The Trade Deficit Is Not the Problem, Believing That Story Is

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We all know about the huge US trade deficit with the rest of the world.  Most of us know this is just about trade in goods, so that it does not include the trade surplus in services—which historically compensates for roughly 40% of the total deficit.  So services are large and growing but nowhere near the size of the problem.  What’s less obvious is just how wildly incomplete this story is.

It’s straightforward to see why. Look at the iPhone.  iPhones imported into the US are a significant (but of course not decisive) contributor to the deficit.   It’s an expensive item and we get lots of them.  However what’s imported is the hardware—which is what counts for the balance of payments—but essentially all of the profit goes to Apple, because most of the product value is from the software written here.  The balance of payments calculation is backwards—it’s a win recorded as a loss.

It’s worth noting a historical parallel. Early in the Industrial Revolution the British insisted that India only export raw cotton to Britain, so that all the value-added would be captured there. All parties recognized this as an example of colonial exploitation. We’re in exactly the same position, and we’re worried about the balance of trade!

We can even go a step farther. Consider an iPhone made in India and sold in Korea. It shows up nowhere in balance of payments calculations, despite the profits earned by Apple on every such sale. There is no reality to the balance of payments statistics at all.

And this isn’t a one-off.  Here is a list of the top ten US companies by market valuation. 

🏆 Top 10 U.S. Companies by Market Capitalization (2026 estimates)

  1. NVIDIA Corporation – approx. $4.5 trillion (currently world’s largest)
  2. Apple Inc. – ~$4.0 trillion
  3. Alphabet Inc. – ~$3.8 trillion
  4. Microsoft Corporation – ~$3.6 trillion
  5. Amazon.com, Inc. – ~$2.5 trillion
  6. Meta Platforms, Inc. – ~$1.4 trillion
  7. Broadcom Inc. – ~$1.7 trillion
  8. Tesla, Inc. – ~$1.3 trillion
  9. Berkshire Hathaway Inc. – ~$1.0 trillion
  10. JPMorgan Chase & Co. – ~$0.6–0.7 trillion (approximate, rounding into the top decade range)

The #1 is now Nvidia.  Perhaps surprisingly it’s just like Apple.  They don’t make the hardware either.  What they provide is another kind of software—detailed specifications embedded in a form for transfer to TSMC for fabrication.  The high-value contribution is made by developers in the US, which is where the profit is realized as well. (It’s interesting to compare Nvidia with TSMC.  Both companies have monopoly positions in their markets, but Nvidia avoids the huge capital expenses of hardware, and makes much more money by being on top of the production stack.) There is something more than a little disturbing about national policies based on numbers that are completely off-base for the two biggest companies in the world.

The problem here is that the goods versus services distinction doesn’t mean what we think it does.  We want to think about that distinction as somehow capturing hardware versus software, but it doesn’t work that way.  More and more software is getting embedded in products, so it’s counted wrong.  It’s more correct to think about software (broadly-defined) as highly-skilled manufacture.  The same kind of thing happens with pharmaceuticals.  More and more of the value creation is not in building the product hardware, but in defining content.  So the value-added enabled by the imports is not captured anywhere in trade statistics.

And the software business is great—fewer capital requirements and you’re on top of the heap for revenue.  There is also a strong trend to monopoly from network effects and software’s built-in economies of scale. Most of the businesses on the top 10 list—one way or another—are software businesses and many are effective monopolies in their sectors.  It’s not surprising our economy has evolved in that way, and the top 10 list is anything but a sign we don’t know how to make money. However since the statistics have not kept pace, we end up deluding ourselves about both the present and what matters for the future.

