Immigration

US Competitiveness—Hiding in the Numbers

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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 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 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 far from decisive) contributor to the deficit.   It’s an expensive item and we get lots of them.  However essentially all of the profit from that item goes to Apple, and in fact most of the value-added is from software written here.  From a functional point of view it is a US-manufactured item, because that’s where the software is written.  The balance of payments calculation is backwards.

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.)

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 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.  And the software business is great—fewer capital requirements and you’re on top of the heap.  There is also a strong trend to monopoly from network effects and the 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.

Going forward there is every reason to believe this trend will continue and even accelerate.  AI makes it ever easier to build software that works with all kinds of products.  And robotics in particular can be revolutionary. As robots become software platforms, rather than individual products, all kinds of businesses can be imagined primarily as software applications.  Al 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.

What does that say about the future?  On the face of it that sounds terrible—people are not adding value by standing in front of drill-presses all day, so what happens to them?  Certainly Trump’s idea of building a future for the US depends on the drill-presses, so what is the right picture?  We need to follow through to a logical conclusion.

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.  These 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.   Most recently this was true for AI, where many of the key players come from Chinese backgrounds.  US openness was perceived as unique worldwide.  Many company founders and employees have been immigrants and children of immigrants. Additionally the strong network of research universities and government labs meant that the latest technologies could be counted on to be supportable for new business. 

(Note that China is a kind of opposite pole—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 software value added.)

It’s significant that the overall well-being of the population counts for plenty here—it’s not an additional extra goal.  Many important contributors didn’t come rich.  Recently we’ve been less successful in that, as we’ll talk about later.

What we do have to note here is that we have recently decided to relinquish all 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 today’s 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.

As for the well-being of the population and national security, the most important message is a simple one:  there are a great many important problems that the private sector will not solve by itself.  This may seem obvious (it was to Adam Smith) but it’s contrary to the endlessly restated ideology of the last decades.  I’ll start with security. 

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.  Government also needs to think broadly about security.  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. 

As for 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.  However the overall wealth of the country will translate to general prosperity in the domestic economy (e.g. entertainment, home services).  That will help—but still won’t be enough to fix it.  To go further will require things like an adequate minimum wage as well as a bigger role for the government in infrastructure of all kinds.  There is no shortage of work that needs to be done—in physical infrastructure or healthcare for example.  Climate change will require significant near-term modifications all over the country.   The margins you get in sector-dominant software companies should provide the money to do it.  The challenge will be to restore the idea that shared prosperity is ultimately the best thing for everyone’s benefit.

National well-being isn’t charity; it’s a key part of making the whole system work.

The Zero-Sum Trap

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It’s not unusual to talk about zero-sum games as a political issue. Probably the most common example is in international relations, where the Trump people treat countries as ordinary business competitors: what profits them is lost to us. That’s a false analogy as we’ll discuss later, but that’s not the main point here. What we want to emphasize is that the notion of zero-sum games—where all gain is someone else’s loss—is even more pervasive and dangerously wrong than commonly believed.

There are many kinds of zero-sum examples:

  • Our progress means taking it from someone else (as just mentioned)
  • Anyone else’s progress means taking it from us (racial progress means blacks taking from whites)
  • Hurting others means helping us (the party line with DOGE).

Notice the logic runs both ways: not only does our progress require hurting others, but also hurting others can be assumed good for us!

The issue is not that such things can’t happen; the problem is assuming that they always do. The chaos around DOGE produced wild enthusiasm in Trump’s base even though there was no logical connection to anyone’s well-being (either in theory or in the One Big Beautiful Bill). Moreover, paradoxically, all the publicity about DOGE viciousness seemed to increase confidence in the unstated zero-sum assumption. “Look at all the progress in the first 100 days!”

To start with it is not surprising that a zero-sum situation is more the exception than the rule: that two different phenomena are so directly related means there is an explicit causal connection, and the costs and benefits need to more or less match up. There are such connections in budgeting decisions for example. However the connections between tariffs and anyone’s well-being, for example, are so circuitous and filled with logical gaps that no one is trying very hard to argue for them. Instead promoters fall back on a kind of instinctive belief in the zero-sum game. The more Trump talks about making others poorer, the more it must be the path of progress.

