At least five interesting things for the middle of your week (#5)

The world loves America, Twitter's self-destruction, the "richcession" continues, more decoupling, permitting reform in California, and backtracking on patent reform

"20130705 statue of liberty (from boat)" by schizoform, CC BY 2.0

Howdy, folks! This week started with the Fourth of July, so we have “five interesting things” post in the middle of the week. As always, paid subscribers should feel free to drop links in the comments that you’d like me to think about, or include in next week’s roundup!

1. America is still popular all over the world

There’s a narrative out there, floating around on social media, that the United States is deeply unpopular among the nations of the world, especially in the Global South. Although I’m sure the foreign ministries of China and Russia would dearly love to believe this, it just isn’t true. The U.S. remains remarkably popular worldwide.

A new Pew survey has the data. America’s image among the developing countries surveyed — Nigeria, Brazil, Kenya, Mexico, South Africa, etc. — is very strong. Opinion in Europe is a bit more divided, but still solidly favorable.

Source: Pew

Happy 4th of July, Americans!

Digging into this data gives us some important clues about how the U.S. can continue to improve its global image and solidify its global leadership. Strong majorities around the world enjoy America’s entertainment products and admire its technological innovation, and are happy to get U.S. investment and export demand. Those things all provide a strong foundation for American leadership, but they’re also pretty constant. What seems to change is countries’ perception of how America contributes to their security and considers their interests.

The three most strongly pro-American countries surveyed are Poland, Israel, and South Korea. It’s not hard to see why. America is the guarantor of these countries’ security against powerful, threatening neighbors — Russia, Iran, and China and North Korea, respectively. People like America when they feel that it protects them.

People around the world have also become more likely to say that America considers their interests:

Source: Pew

Historically, people in most countries tended to say that the U.S. didn’t consider their interests, even under Obama. The U.S. built up a reputation as an inconsiderate, self-absorbed superpower, throwing its weight around carelessly without considering the interests of its smaller allies or of poorer, weaker countries. That bad reputation is rapidly eroding under Biden. Chastened by its misadventure in Iraq and its internal unrest under Trump, America is shifting from a swaggering hegemon to a helpful offshore balancer. The Ukraine War is probably key to this perception — instead of launching invasions, the U.S. is helping stop one.

The lessons for U.S. foreign policy seem very clear. America should refrain from trying to act like an empire, and instead commit itself to being the spoiler of empires. And it should seek maximum input from allies and potential friends alike, and make it clear that it cares about their own interests and concerns. In a multipolar world, that is how we can retain leadership, relevance, and prestige.

2. Decoupling rolls along

As regular readers of this blog know, I view some degree of economic decoupling between China and the developed democracies to simply be inevitable. A lot of people think that decoupling is being driven entirely or mostly by U.S. policy choices, but this was never really true, even in the Trump era. The truth is that Chinese policy choices are a major driver of decoupling.

For example, China is now lashing out at other countries with export controls. It recently announced curbs on the export of the minerals germanium and gallium, which are important for making chips. China is responsible for most of the world supply of both minerals, and while they’re not that hard to replace, doing so will require building up processing capacity in other countries — a capital-intensive, low-margin business that most nations had been happy to outsource to China. This move will probably do more to speed the rapid reshoring of critical supply chain bottlenecks than any Biden administration incentives.

The controls on gallium and germanium are in reaction to the U.S.’ own chip export controls. But in a less well-publicized move, China is also restricting graphite exports to Sweden. Graphite is important for building batteries. China dominates the global battery industry, but Sweden’s Northvolt is one of the best battery makers outside China. So China is restricting the sale of battery minerals to Sweden in order to strangle a potential competitor and retain its dominance in batteries.

What this shows is that unlike the U.S., Xi’s China uses export controls not just to maintain or gain a military edge, but to gain a purely commercial edge for domestic companies. No one had tried to kill the Chinese battery industry, but China is trying to kill the Swedish battery industry nonetheless. This isn’t geostrategic competition; this is pure mercantilism.

In other words, companies around the world now have to realize that whenever they compete with Chinese industry, even if there’s no military angle at all, they can expect China to leverage the power of the state against them. That understanding will speed decoupling, as companies everywhere look to protect themselves from this kind of mercantilist supply chain attack.

In any case, this is far from the only thing China is doing to speed decoupling along. It has onshored the manufacturing of intermediate goods (chips, displays, industrial machinery, auto parts, and so on) to such a degree that South Korea, which boomed in the 2000s and 2010s from selling these goods to China, now exports more to America. The less that companies from advanced economies like South Korea can sell to China, the less reason they have to stay invested in China.

