International

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.

An Example Says It All

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During the Covid crisis the Trump people carried on a campaign of blatant immorality that never got the attention it deserved. They got themselves vaccinated, but encouraged their supporters not to. Not getting vaccinated was an act of resistence to Biden, a gesture for freedom in the face of government overreach, and would be just fine. They killed supporters for their benefit.

That was handy for the campaign. It was a smokescreen for their botched handling of the early stages of the epidemic. So many people died from the anti-vax campaign that they could repeat their bottom line over and over again: “More people died from Covid under Biden than under Trump.”

Now cut to the present. As with Covid, it’s not an accident that Trump’s supporters are the ones hurt most by today’s Trump economy: the tariffs, the instability, the cuts to public services including medicare and social security. It’s certainly not the billionaires (or Trump himself) who are getting hurt. They’ve got their tax cuts, which is to say all those supposed savings from DOGE and other budget cuts went to them. The MAGA people–like the unvaccinated–are sacrificed to the program.

It’s the same internationally–who is getting hurt? Not Russia or China. He’s buddy-buddy with them. They’re all on board with the idea of spheres of influence, the idea that big powerful countries should be able to take what they can get. It’s US allies who trusted us. They’re easy targets, because they were on our side. They represented the first line of our defense against the USSR and now Russia. They didn’t have defenses against us (although they’re now learning).

It’s time to recognize that’s what Trump is. It’s easier to fleece people who considered themselves your friends than to fight enemies. He’s the ultimate confidence man. He’s enormously skilled in insinuating himself with people who are ambitious or have problems, and absolutely ruthless in taking advantage of those who have the misfortune to trust him. Whether he sees himself that way or not, that’s what he is.

There’s no arguing that the MAGA people, among others, have seen the prosperity of the country pass them by. There are real problems with the top-heavy distribution of wealth in this country. But Trump has sold them a story worthy of his talents: that poor immigrants and our foreign allies are the ones making them poor, while the billionaires who command real money and used their political power to create the wealth distribution are their friends! This amazing switch of responsibility is sold as free market economics, but it comes down to something as old as time–that the rich deserve all they can get and certainly should not be saddled with the needs of their inferiors. Unsurprisingly those billionaires are now cashing-in left and right while the others are standing hat-in-hand waiting for the ever-distant golden future.

The ultimate confidence man has delivered the ultimate win.

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.

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.

Our Colony on the Mediterranean

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There’s something simple behind Trump’s 20-point plan for Gaza—we now have a colony on the Mediterranean. It is a state containing Palestinians without being a Palestinian state. Since we’re in charge it’s ours, even if we counting on others to pay for it or somehow keep the peace.

It’s not the first colony we’ve had recently.  There was also Afghanistan and to a lesser extent Iraq.  Colonies can seem rational—even benevolent—at the start, but it doesn’t tend to work out that way.  So we have to hope this one works better.

But that’s getting too far ahead.  What is there to say about the plan?  First, there is no denying that it is a lot better than continuing the war.  This has always been a particularly terrible affair, because in this horrible mess both sides wanted to kill as many Palestinians as possible.  For Netanyahu, the prime objective has been to kill enough of the enemy so that the Israeli population would forget that he was responsible for the success of the October 7 attacks.  For Hamas, the main point was to prevent any kind of Israeli-arab cooperation and to provoke an Israeli counterattack that would demonstrate the evils of Israel to the wider world.  Before his death Sinwar gloated to his boss in Qatar about the number of Palestinian dead he had achieved for the cause. What world this is!

With the peace comes the colonial bureaucracy.  The Palestinians aren’t running anything, because the Israelis don’t trust them to even the slightest degree.  In Netanyahu’s UN speech the Palestinians were described in every instance as unrepentant, vicious terrorists.  The plan has a lot of talk about how Gaza will be purged of Hamas, and there will be a whole new body to keep the peace—once it is ready.  Until then (whenever that is) the Israeli army will need to do that job.  There is a longer-term objective of maybe someday a Palestinian state once Palestinians can somehow be trusted to live in peace with Israelis.  Netanyahu has been explicit about when that is—never.

In the interim it’s not clear what is going to happen, except hopefully relief for Palestinians (an expensive proposition) and the encouragement of business investment.  There is no guarantee how much business investment will be aimed at the well-being of Palestinians.  Anything done for the Palestinians will come under US control and with arab or even Israeli investment.  On the face of it, this sounds like a bunch of fancy hotels and a massive complex of cheap apartment buildings to serve them.  I’m also a little worried about who else might be coming as immigrants, but which may or may not be an issue.  It’s hard to guess how peaceful this is going to be.  The horrors of the past two years are such that one can’t imagine there won’t be resentment.  The ideas of Hamas will be harder to exorcize than the known Hamas fighters. And we can’t know what will happen with the released arab prisoners.