It’s useful at this point to review just how far the tariff argument is from being true. What companies are the pillars of US economic strength? They are the big tech companies that dominate market valuations, earnings, and international influence. Just eight such companies represent 40-50 percent of market valuations. What is the basis of their success? Are they winning because they can make better cheaper products that anyone else can make, so that tariffs can lead to even greater success and lots of new good jobs for US workers?

Actually not. Those companies represent technological advances that led to monopoly powers in their chosen sectors (those sectors are now starting to merge, but that’s another story). They have clear profit advantages over businesses in competitive sectors, and in fact they can force those companies in competitive sectors to bid against each other to supply them. These are primarily software companies (so they are not well-counted in balance of payment figures that ignore services) and their reason for success is technological advancement—often predicated on government-funded basic R&D—and ability to attract the best and brightest from everywhere to contribute to their success. Such monopolies are actually not new. In the good old days of American manufacturing it was the high-tech of its time. We don’t get to choose where the money is.

Tariffs have little or nothing to do with this picture. Somehow tariffs are supposed to create a new golden age for factory workers, recreating the good old days. However that is without the technology advantages that fueled the wages, without unions, and after many decades of automation that mean far fewer (and more skillled) people are needed in production. Tariffs have of course been threatened as retaliation for restrictions on tech company activities in other countries, but those are different fights over different issues. None of this means extracting blood from evil foreigners will deliver gold to Trump supporters here.

How about the benefits of white racial dominance and the deporting of immigrants? Most of the arguments for those come down to “everything they’ve gained is taken from us”. That’s easy to believe (one thinks of Vance’s performance in the VP debate where immigrants were the answer to every issue raised) but is it true? You can certainly find examples, black people promoted for their race or professions where desperate immigrants have depressed wages. But that isn’t the same as the net effect of what has happened. You can’t argue that by assuming it’s true.

What made this country’s historical success is the (relative) freedom of US society from the centuries-old societal hierarchies elsewhere. Anyone could come here and succeed. The US pioneered mass education, and its own aristocracies just didn’t have the powers to exclude that existed elsewhere. We have prospered from everyone’s contributions, people of all races and from everywhere. That there are more people in the picture does not mean everyone is poorer; historically it has made us richer. Even today the immigrant population (including the illegal part) is paying taxes, using fewer social services, committing less crime, and staffing difficult jobs (in agriculture, eldercare, and construction) that locals don’t want to do. The big technology companies are filled with immigrants and children of immigrants who are making the country richer for everyone. (As is evident from any discussion of AI for example, this is more a matter of scarce talent than outsourced jobs.)

When you think about it each zero-sum argument assumes a static world where all that matters is dividing up a fixed pot of goods. That’s where the zero-sum comes in—who is giving or taking. But the picture is completely wrong. It’s not just that the overall pot is growing, it’s that the pot is being redefined entirely. And it’s that effort—the creation of the new pot—that will determine our success as a nation. And again looking at the new corporate leaders of our economy, that new pot (as noted) is being created in large measure by immigrants and children of immigrants of all races and nationalities.

(It’s important to be careful about the conclusion here. This isn’t an argument for uncontrolled immigration or even for what rules should be applied for who gets in. It’s also not an argument either for or against any kind of affirmative action. In both cases there are tradeoffs that have to be made rationally. Every country decides how many immigrants it can absorb annually, but that decision should not be based on false stereotypes of what those immigrants represent. In the case of affirmative action, you don’t want to create new forms of favoritism, but at the same time you need to find ways to prevent existing prejudices from perpetuating past discrimination. That those subjects are out of scope here doesn’t mean they can’t be addressed.)

Government’s task is providing the environment for both economic progress and well-being of the population. A key objective is equality of opportunity, as we need contributions from all. And it is up to government to see that the two objectives—for the economy and for the population—are both satisfied. That is always a political challenge.