Anyway, what all this means is that Chinese policy is driving a flood of investment out of China. Robin Brooks of the Institute of International Finance writes:

The one place where decoupling from China is definitely happening is capital flows. Our high frequency tracking of flows shows a huge inflow into non-China EM, even as flows to China are near zero.

And Matthew C. Klein has an excellent chart documenting the decrease:

Source: Matthew C. Klein

I’m telling you, folks…decoupling is happening.

3. Twitter’s decline — slowly, then all at once?

This week, Twitter users awoke to a rude surprise: The number of tweets they could write, as well as the number of tweets they could read, had been capped. There are various theories as to why this happened — Elon Musk claimed that it was to stop data scraping, while others conjecture that Twitter ditched Google Cloud and was managing a difficult transition to a homemade solution.

The move prompted massive outrage and despair from regular Twitter users; if there’s one thing that addicts hate, it’s being cut off. As for Elon, he seemed to think the whole thing rather droll:

The big question is whether this is the thing that finally kills Twitter. As you know, I’m strongly in favor of internet fragmentation; the world needs more than one “town square”, so I’ll be happy if people scatter to various other platforms. The question is whether this will actually happen now.

An interesting paper that might help shed some light on this question is “Cascading collapse of online social networks”, by Torok and Kertesz (2021). They find that the first stage in the death of a social network is when non-core users abandon it for a competing service. Eventually, there’s some critical point where not having those peripheral users around makes the core users make a collective decision to leave:

The empirical results suggest that in the early stage users leave the OSN mostly because they are not anchored to it by a large number of friends, that means, they are not interested enough in online networking or they churn to a competing service. As time goes on, the latter effect seems to dominate resulting in a linearly increasing churning rate following the increasing popularity of the competitor. This erosion of the network due to exogenous influence has the effect that the social pressure becomes critical for an increasing number of active users, who then decide to leave, which leads to a cascading effect and finally, to the collapse of the OSN.

This explains why Musk has been so anxious to strangle the rise of competing services like Mastodon or Substack Notes. He knows that the swing users — the people who aren’t really that attached to any network — have to be kept on Twitter so that the power users will also stay.

I can easily understand this principle when I think about my own Twitter usage. I am one of the heaviest tweeters in existence, and I have a decent number of followers (about 300k). But if a lot of those people stop logging in to Twitter, and my engagement goes way down, I’m going to conclude that people aren’t really listening to what I’m saying on the platform, and look for some other soapbox to shout from. It’s not worth it to stay just to talk to other core users. The peripheral audience is more important than the core.

Anyway, there may finally be a Twitter competitor that Elon can’t strangle: Instagram Threads. Meta’s new Twitter-like discussion app can draw from the massive existing network of Instagram itself, which is already much bigger than Twitter. Assuming Zuck and his engineers can execute on the product itself — which they have shown great ability to do in the past, with things like Instagram Stories — then Twitter could finally have a real fight on its hands.

One key demographic to watch will be Japanese users, who are a surprisingly large percent of Twitter’s core users. Japanese people, generally speaking, don’t care at all about the drama surrounding Elon Musk, but they do care about having their Twitter usage arbitrarily rate-limited. They know the Instagram brand name, and they are curious about Threads.

Anyway, to paraphrase Adam Smith, there is a lot of ruin in a social network. But not an infinite amount. If you keep clobbering a platform hard enough, it will collapse.

4. The U.S. economy is working against inequality

At the beginning of this year I wrote about an interesting and potentially very important trend: Inequality in the U.S. economy might be going down now.

Inequality might be going down now

The various indicators are pretty split; wealth and labor income inequality have either stagnated or declined since the early 2010s, while total income inequality has continued to rise. (There are various measurement issues with each of these, of course).

But the economic expansion of the last few years may be working even more strongly against inequality. This is from Autor, Dube, and McGrew (2023):

Labor market tightness following the height of the Covid-19 pandemic led to an unexpected compression in the US wage distribution that reflects, in part, an increase in labor market competition. Rapid relative wage growth at the bottom of the distribution reduced the college wage premium and counteracted approximately one-quarter of the four-decade increase in aggregate 90-10 log wage inequality…[T]he pandemic increased the elasticity of labor supply to firms in the low-wage labor market, reducing employer market power and spurring rapid relative wage growth among young non-college workers who disproportionately moved from lower-paying to higher-paying and potentially more-productive jobs. (emphasis mine)

This is a pretty staggering finding. Just three years of a post-Covid economy have managed to reverse one fourth of the increase in wage inequality since Ronald Reagan first took office — at least, by one common measure. That’s pretty incredible.

