Americans have been deeply dissatisfied with the economy for many years, even as standard metrics continue to show strength and prosperity. This gap between popular and elite thinking has helped populism surge and sparked intense debates about whether old economic assumptions—and policies—need wholesale revision. 

Transcript

Note: this is an AI-generated transcript and may contain errors

Jon Bateman: My guest today on The World Unpacked is Oren Cass, one of the most influential American conservative intellectuals of today and the last 10 years, really, especially when it comes to issues of economic policy. We're going to have a big conversation today about Trumponomics 2.0, tariffs, fiscal policy and everything under the sun. Oren, welcome to the show. Thanks so much for having me. We have a lot to cover, I guess. We have a lot to cover and we have a law in common. I was just brushing up on your bio and realizing we both were at Harvard Law School at the same time. One of us, i.e. Me, spent his spare time smoking hookah and driving around on a motorcycle. The other one of us i. E. You, spent his fair time actually serving as the domestic policy advisor to presidential candidate Mitt Romney, Walla Walla students. So you've been. In the game for a while now, but the reason why I bring that up is I'd love to hear about your intellectual journey before we dig into the real meat here. From Mitt Romney's campaign to, I think you're often described as part of the populist wing or a more reformist wing of the Republican party and conservative intellectualdom today. That's a journey that the right writ large has gone through during this time and you've been a part of making that happen. So... Tell us a little bit about that.

Oren Cass: My sort of progression through right-of-center politics and policy was pretty unconventional. I had never done the summer fellowships and the Hayek reading groups and the working on the hill or an AEI or whatever that I think are typically the gateways into this kind of work. And so I had a tremendous amount, still have a tremendous number of admiration for or Romney. He was very proud to work for him, but I think my own point of view, even back then on the Republican Party, was to some extent like I would always have described myself as conservative. It wasn't always clear how, at least my understanding of conservatism connected to the market fundamentalism that you would get from the Wall Street Journal editorial page. Uh, and I think Romney's actually, you know, a very interesting figure in this. I've, I've written a fair amount about a key moment in, in my own intellectual development being, uh, my work for him on trade policy, where I prepared the sort of very standard briefing on, you know, here's what a Republican says about trade. And his response was that's fine. But what are we going to do about China? Um, at a time when that was a, that was not a question you were supposed to ask. And certainly not a question anybody else was asking, and I got sent off to help the candidate figure out, you know, what else could he say about China. And through that really came to discover how thin the thinking was in economics as a profession, certainly on the right of center politically, on an awful lot of questions around free trade, globalization, how markets were working or not working more broadly, um, the reality that, you know, this was before the China shock research had come out. But the reality of anyone who's actually looking at the world was that this clearly had not been a good deal for an awful lot of workers. And so I think, you know, that really sent me off on onto the path of both being quite skeptical that the Black Letter Republican orthodoxy was correct, but even more so that it was even especially well thought out or substantive. A lot of it turned out to really just. Be dogma and I think to have really pulled certainly the party and right of center in politics in America away from what conservatism should be.

Jon Bateman: It's an interesting thought experiment. If Romney had won that election, what would have happened to our China policy? Obama really only started addressing China in a serious way toward the latter half of his second term in office. And so all of this reckoning with trade imbalances, the shifting strategic positions of the two countries really was put on hold until Trump came into office and you could argue that that's really shaped what's happened since. So I want to talk to you about China. It's a defining question for U.S. Economic policy and more broadly, but just sticking with how you see yourself fitting into a contemporary debate about U. S. Economic policies. I called you a populist, a reformer. I'm not quite sure what the right term is. Do you have a pithy description for your worldview and Maybe. Who you see yourself arguing against on the left and right in this moment.

