has become far more heavy-handed. Chatter on the internet has turned into a dreary chorus of nationalist talking points. On Chinese television depictions of “effeminate men” and women’s cleavage have been banned. Video games have been deemed too much fun; authorities have ordered the removal of gore and tried to limit kids’ playing hours.

At entertainment venues, bands are asked to send authorities videos of their sets before gigs. Directors of plays know that in the audience there are people checking that actors stick to approved scripts. Comedians plead for their audiences not to record them. Earlier this year Li Haoshi, a Beijing-based comic, used an army slogan—“Forge exemplary conduct! Fight to win!”—in a joke about how his dogs eagerly chased a squirrel. That was deemed insulting to the armed forces. Media companies were told not to hire the comic. Police said he was under investigation for causing a bad influence on society.

So, yeah, rather than merely harping de rigueur on the failures of the Biden administration, those GOP presidential wannabees should have acknowledged the moment of opportunity that we currently live in and had a serious conversation on how to best seize it. I mean, there was zero mention of artificial intelligence, much less the potential for an orbital economy being created by SpaceX, other than a snarky comment from Chris Christie that Ramaswamy sounded like he was a chatbot.

Bottom line: This debate was a missed opportunity to make a center-right, pro-progress case for both political reasons and to alert the American public of the vast opportunity right in front of us.

---

5QQ

💡 5 Quick Questions for … economist Martin Baily on productivity, protectionism, and AI

Martin Neil Baily is an emeritus senior fellow in economic studies at the Brookings Institution. He’s done some fantastic work on productivity over the years, which he recently reflected on in “Lessons from a Career in Productivity Research: Some Answers, A Glimpse of the Future, and Much Left to Learn.” I loved chatting with him about his lifetime learnings on the subject.

1/ Do we have a strong understanding of why US productivity growth downshifted in the early 1970s? And are the factors that are believed to have caused that downshift the same factors affecting what is in effect a second downshift starting in the early 2000s after the internet productivity boom?

That's a tough question, and not everyone agrees about the answer. I think the person who would give a clear answer to that is Robert Gordon of Northwestern. It's dangerous putting words in other people's mouths, but I think he would say that we started to run out of some of the better ideas to raise productivity. There was still innovation taking place, there was still a lot of tech stuff going on — and of course, a lot still to come, if you look back all the way to the early 1970s — but the judgment that he describes in his writings is that those things were not big drivers of productivity. They're sort of fun-to-have stuff like our iPhones and being able to do things which we couldn't do before, the internet, stuff like that. But he doesn't see those as having been big drivers of productivity, and you'd have to go back to the early days of the development of steel mills and the production line for automobiles and all that kind of stuff which appeared to have had much bigger effects on productivity.

I think many of us find that sort of puzzling. It's really hard to think that the internet hasn't had a fairly substantial impact on productivity. Certainly, all the computerization, all the things that not only individuals as consumers can do but that businesses can do as well, seem to have been very remarkable changes. And certainly, I think if you talk to businesses, they will tell you that there are just all kinds of things that they have been able to do that they wouldn't have been able to do before. Plus, there has been an ongoing march of automation in tasks that were hard to get machines to do, or to have robots to do. We've certainly increased the amount of automation so that in an automobile plant, painting and welding are but all done by robots. Those things are definitely still going on in the background, the sort of industrial innovations that we've had for some time. But overlaid on those have been the stuff that is facilitated or encouraged by electronics. It's surprising to me that we have not been able to exploit all of this in order to achieve more measured increases in productivity. I don't think we do have a great answer as to why productivity growth is so slow.

2/ Are you inclined to think that the more important answer is a macro answer, such as exploiting all the big inventions in the past? Or do you think the answer might be more of a micro answer, perhaps something about public policy that has made it hard to take scientific discovery and technological innovation and produce measurable business productivity growth?

