At least five interesting things for the middle of your week (#39)

Modi's third term; Biden and the border; good news on climate; nonprofits being bad; interest rates and austerity

Source: Wikimedia Commons

It’s been a slow news week for those of us who don’t write much about presidential politics — Trump’s criminal conviction is sucking the air out of the discourse. But Noahpinion is always — well, OK, almost always — a calm oasis in the swirling storm of chaos and vitriol.

I’ve got just one podcast for you this week. On Econ 102, Erik and I discuss elite overproduction, and the future of the political Right in America:

OK, on to the list of interesting things!

1. Modi wins again. What’s next for India?

Narendra Modi is an electoral juggernaut. Polls project his Bharatiya Janata party (BJP) to win an even more commanding majority in the current election (Update: The election results turned out a bit differently than the exit polls, with Modi’s party winning a plurality but being forced to accept a coalition with smaller parties). This will make Modi the first Indian prime minister to serve three terms since Nehru. That means Modi will probably be at the helm for almost all of the rest of the 2020s.

A few people on Twitter accuse me of being a Modi fan, because I cheer for India to have robust economic growth under Modi, and because I support the quasi-alliance between the U.S. and India (which Modi has worked to further). In truth, I’m pretty agnostic about Modi. I take organizations like Freedom House seriously when they warn that India has become a less free country under Modi. That’s worth worrying about.

On the other hand, it would be morally unconscionable for me to root for India to remain mired in poverty simply in order to decrease support for the prime minister. India deserves to grow, and Indians deserve to get rich, no matter who is in charge (and yes, I would have said the same about the Chinese Communist Party in the 1990s).

And as for U.S.-India relations, it seems to me that whatever Modi has done wrong, his regime is still far more liberal and far less internationally aggressive than Xi Jinping’s, and acts as a balancing force in a region badly in need of balance. America has a long and fruitful history of being pragmatic in choosing our alliances, and we should not change that now.

So yes, I am absolutely rooting for India to be a fast-growing strong country under Modi, and to partner with the U.S., even as I also urge Modi to maintain and extend India’s liberal democratic traditions.

The next question is: What can Modi do to make India richer and stronger? Growth is already proceeding at a fairly rapid clip — poverty is falling rapidly, and the population is becoming healthier. Modi has done an excellent job on infrastructure, building large amounts of new railways and highways, electrifying the railways, expanding capacity and efficiency at India’s ports, and so on. India is building vast amounts of solar power (which is why I’m not very worried about its carbon emissions). And the country’s strong service sector is booming even more than usual.

The next job is to build a world-class manufacturing sector — India needs to industrialize. Fortunately, this is exactly what Modi has in mind:

Indian Prime Minister Narendra Modi plans a raft of business-friendly measures if he wins a third term this week, including pushing through regulations making it easier to hire and fire workers…The premier also plans to reduce import taxes on key inputs for locally-made goods, which have pushed up India's manufacturing costs…The government plans to increase India's share of global manufacturing to 5% by 2030 and 10% by 2047[.]

That all sounds great, especially the reduced tariffs on intermediate inputs. Import taxes on intermediate inputs generally hurt domestic manufacturing more than they help — if you can’t buy cheap steel, you can’t make cars, and it’s better to be the country that makes cars than the country that makes steel.

Lowering import tariffs is consistent with a strategy of integrating into global supply chains instead of trying to do every part of the production process in-house from day 1. Countries like China, Poland, and Malaysia have succeeded in recent decades by first courting foreign direct investment and doing assembly work, then moving up the value chain, and India should do the same.

Modi’s push to “Make in India, make for the world” seems like the right approach. Apple is rapidly shifting iPhone production to India — in 2021, only 1% of iPhones were made in India, but this is projected to rise to 25% next year. Tata, India’s top conglomerate, is getting involved and may emerge as a competitor to Foxconn. This is just the tip of the iceberg, of course — India is courting a vast array of other foreign companies, from Japanese farm equipment makers to Dutch semiconductor companies. Even Chinese companies are investing in India, despite fears that they might be training their replacements.