We can put some numbers on that.  What are the actual revenue impacts of the balance of payments deficits?  For Apple and Nvida the calculation is straightforward from available product costs.  For the iPhone the ratio of enabled revenue to the balance of payments deficit contribution is 5 to 1.  For Nvidia the ratio is 6 to 1.  It’s harder to get numbers for US companies overall, but arguing from both S&P 500 foreign sales numbers and OECD value-added statistics gives values of approximately 4 to 1. (The argument is not complicated.  S&P 500 foreign sales of $5.5T gives $2.3T of foreign revenue above all reported exports, both goods and services.  That’s real value not captured by the trade stats. And as a conservative estimate we can use that same uncaptured value for the US business of the same companies.  That’s now $4.6T.  Divide by the goods deficit of $1.2T and you get 3.8. The more correct goods + services deficit of .9T gives 5.1)  Our true global trade balances are a resounding plus.

 So what do we conclude about the balance of payments deficit?  First of all it’s NOT a problem.  It’s a reflection of the way our economy works, and that’s a proven productive direction.  The unbalance is not because we are losing out but because the trade statistics don’t see where we make money.   Furthermore this is not a picture of everyone taking advantage of us; on the contrary we have the rest of the world competing with lower-margin items to supply us in our higher-margin activities.

That’s not to say there are no issues—we obviously need to talk about jobs and security of the supply chains.  Jobs are the more pressing item.  However the only reason jobs are in this discussion is the assumption that people are hurting because other countries are stealing our prosperity through trade.  That story is false.  People are not poor because we as a nation are not making money—we are–they’re poor because the distribution of wealth in our society has left them behind.  The idea that we’re going to solve that problem by having our people substitute for the workers in the low-margin industries that feed our industrial giants is so ridiculous it’s hard to know where to begin.  Those aren’t manual labor jobs, and they can only be good wage jobs in this country if the government basically pays their wages.  There’s no other way they are going to meet the price targets for the final products.  Even then it’s hard to imagine anything practical about these half-governmental uncompetitive companies.  What we should do for disadvantaged populations is part of a bigger story about government responsibilities—we’ll return to that later.  But this story—solving poverty by bringing low-margin, low-wage factories here—was never more than populist gloss.  No one ever cared enough to work it out at all.

As for supply chain security, the argument seems to be that we need to bring all of these supporting activities in-house to make sure that supply chains are under control.  That argument is also false. Bringing supply chains in-house is no guarantee.  During Covid the CDC had a contract to provide M95 face masks prior to the pandemic.  However, the contracting company got acquired, and the bigger company noticed there was no health emergency and no real business.   So they spent their money elsewhere and no single mask was ever delivered.  Running an artificial, uncompetitive business for reasons of security is anything but a sure thing, and providing a second such business for redundancy is even worse.  And again if the business is to be price competitive lots of money needs to be pumped in.  It’s an expensive bad solution.  Instead what is most useful is real multi-sourcing.  We need diversified supply chains with production spread across Taiwan, South Korea, India, Vietnam, and Mexico, so that no single disruption can choke off supply entirely.  Instead of competing with those real, productive companies, our interest is in making sure they’re healthy.  They are doing better at it than we would do ourselves—and we’ve already talked about the jobs.

Just about everything involved with the balance of payments discussion is out of touch with the realities of US economic strength and the needs of the population. Thus far it’s too early to see the full dangers of the mismatch of policy and reality: The final tariffs were significantly lower than originally proposed, so that supply chains have been able to adapt, but multiple studies have shown that the tariffs for more than 90% are paid by us (regressively).  And there has been only pain—not benefits—to the people Trump is nominally saving; only the billionaires are cleaning up left and right. (But at least today we can celebrate the Supreme Court’s blocking Trump’s ill-conceived and illegal tariffs!)

However the future is the main story, which is where we need to go now.

For that we need to recognize just how dynamic the world economy is becoming.  There is every reason to believe the trends we discussed for the top 10 list—software (broadly-defined) and monopoly—will continue and even accelerate.  AI makes it ever easier to build software that interworks with all kinds of products.  And robotics in particular can be revolutionary. As robots become software platforms, rather than individual products, a greater range of businesses can be imagined primarily as software applications.  That way the iPhone business model can extend to all kinds of physical devices. AI has already made it possible for small teams to do things that used to require many more people with distinct specialties.  We’ve already seen companies come from nowhere in a very few years—there will be more and faster.