Oren Cass: Well, I would argue that the correct word is conservative. You know, maybe that causes a little confusion or at least he's a good starting point for a discussion because, you know, the man on the street would probably say, oh, conservative economics, if they have any thought at all about it, that would be tax cuts, free trade, deregulation, you know maybe a little light union busting on the side. And I think it's really important, both philosophically to think about, you knows, how does that connect to any... Genuine understanding of conservatism, whether that's in, you know, the Berkian tradition of political conservatist, or more broadly, the types of values and priorities that even conservatives in the United States tend to emphasize. And it prompts also a recognition that the Republican Party as it is today is still a legacy of the coalition that Ronald Reagan constructed, right? Ronald Reagan took... Social conservatives and added in free market libertarians and foreign policy hawks, neither of whom were necessarily conservative at all. I mean, you know, Friedrich Hayek, one of his most famous essays is called Why I Am Not a Conservative. I think of my mission as restoring an economic consensus that emphasizes the importance of family, community and industry to the nation's liberty, liberty and prosperity. Maybe the most important point there is the restore that, you know, the American tradition of economic policy going all the way back to Hamilton, the so-called American system in the 19th century was always a robust national economic policy, you, know, federal investment, protection of domestic markets. The Republican Party was the party of tariffs, um, all the up through Richard Nixon using a global 10% tariff to address. Uh, you know, imbalances that were emerging in the global economic system. Reagan himself was, uh, was someone who would aggressively use protectionist tools, uh particularly vis-a-vis Japan. He's also someone who raised taxes five times when his initial tax reform generated less revenue than his advisors had predicted. And so in, in my mind, you know, we have a very strange aberration on the right of center and then on the center left, you I typically call neoliberalism that is of quite recent provenance. I think it's a feature of the Cold War ending, you know, the belief we were at the end of history, market democracy was on the march everywhere. And I think gave rise to just very lazy thinking and with it very bad policy.

Jon Bateman: A lot of threads to pull there, including, I'm gonna ask you in a moment, what was the time in American history when we had the best or most ideal economy or economic policy? You've brought up the American system, built for a world very different from the way we have, we are in now. But maybe we could just start with a more foundational question of, what is a good economy in your mind? You brought up... Poll stars that no one could disagree with, family, community, and industries. No one's anti-family, anti-community, anti industry or prosperity. And yet we do live in a time when it seems like it's more and more up for grabs how one envisions a good economy, that there can be a GDP, an unemployment rate and inflation rate that we might all agree on and yet have a range of views as to whether that speaks to. A healthy, sustainable, flourishing economy, or one that's really sick and unwell? How would you describe the economy that we're trying to build here in America?

Oren Cass: It's a great question. I think that's exactly the right way to frame the discussion at the foundation. The way we approach it at American Compass is to ask the question, what are markets for? Because to your point, nobody says family or community or industry are bad, but it is the case that certainly in recent decades, the economics field and economists have focused the purpose of the market economy. Solely on maximizing consumption and I mean you could go and you know that's sort of as a value statement and a description of their models it's true. You can also go find folks like you know Glenn Hubbard who was he was actually one of Romney's senior economic advisors he was chair of the council economic advisors under George W Bush explicitly saying that that that is the purpose of of the market economy and if you if you think about it in those terms you can go a step further and say An economist will tell you the ideal outcome is one that maximizes consumption while minimizing work. That sort of, that is the way that, right? If you're taking an economics class.

Jon Bateman: As a father of a one-year-old, I strongly endorse that description of ideal economics.

Oren Cass: You say that until I tell you that, well, then what you should really have done is stayed single and not had kids and maximized your consumption, right? I mean, that would have minimized your work and maximize your consumption. And so I think what's so important to say is that that's not all markets are for, that a well-functioning market economy, what we need an economy to deliver is, yes, consumption is great, right, I'm not a de-grocer, I don't think we should go live log cabins. But consumption is just one element of that pie chart of things that matter to human flourishing. And frankly, in a lot of ways, it's not the most important one, especially once, you know, basic needs are met. I think most people recognize in their own lives, when they think about what they aspire to for their children, that at least as important are things like being able to find a vocation. That is gonna allow you to be a productive contributor, that's going to allow you support a family. It's having a family, being able to raise kids who are going to have those opportunities themselves. For a lot of people, it's place. Being able to stay in the place where you grow up, near family, near friends, in that community, incredibly important. And then when you talk in more macro terms, it's not the case that all... All production in the GDP function is equivalent. There's a famous quote from Michael Boskin, who was chair of Council Economic Advisors for George H.W. Bush, where he said, computer chips, potato chips, what's the difference? This notion that we just sort of aggregate output into dollar terms and it's all the same. And that's not true. That's certainly not true for what the trajectory of an economy is going to be. It's not through for the resilience, the national security of her country. Um, and so if we say, actually, you know, we want, we want markets to deliver all of those things, then when we think about what we're optimizing for, it becomes a much more nuanced and, and prudential conversation. Yeah. Um, And that's where, you know, as you said, something like China becomes such an obvious and important litmus test for our thinking is, well, gee, China will make stuff cheaper, the end of the discussion. That is, in fact, what economists, at least until very recently, would have told you is the end of the discussion. Or is there a lot more that we need to think about in terms of what kinds of trade are going to be beneficial and what kinds might actually be quite harmful?