And Modi may also be doing something else I’ve long hoped to see — building larger special enterprise zones where India’s famously harsh regulation is relaxed. More of that would be great, though a national push for deregulation of industrial land use would be good as well.

But there’s one big thing Modi needs to be doing in order to promote Indian manufacturing: putting the country’s women to work. Despite improvements in education, health, and transportation, India’s female labor force participation is at an incredibly dismal 37% and falling. To my knowledge, no country has ever built a world-class manufacturing sector without taking advantage of large numbers of women who move from the country to the city to work in factories — it is a universal feature of industrialization. And women flowing into the cities would also help improve India’s lagging urbanization rate.

So moving India’s women from the farm to the factory should be a very high priority for Modi in his next term.

(Update: The fact that Modi’s party lost a bunch of seats and ended up leading a coalition government instead of having an outright majority should make you more confident about India’s democracy. India goes through periodic surges of illiberalism — the Emergency in the 1970s was another. But its democracy has never really been in doubt. When analyzing India’s rise, I urge you not to think of it as being congruent with Narendra Modi. India and its system are much bigger than any one person.)

2. Biden gets tough on the border, but will the courts let him?

In many ways, Joe Biden has been the most progressive President in living memory — he has poured vast amounts of money into fighting climate change, forgiven lots of student debt, reinvigorated antitrust enforcement, pushed for trans rights, and so on. But he has also done a lot of important conservative things — opened up fracking and pushed oil production to record highs, tried to increase the number of police on the streets, and so on.

Now, after years of largely neglecting the border crisis, Biden is getting tough — arguably tougher than Trump ever got. He tried to pass a tough border bill, but Republicans scuttled it in order to stop Biden from getting a win in an election year. Now Biden is preparing an executive order that would bar people from requesting asylum at the U.S.-Mexico border unless inflows drop to a low level:

The White House is telling lawmakers that President Joe Biden is preparing to sign off on an executive order that would shut down asylum requests at the U.S.-Mexico border once the average number of daily encounters hits 2,500 between ports of entry, with the border reopening only once that number declines to 1,500, according to several people familiar with the discussions…[T]he executive order could go into immediate effect, because daily figures are higher than that now…

Administration lawyers have been planning to tap executive powers outlined in Section 212(f) of the Immigration and Nationality Act, which gives a president broad authority to block entry of certain immigrants into the U.S. if it is deemed “detrimental” to the national interest. It is the same legal rationale used by Trump to take some of his toughest actions on migration as president.

Progressive groups are already preparing to challenge the executive order in court. I’m not a legal expert, but my guess is that the executive order will be struck down, just as Trump’s were.

The core problem here is that U.S. asylum law says that if you illegally cross the border and turn yourself in to the Border Patrol, you’re legally entitled to request asylum, just as if you had presented yourself at a port of entry. That doesn’t mean you’ll get asylum — in fact, most of the people flooding over the border will not get asylum, since they’re actually just looking for jobs instead of fleeing war or tyranny.

But simply being able to request asylum conveys lots of benefits. For one thing, you’ll get to apply a lot more quickly than if you wait at a port of entry — basically, entering illegally means you get to jump the queue. Also, you can often wait in the U.S. while awaiting your asylum hearing.

In other words, U.S. asylum law gives migrants an incentive to cross the border illegally. That’s not actually the same thing as having open borders, but explaining the difference to the average American can be surprisingly difficult. In fact, regular people are often astonished and angry when they learn about this key aspect of U.S. asylum law:

The obvious solution here is to amend U.S. law to disallow asylum applications by people who are in the country illegally (and to amend the law that allows people who are in the country illegally to apply for “withholding of removal”, which is similar to asylum. In other words, the solution is to have Congress amend U.S. law to do pretty much exactly what Biden’s executive order will try to do.