How do we prepare for success in that future?  The balance of payments view of the world doesn’t help, because it is static and already out of touch with the present.  Fixing that gets us nowhere.  Further Trump’s rhetoric about bringing back the good old days of factory jobs mixes up corporate value-added with imagined low-skill job creation—for jobs that largely no longer exist!  He may want to think about people standing in front drill presses all day, but we had better not take him seriously.  We have to deal with the future as we see it coming

To begin we need to talk just about business competitiveness.  If we’re going to succeed in the kind of business environment just described we need three things: 

  • We need innovative types able to start the new businesses which will make up the rapidly evolving landscape we just described
  • We need people who will provide the kind of value-added needed by such businesses
  • We need government to support innovation.  In practice that means not choosing winners and losers and protecting innovators from the powers that be.

Those are absolute requirements.  Before we can talk about anything else, we have to satisfy those. At the same time however we need to provide for the well-being of the population and the national security of the country.  Those two types of requirements seem distinct, but as we’ll see they are closely linked.

On the innovation side we have traditionally been well-positioned here.  The single most legitimately-true feature of American exceptionalism has been our openness to enable people from anywhere and with any background to find a home where they can thrive and fit in.  We have been the place for the best and brightest from everywhere to come and build success. Immigrants and children of immigrants have been prominent for Nobel prizes, in founding companies, and more generally in staffing the high-tech companies driving the US economy. It’s true for AI today.  And the strong network of research universities and government labs has meant that the latest technologies could be counted on to be supportable for new businesses. 

US openness has been perceived as unique worldwide—which matters for all of us. Because we draw from the whole world, the US achieves levels of technological dominance and wealth that are hard to match. China may be big, but the whole world is a lot bigger—and so are we. It matters in every domain. That not everyone experiences that wealth is a different issue—a political problem (as we’ll discuss later) not a national wealth problem.

The bottom line is that the overall well-being of the population is not just a matter of decency—it’s intrinsic for national success. Our dominance is in a very basic way a reflection of what we as a nation represent.

It’s interesting that China is a kind of opposite pole from us—a huge inwardly-focused country whose export businesses are primarily in hardware with hard-won price advantages.  That’s not to say they can’t move in our direction, but thus far their focus has been different, with less emphasis on software value added.  As the following chart indicates, China’s exports have been considerably less oriented toward added services than ours.  If we’re worried about competition we have to recognize and play to our strengths.  Our big world of economic as well as political allies has been of major importance.  As in the discussion of imported inputs for Apple and Nvidia, they do their jobs for us better than we would do for ourselves.

All of that is why it is so serious that we have recently decided to relinquish many of those traditional advantages in a burst of self-destructive nationalism.  We now have overt hostility to foreigners, attacks on universities, and cancelled research money.  We’ll throw lots of money into today’s hottest development item—the current version of AI—but we have chosen to be deliberately blind to whatever comes next.  In addition we’ve decided to choose winners and losers in technology based entirely on “intuition”.  Since climate change is now officially non-existent, all technologies associated with it are removed from our national consciousness.  Unless some of this is reversed we will be like the British after World War II, living in past and lost grandeur.

Beyond competitiveness, we need to talk about national security and population well-being. For both the most important message is a simple one:  there are a great many important problems that the private sector will not solve by itself.  That may seem obvious (it was to Adam Smith) but it’s contrary to the endlessly restated ideology of the last decades: that the unfettered private sector just needs to be left alone to work its magic.  I’ll start with security.  We need to be clear—we’re talking about national security here, not the reliability of value chains as before.