Having said I don't really know the answer, you're sort of putting me on the spot. But let me try to elaborate a bit along the lines that you said: One of the things that we certainly found in the studies that were done comparing across countries was that those countries that had certain kinds of regulation definitely inhibited their ability to achieve best-practice productivity. If you look at a lot of countries in other parts of the world, in South America, Africa, places like that, certainly there are disadvantages that they have. But at the same time, it looks as if the kind of regulatory structure that they have has actually discouraged competition and discouraged companies from achieving best-practice productivity. And in many cases, also, there's been some reluctance to bring in best-practice companies from around the world, whether they are European companies or American companies or Asian companies, that maybe could have invested and boosted up productivity. There's been a reluctance to let them come in. And I think that's got quite a bit to do with protecting vested interests. Vested interests get going, and then they want to protect the position they're in. Some people are doing very well in that economy; a lot of people not doing so well. We think it would've been a good recipe for them to get rid of some of that regulation, have more open economies: more open to trade, more open to foreign direct investments. So bringing in, allowing to come in, or encouraging to come in best practices from around the world.

Does that apply to the United States? I think as we were doing those studies in the 1990s, we generally felt that the United States, while it certainly had economic policy issues, was probably the most open economy that you could find. And where, generally speaking, I wouldn't say do what you wanted, but there was much more freedom for businesses to do the things that would bring productivity leadership in their industry, which often included bringing, for example, the Toyotas of this world coming into the US market. It wasn't always just letting American companies act openly, but bringing in foreign companies. We have a lot of foreign direct investment here in the United States. And that's still the case.

Have we eroded that position now? We now are a much more regulated economy than we used to be. And is that a bad thing, or is that just a price we have to pay to protect consumers, to protect workers? I would say we probably are somewhat more regulated. There are certainly measures like looking at the number of pages in the federal register or something like that. We are a more regulated economy. Have we become such a regulated economy that it has discouraged innovation or discouraged investment in the United States? I think that's a bit of a harder case to make. I mean, there's still a lot of innovation going on. Just look at Silicon Valley. Just look at North Carolina. Just look at even Cambridge, Massachusetts. You'll see a tremendous amount of innovation taking place. There are still a lot of companies that are coming to invest in the US. We still have a lot of very dynamic American companies that are making the kinds of investments that they want to make. So I think, yes, it may be somewhat regulation. But I don't think we've transformed the US all of a sudden into a Brazil or a country in the developing world that really needs to transform itself. We may have done some of that.

3/ As long as the United States can adopt the best practices and new technologies and innovations that may arise elsewhere, is it really that important that those innovations arise here? Do we need to be the country pushing the frontier in a variety of areas, or is it okay if lots of places come up with new ideas and we're just one of many?

If I had to give a quick answer, it would be that it's a little bit better if it happens in the United States. But the key thing is to make sure that you adopt the best-practice innovations wherever they originate. I've said in the stuff that I've written that there's a fair bit of serendipity going on in terms of where innovation takes place. You don't know who's going to get the great idea. The United States, certainly for the last at least century, has been a great place for innovation. And we've had a lot of wonderful innovators, and I think we still have many innovators. We also attract innovators here.

I'm not a huge fan of everything that Elon Musk does. But at the same time, I admire enormously the innovation that he has brought in the automobile industry, for example. And he did not start out in the United States. He was attracted to come to the United States and has had a big influence on our industry here. I think the crucial thing, the simple answer to your question, is it matters most whether you are willing to bring that innovation into your economy or whether you try in some way — overt or under the table — to try to keep it out. I think we've been pretty good at encouraging American companies to adopt the best practices or to bring foreign companies to the United States when they have something to offer to our economy.

4/ Do you worry that a slide toward more protectionist policy, which seems to be affecting both parties, will create a roadblock against the kind of innovation process you just described?

