Noah Smith on the Future of the Chinese Economy and the Climate of Social Change in the US

As the economic, political, and social environment begins to collapse around Xi Jinping, China’s perceived hegemony is beginning to display serious cracks.

Noah Smith is a former columnist for Bloomberg and is now a popular writer at his own Noahpinion Substack. Noah is also a returning guest to the podcast, and rejoins Macro Musings for a wide ranging discussion on some of the recent issues he’s been covering on his Substack, including China, social change in the US, recent macro developments, and much more. Noah and David also discuss the façade of Xi Jinping’s leadership, the elite overproduction hypothesis, how Fukuyama’s *End of History* thesis can be applied today, and more.

Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Noah, welcome back to the show.

Noah Smith: Hey, thanks for having me on.

Beckworth: It's great to have you on and I've been following your work. I'm a regular reader of your Substack and early subscriber. And maybe you could tell us a little bit about that journey, because you went from being a blogger to a columnist to a complete freelancer living the American dream as a Substacker. So maybe talk about that a little bit.

Smith: Substack is the American dream. I feel unemployed because I'm just doing my same old blog, but now I'm getting paid for it. And so I feel like it's my hobby. I always want to write a blog post about something. And so when I run out of things to write, I just want to write some more. I'm like, "Okay, I'm done with my job, what do I want to do? Write." And so I guess that is in some sense the dream to be able to do your hobby as a job.

Beckworth: That's right.

Smith: But what I like about Substack is that it seems like it's not as pareto distributed as a lot of things, and like in podcasts, you have a few podcasters who are just fabulously rich and you have a whole lot of podcasters making podcasts for free. And in Substack, I feel like even people who are small or modest Substackers are able to make a decent amount of income off of that. And so it seems like there's more of a long tail, less of a pareto distributed superstar economy there.

Smith: And it remains to be seen whether that will stay the same. But I think that I'm hopeful. So that's good. It's good for the ecosystem to have a bunch of people who can make money. I'm not one of the top stars of Substack. The big politics bloggers, Matt Yglesias and Judd Legum and Glenn Greenwald, Bari Weiss, Andrew Sullivan, Matt Taibbi, and those guys, they all make over a million dollars a year. I'm not in the pantheon because I guess economics is a little more nerdy, a little more niche than just talking about politics. Everyone wants to yell about politics. But I'm doing all right and slowly climbing. Growth has been very linear. You look at the growth, it just looks like a line forever.

Beckworth: Which is kind of like total factor productivity as you've written about...

Smith: Oh, right.

Beckworth: We had this big debate-

Smith: Linear growth, man.

Beckworth: That's right. Linear growth. No, but I've enjoyed your writing because it's wide ranging, as I mentioned at the beginning of the show. You cover a lot of different things, whereas listeners of this show know my niche is Fed policy, financial markets, I dabble a little bit in trade policy and population, immigration because that's one of my things on my soapbox. But you're all over the place. We're going to talk about China today. We're going to talk about social change in the US. So how do you find your topics? What's the typical production function of Noah Smith like? Like you wake up on a given day, how does it work?

The Noah Smith Production Function and the Future of Twitter

Smith: So I wake up on a given day, open up Twitter, read some Twitter, find 20 things to disagree about or comment on, or just thoughts, write down a couple of those and then maybe get around to one of them eventually. And then I'm like, okay, well I've read enough Twitter, my rabbits have gone to sleep, so I can't play with them. I have these pet rabbits that I always talk about.

Beckworth: Oh, we see them all the time, yes, on Twitter.

Smith: Yes. They're asleep now. They're under the bed hiding. They’re like cats, they are very active in the mornings and evenings. And then I'm like, okay, well, now what can't I stop myself from writing about today? And so then I write about that and then I'm done. And yeah, so basically it's just not just the news. So it's not just writing off... A lot of writers will just read the news and comment on that. Some of it's the news, but a lot of it is just other blogs making intellectual arguments, think tank reports or academic papers, like interesting papers that come out.

Smith: I've done less of that recently and I think everyone has. For years at Bloomberg, I focused on the latest research and what the research tells us. And now I focus more on the momentous events happening. And I think it's because during the Obama years, I felt that writing about research was useful because someone might be listening somewhere. During the Trump years, I felt like writing about research was a good way of distracting us from the political scrum of Trump where everyone was just like, every day people were screaming about Trump's latest thing. And when we look back on these years, we see that not much actually happened. But maybe it was because every time Trump tried to do something, a million people would just scream about it and stop him. So I think during those years, thinking about research was a good escape. It was a good intellectual exercise and escape.

Smith: Nowadays it feels like big changes are afoot in the world and the details of whether we regulate payday loans or what kind of cash benefits we give to people are not only relatively unlikely to make it into policy now that we're done with the Inflation Reduction Act and whatnot and that Republicans now control the House. Not just that, but the fact that so much of the stuff is just out of the realm of the kind of small-bore questions that economics has suited itself to. So if I could get together a group of economists to think big about industrial policy, I would like to do that. But in the meantime, when you look at the research, there's just an occasional paper about how South Korea's heavy chemical industry drive worked and whatever. So I guess the events have outpaced research to some extent, and that's where we are now and that's why I've been writing about all these big things.

