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Oren Cass is the founder and executive director of American Compass and author of The Once and Future Worker: A Vision for the Renewal of Work in America.
In this week’s conversation, Yascha Mounk and Oren Cass discuss the decline of manufacturing in the U.S., whether there is any coherence to Trump's economic policy, and if the Democrats or Republicans are the more natural home for working class voters.
This transcript has been condensed and lightly edited for clarity.
Yascha Mounk: If there's somebody who's trying to create the preconditions for a kind of multiracial working-class conservatism that takes the economic plight of working people in the United States seriously, that is you. What do you think the traditional Republican Party got wrong on economic policy and how does it need to change?
Oren Cass: That's exactly the right question—what happened on the right of center? One thing I always find interesting in these debates is that people have a very strange understanding of what conservatism is or should say about economics. At this point, we think it’s tax cuts, free trade deregulation, maybe some light union busting.
But all of those things as an agenda are a relatively recent phenomenon. What you saw happen with the Reagan coalition was this effort to really bring libertarians in and frankly move to an economics that is market fundamentalist. It puts excess faith in markets to always deliver the best possible outcome, and defines that outcome almost entirely in terms of consumer welfare. We embraced this quite formal economic model that said the goal of markets is to let people consume as much as possible, and the less work you have to do in order to consume, the better. And the way we're going to get that is to just get the government out of the way and let markets rip because markets always accomplish that.
Neither of those things is conservative, but more importantly, neither of those things is right. So the focus of our work is on challenging both those elements, recognizing the limits of markets, and recognizing the role that public policy does need to play.
But then it’s also recognizing that what we want from our economy is much broader than just cheap stuff. It is an economic system that actually supports family and community flourishing, and supports a strong nation. That's not something markets are necessarily going to deliver in all cases.
In the U.S. economy, it's absolutely the case that material living standards have improved across the board. Even if you're talking about very low income households, if you want to know how big their TVs are, whether they have air conditioning, even their access to health care, there's no question that it has gotten much better. But I think that is a very partial and incomplete measure of what we're actually looking for in a society. The reality is that, in part to accomplish that, we had to rely on much higher levels of redistribution, which can solve the consumption problem, but brings a lot of dysfunction and maladies in its own right. And I would say that what we have really undermined is the capacity of the typical American.
Ensuring that someone who doesn’t have a college degree—certainly doesn't have a job that we would think of as requiring a college degree—is actually in a position to raise a family and achieve anything we would consider to be middle-class security… that's what is missing, and that’s what a GDP per capita measure doesn't even begin to get at. I think a very telling indicator is what has gone on with the opioid epidemic. Obviously, the sheer number of deaths from the opioid epidemic is an extraordinary tragedy. But what I find to be the most shocking measure is to just look at what it has meant for the death rate from drug abuse in this country as compared to what was going on with alcohol abuse in post-Soviet Russia. Our death rate from drugs in this country is now as high as it was in Russia from alcohol in the 1990s. That speaks to a real failure of our economic model and its ability to support the things we really care about.
Mounk: You make a very convincing case, and I’m sympathetic to much of it, but there are two possible responses. The first is to ask whether the rise of the opioid epidemic—which is clearly a very serious problem—really has economic rather than cultural roots. Many of the same economic developments have been present in other countries in Western Europe and elsewhere, but they haven't seen a similar rise in deaths of despair, particularly in deaths from drugs. There are questions about whether that is rooted in the fundamental American economic settlement, or whether it's to do with regulatory failures around opioids and the specific attributes of the American healthcare system.
Then, more broadly, there's a question about how central manufacturing should be to the future of the American economy. Clearly what we've seen is a major disruption in which manufacturing has moved out from many parts of the United States, leaving a dearth of good jobs for people who are trained to be factory workers. But we’re now at a point where the younger generation has lots of people who are trained for the jobs that are actually needed across the economy and they're able to make better wages because we have a tight labor market. So perhaps it’s too late to go back and try to push them into manufacturing.
I'm not sure that I'm convinced by all of these critiques, but I'd like to hear your response to them.
Cass: On the question about the cultural versus economic determinants, a lot of the dysfunction and tragedy that we are seeing in this country, I don't think anybody would argue this is a purely economic phenomenon. My frustration is that there do seem to be a lot of people who are trying to argue it is purely a cultural phenomenon. The clear tell here is that all of these things are only afflicting one part of society, specifically the part that has seen the economic challenges. I think there’s a very heavy burden of proof that no one has come close to carrying to claim that it is not an economic phenomenon that we are observing.
On the macro question about manufacturing in particular, this isn't just about the jobs in manufacturing itself. I think what we are seeing in the U.S. economy today is sort of a fundamental disorder that is a function of saying that manufacturing just doesn't matter, that we don't need to make anything. We can have our iPhones designed in California and it doesn't matter where they're actually produced.