Government needs the professional competence to decide what actions have to be taken in the economy for reasons of national security.  That includes what products and capabilities we need to have here and what needs to be done proactively to prevent the kind of dependencies we have with rare earth elements today. We have to be able to think ahead in a way that the private sector won’t.   So government needs professional competence protected from political persecution.  After all, the Chinese clearly were able to think ahead; a primary reason we couldn’t was the ever-present private sector mantra just mentioned. We were too smart to think about government telling businesses what to do.

In addition government needs to think more broadly about security.  As we noted earlier we will never be able to take everything in-house, and even domestic suppliers have their own interests.  So complete self-sufficiency is a chimera, and security is intrinsically concerned with international relations and the world order overall. That’s a big subject worth discussing but out of scope here.

Returning finally to the well-being of the population, the most important thing to say is that the businesses that form the basis of US economic strength won’t necessarily fix it.  They’re not going to employ everybody.  To some extent the overall wealth of the country will translate to general prosperity in the domestic economy (e.g. entertainment, home services)—but there’s no way, particularly with AI, that will be enough. It isn’t enough now, which is why we get Trump’s fairy tale with 1950’s jobs. Government will need to be involved with things like an adequate minimum wage as well as a bigger role in infrastructure of all kinds.  There is no shortage of work that needs to be done—in physical infrastructure or healthcare for example.  Also climate change will require significant near-term modifications all over the country.

That takes money, but national wealth is not the issue. The companies in our top ten list aren’t low-margin businesses even if they’re happy to get tax cuts. And going forward, we’re talking about sector-dominant software companies for even more of the same.  The challenge instead will be to restore the idea that shared prosperity is ultimately for everyone’s benefit, so that progress can happen.

It’s a truism that we have to grow the economy and ensure that wealth is broadly shared. But it’s important to recognize the two aren’t the same thing, and we need both to make the economy work. (Stephen Miller’s much-repeated slogan—getting rid of immigrants means more of the pot for all the rest of us—is a good way to fail at both.) This isn’t easy, but it’s not as if we haven’t done it before. Trump talks about the good old days of the 1950’s, but he doesn’t talk about how we got there. That broad-based prosperity was most assuredly not achieved by liberating the miracles of the unfettered private sector; it was by doing what we’re talking about here.

Last time we had to go through the Depression and two world wars to get there. This time we need to do better—both the risks and rewards are too great not to.

Climate Change is Jewish Physics

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It goes with the territory. Fascist leaders are convinced they are always right and therefore empowered to make correct judgments about anything that comes their way. For Hitler that meant denial of most of 20th century physics, especially relativity and quantum mechanics, as Jewish physics. There was a direct line from that to the Germans’ inability to mount any significant challenge to allied development of nuclear weapons. In the end the Germans were defeated without such weapons, but it was only a matter of luck that it happened in time. Hitler defeated the entire German war machine, because he was always right.

The parallels to climate change are exact. Climate change is real, and the technological underpinning for the rest of the world is being built about combatting it. We’re either part of that future or we’re not. It affects not only how energy is generated and distributed but also how major applications use it. We sit around talking about how to “win” our competition with China when we have ceded all of that to them.

In our own power network the situation is beyond ridiculous. The many new mega-datacenters demand vast increases in electrical power to run them. We could use that opportunity to upgrade our (outdated and insecure) electrical infrastructure nationwide in a way that would serve the datacenters, the public, and the evolution to new energy sources. That would buy benefits for the datacenters themselves, and would certainly improve public attitudes about their construction–and that’s in addition to the benefits as we address climate change and new energy sources come online. (See what China is doing here.) In fact we have refused to do any such thing, leaving the implementation as a bunch of point solutions based primarily on fossil fuels and an outright prohibition on wind and solar. When you’re never wrong, there’s no limit to the damage.

We the human race may or may not succeed in avoiding real climate disaster, but any successes we achieve will be despite Trump’s sabotage. Whatever international order comes out of it all will reflect the interests of those who build it. And the status of the US will recognize that Trump’s sabotage was in literal terms a crime against humanity.