Smith: It's not just because that's what people want to read, people want to read about the details too. But like right now, Russia's invasion of Ukraine, there's occasionally a paper that's relevant to that. But usually that's not the kind of stuff that econ research will cover. And yet the future of much of the global economy depends on what happens with the sanctions, with export controls, with European energy crisis, with all these things.

Beckworth: Yeah, that's a great summary there of the change I've seen too in this space, the space being blogging, Twitter, podcasting, writing. We are a product of our times. That's fair enough. And I think we are definitely living in these momentous times as you mentioned. And we're going to talk about one of the big momentous developments and that is China. But before I do that, one last thing about your workflow and how you get things done. You mentioned Twitter, so I love getting on Twitter too, and on this podcast, I've introduced many guests many times as someone I met on Twitter, some great interaction. But I wonder what your thoughts are about the future of Twitter because there are changes afoot. And do you think it will be the same place that it has been? Moving forward, will you be able to turn to it as a resource like you have in the past?

Smith: I don't know. So, to be honest, I feel like I am Twitter proofed if Twitter goes down. I kind of think Twitter is bad for our society because it basically shuts all the journalists, academics, and politicians in a small room with psychotic pseudonymous teenagers who then the journalists, academics, and politicians believe to be representative of true public opinion. And so I think that that is an extraordinarily and uniquely toxic way to run a country. And so I'm hoping that Twitter either dies or that Elon Musk finds ways to just massively improve the effect of Twitter on our politics. Either way, I feel that I'm hedged because my Twitter audience has already been essentially ported to Substack. Everyone's already on this Substack email list over there. So I don't need Twitter to reach people directly. Most of the added reach of my post is done through other people's sharing stuff. And if they're not sharing it on Twitter, they'll share it on LinkedIn, Instagram, Facebook, Mastodon, Discord, Reddit, Hacker News or blogs or anywhere.

Twitter is bad for our society because it basically shuts all the journalists, academics, and politicians in a small room with psychotic pseudonymous teenagers who then the journalists, academics, and politicians believe to be representative of true public opinion. And so I think that that is an extraordinarily and uniquely toxic way to run a country. And so I'm hoping that Twitter either dies or that Elon Musk finds ways to just massively improve the effect of Twitter on our politics.

Smith: There's so many places to share news. News will get around. And so in terms of my own news diet and news consumption, I will find ways to find out what's going on in the world. There will be no difficulty finding out what's going on in the world and interesting research is not that hard to find. In fact, I would say that still Twitter is not my main way of finding interesting research. There's a few things that Twitter's better for. There's journalists who read and analyze think tank reports and then write the results of those with nice graphs. And those… I'll have to find new ways to follow those people. So like John Burn-Murdoch of the FT, I want to see his graphs and stuff. So I might have to go on Mastodon or wherever, but those people will be somewhere and they will find a platform or multiple platforms to get the word out to the world. They will do the work for me and I will just go to where they are and piggyback on them to tell me what's going on in the world and then I will analyze it.

Beckworth: Well, I hope that optimism comes true. My fear is that if Twitter ends, the big network that it's established won't be easy to replicate quickly and so we'll be in little silos. The financial journalists will be in one social network, there will be someone else over here… [inaudible] I think is one of them. I just hope we find a place where we can all come together. That's what I like about Twitter. There's a lot of people there. Yeah, there's a lot of garbage, but there's also great opportunity to meet people, to interact in a way we wouldn't have been otherwise. It kind of reminds me, it's very different, but the spirit of it reminds me of Google Reader, if I can go back that far. It was a place I could bring everything together, one stop shopping, but now for people and interacting with them.

Smith: Those are both essentially due to the same guy that nobody knows.

Beckworth: Really?

Smith: A guy who I was a big fan of in college and who I know from way back. His name is Chris Wetherell, W-E-T-H-E-R-E-L-L. And if you look up Chris Wetherell, you'll find he invented Google Reader and he invented the retweet button.

Beckworth: Very nice. Well, thank you. We appreciate all you've done for society.

Smith: From now he's just very sad because he feels that the retweet button that he invented was the source of all the toxicity of the Trump years and regrets this deeply. I think he puts too much on himself.

Beckworth: Yeah, and again, you want to look at both sides of the ledger. There's been a lot of positive as well that's come out of Twitter. Okay, let's move on from Noah Smith's production function and the future of Twitter to things that are happening in the world. As you mentioned, it's a momentous time, big things are happening, the war, Russia, Ukraine. But let's look at China because you've written a lot about China, you've reviewed a number of books. In fact, you just were recently in Taiwan, pretty close to China, so you got maybe a peek into China and a feel for what's going on there. And to kick things off, I just want to read an article from a magazine online called The Grid and the title is, *Is China Heading Toward Another Tiananmen Square Moment?* I just want to read a few excerpts from it and then get your response and talk about some of the things you've written.