The simple answer is, yes, I am concerned about that. I think it's a bit of a complicated issue. Let me give you an example: Ronald Reagan, our free market president, put roadblocks towards the importation of Japanese automobiles. There were actually quotas on the import of Japanese automobiles. And that was in response to a lot of domestic pressure, both from the unions and from the companies, that they were getting swamped by imports coming in from Japan and they didn't know how they were going to survive. And as you know, GM and Chrysler basically went bankrupt, although many years later. What was the effect of that? Was that to damage productivity in the United States? The United States actually has a big advantage because it's a big economy, so that if you are a small economy, if you are a Finland or something, and you decide to keep certain kinds of investment out of your economy or certain kinds of products out of your economy, then they probably just will go away and not worry about you because you are a tiny market and they couldn’t care less. The United States is such a big market that the Japanese companies decided, "If we are going to be limited in the number of cars we can export to the United States, we'll have to start building more of them in the United States." And they did. Now, it didn't start right then. I think Honda had already been building motorcycles, and I think maybe automobiles. (My timing may be off, or my memory may be off.)

Certainly, that action actually triggered heavy investments by those companies. And then subsequently there was big investment by the German companies, BMW and Mercedes, also to come into the United States. Those limitations did not actually have that much of a bad effect on US productivity. In fact, that could slightly make the argument that by encouraging more high-productivity investment in the United States — and Toyota was at the time the productivity leader in the auto industry — by encouraging them to not only export but to produce in the United States, you actually had a higher-productivity automobile industry located in the United States in the end. Now, is that the exception that proves the rule, or is that the normal case? I think the United States is such a big market that if you have limitations, that will encourage companies to come and produce here in the United States and avoid the barriers. But it is a slippery slope I hate to see us go down. I would rather see us avoid protectionist measures. And of course, the nature of protection is changing because now it's motivated by fears of China and China being a threat to the United States not only economically but militarily. That’s a bit of a different case. I think we are right to be concerned about potential damage from China. I hope we don't go overboard, because I think we have to coexist with China one way or another. But we certainly need to be careful. The Chinese have been very forceful in looking to borrow, bag, or steal technology from around the world. And they would certainly be interested in buying companies in the US if they could get the technology that went with them.

I'm giving a complicated answer to your question. I do worry that if we become more protectionist, that will have an adverse effect on productivity. And certainly, the lesson of the work that I was involved in during the ‘90s would suggest that protectionism adversely affects productivity in manufacturing. If you extend that to direct foreign investment, it will adversely affect the service sector as well. I hope we don't go too far down that road and we try to handle any protectionism carefully. But I worry that our political system is not so great at making wise decisions about this. They tend to make political decisions rather than wise decisions.

5/ It's my sense that economists who are bullish on faster productivity in the years ahead are also bullish on artificial intelligence as a key factor in that bullishness. Where do you stand? Do you think that AI will result in another productivity boom like we saw in the ‘90s, perhaps even longer?

I recently co-authored together with Erik Brynjolfsson of Stanford and my colleague at Brookings, Anton Korinek of UVA. We wrote a piece about the productivity potential from generative artificial intelligence. I wouldn't say I was the productivity guy, because Erik Brynjolfsson is also a productivity guy, but I was perhaps the productivity guy while they were the guys knowing the most about artificial intelligence. I'm sort of trying to struggle and learn more about it. Erik is a real optimist about this stuff, and to some extent Anton is as well, although he's quite worried about the potential impact on the labor market, afraid that we will get job displacement and unemployment as a result of all of this. What did we say? We said we saw a tremendous potential from these new developments in AI.

We think there have been some breakthroughs in the ability of AI to be helpful to businesses. Certainly, a lot of businesses believe that's the case. And folks like McKinsey, IBM, and Goldman Sachs have written reports suggesting that, and they have in some cases surveyed businesses and talked to businesses about this. So there is a lot of potential for this new technology to substantially improve productivity, not only by displacing people, although I think some work will be displaced, but also by making workers more productive. We talked earlier about slow productivity growth in the United States, and I do think one of the reasons we have slow productivity is that much of our workforce is not equipped with the skills that they need in order to be more productive so they end up doing often menial jobs, working behind a counter or carrying boxes, that kind of thing. There’s nothing wrong with those jobs, exactly, but they're not high-productivity jobs. And I think a lot of our workforce unfortunately is no longer able to get manufacturing jobs because there just aren't that many manufacturing jobs anymore, and they haven't been able to transition into high-productivity alternatives.