Jon Bateman: Yeah, so what I'm hearing is consumption is great, but it needs to be kept in balance with a bunch of other considerations, our identity as workers, the health of a community, our national security, enroll in the world, and that in recent decades, we've been out of balance and part of your project is to bring us back into balance. Is there a moment in, let's say the last hundred years, if I could keep you to that, where you think... We have had balance.

Oren Cass: Well, in general, I would say we tended to be much more balanced up until, roughly speaking, the 1980s and then even more so the 1990s. The entire story of America's development, and I will not stay within the hundred years because I think it's fun to go back and remember that these are the things that Hamilton and Jefferson were fighting about. These are long running debates about the nature of an economy, the priorities for nation. Um, but it is the case that, uh, from the, the early 1800s and actually the war of 1812, when the British kind of just marched right in and, and trampled through everything, opened the eyes of a lot of folks like Jefferson to a recognition that, Oh, actually building up industry and self-sufficiency is going to be really important.

Jon Bateman: Kind of in the same way that the Ukraine war today has shocked people into realizing how important supply chains are and our dependency on potential adversaries.

Oren Cass: Yeah, it would be nice if it had, in fact, shocked them into... Shocked some people. The Europeans, what the Europeans are actually doing remains to be seen. But I think, you know, look, COVID obviously also had that effect in the way that people thought about supply chains. And so I think what you see is from the early 19th century all the way up through the late 20th century, this remarkable economic and political miracle. The United States went from colonial backwater to the country that wins two world wars, emerges from World War II as the absolute unquestioned dominant industrial power, and then leverages that into not kind of resting on our laurels, but the development and growth of an extraordinary middle class. Actually, our economy performs and grows even more in those decades after World War II. And so I always point out to people that, you know, we reach the year 2000 and you can already see some of the choices that we've made, particularly in the nineties, you know, starting to create some cracks in the foundation, but we reached the year 2000 as the sort of unquestioned hyper power leader of the world. Dominant in technology until recently, you know, starting to give it away, but had been dominant in industry. And for that matter, with a debt-to-debt GDP ratio of 33% and a budget in surplus, it was possible to do these things, and yet a shift occurred that I think you can trace quite directly. On the right of center to the aftermath of the Reagan revolution, but on a bipartisan basis to the end of the Cold War, to this thinking that we could just sort of place blind faith in markets, that this was the inevitable direction everything was headed, and that if we just sort took our hand off the steering wheel, we would get the best possible outcomes.

Jon Bateman: I think one of the great strengths of your ideas or narrative here in terms of the public reception to them is that it's intuitive. Many people feel that the economy has been fading over decades, not in terms of the headline statistics like GDP and unemployment. Those don't quite tell that story, but the broadly shared sense that people cannot achieve their aspirations for... Living better than their parents did, buying a home at a certain point in their life, saving for retirement in college. So I think there's just, there's an intuitive aspect of this. Now, there are some intellectuals who just take that on fully and who say, actually the economy of the modern world is great. Yes, it's true that maybe you can't sustain a family of four on a single earner income, but our houses are way bigger than, And if you're actually. Went back and looked at the houses that they were living in, you wouldn't wanna live in them. Yes, it's true that it's more expensive to pay for healthcare now, but people are living way longer. That kind of healthcare that you can buy is extraordinary. Yes, retirement is expensive, education is expensive but way more people are going to college than ever before. People have the ability to retire whereas in previous generations manual labor might've just kind of croaked. What's your response to, this is not a normal person view, but there is an intellectual counter that says, this is a great time in America's economic history.