Beckworth: And the article begins with this, "In October, a man unfurled banners from a Beijing bridge calling for people to rise up against China's restrictive COVID policies and the Communist Party itself. He was alone that day and quickly arrested and the nationwide protest he had hoped for did not materialize. But now they have, and they have started because of a fire in an apartment building. When word spread of the fire, the 10 fatalities and reports that rescue efforts may have been slowed by COVID lockdown, the apartment building tragedy turned into a national rallying cry." And then it continues to go on and talk about how this is spread everywhere and how it's become this great, again, unifying rallying cry. Then it poses this question, and I won't read the whole article, it poses this question, “is China heading toward another Tiananmen moment? It's a question that would seemed almost absurd to ask only a week ago,” and I'll stop there. So, let's start with that. Are we on the cusp of big change in China?

The Economic and Political Future of China

Smith: I have no idea. I'm not a China expert. Go ask a China expert. Yeah, no idea. But I can talk about the economics of the situation. So I can deflect this question into a question I'm more prepared to answer.

Beckworth: Let's do it.

Smith: Which is that pretty much conventional wisdom is that after the Tiananmen Square unrest, which is really just the focal point of a wave of unrest throughout the country as people grew more and more dissatisfied with the Communist Party's ruling regime and were in both encouraged by economic liberalization of the 80s and also pissed off about some of the side effects like inflation. And so that was what really was driving that unrest is a combination of optimism over liberalization and anger over some of the side effects.

Smith: And after that, basically the government cracked down hard for two or three years and China became very repressive again. Investment receded, the economy slowed and people got mad at China again. And then after that, Deng was like, his approach was to say, "Look, okay, so we're not going to liberalize." The liberalizing trend of the 80s, the social liberalizing trend, which was sort of led by a guy named Hu Yaobang, who Deng sort of purged, but had been a Deng ally.

Smith: He's like, "Okay, we're not going to do that anymore. But instead, you guys pipe down, chill out and accept unchallenged Communist Party rule and we will deliver you increased living standards." And if you look at this program, it is not dissimilar in nature to the program that Japanese leaders made in 1965. Shinzo Abe's grandfather, Kishi Nobusuke, basically said, "Okay, we're going to double incomes by this much by this time, and you just keep electing the LDP."

Smith: And so Japan is not authoritarian at all and its elections are actually more free and fair than almost anyone's. And yet people kept voting for this party because they delivered the goods. And once growth slowed down, they started weakening, they lost power a few times. But then during the 60s and 70s, they really delivered the goods in terms of rapid increases in living standards for people. And people were loyal. And in the United States, the GOP was really super dominant from, with only a couple interruptions, all the way from the end of the Civil War up until FDR. And then during that time we had relatively rapid growth. We didn't have as much catch up growth.

Smith: We were the pioneers. We were at the frontier already, but we had very rapid growth. And during that time, the Republican Party, which was often quite corrupt, was sort of the permanently dominant party. Part of that had to do with the legacy of the Civil War, but partly it had to do with the fact that people didn't really see a need to shift because things were going so well. And of course, then you get the Depression and they do shift. So, I think that that deal that Deng made and his successors, by the way... So, people don't know this, but Deng handpicked his successor and his successor's successor, Jiang Zemin and Hu Jintao. And he picked both those guys beforehand. It was foreordained that those people would be in charge of China after Deng was gone, and they carried on his program.

Smith: And they basically made the same bargain that successful industrializing parties and industrializing leaders make with their people in times of rapid industrialization and growth. And that worked, that held. There were farmer protests and there were some worker protests during that time, plenty of rural protests, plenty of protests against rural governments, but very few people challenging the supremacy of the CCP because everyone basically agreed they were doing a good job economically, like living standards were rising and rising and rising. Everything was going up, up, up, and confidence was very high. This will not happen again. That trick is done.

Smith: If this unrest reaches a large level, and I have no idea if it will, it might just peter out, it might have already petered out, I don't know, but if it reaches a large level or if a subsequent wave of unrest reaches a large level, Xi Jinping doesn't have the option of making the bargain that Deng and his successor struck. For a number of reasons, all related to the fact that China's growth potential has dropped massively. In 2011, China was still growing at 10% a year. Over the 2010s, over that decade, China's growth fell to about 6%, from 10% to about 6%. Now it has fallen even more, partly as a result of Xi Jinping's policy mistakes. The Zero-COVID and the real estate bust, industrial crackdown. So, Xi has made some mistakes and has tanked growth more than it had to. But ultimately growth potential has been lowered quite a lot and will continue to fall.

Smith: And there's several reasons for that, one is that productivity growth has really fallen to a very slow rate after being fairly rapid in China, has fallen now to quite a low rate of productivity growth. And when your tradable industries, your manufacturing and whatnot, reach the frontier, productivity growth slows down. Because it's harder to get growth from service industries, you've got to do a lot more liberalization and neoliberal stuff. You can't just copy foreign technology and industrial organization methods. You've actually got to restructure all your groceries and your insurance and your banks and blah, blah, blah, blah, blah. So, that's harder. And so China's really caught up to the frontier in industrial terms pretty much, not entirely, but 90% of the way.