But the reality is that the industrial sector—energy production, natural resources, essentially doing things in the physical economy—really matters to the ultimate health of your services-based economy. There's no question that over time we are evolving and will continue to evolve more toward a services-based economy. But you do need to actually build that on a foundation of industrial strength, for a few reasons.
One is the actual ability to make things turns out to be incredibly important in driving innovation. Another reason comes from a perspective of diversification and diffusion in the economy. There are some industries that are very well geared toward finance, tech, and media, concentrating in coastal urban cities. There are others that really benefit from being in places that are close to natural resources and have logistical advantages, like a lot of open space. So you actually want to have a diversified economy that does that other stuff too. If the factory on the edge of town employs fewer, highly paid and highly skilled workers, that is still an anchor for a flourishing local services-based economy. If you say we just don't care about the factory, shut it down and move it to China, I guarantee you the experience of that community is going to be very, very different. So I think there are a lot of reasons.
My last point is that there are also concerns beyond the economic ones here. From a resilience perspective, from a national security perspective, you actually have to make things. We talk a lot about this concept of a defense industrial base. One thing we're doing a lot of work on right now at American Compass is just emphasizing that it is nonsensical to think you could maintain a strong defense industrial base absent an actual strong industrial base. If you want to be a world power, you have to have a commitment to maintaining a healthy industrial economy, even if it’s not the most productive allocation of capital in every case. But generally speaking, I would say it is a much more productive allocation of capital than a lot of things we are allocating capital to right now.
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Mounk: So let's assume that my listeners are convinced by everything you've said so far, that we shouldn't make GDP the be-all and end-all of our economic policy, that we recognize that manufacturing is an important part of a healthy 21st century economy, that we're currently falling far below that in the United States and probably in big parts of Western Europe as well. How do we change that?
Cass: There's both an outward-looking element and an inward-looking element. The outward-looking element that is obviously getting a lot of attention here early in the Trump administration is the idea of tariffs: that you actually want to give an advantage to domestic production over imports. This drives economists crazy. But it's important to understand that the reason it drives them crazy is because they are working from a set of assumptions and a set of models that says that making things doesn't matter. This is the same set of models that said free trade with China is a brilliant idea. Unsurprisingly, when you say, actually we’d like to do something different, they say, what are you talking about? You're crazy.
If you actually recognize that making things matters, that we would love to have high levels of trade but it needs to be balanced trade, then, in fact, having a tariff and putting a thumb on the scale for domestic production becomes a correction of an inefficiency that we're suffering from. Having a tariff says, look, you can import stuff if you have to or if you want to, but there's going to be a cost associated with doing that, which means you're going to think a lot harder about what you can make here. If you're investing, maybe it makes sense to invest in building things here.
The implication of a trade deficit is that we lost all of the manufacturing jobs in one area and created nothing new to offset it. That's an immediate problem for the health of our economy and for the trajectory of our growth. The second problem, of course, is that people are not sending us this stuff for free. What we are trading instead of goods is assets. So what’s going on in fact is a trillion dollars of stuff is coming in and what's going back out is pieces of paper that say IOU. A lot of it is outright treasury debt, and then it's also assets: ownership of American companies or ownership of real estate. We’re essentially trading the future control of our economy and claims on its gains in return for consumption today.
Mounk: How do we fix that? There's been a lot of very big benefits from our globalized economy, including to our own country in terms of the goods and services that we've been able to use and in terms of the rapid economic growth it has enabled. How do we raise tariffs in a way that doesn't inspire a big global trade war?
Cass: Before we get to how we do it, I do want to challenge the assertion that globalization has brought all of these wonderful gains to the United States. It's certainly true that for other countries, it has worked exceptionally well. But I don't think it's true that globalization has led to increased economic growth, for instance. In fact, economic growth in the U.S. has steadily slowed throughout the period that we’ve pursued globalization. It was much higher in periods when trade was much lower. If you look at what globalization has actually done, how it’s affected flows of investment, which industries have grown or not, it makes sense that this would not actually be good for economic growth in this country.
I think it's worth scrutinizing even the idea that it has led to much cheaper stuff here. What we've done is after 30 years of saying we don't care whether we can make anything, we now look at how incredibly cheap these Chinese televisions or whatever are, and say, imagine how much it would cost to make one here. While that's true as a static analysis at this moment in time, it's not at all true as a dynamic analysis in which we envision a world where we actually were focused on maintaining and extending our technical capabilities, our infrastructure, and our expertise in manufacturing. We’re already seeing this as we try to bring semiconductor manufacturing back. The first new TSMC semiconductor plant coming online in Arizona is already achieving higher yields than TSMC achieves at its state-of-the-art factories in Taiwan. There are absolutely going to be costs to climbing back out of this hole we have dug for ourselves, but the idea that things would be so much more expensive in the United States if we’d nurtured and fostered a productive domestic manufacturing industry instead of giving that away isn’t at all supported either by economic theory or by experience.