We’re Betting Everything Against Climate Change

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The takeover of Venezuela has made us a colonial power. Trump is now the dictator of Venezuela for the indefinite future. It has also led to new rhetorical heights about spheres of influence and how we should be able to use our superpower status to take whatever we want from anyone. So seizing Greenland from a NATO member is our perogative by right.

We’re telling all nations of the Americas that their independence is only for as long as we like it. Outside the Americas we’re threatening NATO’s existence by seizing territory. More generally we’re legitimizing the use of military force by anyone with the power to do it. History shows where that goes.

And what we’re getting for all that is oil. Oil that for the most part is not going to become available without billions of dollars of investment and years of development. Even without climate change that’s a shaky prospect; with the reality of climate change it’s nuts.

Climate change denial is not just a matter of sabotaging the Paris agreement and killing research funding.; it’s fundamental to everything they do. The rest of the world is continuing without us. It has to, since there is no other choice. China may be a dictatorship, but it values competence. Europe has kept its act together despite US pressure. Others are already seeing climate impacts. We’re off in our very own never-never land farther and farther from reality.

We’re going nowhere. The only question is whose sphere of influence gets us.

Jobs per Dollar

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As an indication of where the economy is going, someone should calculate permanent jobs created per dollar of capital expenditure for all the new datacenter construction.  That’s probably a new low for expenditures of this magnitude.  It’s more complicated to predict the effect on jobs in the rest of the economy, but that’s most probably negative.

It’s hard for me to think this doesn’t say something about the world we’re going toward.  It’s not so much that there will be a shortage of jobs overall as of good jobs.  What is it that we are going to use to bargain with employers?  Traditional education is about knowledge and capability.  In our familiar world it takes years to put together the package that an employable person represents, and there are many distinct niches that need to be filled.  In the new world, knowledge is more readily accessible, the capabilities required are more generic, and staffing levels may be reduced by efficiencies.  We’re only beginning to see how that will shake out.

As we noted last time, the private sector is not good at managing effects of radical change—on people and on the environment.  On the other hand, we’re talking about really significant productivity improvements, so in principle that should be a good thing.  But that’s not going to happen by itself. It sure didn’t happen at the start of the industrial revolution—for most of humanity that meant misery and war.

In this anniversary of the American Revolution there is a relevant quote from the signing of the Declaration of Independence: “We must, indeed, all hang together, or, most assuredly, we shall all hang separately.”  That’s now true worldwide.  In this time of economic ferment, climate change, and nuclear weapons we had better learn to work together for global well-being or there may be nothing left at all.

The Bigger Story from Rare Earths

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The Rare Earth affair tells us a very important simple truth:  contrary to the endlessly-repeated Republican message, the unfettered private sector (AKA the “free market”) does NOT solve all problems.  The private sector by itself is not sensitive to national security concerns and isn’t terribly worried about single sourcing so long as the price is right. After all there has never been a problem.  Tough luck.

This isn’t some strange outlier issue—it’s the main story.  The business community serves its own interest and generally with a short-term focus.  No one gets promoted for wasting money on what isn’t going to happen, which includes low probability events and any significantly different futures.  The private sector is good at optimizing its own operation.  It’s not good at providing for the population, the environment, or even the conditions for its own long-term success.  There is no “free market” magic to make that happen.  If the government doesn’t do it, it won’t get done.  And that is terrible for the future of the country.  We’re going to get one Rare Earth problem after another (and not just for security reasons), because we’re making sure not to look out for them.

We should be very clear about what we have today.  Trump wants to run everything, but that doesn’t mean we have government doing its job.  On the contrary what we have is business capture of government, so government is making sure that what business wants and nothing else gets done.  That’s why we can’t have government-sponsored basic research or any consideration of consequences of climate change.  Instead we have a whole bunch of protectionist tariffs and business tax cuts—just what business always wants.  There’s a juicy story of golden futures for everyone, but that comes cheap.  There’s no serious logic behind it, just what businessmen always want to believe.  Trump wants to mess with the business environment, but he hasn’t taken his businessman’s hat off.  He just thinks he’s such a genius he can tell all those big shot execs how to run things. Even the H1B affair fits here—there’s no strategic issue, since those pointy-headed engineers are a dime a dozen.