Smith: So, that source of growth has really petered out. China used to have a lot of surplus rural population that could just move to the cities, that has petered out. Actually a while ago, China reached the so-called Lewis Turning Point where you run out of rural surplus labor. And when you just look at overall demographics, the population of 18 to 29 year olds has just absolutely cratered in China, it's fallen by a large percent in the last few years. The number of young people in China is just emptying out very quickly. It's a legacy of the one child policy, but also just the fact that when you have a lot of urbanization, industrialization, fertility naturally tends to go down. So, the one child policy's role in that is often overstated. And next year by the way, China's overall population is projected to begin decreasing. And that's the same year that India will surpass China as the world's most populous nation.

Smith: So, demographics, the end of catch-up [growth] and the end of urbanization are these three gigantic headwinds that mean that fast catch-up growth is over for China. It can still probably grow a little bit faster than the rich nations if it implements good policies. I wouldn't be surprised if it can grow at 4% compared to 2.5% in rich nations. And that will look good. When Japan was growing at four, four and a half percent in the 80s, and the other economies were growing at two and a half, three, that was seen as Japan's going to take over the world. That was of course unrealistic, never going to happen. But that was the sort of differential we're talking about. And after the 1997 crisis, Korea's growth slowed, but it still was a bit higher than the other rich countries, meaningfully higher.

Demographics, the end of catch-up [growth] and the end of urbanization are these three gigantic headwinds that mean that fast catch-up growth is over for China.

Smith: I think we could still see China grow at 4%, a point and a half higher than rich countries, but I think that the fast catch-up growth is over and certainly not the kind of life-changing within a decade like you just get much richer and your life is much better. Certainly not that kind of thing is on offer for the Chinese people. And that means that if Xi Jinping is going to make a deal where people accept massive, continued, permanent CCP supremacy and massive intrusion into their private lives and regulation of their private lives by the CCP, Xi's going to have to give them something else in exchange for that. People don't just accept that because they like it. He can scare people by saying, "I'm the only person who can preserve stability. If you get rid of me, the country will disintegrate and we'll have another cultural revolution and century of humiliation, blah, blah, blah."

Smith: You can scare people, but ultimately people aren't that scared. And [Xi’s] going to have to offer them something. And so far he's tried to offer them sort of nationalism, national greatness as the alternative the alternative to rapid economic improvements. I don't know if that dog is going to hunt, to use a Texanism.

Beckworth: Let me speak to some of those fascinating points you just made. One of them I think is a great point that really is something that we don't appreciate. But you mentioned this catch-up growth that's done, one and done. And you think of in the literature, the China shock that really threw a lot of people out of work. There's a big debate over this, but there's this big finding about China entering the WTO, having this shock. Well, to the extent it is real, it's a one and done shock. It's not going to keep occurring. It also reminds me of Mexico. Mexico had its own baby boom experience, led to a lot of immigrants coming to the U.S. That's not going to continue to happen. All these things are like one and done shocks. And that's an important point with China that I think we often overlook. And you highlighted these great demographic points.

Beckworth: I want to use it as a segue into a book that you reviewed on your site called *Danger Zone, The Coming Conflict with China.* And they mentioned all the things you just said, population and aging. I looked up before the show, roughly 1.43 billion in China, same thing in India. And then thereafter they go on very divergent paths. China will lose a quarter of a billion and India will gain the same amount. So, that's a huge, huge shock. Now this book, the *Danger Zone* also mentions limited natural resources, the hardening geopolitical opposition from around the world, slowing economy. And you had a great article on this, Noah, where you spoke to some of this, and part of it is due to Xi Jinping himself.

Beckworth: And I want to highlight that because I think he is a short-term factor, but he also plays into the long-term factors. These forces are at work. As you said, there's not a lot he can offer them. Before I do that though, Noah, has it been striking to you that there hasn't been a hard crackdown yet? That's one thing that's been surprising. There's been arrests here and there, but I haven't seen any evidence of a hard crackdown yet.

Smith: Well, things have to get pretty big... I mean, Tiananmen Square protests were absolutely huge and went on for a very long time before they were cracked down on.

Beckworth: Okay.

Smith: These protests are not large enough to warrant a hard crackdown. Crowd control methods have improved a lot since Tiananmen also. Unrest has to be at a larger level before you crack down.

You can scare people, but ultimately people aren't that scared. And [Xi’s] going to have to offer them something. And so far he's tried to offer them sort of nationalism, national greatness as the alternative the alternative to rapid economic improvements. I don't know if that dog is going to hunt.

Beckworth: Well, one thing I'd say is different now is, and this is in the article from the Grid, they mentioned on Weibo, China's Twitter-like platform, post about the fire that kind of spurred this writing has received more than one and a half billion views. Of course, that may be more than each person, but that could be a majority of the country has witnessed this. So, the Great Firewall of China doesn't seem to be holding as strongly as one might expect. But let me go back to these long-term challenges that you've highlighted, again, the demographics, Xi Jinping's leadership, slowing economy, hardening geopolitical opposition. And this article you have was really great where you highlight how Xi Jinping is kind of playing the wrong hand. You actually outline, he's not the great guy that we kind of make him out to be. So, maybe speak to that before we move on to the long-term implications. Why is he not quite the leader that others have made him out to be?