Many people in the legal profession would be very upset if we do this, since there’s a common viewpoint among lawyers that the right to apply for asylum is a universal human right. Of course, even if we changed the law in the way I described, people would still be able to apply for asylum at ports of entry, although it would be harder and more dangerous. To some, human rights requires that we make asylum application easier and safer by allowing people to do it by crossing the border illegally.

But this point of view will probably make little sense to the average American. The idea that one part of our government (our asylum law) should offer an incentive for foreigners to flout another part of our government (the border) seems a bit nonsensical. And Americans are just generally angry about the border crisis, and they don’t tend to feel warmly toward those who break the law. Immigration is incredibly important to America’s future, and preserving broad, enduring popular support for robust immigration requires staunching the massive chaotic flood of illegal border crossing.

Anyway, the real question is why Congress hasn’t tried to do this yet. Democrats, presumably, are somewhat beholden to the progressive activist groups who want to make applying for asylum as easy as possible. Republicans might simply want to keep the border issue around so they have something to bash Democrats about. In any case, as long as Congress leaves asylum law untouched, it’s doubtful that Biden’s tough action will solve the problem in a durable fashion.

3. Good news about the climate

There’s a lot of climate doomerism out there, and it’s pretty useless and silly. But I can forgive even rational people for feeling a bit pessimistic, since the fate of Earth’s climate is largely out of the hands of the Western countries they live in:

Source: Nat Bullard

China is far and away the most important player here, since it’s pretty much the only country in the world building new coal plants — and it’s building quite a lot of them. I recommend this excellent interview with Lauri Myllyvirta, about why China’s already-enormous emissions have been rising despite building so much renewable energy:

What's going on with China these days?

But there’s a glimmer of hope. Myllyvirta has a great blog post showing that China’s emissions actually fell a bit last month:

Source: Lauri Myllyvirta

The biggest reason for this, Myllyvirta writes, is China’s economic slowdown. But continued rapid growth in solar and wind is also starting to have an effect:

The main driver of China’s emissions growth in recent years has been the power sector…[T]he main reason…was that power-sector emissions growth slowed down sharply. Emissions from the sector only increased by 1% year-on-year, due to strong growth in solar and wind power generation…While power-sector emissions stabilised, the largest source of reductions in emissions in March was the continued decline in demand for steel and cement from the construction sector…Steel production fell by 8% and, as a result, there was also a fall in production of the main fuel used by steel mills – coking coal. Cement production fell dramatically, by 22% year-on-year.

As a result, Bloomberg New Energy Finance now thinks global emissions have peaked and will decline at an accelerating pace from here on in.

That’s not yet fast enough to save the world from serious harm. But it should be an antidote to some of the flamboyant doom and gloom going around.

4. Nonprofits are choking America; Is America finally waking up?

A year ago, I wrote a post decrying the fact that U.S. city and state governments, especially in progressive areas, have outsourced essential functions to nonprofits:

Nonprofits are sapping the progressive project

Outsourcing government functions to nonprofits is a form of privatization. Importantly, it’s a form of privatization that progressives could accept. But nonprofits have little accountability, causing costs to bloat and services to degrade, and allowing unscrupulous nonprofit execs to pocket taxpayer money. And it’s easy for them to become involved in corrupt relationships with their political patrons. One has to look no further than San Francisco, where laws have been crafted in order to give nonprofits maximum influence, to see the negative consequences of government-by-nonprofit.