Oren Cass: Well, I think the first thing to recognize is that you've essentially just described consumption, right? And I think it's important to say that, yes, the data supports the fact that our material living standards are higher than they've ever been. Massive expansion of redistribution, as well, has ensured that people pretty much everywhere on the socioeconomic spectrum are consuming more than they ever consumed before, whether you want to talk about that in terms of. The size of houses, amenities like air conditioning, widgets in cars, amount of healthcare. There's no question that we have more stuff. The two questions I think that we need to ask are, one, OK, but what about all the rest of it? Is that really how any of these people saying these things measure their own well-being? And can I just push on that?

Jon Bateman: What is the rest of it? Because I do think a lot of people aspiring to the middle class would say that what they want is to be a homeowner, to get a college degree, to be able to afford retirement, vacations, and healthcare. There's other things in there, but what's the rest of it that's missing from that picture?

Oren Cass: Well, so, so what you said kind of raises both halves of the problem, I think. So, so one piece is to say, well, the rest of it is like, can I find, you know, a good stable job with dignity that allows me to support my family and feel like I'm a productive contributor to my community, right? One piece of it, is, you now is the place where I live, a place that's thriving or a place, that's declining. Um, one piece of, it is, do I. Do I have pride in my country and feel like it is, you know, that we are a place that does great things together. All of these things matter enormously to people's lives. So there's a lot that the sort of consumption measures just leave out entirely. The other piece I think is important to recognize though is that even if we stay just within the kind of things economists already measure frame. You've noticed a lot of slippage in the exact sort of examples you just gave. So, yes, if you can afford to buy a home, the homes are bigger and that's wonderful. Um, but it turns out that we don't make the kinds of homes most people can afford, to buy an email, right? Starter homes. And right. And so, you know, this is something we've developed something that we call the cost of thriving index. That very explicitly rejects the conventional way that we use inflation to track cost of living. Because economists using inflation would say, well, if houses are twice as big and they cost twice as much, there has been no inflation. If you are the person who needs to buy a house and the set of options available to you are only the ones that cost twice as much your cost of learning has skyrocketed. And in fact, things that once were in reach, owning a home in a- good neighborhood with good schools, ours now, out of reach. College education, same thing. Yes, we send an awful lot more people to college, but if you actually look at completion rates and you then look at even a people who complete, how many end up in the kind of job that required a degree in the first place, you know, roughly one in five are actually following that pathway, high school to college to career. Everybody else falls out somewhere else along the way, but we've gone from a system where, uh, look. Finish high school, there are entry level jobs, you can start to earn a living, move your way up to one where saving for, you know, planning on doing that college thing, taking on the debt, whatever else is the only really acceptable pathway that people consider. If you are an economist, that's just kind of crunching the aggregate numbers, you can say these things all look great. If you aren't ordinary American, you are equally right to say, this is not great at all. This leaves us feeling. Uh, left, well, not just feeling, but in fact, left behind, this feels us, you know, leaves us lacking in the social equality, political equality we used to enjoy, and this leaves us no longer able to actually build a life and provide security for a family.

Jon Bateman: One takeaway for me so far in this conversation is that you are attempting to bring back into economics things that people have been classifying as non-economic issues, right? I mean, you even mentioned earlier, pride in one's nation, the sense that one's community is thriving or not thriving. I did want to take us a little bit more into the contemporary moment. And what I was going to ask you is what do you think first year of Donald Trump's economy in his second term? Now I'm kind of wondering, do you even have a strong view of that? Because it sounds like most of your intellectual investments are about these kind of deeper macro trends that are persisting well before and after individual presidents and their policies. Do you have a view or is it interesting to you How the economy is doing in this moment Or is that kind of quarterly reporting not really where we should be focusing?

Oren Cass: Your intuition is correct. And I really appreciate you putting the question in those terms. I usually have to spend a lot of time answering the, well, how's the economy doing question with saying, well, it's a little more complicated than that. But you have anticipated that. I think there's a tremendous amount to be said about the first year of the Trump administration and the policies they pursued, the ones I think are very much on the right track for the kind of long run reform we need, the kinds that aren't, and so on. But exactly as you said, these problems I think that we have in this country today are the result of 30 or 40 year trends that cannot be solved in a year or even four years. You we can we can. Turn the ship, we can alter the trajectory. But that's what I think we really need to be asking whether we're doing much more than sort of, okay, well, are we back to a good economy now?