The Facade of Xi Jinping’s Leadership

Smith: Well, if you look at his record in office, all his successes have been in terms of internal domination of the CCP. He's very good at riding herd on this organization and dominating them. But if you look at anything he does that interfaces with reality such as the economy or other nations, you see him going from failure to failure. So, for example, the Belt and Road, this huge initiative that was supposed to put China at the center of the world economy, blah, blah, blah, basically created a whole bunch of extremely uneconomical projects that the people in the host countries are very upset about. And it basically is a giant flop. He was able to distribute pork to Chinese companies, but not much else, not much beyond that. Sri Lanka's mad and Indonesia's not particularly happy, and all the African countries are mad and Pakistan. It's like people are blowing up the pipelines, Malaysia's mad.

Smith: So, Belt and Road was a giant flop. And now Japan is doing their own sort of more modest version of Belt and Road where they're actually evaluating whether projects make economic sense and doing them based on that. This will be much more durable and ultimately China's influence will be decreased and Japan's increased, I think, which is not what Xi Jinping would want. And then you see the weaker crackdown was extremely harsh, and whatever gains in stopping terrorism, of which there was a tiny amount, is absolutely outweighed by the public relations disaster that Xi has incurred from that. The Hong Kong crackdown was a massive public relations disaster. Basically those two things made everyone sort of realize that China was bad, not worth whatever domestic stability Xi thinks he got from that.

Smith: And Zero-COVID was maintained way too long because they failed to import and widely distribute Western vaccines. Every other country with a successful Zero-COVID policy abandoned it in the face of Omicron and universal vaccination. Xi did not. Xi's industrial crackdown, just pointless. Now, everyone's scared to start a company because your industry could be next. It had no policies to actually decrease inequality. The idea of common prosperity is absolute bull. All it does is just arbitrarily smash China's industrial champions. A real estate crunch or collapse was long incoming, but it could have been handled a lot more smoothly. They could have initially recapitalized the banks ahead of it and done audits and blah, blah, blah, all this stuff. And they could have not done it exactly at the time that Zero-COVID was happening.

Smith: But instead they didn't do any of that, and then Xi was just like, "Kick it, kick it, destroy this real estate industry. It's not productive, aargh." So, that it was much more severe than it had to be and still ongoing. And Taiwan stuff, Xi has just made them... The wolf warrior diplomats? Xi thought, "Oh, people want to see some red meat. We want to see us standing up to these other nations." So, he just had his diplomats go out and say jerky things to everybody and yell at everybody for a year and a half. Nobody liked that. That is not how you make friends in the world. That's Wilhelm in Germany. That's what Kaiser Wilhelm II and his cronies did in the early 1900s and the run up to World War I, they went around just giving themselves a bad name and being like blustering, swaggering ---holes.

Smith: So, it's very similar to the mistake that Germany made in the run up to World War I, where they basically thought, "We are so great, we don't need anybody to be our friend." And so everything Xi has done has been a mistake. He's been losing influence. The economy has basically crashed. Nobody's really happy. The youth unemployment is, I don't remember, 20, 30%. It's ridiculously high. It's hugely high. Nobody has a job. Everybody is just lying flat. He banned all these pop star fandoms and said you can only play video games a certain number of hours a week. And then banned these TV idols that people liked.

Smith: And all this entertainment industry stuff, he banned because he wanted to prepare Chinese society to be this martial tough guy society where everybody just either works in a factory or is in the army or somehow subordinates their life to national greatness. And the Chinese young people are like, "No, we would like to slack, please." And that movement is called lying flat. I know a lot of Chinese people, and I don't know anyone who speaks positively of Xi Jinping.

Beckworth: Very interesting.

Everything Xi has done has been a mistake. He's been losing influence. The economy has basically crashed. Nobody's really happy. The youth unemployment is...ridiculously high. It's hugely high. Nobody has a job. Everybody is just lying flat.

Smith: Only western leftists who've clinged to this idea that the Chinese Communist Party is actually Communist.

Beckworth: Let’s talk about another topic that you've written on. I mentioned the book *The Danger Zone: The Coming Conflict with China,* there was talk about war with Taiwan. You had a post you wrote about how war with Taiwan would probably be World War III or a good chance of it becoming World War III. You've also written about President Biden's economic war on Chinese semiconductors, which is quite an escalation on that front and that industry. Do you think these riots change any of the calculus on those issues? Does Xi feel more endangered? Maybe on one hand, he can be more cautious, more tepid, in what he tries to do, he dials his ambition back. On the other hand, the argument of the danger zone in this book is because they know their days are numbered, because they are feeling threatened now, they're more likely to lash out and do something irresponsible, start a World War. Any thoughts on which direction this could take us?

Smith: It's hard to say. I'm not an expert in either Chinese politics and society or security issues, so honestly, your guess is as good as mine, so I don't really know. I hope he doesn't try it, but I think it seems like a possibility, but what do I know?