You don’t have to be a PhD economist to understand this.  Adam Smith understood it in 1776. I won’t give the usual long quote.  We just need a shorter one: “The government of an exclusive company of merchants is, perhaps, the worst of all governments for any country whatever.” — Book IV, Ch. VII

The Real Deal on Rare Earths

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The subject of “rare earths” is everywhere—now that Trump has discovered that not everyone he bullies backs down. (Like most bullies he clearly never thought of risks beforehand.)  But it is shocking how much of the discussion is both wrong and wrong-headed.

Let’s start with what’s wrong.  First of all, the set of rare earths includes 17 chemical elements that share some chemical properties, but whose significance is individual not collective.  Particular elements are important in particular ways.  Availability and processing requirements are not the same either.  So if Trump announces that we’re going to get rare earths from, say, Ukraine that may be relevant to an important issue or it may not be.  Similarly when someone announces with fanfare that we’re going to start processing rare earths somewhere outside of China, that may or may not have any importance at all—depending on what it is.

All that sounds like we need a lot of new information that would be hard to track down, but actually that’s not true.  There is an excellent, widely-available report from an unbiased source that goes right down the line on everything you would like to know.  And the answer is that there is nothing we are doing that is going to change China’s leverage any time soon (measured in years of course).  And that’s the news about rare earths. 

Wrong-headed is a different issue.  The important thing to realize is that the rare earth problem is NOT one-of-a-kind.  The rare earth problem is what happens when you don’t plan ahead for what the world is going to look like in the future.  There are two changes that made this problem happen:

  • The technology environment changed, so that suddenly these elements went from exotic to strategic.
  • The political environment changed to one of economic war with everyone, so that the US suddenly has to become economically independent of everyone whose arms it can’t twist. There is a strategic question with China, but we forced this issue by declaring war.

The impact of item one is only going to get worse.  Trump is preoccupied with the past (e.g. the 1950’s) not the future, so all kinds of necessary technologies won’t be here. He has done all he can to kill funding for future-oriented research at NIH and universities.  His climate denial has ceded leadership in all the (many) sustainable energy technologies to China.  His anti-trust policies favor existing large companies over new entrants.  He even told the troops on the aircraft carrier he visited that they should be happy it still used steam pressure to launch planes instead of the newer electronic system on the (single) new Chinese carrier.  We can count on being behind the eight-ball for the foreseeable future, and it’s going to be hard to reassemble the infrastructure to catch up.

On item two we have only begun to appreciate what it means to be at economic war with everyone.  We’re still in an environment where the US has many historical mutually-advantageous relationships with partners.  We benefit as participants in a common enterprise.  All such partners now find they are under attack.  Trump relies upon factors such as NATO membership and US market size to coerce other countries to do his bidding.  Neither form of coercion is permanent, as everyone can see that even Canada is under attack.  Resources and support come into question.  Whether we like it or not, allies are important.  And that’s not just a military matter.  It’s a basis of our economic strength and our standard of living.

Rare earths are no one-of-a-kind deal.  They’re a bellwether for our future.  

Things Aren’t Okay—We’ve Been Here Before

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It strikes me that comparisons of Trump with other would-be dictators are actually a distraction from a more important historical parallel.  Unless we can stop it, we seem hell-bent on replaying the 1930’s with even more at stake.

This isn’t just an economic story; it’s a story of response to worldwide crisis.  When the US stock market collapsed in 1929, it wasn’t inevitable that the entire world would move to disastrous depression and then war.  That it did so was a failure of national and global governance.  We humans did it to ourselves.