One thing that artificial intelligence potentially could do is make those folks more productive. There are a lot of people who maybe didn't do that well in math, maybe have some difficulty writing emails that are clear and concise. And if you can get a computer program that helps you out with that stuff, then those people could become more productive. Do I know this is going to happen? No, I don't. I think we're living in a lot of uncertainty around what AI will do, but I think there's some hope that will happen. And I think one of the messages we wanted to get across was that rather than dwelling on all the dangers from AI and some of these extreme cases — people say the machines are going to come and kill us all or something — rather than getting into that rather fanciful stuff, we should be embracing the fact that we have this amazing new technology. We do need to do more training of our workforce or retraining of our workforce, but looking for ways to make this new technology work productively for as many people as possible.

---

Micro Reads

▶ The Short-Term Effects of Generative Artificial Intelligence on Employment: Evidence from an Online Labor Market - Xiang Hui, Oren Reshef, & Luofeng Zhou, CESifo | This paper studies the short-term effects of generative AI and LLMs on labor outcomes by estimating the effect of ChatGPT on the employment of workers in a large online labor market. Across the board, we find that freelancers who offer services in occupations most affected by AI experienced reductions in both employment and earnings. The release of ChatGPT leads to a 2% drop in the number of jobs on the platform, and a 5.2% drop in monthly earnings. The results are robust to several alternative tests, including a similar reduction in the employment outcomes of freelancers offering design and image-editing services following the introduction of image-focused generative AI. In addition, we find that offering high-quality service does not mitigate the negative effect of AI on freelancers, and in fact presents suggestive evidence that top employees are disproportionately hurt by AI.

▶ Environmental group suffers setback in legal fight to close California’s last nuclear power plant - Michael R. Blood, AP |

▶ NRC Needs to Take Additional Actions to Prepare to License Advanced Reactors - GAO |

▶ Population Aging and Economic Growth: From Demographic Dividend to Demographic Drag? - Rainer Kotschy and David E. Bloom, NBER |

▶ Correction, Coercion, or Collapse - Alex Trembath, Breakthrough Institute |

▶ AI-powered brain implants help paralyzed patients communicate faster than ever - Emily Mullins, Ars Technica |

▶ Growing share of Americans favor more nuclear power - Pew Research |

▶ AI-discovered drugs will be for sale sooner than you think - Rachel DuRose, Vox |

▶ Our genes shape our education level more than our upbringing - Claire Wilson |

▶ Two new papers show major advances in the effort to translate brain activity into speech - Cassandra Willyard, MIT Tech Review |

▶ Brain-to-Text Technology Is About More Than Musk - Lisa Jarvis, Bloomberg Opinion |

▶ Apptronik Introduces Apollo Humanoid Robot - Evan Ackerman, IEEE Spectrum |

▶ What can a virtual village made up of AI chatbots tell us about human interaction- Oliver Roeder, FT |

▶ Trump promised this Wisconsin town a manufacturing boom. It never arrived. - Jeanne Whalen, WaPo |

▶ Are You Using ChatGPT in Your School or University? We Want to Hear About It. - Natasha Singer, NYT |

▶ In Reversal Because of A.I., Office Jobs Are Now More at Risk - Claire Cain Miller and Courtney Cox |

▶ Japan Is Next Country to Shoot for the Moon After Russia and India Missions - Nicholas Takahashi, Bloomberg |

▶ Will AI Make a Planned Economy Feasible? The Socialist Calculation Debate Revisited - Timothy Taylor, The Conversable Economist |

▶ When tech says ‘no’ - Benedict Evans |

▶ The U.S. Regulates Cars, Radio and TV. When Will It Regulate A.I.? - Ian Prasad Philbrick, NYT |