Beckworth: Well, I'll make one comment. Again, I'm not a China expert, either, but one thing that's always struck me is it never seemed to be in China's economic interest to invade Taiwan, only for national reasons, pride reasons. To fight a war against Taiwan would probably destroy a good part of China and what would they gain from it? I'm sure Taiwan would probably be damaged, as well. I'm not sure they would gain a whole lot economically, but maybe politically, there is the belief it would be a big gain. Let's switch from China, we spend a lot of time on China, and we'll provide a link to your article where you give book recommendations for China, but for the sake time, let's move on to some other topics. You have some books that you would recommend and I'll let readers check those out.

Beckworth: So, Noah, one last question here. You've written about China's developments from a broader context, and this broader context is Francis Fukuyama and his famous *The End of History* thesis. Maybe explain what that thesis is to our listeners and then what do you think is happening to it now? Is it being verified, are we seeing it maybe gain some credibility? What are your thoughts?

Applying Fukuyama’s *End of History* Thesis to Today

Smith: Well, Fukuyama came out the very triumphalist idea, that liberal democracy has won the battle of ideas in the world, that was the original *End of History* thesis. In his 1992 book, *The End of History and the Last Man,* he tempers this triumphalism with a concern that even if liberal democracy has won the battle of ideas among say, serious, rational people who know what they're talking about, and even if no rational person would entertain a different alternative, the world is full of irrational people who want reasons to dominate and subjugate other people, or who feel disrespected and feel the need to overturn society because of that, and these people will still turn to discredited ideologies and ideas and fight about them in the future. Fukuyama in 1992 really qualifies original Fukuyama.

Smith: In the years later, Fukuyama, although he became the poster child for the idea that liberal democracy had triumphed, he spent those decades worrying that we would find something to fight about, anyway, and the unrest of the 2010s seemed to prove his point. But I think a more plausible hypothesis is that suppose liberal democracy is actually the best, but people don't always realize that, because there's generational turnover. The generation that fought fascism has now passed into memory and passed into history, really, and so fascism has passed into history and so now you have people saying, "Well, why were the Nazis so bad?" Or, "Progressives are the real Nazis." They're just completely forgetting all the context of that history and what we learned then, and so I think you see fascist type of stuff coming back, of course, among the New Right in America or whatever, but in Putin's regime.

Smith: They're calling Ukraine Nazis for no good reason at all and they're acting like Nazis, even more incompetent Nazis. And then in China, you have advisors to Xi Jinping getting really into the works of Carl Schmitt, the Nazi legal philosopher-scholar, and coming up with ideas of national greatness to replace both communism and rapid growth stuff, come up with these ideas of national greatness that sound somewhat Nazi, actually, in terms of their emphasis on the unity of a race and all this stuff. So, I think that because we forgot, we're tempted to revisit the mistakes of the past, but because institutions are sticky... In each time in each of these conflicts, liberalism has the advantage. It doesn't mean liberalism will always win, but it means that it has a natural advantage, because it's just the best.

Smith: So, in the Civil War, you saw the North defeat the South, this is not to say the North was a paradise of liberalism, but it was more liberal than the South. Thirty Years' War, I'm not going to say that Cardinal Richelieu and the Swedish army were paragons of liberalism, but they were more liberal than the Habsburgs, by a little bit, and they won that war. And then you saw World War I, World War II, the Cold War, liberals kept winning. In the French Revolution, liberals kind of lost, but they dramatically overperformed before losing. Of course, in the French Revolution, they went way too far, and so I'm not saying liberalism is always nice and happy like Sesame Street. Sometimes, liberals do some crazy stuff and bad stuff, but overall, liberalism kept winning these victories. They were always qualified victories, it wasn't a victory for pure liberalism and it was not a complete and total victory, but it continually built up institutions that were a little more liberal than in the past.

Smith: Actually, Steven Pinker wrote a book about this, we've basically become more tolerant and more liberal over time and these great conflicts that pop up every few decades or whatever seem to push that process along a bit each time, because liberalism tends to get the upper hand... Which is perfectly consistent with the Fukuyaman idea of inherent superiority of liberal democracy, in fact. But just because you're superior in fact, feelings don't care about your facts and people will still keep experimenting with this stuff every generation, and so it's a trend and a cycle. It's like when you use a Hodrick-Prescott filter on your time series of GDP or employment or something, you see that there's a stochastic trend and then there's a cycle around the stochastic trend. If the stochastic trend is the progress toward liberalism that original Fukuyama envisioned, the cycle is the desire for domination, respect, and status that Fukuyama 1992 envisioned. So, the cycles around a trend, I think, is the correct integration of the two Fukuyamas.

Beckworth: What's going on right now? These data points, so we have China, we have people objecting writing against the strict COVID regulations and other structures imposed on them, we also have the protests in Iran. I believe you mentioned a few other places, but we see movements towards more freedom, and so is this fulfilling that thesis?

Because we forgot, we're tempted to revisit the mistakes of the past, but because institutions are sticky... In each time in each of these conflicts, liberalism has the advantage. It doesn't mean liberalism will always win, but it means that it has a natural advantage, because it's just the best.