Government structure is important. That the private sector will miraculously do it all is a myth understood perfectly even by Adam Smith. That myth only persists (without evidence) as an excuse for government to neglect its second objective—for the population. Expecting arbitrarily-powered dictatorship to be more dynamic and effective is even worse—for reasons that are already evident. Dictators make uncorrectable mistakes and ignore what they don’t want to hear. We’re cutting basic research in all domains and treating climate change as treason, exactly what we don’t need in a technology-based world economy. That hurts BOTH the economy and the population. By our own history, democracy is a good thing.

Finally we need to return to the issue we started with—international relations. Are nations just a bunch of business competitors fighting for market share? The answer is no, because we all share one world and there is an enormous (if not always recognized) common interest in making it work. Without thinking hard we are all confronted with the pressing problems of climate change and the ever-present threat of war. Chaos risks disaster. And there is a positive push also. Over the past decades we have proven that by cooperation (admittedly incomplete) we have been to grow the pot of benefits enormously for all. This could hardly be farther from a zero-sum scenario.

Zero-sum reasoning is a big problem, because it is instinctive and can be crucially wrong. We can’t prosper by believing life is all about fighting it out for advantage. If we want to be successful the task is to build prosperity for the future—for our entire population and for the world. Nothing says that’s easy, but it’s the only game there is.

Exported and Armed Prohibition

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“Prohibition Repealed: New York Times, 5 December 1933” by cizauskas is licensed under CC BY-NC-ND 2.0

As a nation we seem to be baffled by the problems of drug-based criminality south of the border.  Why can’t those people live like us?  What makes us so superior?

For those questions it’s worth emphasizing that we used to have problems like that too.  Our problems were self-inflicted, but the phenomenon was similar.  Let’s talk about Prohibition.

Prohibition was a reactionary revolt much like what we’ve got with the Christian right today.   The heartland was able to stick it to the godless, immigrant-infested cities.  No more alcohol to corrupt our body fluids.

That repressive crusade was just too overarching to succeed.  It resulted in an immense network of criminality to meet demand.  Criminality pervaded every corner of the country, and the kingpins captured the news daily.  It could and did happen here.

Let’s compare with the situation in Latin American.  North of the border there is vast money to be made with illegal drugs, and the resources available to stop it are ludicrous by comparison.  Big surprise they’ve got a problem.  We have drug problems too, but we also have resources of the US.

What kind of help do they get?  They can’t even get us to slow down the sale of military-grade weapons underpinning the drug wars.

It’s like the wall.  Let’s just keep problems out.  We’ve exported and armed Prohibition.

Let’s Just Do Immigration

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Now that Trump has decided that the target for the total number of immigrants is unchanged, why don’t we just fix immigration:

  • Family unification is a good thing, but it has taken too much of the total, now 70%.
  • It’s sensible that some fraction of immigrants should get in based on special capabilities or other demonstrable merit.  (It’s worth noting that the current system is actually not so bad in that respect.)
  • It’s also sensible to have some fraction of immigration that is not so constrained.  You never know who’s going to be a hero, and diversity has value.  Moreover past immigrants mostly came from places where they were denied opportunities for such merit.  So a lottery system has value too.

As a default, divide it up 1/3 for each and call it even.  Otherwise negotiate the limits for a while and then call it done.  (As an interesting variant, Canada handles family unification with relationship points in the merit index.)

Additionally:

  • We need to settle DACA once and for all, because there is no value to anyone in not doing it.  Since we’re talking about merit, these are upstanding, fully-adapted, English-speaking contributors.  And their number, compared to Trump’s new annual totals, is on the order of 1%.
  • For the rest of currently undocumented immigrants, we had a bipartisan bill passed by the Senate in 2013.  That can still be a basis for work.  These people are almost all working and paying taxes.

This isn’t so hard.   It only takes the will to do it.

There remains the question of enforcement.  For that, the problem is that we’ve been postulating solutions without any serious analysis.   Politicians shouldn’t be arguing about this.  (Border control was never wild about the wall until they were told they”d better be.)  There needs to be an independent assessment of how money should be spent to enforce the law.

However one thing that is definite is that there is no excuse for mistreatment of desperate people looking to escape overwhelming problems for themselves or their families.  We can’t satisfy them all–immigration law is there to say who gets help–but that’s no excuse for treating them all as criminals or worse.