One policy that we focus on at American Compassis is very big and broad and blunt, which is that we should have a global tariff. We should essentially say that anything coming into this country has a 10% tariff attached to it. That makes imports less attractive than domestic production and consumption.
Mounk: When you say a global 10% tariff, that means a tariff on Mexico and Canada as well. It means getting out of existing free trade agreements that constrain the ability of the United States to impose such tariffs?
Cass: Yes, that's right. Now, I also think you ideally want to define that tariff as one that can go up or down over time, tied to the trade deficit. You want to say predictably over time that it's going to keep rising if it needs to to correct the trade deficit. Conversely, that can come back down if the trade deficit is in fact fading away as we start to do more of this stuff ourselves.
But that's not something you want to announce overnight—it’s something you ideally put in legislation so that it's much harder to change. You say this is going to start on this date a year from now and increase at this rate. When you ask about Canada and Mexico as an example, I do think there's an important point here about the long term, which is that there are plenty of places where our trading relationships actually can work quite well, where the U.S. is engaged in free trade essentially with other market democracies, particularly those that also have not just similar labor and environmental standards but also similar standards of living and so forth. Ideally, you would have quite free trade with them and it would operate much more as the classic models said and to the benefit of everybody.
But to get from here to there, I think we need to replace the current baseline of free trade with a default where there are in fact going to be tariffs, and then let's figure out who wants to be essentially inside a U.S.-centered trading bloc. Part of being in that bloc is you have to play by the rules that we're going to define, but if you're in that bloc, then certainly there's no need to have those tariffs on you. But you're also going to need to maintain a consistent policy that says the countries outside the bloc can't just cheaply import things into Canada instead and then get them into the U.S. that way. You've basically got to have the onside team and the offside team.
Mounk: Clearly some of these ideas have been very influential in those parts of the Republican Party that are trying to transform into this multiracial working-class coalition. Perhaps the most radical break that the current Trump administration is making with long-standing Republican policy is on tariffs. In the first weeks of this administration, Trump has imposed 25% tariffs on Canada and Mexico and threatened to impose tariffs on many other countries. As we're recording, it's unclear what the fate of these tariffs is. Quite quickly, Trump seems to have come to temporary agreements with Canada and Mexico to suspend those tariffs in return for undertakings that they will do more to secure their borders with the United States. Do you think that the Trump administration is in fact moving American policy closer to the kind of endpoints you want to get to? Are there elements of what they have done so far that you're concerned about?
Cass: I think that the distinction you made between tariffs as a bargaining chip versus as an economic policy is a really important one. We see this with all sorts of policies. We have taxes that are designed to raise revenue and fund the government, and we want those to be as broad and simple and predictable and efficient as possible—but we also have taxes that we use when there are specific things we're trying to discourage, and it would be a huge mistake to analyze those in the same light. They are doing very different things. Likewise, tariffs, as we've just been talking about them for a few minutes now, as an economic tool, can have very important effects in shaping global trade and patterns of investment. But that's very different from using them as a bargaining chip. What you've seen with Trump, certainly with respect to Canada and Mexico, is tariffs as a negotiating tool. I think it's a huge mistake to ask whether this is good economic policy. Because it's not supposed to be economic policy.
Mounk: What about the political cost of this? One of the things Larry Summers was absolutely right about in 2021/2022 was to warn about the potentially inflationary impact of the not-aptly-named Inflation Reduction Act and other measures that the Biden administration was taking. Clearly, that bout of inflation proved to be incredibly costly to Democrats. And we saw across the board that incumbents have been struggling for the last year or two in part because of post-pandemic inflation. Surely when you put up tariffs, you may be right that in the long run, perhaps that is good, but in the short-term, there is a serious price to pay in terms of inflation. Do voters just hate inflation so much that this is a suicidal policy? Or do you think that you can sell tariffs as a form of investment in the future and perhaps as a form of patriotic policy?
Cass: I think there are good and bad ways to do it. Any effective policy to impose tariffs and reshore domestic manufacturing has to be paired with domestic industrial policy that makes that possible and effective. One of the advantages of having predictable phased-in tariffs is that you can pair that with predictable investment commitments to actually build up domestic capacity. I think one thing we should want to see is that, among other things, by using the revenue that we get from the tariffs to reduce other costs and to encourage investment, you can be doing these things in parallel so that it's not just a strategy of, we're going to shock the system and come out the other side. It's a strategy of we are going to facilitate a transition from one model to another. I think it’s important to say that when we talk about the inflationary side of it, the kind of price effects you might see from tariffs are not of the same magnitude we saw in the Biden administration. If you press economists on it hard enough, they'll admit that tariffs aren't actually inflationary. There are relative price effects.