There’s a problem with human psychology.  When something bad happens, we pull in and defend what we’ve got.  In societies, that means in downturns those on top focus on defending themselves (e.g. with austerity) from what they see as the moral failings of the rest.  That’s why countercyclical policies are so hard to do—they’re the last thing ruling classes want to see. However austerity itself breeds more declines and a vicious cycle to the bottom.  In international relations the corresponding phenomenon is xenophobic retrenchment in a cycle of increasing grievance, paranoia, and hostility.  All that matters is to make sure you end up on top.

That’s pretty much what happened in the 1930’s. It drove the world to economic disaster and then World War II. (World War I contributed, but dire times in Germany elected Hitler.) The post-WWII institutions—whatever their shortcomings—were an attempt to prevent it all from happening again.  They gave us an unprecedented period of worldwide economic growth.  Even with the 2008 crash the US and China basically cooperated in keeping the world economy afloat.  But we’re a long way from that now—all we hear about is being on top.

We haven’t had 1929-style crash, but there are problems that can’t be papered-over. Even before the current AI explosion, technology change was making working populations obsolete far faster than governments could cope. In the West there is nostalgia for a simpler, somewhat-mythical past—a fertile ground for anyone willing to lie about recreating that past and to blame others (elites, immigrants, other countries) for lost status and security.  For the East and global south it is a time to get even with past oppressors.  It’s a hard time for global action when everyone is looking to get ahead in a hostile world. As many have noted, Trump’s high tariffs recall the Smoot-Hawley tariffs of 1930.  Those tarrifs should be recognized as a sign of danger above and beyond the immediate damage that they do.

In addition we’ve got something new.  Climate change is an existential threat to everyone, but a hard sell for real action.  It requires real money in the present to prevent locked-in damage in the future.  It’s all too easy to claim it’s all unnecessary or can be put off to some unspecified future—with immediate benefits as a sweetener.  The US may win prizes for foolhardiness (no real businessman would tell his investors that no risk contingencies are needed because of his personal genius and intuition), but there are few countries whose expenditures match the danger or even the Paris agreement objectives.  No one can be beyond the risks of climate change, but with Trump’s incessant hawking of US fossil fuels we’re sure are trying to believe we’re special—like the 1930’s rich people who couldn’t be bothered with the problems of the depraved poor.

Given that, what is the world working on today?

  • It’s certainly not working toward global governance and not effectively working on climate change.
  • It’s not working on political stability, since the UN is now extraneous to most of what is going on.
  • It’s not working on peace (despite Trump’s many claims), since the most basic rule of the post-war system—that countries shouldn’t invade each other—has pretty much fallen by the wayside.  It was never fully obeyed, clearly not even by us, but we’re now in new territory.  Russia is making no apologies in Ukraine, and the same is true for the US in Venezuela. If anything the new stated mantra is about spheres of influence where the strong have a right to do what they want to the weak.
  • However there is one thing that the world IS definitely working on:  a desperate competition for dominance in artificial intelligence, and that is serious enough for a discussion of its own.

Where is AI taking us?

  • Since AI has both military and economic consequences, this amounts to a full-scale arms race.
  • The money spent on data centers is phenomenal even compared with total investment in the participating countries.
  • As such, it drains resources that would otherwise be used to the benefit of the population, accelerating the disaffection noted earlier.
  • Its massive energy use accelerates the timetable for climate change (and takes money from climate-oriented activities). In this country of course wind and solar contributions are banned.
  • Most importantly its objective—Artificial General Intelligence, basically surpassing human capabilities for reasoning—is ill-defined, and the work to get there is hard to predict.
  • Because of the huge level of debt financing, it raises the specter of financial collapse if gains don’t match revenue expectations in predicted timeframes.
  • Even more dangerous, the military consequences are considered so important that the arms race threatens to become more and more serious, with competitive positions extremely difficult to assess—raising risks of instability and preemptive war.

The story is not exactly the same as the 1930’s, but the parallels are too clear to ignore.  We’re not addressing the festering problems, and we’ve created new opportunities for economic collapse and unimaginable war.  That isn’t okay.

We, the human race, can’t aford to fail as we did last time.