Jon Bateman: Completely agree with you. And it creates this very frustrating puzzle for something like presidential politics, right? Because to become president, one needs to have a vision of how you're going to improve the economy. And I think, Oren, what you're saying that we're in a 30 to 40 year spiral and that that's actually the level at which people are experiencing economic malaise. I think that is how voters feel and how normal people feel and yet how does a policymaker plausibly offer any kind of agenda that speaks to that. Trump has had one approach, which, and I'll just be frank about it, is braggadocio. He's just gonna come out and say, I'm gonna usher us into a golden era. So that's kind of his style, is fake it till you make it, I guess, or just make the big promise and sort of hope that people buy it. I guess Kamala Harris took the other approach. She did the classic. Democratic or just classic presidential candidate move of, I'm just going to have a policy list, I'm going to offer you a $25,000 tax credit if you're a first time homeowner. And I think people rightly respond to that and said, that's not really going to do it. That's not speaking to the level of dysfunction that I personally feel in America's economic system. So how do we merge the very long term fundamental view that you have with some intersection where a regular person can feel like there's a plan that a candidate has that can meaningfully address that.

Oren Cass: Yeah, it's it's like I think about a lot just one sort of slight digression I want to hit that that I'll connect back to this is this whole affordability Yes, that we're having right now, right? Because I think again economists are sort of rightly confused They look at info the actual inflation rate They look real wages keeping up with price increases and they say like what what is this affordability issue that we haven't? Nothing has really changed I think the American people rightly feel like a 30 or 40 year process has left them badly squeezed and the very sharp inflation that we had after COVID translated into this language of affordability. The problem is you say exactly, and this is a great example in presidential politics is, okay, what do you do at the point where people have affordability as their top issue? But it's not an inflation rate that you can bring down. It's not, you know, you can bring down the price of eggs or you can hope the price of eggs goes down, that's not going to actually make their budgets add up at the end of the month. But if you see, and this was for Biden and now Trump, also a challenge of feeling like you have to say, I'm going to fix this, up to including saying I'm going to bring prices down. Which you're not gonna do now. And by the way, you think people don't like inflation, wait till they experience deflation, right? You don't even wanna do it. And so, on one hand, it's a huge challenge. On the other hand, I think we have plenty of examples over time of America's best politicians, the presidents we think back about most fondly. Doing exactly this. And as any listener can already tell, I have no shortage of objections to Ronald Reagan. But I think one of the most impressive things that he did is come in in 1981 with the Volcker shock and tackle stagflation head on. I mean, stagflation was a long running phenomenon at that point. In objective terms, Americans were in much worse economic shape in a lot of ways than they are these days. And He had a very clear explanation of the problem and what he was going to do about it and that it was going take time and be painful in the short run. And interest rates went up to 20%, unemployment rate went up above 10%, market went way down, we had a sharp recession. And even if you then look, you know, 1983, 1984, we call it morning in America or he called it morning America, not mid afternoon in America, it was. Not the case that everything was already better. Even on election day in 84, markets had barely recovered, unemployment was above 7%. And Reagan wins practically the biggest landslide re-election since George Washington because he had explained what he was going to do and what progress would look like and could show that that progress was happening. And so I think you can map that onto the challenges we face today. I think one place where Trump is actually quite strong is on the diagnosis. You know, I think this was much of his success all the way back in 2016, actually saying, well, you know, here are these broader choices that we made here. These things have been happening and why they have been bad, why you are unhappy with them. We have to pair that with a long-term agenda that turns these things around. That's where I would give him a very mixed report card, right? I think we did need to dramatically alter trading arrangements, immigration policy, and so forth. In the details, I think, we've gotten some things right and some things wrong. But what success is gonna look like is not, okay, everybody feels great again in six months or 12 months. You have to be able to point to, you know, here are the things that you're going to start to see in the first year or two. You know, we're actually going to see domestic investment increase. We're actually gonna see people bringing factories that had gone overseas. Now they're going be building factories here. But I want to double click.