Mounk: Explain to me why not, because the simple argument is that they're a form of tax, right? Today, I paid $10 for my cheap pair of shoes and let's say $15,000 for a relatively cheap electric vehicle from China. You're coming in, you're gonna say, well, they can't just import that without paying anything. We're gonna put a 10% tariff on this. Presumably, manufacturers are at least going to try to pass on those tariffs.
Cass: Have you ever heard anyone else argue against another tax on the grounds that it's inflationary?
Mounk: Some, but I get your point. Go ahead.
Cass: The thought exercise to run through is, imagine you went up to your economist or policymaker friend and you said, I'm really concerned about this budget deficit we have and feel we probably need to raise taxes a little bit. I was actually thinking we should probably do a VAT, a value added tax. Your economist friend is going to get very excited. That's terrific. VAT is the most efficient, ideal revenue base. My model says it's going to be good for growth and all sorts of wonderful things. Then you say, great, just one other caveat—we're only going to do it on imported products. Then they say, well, wait a minute, now I notice you're proposing a tariff. I now declare it to be insane and terrible and inflationary. What you realize is that no, actually, these are just arguments being thrown at tariffs. Is there a price effect on some goods? Absolutely. But the thing to understand about it, first of all, is that those are mediated by an enormous number of other forces. How much of it lands on the producer versus the consumer? It's certainly not true that the producer pays all of it. But in any economic model where you're thinking about the incidence of the tax, you would assume that it falls depending on elasticities and so on. It's only when it comes to tariffs that economists decide to throw all of that out the window and just score political points.
Another thing you see is that it's absorbed at different points in the supply chain. So one really interesting thing with a lot of the China tariffs imposed in the first Trump term is that you could see that essentially the importers, the wholesalers and the retailers, were paying higher prices for those goods—but that wasn't really showing up in a lot of cases in the retail prices that consumers paid. So there's an instance where maybe you're talking about lower profit margins for others. That, again, has its own set of costs and benefits, but it isn't necessarily inflationary.
You also see situations where, because of how this stuff is being phased in over time, how supply chains adjust and so forth, you don't actually tend to see what consumers pay going up much at all. When you're asking what the scale of that is, you have to remember that only about 15% of American consumption is imported. Even if you put a 10% tax on it immediately on day one and consumers have to pay all of it, that's only 1.5%. If you're phasing that in over a couple of years, and if it's not even all being paid by consumers, you're talking about less than 1%.
So you're actually essentially talking about actions within the margin of error of what we experience in inflation rates every year anyway, and, importantly, they are one-time level change effects, so a 10% tariff isn't another 1.5% inflation every year. You're certainly talking about an order of magnitude less than what we saw with Biden.
Mounk: To push you one more time on this, let's distinguish between two forms of inflation—one of which is much more worrying from a macroeconomic perspective than the other. The first is if there's just profligate spending from the government or there's various forms of handouts or the central bank isn't independent in ways that leads to them making a ton of money available just in order to make sure that the government gets re-elected by inducing an artificial boom. These are the kind of policies that can create ongoing or runaway inflation.
But then there's a second kind of inflation that might be less worrying in a macroeconomic way, but more worrying in a political way, which is one where even a one-time level change still means that people can buy less. We think that being able to buy stuff is good. Then even a one-time level change means that people can buy less than they could earlier, and that's a reduction in human well-being. But more importantly, in a four-year political cycle or in a two-year political cycle as you have in the United States, when you think of the House of Representatives and parts of the Senate, a one-time level change can really matter.
Cass: I think that's certainly a risk. But the example from the first Trump term is really important to look at here. I mean, the tariffs that Trump put on China in 2018 were enormous—25%, for the most part, out of the gate—and it's important to notice both that there was very little inflation that actually showed up in the data and that where there were places that consumer prices rose significantly, I'm very hard pressed to remember any sort of political fallout or political cost associated with it.
So not only do you have higher tariffs on everything from China, you now have every consumer who loves buying stuff from Shein and Temu seeing an even bigger effect on top of that. It would be cool if the political science crew took at least a minute to acknowledge that the Trump administration does in fact seem to be sort of living by the courage of its convictions on this stuff and doing things that may well have short-term political costs, but that are consistent with the broader commitments that they've made and certainly have the potential to—and in my view will—have significant long-term benefits.
In the rest of this conversation, reserved for paying subscribers, Yascha and Oren discuss the role of the unions and the direction of the Democratic Party…
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