The WSJ has some more details in a recent story on the “richcession”:

Layoffs are still making headlines, and they are still disproportionately affecting higher-earning workers…Meanwhile, overall layoffs have remained low…

New York state reported that the average bonus paid to New York City securities-industry employees in 2022 was $176,700—still more than enough to buy an orchestra’s-worth of tiny violins, but down 26% from a year earlier, and after adjusting for inflation, below prepandemic levels…

[C]ompensation paid to U.S. employees was up 20.4% from the fourth quarter of 2019, driven by rising wages and employment…But proprietors’ income, which goes to sole business owners and partnerships such as law firms, was up a smaller 17%, while personal-income receipts on assets, such as dividends, were up just 9%.

And as I noted in last week’s roundup, this expansion has been particularly good for Black people, especially Black women.

In other words, tight labor markets are effective at reducing inequality and lifting up people at the bottom of the distribution. The downside, of course, is inflation, which can hurt real incomes for the middle class. So the lesson here is not to simply make labor markets as tight as possible by any means necessary. Still, it’s good to see the seemingly relentless rise of inequality get halted without the need for major social upheaval. The U.S. economy isn’t as broken as many people think.

5. California shows the way on permitting reform

At the national level, there’s a big battle underway over reform of the permitting process for building new factories and new energy infrastructure. At the core of that battle is the National Environmental Policy Act, or NEPA, which allows local NIMBYs to sue developers in court, tying them up with demands for onerous multi-year environmental reviews, even if the development plan is 100% in compliance with all environmental laws. Todd Tucker and the Roosevelt Institute, the biggest progressive proponents of industrial policy, have demonstrated a stubborn resistance to NEPA reform. That worries me, because if the people who most want America to build things again also want to avoid making changes to a system that requires multi-year paperwork and court proceedings to build those things, the political economy of industrial policy could be in big trouble.

But in California, something surprising and good just happened. California has its own version of NEPA that’s even stronger, called the California Environmental Quality Act, or CEQA. CEQA is regularly used to block affordable housing through onerous procedural requirements, and is thus a contributor to the housing shortage. So the state legislature is taking action.

The state senate still has to approve the bill, called SB 423, but things are looking good. Note that the basic idea of this legislation — a time limit on CEQA-related judicial review, which will prevent costly multi-year delays — is also at the core of ideas to reform NEPA at the national level.

If California can show the way to effective permitting reform, it’ll serve as an example to progressives throughout the nation. It’s time to build, not time to sue and delay.

From the comments:

6. The wrong kind of patent reform

For a long time, economists and technologists have been sounding the alarm over the widespread abuse of the U.S. patent system. Patents incentivize innovation, by promising innovators the future rights to a certain amount of exclusive profit from their efforts. But they can also block innovation, by forcing innovators to pay massive royalties to holders of existing patents. This effect benefits big companies, who have the resources to file a ton of patents, and penalizes small inventors and startups.

The problem was exacerbated in the late 2000s and early 2010s by the mass patenting of design, software, and business methods — types of innovation that the patent system itself was never set up to deal with, and where the incentive benefits of exclusive technological monopolies are dubious. Does it really help the U.S. create great electronics to allow Apple exclusive rights to devices with rounded corners? No. So in this case it was the Supreme Court stepped in, ruling in 2014 that “abstract ideas” couldn’t be patented, which helped to put a stop to the over-proliferation of patents.

I personally thought that that was a good decision. But some legislators seem now intent on reversing some of the changes that the court made in 2014. I haven’t been paying much attention to the issue in recent years, but via “A.” of the blog Io Scrivo, I see that Senators Thom Tillis and Chris Coons have introduced a bill that would sharply curb judges’ power to rule inventions ineligible for patents. That could cause a return to the IP feeding frenzy, as big companies, freed from pushback by judges, sought to patent anything and everything in order to secure themselves from any challenge by smaller competitors.

I’m open to counterarguments, but that seems like a bad idea to me. Innovation has not noticeably been harmed by SCOTUS’s 2014 decision — if anything, it has been accelerated. The Tillis-Coons legislation seems like a sop to big business. Innovation is more important than profit margins.

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