Jon Bateman: On the trade and tariffs issue. Trade overwhelmingly is the area of economic policy where Donald Trump in his second term, maybe even in his first term, has put his strongest personal stamp. And you could say it's a bit of a legal hack that unlike many of the other issues that we're talking about, broad affordability. It's just not clear what button a president can push in a single term. President Trump is at least asserting that he has a button to dramatically rewrite our trade relationships, and we're waiting for the Supreme Court to weigh in on that. You've been a supporter of tariffs. You might not agree with everything that Trump has done with tariffs. Could you just give us your general view of why tariffs made sense for the United States at this moment, and where you might depart from what the administration has done so far?

Oren Cass: Well, my starting point is to think about the actual fundamental goal or measure of a well-functioning training system. And in my mind, that standard has to be that it is balanced, meaning that you actually have a balanced exchange of exports and imports from various countries. It doesn't mean every relationship between every two countries is going to be balanced, But it means, broadly speaking, you need countries to be exporting and importing in balance. Because when you look at the actual economic theory of trade, why do we believe it's going to work? Why do we think it could be good for workers? One of the core premises is that, in fact, you are trading stuff for stuff. You know, if you go back and look at the rationale for welcoming China to WTO, if you, if, if go back and read David Ricardo and Adam Smith, it is always assumed that you are going to increase the total volume of trade. That total volume of trade is going to mean both sides now make more things to sell to the other side. And the fundamental failure of our trading system under the WTO model is that we just assumed that the market, for its own sake, as we were talking about earlier, even kind of broader conception of what markets are for, that the unfettered market was itself we put all of these things in place to make sure that nothing is interfering in the flow of trade, even as we did very little to make that countries weren't pursuing policies that what had classically been called beggar thy neighbor policies to benefit their own production at the expense of others. And so what we ended up with was a radically imbalanced system, right? I think even if you think about like the China shock, If you had free trade with China, if you had a rapid increase in imports from China, but China was equally rapidly expanding what it bought from us, we would have seen significant dislocation, but we would've seen as many new opportunities for industry, for manufacturing, as we were losing other ones. It would've been a shift, but it would've not been what we got, which was a hollowing And so when I think about tariffs, I think the first thing to say is that zero, you know, zero tariffs as an end unto itself is not a valid goal. What we should want is a balanced system. And the question is what policies will help us get there. And I think tariffs, as you see Trump using them, help to advance that goal in two respects. One is, if you just have systematic imbalances, a tariff puts a thumb on the scale. The tariff says other things equal. We're going to have a bias toward by, you know, supplying domestic needs from within the domestic market. That's going to encourage foreign producers to set up shop in the United States. And that would be a very good thing. The other thing that you see Trump using the tariffs for, and I think you see this with the so-called reciprocal tariffs, is as a negotiating tool, as leverage to say Look, we would rather, if the only choices we have are this imbalanced system or starting to put up barriers, we're going to put a barriers. But we don't see those barriers as the optimal. We are seeing those barriers as a new default against which other countries are going to have a lot more interest in figuring out how to get back to balanced trade. And so that's where you see, you know, the Europeans taking seriously the need to remove their behind the border barriers. Where you see the Japanese and Koreans making very large commitments to invest in the United States. All of it ultimately in service to the idea that we would love to have high levels of trade with reliable trading partners, as long as that trade is not first and foremost tariff free, but first and fore most balanced.

Jon Bateman: Let me ask you this. So let's say there's a country with which we have a large enduring trade deficit. Does that by definition indicate in your mind that there's some kind of unfair practice that the other country is performing? I mean, we know with China, for example, we do have this large enduring trade deficit with China. And we do know that China. Has a range of very unfair trade practices, largely involving opaque subsidies, regulatory preferences, things that the WTO has really not been able to tackle. Is that the case in all of these other imbalanced relationships, or would you say that regardless of whether anything unfair is happening from a policy level in the other country, that's still a problem? We still shouldn't have that kind of deficit.