Smith: I don't know. I definitely think that we are seeing another fluctuation. We are seeing people revisiting the totalitarian and authoritarian ideas of the past, especially fascism. I think communism, you're seeing there's a few people who want to revisit it. There's this scattered, ragged, leftist internationale that supported Hugo Chávez and then a few like Corbyn, Mélenchon, and all these guys and Syriza, I guess, in Greece. They're pretty tattered and scattered, to be perfectly honest. Really, what people are revisiting is fascism, because fascism got dunked on very quickly and very decisively and hard in the 1940s. It was a little flash in the pan. But if you look back on it, fascism was a much bigger threat, in some ways, than communism. Communism was a threat because people didn't immediately realize that it failed, and so in the meantime, they could do some horrible, nightmarish things, but in the long run, its inherent contradictions and weaknesses made it unlikely to survive.

Smith: Fascism, on the other hand, was much more viable, because it combined corporatism, maybe it wasn't exactly economically optimal, but it combined a pretty effective economic corporatism with this ethnonationalism and stuff. So, fascism was probably a little more naturally durable than communism and that's why its defeat… we didn't just wait for it and soft kill it by letting it kill itself, we had to hard kill it by just punching in the head until it died, or didn't die, but slithered back under its rock for another 70 years or something. But I believe fascism is an eternal recurring delusion in the human race and humans will long for this exclusive ethnonationalism combined with strongman leaders who will make the world the way it used to be and blah, blah, blah, blah, blah. I think it's a recurring impulse. I think that it is now, Xi Jinping's regime, Vladimir Putin's regime, and the kind of regime that the Donald Trump supporters would like to create in America are all recognizably fascist, not communist, they are fascist, or fascist-derived, they're recapitulating.

Smith: Whether or not they're reading Carl Schmitt, some are, some aren't, whether or not they are actually taking ideas from the actual Nazis or Mussolini or whoever, or Franco, any of these guys, whether or not they are, they're recapitulating or reinventing many of the same ideas. The idea is that that only ethnic homogeneity will bring peace to a society, the idea that corporations should be quasi-independent arms of the government, the idea that the international sphere should be one not of fixed borders and balance of power or liberal rules or any of those things, but instead should just be a pure contest of empires. You conquer as much as you can and the winners win and the losers lose, and the winning empires represent superior races. You prove that you're great by conquering, defeating. All these ideas are very fascist and they're all being recapitulated, in some form, by some of the rightest dissidents in America and a couple other places in the West, but the ruling regimes in Russia and China. That's scary and that's worrying, but maybe this is just part of the oscillatory process we have to go through.

Beckworth: I was going to say, so going back to your Hodrick-Prescott framing of this issue. So, if I step back and I look at my trend and I look at my cyclicality around that trend, the trend for liberalism, for freedom, in general, if I'm looking at it, am I seeing an upward trend, maybe gradually upward, but still positive on the trend side?

Smith: I think so.

Beckworth: So, the cyclicality is the fascism that reoccurs?

Smith: Right, fascism, and I think communism will be back. I think it's a little too soon after the Cold War, but I think that we're going to see class resentments are real. People get upset over inequality, not just because of material inequality, but because of inequality of status. When rich people are hidden and you never see them and they're just in their mansions in the Hamptons or whatever, that's different than when tech billionaires go on Twitter and suddenly, you're mixing it up with them in their replies.

Beckworth: Elon Musk.

Smith: Right. At the same time, you know that these people have infinitely more money than you do and maybe that you resent that because you disagree with them politically or you don't like them personally or you're just resentful, because “I went to college and I'm white, too, so I deserve as much as you,” which I think is an unappreciated motivation of a lot of the more hardcore Bernie leftists.

Fascism, and I think communism will be back. I think it's a little too soon after the Cold War, but I think that we're going to see class resentments are real. People get upset over inequality, not just because of material inequality, but because of inequality of status.

Beckworth: Let me use that as a segue, because we're running out of time here, and there's an article that you wrote that was really fascinating. We'll provide the link to it and I want our listeners to all go check it out. But this was back in August, you wrote an article titled, *The Elite Overproduction Hypothesis,* subtitled, "Did America produce too many frustrated college graduates in the 2000s and 2010s?" You start the article out by describing the trends in higher ed in terms of majors and what people are studying, and you see in terms of humanities, they're just falling through the floor ever since the Great Recession. Hard sciences, they're going up. And I was looking at this, but it speaks to a bigger issue. So tell us now, what is this elite overproduction hypothesis and how does it tie into these trends we see in higher ed education?

The Elite Overproduction Hypothesis

Smith: So the original elite overproduction hypothesis was by a historian named Peter Turchin, and I adapted it and changed a few things for my own purposes because I'm a blogger and I can do anything I want. And yeah, if you don't like it, don't read my blog. But I can do anything I want, so I don't have to be peer reviewed. But anyway, blogger supremacy. My version of the elite overproduction hypothesis is the idea that I combined it with this idea called the “Revolution of Rising Expectations.” So basically when you have a period of rapid growth, you have a lot of people who think they're going to be part of an expanding elite, and a slow down in growth leads to a crunch where suddenly it's a more zero sum game where not as many people can be in the elite as we expected. A lot of people who had mentally prepared themselves to be part of the elite suddenly get really mad because they can't. And so there's not enough yuppie jobs or faculty jobs or whatever sort of elite status slots people are craving or people had prepared themselves to fill. And so they get mad and they start turning their intelligence and their restlessness and energy or anger toward disruption of existing society.