Fortunately, more Americans are starting to wake up to this governance disaster. I’m starting to see more pundits echo my warnings about the nonprofit-industrial complex. For example, here’s Jonathan Ireland in American Affairs:

When someone hears the word nonprofit, they assume that such an organization is working for the public good…Hearing that something is a “nonprofit” immediately gives a sense that the organization is trustworthy and the people running it are driven by a charitable agenda…Consequently, non­profits receive a benefit of the doubt that would not be granted to any other form of private corporation…

As a consequence…there is rarely enough oversight to guarantee that they are doing what we pay them to do…[M]oney is…spent in ways that would shock the taxpayers whose hard-earned dollars are being effectively stolen from them. Non­profits that self-righteously declare themselves providers of homeless services actively lobby to make homelessness worse in order to increase their own funding…and the executives of nonprofits, the very people in charge of institutions whose stated purpose is not to make money, earn millions of dollars while catastrophically failing to deliver the public services we are paying them to provide…And as all of that is going on, the nonprofits in question receive tax breaks from the IRS…

What is taking place in America’s [progressive] urban areas is that taxes are constantly raised in order to fund public services…But this tax revenue is then squandered on…unaccountable nonprofit organizations whose activities do little to rectify the problems…Taxes soar in concert with the collapse in local living standards and the decay in public services…The inability of nonprofits to properly manage services results in European taxes for third-world state capacity. Residents don’t know what the problem is: they don’t know that their taxes go to “violence interrupters” who are convicted felons; they don’t know affordable housing nonprofits use taxpayer money to lobby against affordable housing; and they don’t know money is being misallocated due to insuf­ficient oversight of nonprofits.

Ireland goes on to describe the notorious case of TODCO, a San Francisco nonprofit that is supposed to provide housing services to poor people, yet provides few services while spending the lion’s share of its taxpayer money on A) executive salaries, and B) lobbying against the building of new housing. Quite a racket.

But at least people are starting to wake up. A few progressives, like Will Stancil, have become alerted to the mortal threat that nonprofit privatization poses to the entire progressive project. The alternative, of course, is to restore state capacity by beefing up the civil service, and have the bureaucrats take over many of the functions now being outsourced.

5. Why an Age of Austerity is on the way

I’ve been arguing for a while that America is going to have to pivot from deficit spending to austerity fairly soon. The reason, plain and simple, is interest rates. Interest rates were very low for a long time, but now they’re somewhat high again, in order to fight inflation. That is raising the cost of servicing the U.S. debt:

Right now, the government is clearly hoping that the rise in rates is temporary. The spike in short-term government borrowing is a clear bet that rates will soon fall back down.

But rates might not fall back down to the levels that America and much of the world enjoyed in the 2000s and 2010s. 5 percent might not be the new normal, but there are reasons to believe that 0 percent isn’t in the cards either. Ernie Tedeschi, former chief economist at the CEA, argues persuasively that the “natural rate of interest” — the rate at which inflation and growth are balanced — is set to rise, for various reasons.

Some of these reasons are good. Faster economic growth increases the natural rate of interest, because it increases the underlying economic return on investment. And a spurt of fast productivity growth, coupled with higher immigration, gives us reason to be optimistic about U.S. growth:

One reason that investors might bid up market yields on Treasury securities, and thus boost [the natural rate of interest], is if expected productivity growth rose, which in turn implies stronger consumption growth…[And] since 2022, evidence has emerged that the labor supply might be larger than commonly measured. The primary driver of this expansion is higher-than-expected immigration.

But there are also probably negative reasons as well. U.S. Treasuries are typically thought of as the “safe asset” in the financial system, but if the U.S. is becoming politically unstable, investors could start demanding a higher risk premium to lend money to Uncle Sam:

The rise in [the natural interest rate] may also partially reflect higher political risk in the U.S. over the last decade, independent of fiscal risk. One recent estimate found that in equity risk premium terms, political risk in the U.S. has risen by 20-25 basis points over the last eight years.

Tedeschi also points out that high deficits can make interest rates go up, making high deficits harder to sustain.

In any case, there are lots of reasons to think interest rates might not settle back to the 0% where they used to reside. And if that’s the case, then even if rates settle at 2% or 3% instead of 5-6%, interest costs on the national debt will be substantially higher than they used to be. That will usher in an age of austerity.

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