Oren Cass: I think it's just empirically pretty safe to start from a presumption that if you see a massive imbalance, there's probably something going on. That being said, it is a rebuttable presumption. There are certainly plenty of reasons you can have imbalanced bilateral trade. So you could imagine a world where, you know, within USMCA. Mexico is exporting more to the US, the US is exporting more to Canada, and Canada is exporting more to Mexico, right? There are all sorts of reasons supply chains might operate that way. I think the bigger question, where there's almost certainly something going on, and even if there's not an unfair policy, it's a problem anyway, is looking at each country's own balance. And that's what I was trying to get at earlier that, you know, China might have an imbalanced, you know more imports from some countries, more exports to others. But the problem is that China's net balance is a trillion dollar plus surplus. So overall, it is selling out to the world more than a trillion dollars more of stuff than it is buying from the rest of the world. And that's something that is almost impossible to have happen naturally. It's interesting to look at during the period of sort of highest optimism for this model. Paul Krugman famously wrote, one of the most important things we can teach undergraduates is that trade deficits are self-correcting. He has since acknowledged that was a naive view, but the assumption was if you started to see that kind of surplus build up, you would have currency adjustments. You would have other internal domestic policies, workers would be saying, wait a minute, why are we not? To benefit for more of the stuff that we are producing and things would correct. What we've seen is that that does not necessarily happen. China is obviously the worst offender, but it's also very important to say that relative to the size of their economies and trade, Korea and Japan and Germany are nearly as bad. In their analysis with the U.S., they're actually worse. All of these countries have these massive trade surpluses, and all of these countries pursue economic strategies explicitly intended to develop major trade surplaces through export-led growth. So we should not think that that's a coincidence. We should recognize that that is what they are trying to do and what they are doing, and that the problem with that is that, again, you could have a system with all sorts of bilateral imbalances, But if you have those overall imbalances... They have to cancel out. If you're going to have countries running huge surpluses, someone else is going to have to run a huge deficit. And in our system, because of the role the U.S. Felt it should play, that has been the U S.

Jon Bateman: China represents so many conundrums for an economic policymaker. You brought up earlier that one way to use tariffs is leverage to get the other country to fix their unfair policies. My fear is, and I want you to react to this hypothesis, the United States and perhaps the rest of the trading world, but certainly the United states, does not appear to have enough leverage to get China to really reverse course in terms of its beggar-buy-a-neighbor policies. We may never know whether we could have achieved something more substantial with the rest of the world behind us. I think kind of the well has been poisoned there. But it does sort of seem like China's probably going to stick to its guns for as long as it can. And because China is a very, very economically powerful country and powerful in other ways as well, if we really press the case on tariffs in order to correct these balances. Going to experience a lot of economic pain and lose access to things that have proven so far time consuming, costly and difficult for us to recreate like manufacturing supply chains. Is that just the price that we need to pay much like Reagan and Volcker? Let's swallow this poison pill, ride it out. We'll see the results on the back end. It's better to do that than to continue to allow China to hollow us out or is there some other way out of this conundrum?

Oren Cass: Well, to answer the question directly, yes, that's the price that we have to pay. And I think it's really important to recognize that it's not the people who are advocating this course of action, who are imposing this cost on the American people. It's the people, who blindly pursued a wildly irresponsible course of actions that are imposing this cost, uh, on the America people, because we don't, we don't have any choice. If you sort of kind of. Vaguely describe the alternative like, oh, we could just let China continue to hollow us out like.

Jon Bateman: Ha ha ha!

Oren Cass: Yeah. You got me there. Oh, right. Like, oh, like, well, you know, maybe isn't the, to unfairly paraphrase you, like isn't the reasonable thing to do to simply become a dependent client state of the Chinese Communist Party? And the answer is no, that is not a plausible choice at all. You know, I think it's interesting when you say that China poses a lot of economic Nundrums I would actually say the opposite which is that China poses an extraordinarily like easy and obvious. Challenges that that have only become conundrums through a total failure to see clearly the things that matter most. And in this case, you know, one thing that I always emphasize is we think of kind of free trade as this extension of free markets, right? If you're for free markets well then obviously you're four free trade. When it comes to China... Free trade and free markets are in direct conflict. The more that you have free trade and integrate your economy with an authoritarian country dominated by a communist party and a state controlled industrial sector, that makes your markets way, way, less free. You actually can't have both. You have to choose one. And again, if all you're trying do is maximize consumption and you give no thought to long-term trajectory of growth, national security, industrial vitality, then you say like, well, that's okay, look at all the cheap stuff. But if you care about those things, you have to choose the free markets. You have to, in fact, believe that our economy will perform better in the long run on the dimensions that we care about if we actually reject the distortions that China would otherwise introduce. And so, you know, yes, I think it will be. Somewhat painful. I think one thing we've seen over the last year is it's frankly a lot less painful than the economists had predicted to start doing this. You know, imports from China are already down substantially. We have countries with whom we can partner that are also substitutes for many of the things that China produces. We do have the capacity to be uh, effective and, and highly productive manufacturers here in this country. And that is, has to be a huge piece of, of what it is that we're committed to doing and, you know, the term for accepting a short-term cost that's going to improve your economic position and deliver long-term benefits is investment, uh, you now conversely, a hedge fund buying and dumping stock in things over and over, which we tend to call investment. Is definitely not investment. And so in a sense, what we're talking about is at the national level and going all the way back to how we thought about the American system, how America always thought about the role of public policy in the federal government is to make sure that we're doing that kind of investment.