I’m not going to propose any simple answer, but there a few things worth saying.

  • I believe that climate can be a model for international cooperation, because it is a true common problem that can only be effectively solved if everyone benefits.  We have a lot to walk back, since Trump killed the original Paris Agreement unanimity, but we have to do it.  The US had a big role then, and needs to play a big role now.
  • The best way to address a full-blown arms race is to diminish the incentive to use them.  The world needs a workable notion of fair trade that will allow all countries to succeed.  We were a lot closer to that than self-interested propaganda would have people believe.  The test for success is shared prosperity, including labor standards and environmental protections.
  • The biggest barrier to that endeavor is how prosperity reaches national populations—obviously a problem today even in developed economies.  Ruling elites everywhere want a big share and have many means to get it.  What’s more AI will make the problem even more pressing, since future job losses can destabilize any progress. Maybe trade groups such as the EU can stand as models, where considerable national autonomy has been ceded in exchange for what has been a very large gain for all. That may sound strange but in fact the US only got going when the states gave up part of their independence for the Constitution, and the EU has managed to unite age-old enemies for something better than war.

Obviously none of this is going to happen tomorrow.  But unless we do something, we can see all too well how this story can end.

Towards a Constitution

/ ontheoutside / Leave a comment

To continue the subject of the Constitution, it seems that the problems we face are more fundamental than we would like to think.

I want to begin by going back to the post-World War II America of my childhood.  At that time we were proud of our Constitution precisely because of the way in which it was able to adapt to new eras that could not have been imagined when it was written.  We were privileged to have a Constitution that was most fundamentally a statement of principles that could guide us on into the future—whatever that might be.

We now see that whole story was a myth.  The only way that the Constitution could play such a role was that in those days the country was largely unified in outlook.  Putting aside the anti-communist hysteria, the country was in a humanistic mood coming out of both the Depression and World War II, and we looked at the Constitution in that way. Also the history of the Constitution fit that mold—written by people who created a democracy by defeating a tyrant.  So the meaning of the Constitution was our shared idea of what the humanistic founding fathers would say about the problems of today.

We now understand that there is no solid legality behind any of that.  Nothing in the Constitution guarantees that interpretation, and the document can be interpreted in wildly different ways—both honestly and dishonestly—by different readers. (That’s not just a matter of “strict interpretation,” which in practice means getting rid of what you don’t like, with no constraint on what you do!)  From a practical point of view it’s hard to say how much of the Constitution exists at all—its meaning is entirely determined by the Supreme Court, and they don’t even have to say how they reach their conclusions. If a President can break the law in the exercise of his office do we still have rule of law?  Do we really have a Constitution?  What exactly do we need to do to get one that works?

As it turns out, two recent books help drive those problems home.  Steven Pinker’s latest “When Everyone Knows What Everyone Knows” talks about the whole notion of common knowledge—what gave us the Constitution of my childhood—as a kind of distributed process independent of its norms.  That’s no way for today’s internet-fragmented society to produce a basis for law.  The second was Jill Lepore’: ‘s “We the People: A History of the U.S. Constitution”.  In passing she notes that the Reconstruction civil rights amendments—numbers 13, 14, and 15—were interpreted out of existence by the Supreme Court for fully fifty years after passage!  It seems words on paper have never been enough.

So the Constitution is a large, serious problem area.  Somehow we have to fix the Supreme Court, determine what level of specificity we need for an enforceable Constitution, and deal with at least some of the other problem areas from our previous note.  That leads to a rather different relationship to the Constitution than we have today.  Instead of trumpeting our Constitution as a world-unique miracle, we’re going to need to turn pragmatic, to understand what the experience has been with constitutions worldwide. And somehow or other we’ll need to find a process to fix it without losing what we’ve got.

There is a lot that is good about the Constitution. In today’s world we’re more conscious of that than ever. But despite our past dreams it can’t defend or update itself.  That, today, is a problem for everyone.