So it’s great that the war is going to end.  At least to start with this particular plan seems dictated by the needs of Israeli security combined with Trump’s fervor for real estate development. However, the first step will be meeting the immediate needs of the Palestinians for a peaceful, livable future.  That is already such a challenge that the rest is up for grabs.

We Are Russia In Ukraine

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In case you haven’t noticed we just declared war on our independent neighbor Canada.  We haven’t sent an army yet, but that’s only because we think we can win with financial weapons.  But there’s no mistaking it—it’s war.  And our declaration of war was beyond ludicrous—for few immigrants, just about no fentanyl, and a balance of payments deficit that has nothing to do with protectionism.  The real reason is no better—a vanity project so that Trump can say he personally added the extra territory to the USA.

That’s pretty bad, but it is certainly not the worst of the lying going on.  For that, you can point to all the talk about getting rich. We’re constantly told that everything going on, no matter how painful or immoral is about getting rich.  But no one has any intention of creating a world where the population gets rich. This is government of, by, and for big corporations.

There is no linkage between all the firings and the well-being of the population—the money being saved is to justify the tax cuts for rich people and Wall Street.  The tariffs are a sales tax paid by buyers—a regressive tax.  The deportations will raise prices even on basic foodstuffs and essential services such as elder care.  Finally and most importantly, as even Adam Smith understood and the entire nineteenth century demonstrated, the big corporations are not going to shower golden paychecks.

If you want to understand what’s in store for the population just look at what uncontrolled free enterprise did in the nineteenth century.  The picture was very much like the story Trump tells—the European powers dominated their colonies and brought all the profits home.  Industrialists made fortunes, controlled government, and kept the work force desperate.  Uncontrolled capitalism is good at making money for itself full stop.  Most people are in no position to bargain.

There is no miracle world of uncontrolled free enterprise—the only people who preach that religion are handsomely paid to do so.  Governments can do bad things too, but without the countervailing power of government there is no one to speak for the well-being of the population.  Just look at some problems facing us today: 

– AI (with robotics) is already becoming a hit on employment. Musk’s savaging of government jobs is actually a foretaste of what to expect throughout the private sector.  Someone will have to help.

– Climate change is real—whether Trump likes it or not—and there will be major changes to be managed if the population is to be kept whole.

– Education and healthcare are necessary for personal financial success and stability.  The private sector is not going to fund it.  Punting it to the states is something business interests do to avoid paying for it.  Musk goes a step beyond that—preferentially hiring H1B slaves whose education was paid-for by someone else, and who can’t quit or change jobs.

– The technological environment is changing faster and faster.  No one predicted just how far generative AI would be able to go.  Unless we are prepared to spend real money on pure research we will be left behind.  That means not only missed opportunities in the economy but these days also military weakness.  Regardless of what politicians may say—the private sector does not do basic research.

Trump’s golden world does none of these things. It’s not good for the vast majority of people.  Except in the very near term it’s not even good for the billionaires.

In business I’ve been to plenty of meetings where someone proposes a new idea—different and exciting, thinking outside the box.  Frequently what makes it new, different, and exciting turns out to be that it’s wildly unethical—kind of like invading Canada.  Wildly unethical may be different, but that does not mean good.  In fact most of the time it’s terrible.  And with Trump that’s what we’ve got.

Genocide is the Wrong Question

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It seems to me that the discussion of genocide yes or no in Gaza is actually letting Israel off the hook.

It’s easy to defend a charge of genocide. It’s true that the war with Hamas is still going on. It’s true that Hamas’ network of tunnels is such that it is impossible to imagine military action that doesn’t involve large numbers of civilian casualties. It’s even true that the Israelis are more or less losing the war, because they haven’t significantly reduced Hamas ability to launch another October 7 attack, and they haven’t even made much headway on those tunnels. So it’s not genocide, it’s an ongoing war of self-defense.

But that’s not actually what’s going on. When Netanyahu launched the war he certainly knew there was no chance of completely eliminating Hamas. He may have believed he could do it anyway; he may have just decided it was a good slogan. But early in the war it must have been clear to everyone that it wasn’t going to happen. For Netanyahu himself the war brought its own benefits–so he didn’t have to care–but you can’t fight a war without real objectives. And it must have been clear to everyone what those objectives had to be.

They had to be the same objectives as in the occupied zones: make sure the population knows who is boss and that massive force stands ready to crush any missteps or simply act on whim. For years that had been Netanyahu’s answer to all questions. It had worked to stop blowing up busses. It was the only achievable option for Gaza.

It’s not genocide, but it’s a war against the population. Make sure they never forget what happened to them–and that we can do it again. Absolute hell in every dimension. You don’t even have to try very hard. It’s mostly a byproduct of fighting Hamas and not caring about consequences, although blocking food trucks is a step beyond. It also serves Netanyahu’s other long-term objective–making a two-state solution impossible by hatred.

One hopes against hope there is some way to recover from this mess. That’s another subject. But it’s worth being clear about what is actually going on–and that it’s not new.