Jon Bateman: I think for the rest of my life, we were going to be arguing about China, and the actions that have been taken in the last 10 or 20 years, and actions that we're going to take in the next 10 or 10 years. The other thing that I just cannot let you go without asking you about is AI. Is going to change everything. I believe that. There are lots of people trying to take a whack at the AI question through an economic lens, much of it very short term. Is there a stock market bubble? Would we be in a recession without the AI data center boom? I think the more interesting question is how AI changes any of the things that we've been talking about, the kind of medium to long-term structural factors. And in particular you started us off with a kind of ode to the worker and how we need to rebalance the economy to be more about work, community, industry, locale. AI does seem to threaten all of that, even if it offers tremendous consumer surplus in the form of more advanced cognitive resources that are available to people. It will disrupt jobs. It will eliminate previous industries. It will add to returns of capital as opposed to labor. How do you think about that problem? And is there anything we can do about it?

Oren Cass: I guess I see the obvious effects of AI a little bit differently. It seems to me that AI is what's typically called a general purpose technology. It's going to have dramatic effects throughout the economy. But we have been through this before. Whether you're talking about the Industrial Revolution, electrification, automation and computerization. We see the introduction of these kinds of technology that have dramatic effects on the labor market, that render entire classes of work irrelevant, that create all sorts of new and different opportunities. And whether or not those work out well for workers, for communities, for labor versus capital, I don't think you can find any inherent rule for that says, well, this kind of technology does this thing. I think you can actually be quite agnostic as to what the technology is and recognize that the effects depend upon the conditions into which you introduce them. Even within the Industrial Revolution itself, at the beginning, it was a disaster for workers. And then we realized like, oh, we probably need some employment law. You know, we probably shouldn't have child labor. And so forth, and then it started to work out really well for workers. We've certainly seen electrification, computerization, I think these things in general have been very good for workers, and I think it's important to recognize that these things diffuse very slowly. You see a lot of folks trying to kind of wave their hands about the China shock, or these other sort of abrupt damaging uh, impacts on the economy and say, oh, well, it's just disruption. You know, it just like technology, technology doesn't disrupt in that way, just shutting things down overnight. Uh, it takes a long time to install it. It takes a lot. Time to get the value out of it. We're already seeing that obviously with AI. And so I, I think we should expect to see that and whether that accrues to the benefit of workers or not is going to depend on. What our policies are around globalization and immigration and labor, and whether we insist on preserving power for workers, whether we insist on saying, if you want to earn a big profit in America, you're going to have to do it employing Americans. And if we get those conditions right, then I think AI will be very beneficial. In a lot of ways, frankly, it looks a lot better for your typical blue collar worker than for a high-end knowledge worker. But if we continue on the path that we've been on, which says, well, just cut costs as fast as you can and outsource what you can, and profits will go up, and then we wave our hands and say somehow that will end up being good for everybody, that undoubtedly will not be good for everyone.

Jon Bateman: When it comes to AI, I've heard ultra positive, even utopian views of the future. I've had ultra negative and dystopian views, mostly on the technology itself. What I rarely actually hear is somebody who shares your optimism or an about our ability to steer this technology at a policy level. But I deeply believe that is the key question and I hope you're right. I have no idea how any of this is gonna play out that you are someone who I will wanna consult with bring back on as these remarkable changes. Continue or and thanks for a great conversation. This was really fun.