Smith: So I think the best example of this are the podcast hosts of Chapo Trap House, the leftist podcast. Basically, yeah, they took a Mexican gangster word and a working class sort of gangster phrase, combined them into an adjective to describe some white guys from rich backgrounds. And these guys, they described themselves as like “fail guys” multiple times. They were kids of the elite and they were preparing themselves to be part of the elite, and yet the elite was largely closed to them, partly because they're just lazy and not that smart. Ultimately they're medium smart. But also partly because the economy slowed down. Faculty hiring slowed down and the grad school pipeline slowed down and the hiring for magazines slowed down. The media industry really took a big hit. And even law school slowed down and there wasn't this escape valve for the elite humanities kids to just go to law school, be lawyers anymore, because the law school bubble popped.

Smith: So here these guys were, and they had prepared themselves to be part of this American elite, this white, upper middle class intellectual elite that their families were part of. And it was harder. But instead, they found a backdoor into that elite by using their resentment to create popular entertainment products, infotainment products, the podcast Chapo Trap House, and its various affiliated enterprises that made them rich people. Chapo Trap House would earn millions a year, I think, on [inaudible] or something like that. So they became rich people.

Smith: And then when politics started not to go their way, they started talking about being "grill pilled." They would post after Bernie lost the second time, they realized that there were… any sort of revolution they pretended was about to happen was definitely not going to happen. And then they just withdrew because now they had the money and now they were in the intellectual elite. People had to respect them. Any journalists, any writer like… Jeet Heer, I remember, this leftist writer, he tried to scold them and criticize them. They just dunked on him for weeks and just made a million people laugh at him. And they could just easily defeat the sort of intellectual elite snobs that they once used to aspire to be like and look up to.

Smith: But yet in the process they created chaos because they inculcated a lot of young people with some silly political ideas that are now leading some of those young people to hate on Ukraine and defend Putin and other… Block new housing because it's neoliberal or just try to get young people to not vote for the Democrats because they're just the same as the Republicans. All these bad political instincts came out of that little mini dirtbag leftist movement or whatever. It created chaos. These frustrated intellectual, upper middle class resentments created this chaos in our society. A little bit of chaos. Other people created more than them. I like to pick on those guys a little bit because they're just so jerky and dumb. I don't know. But that's just one example. And I think across our society, I think we've seen a lot of frustration at all the disappearing pipelines by which people would become regarded as part of the respected elite.

Beckworth: Yeah. So just to put this in the context, I think it's important to tell this story. These people start from an early part of their childhood being put on a track by their parents to be at elite daycares, elite elementary schools, elite prep schools, all on the path to get into the best schools, get into Ivy Leagues, and then get into some job, like you mentioned, some of these elite jobs. And so it's a hard competitive race from a little kid and you're constantly worrying and thinking and doing your best to get ahead, to be the best of the class. And then you get to the end of that journey and your dreams are shattered.

I think across our society, I think we've seen a lot of frustration at all the disappearing pipelines by which people would become regarded as part of the respected elite.

Beckworth: And you just described both people on the left and the right who fall into this category. So people whose dreams were crushed because of the fallout from the Great Recession and the weak recovery after that. So maybe it's part of the story for what gave rise to populism, too. You mentioned the Bernie supporters, maybe some of the Trump supporters. So that's part of the story I think you're telling here. But it's really fascinating. We produced just too many elites. Anything else to add to that? Any connection to the rise of “wokeism?” Because I know you've written about that as well.

The Rise of “Wokeism”

Smith: Yeah, sure. I mean, I view wokeness as a recurring tendency in American culture. If you look at the abolition movement or the radical Republican movement, the 1800s, it was similar stuff. You saw strains of it in the progressive movement and you definitely saw a lot of it in the '60s and '70s. You saw a lot of stuff that's very recognizably similar ideas that we now call wokeness. Even the expression "stay woke" I think comes from the '60s and '70s. And so now we've cartoonified it.

Smith: But I think that there really was a deficit of respect at even the basic levels in the America of 2012. In the America of 2012, women had been admitted to the workforce and now comprised half or even more than half the workforce and yet were still subject to constant sexual harassment at work. Guys would creepily talk about sex all the time with their female colleagues, and it was creepy. And also, there was subtle discrimination against promoting people to management, but especially the sex talk at work was the main one. And so that was just a constantly wearing… and women just felt not respected. They felt objectified. I don't want to generalize and say every woman felt this. I mean, I think a lot of women did feel this.

Smith: Our country had become much more diverse. White people, non-Hispanic white people were down to 60% of the population and only half of the young population, and yet we still had in the entertainment industry and in popular lore, basically it was all just white guys everywhere. And that's where the movement for diversity in the entertainment industry and such came from. And even as the economy slowed down in the Great Recession, I think the fact that the economy slowed down and all the old people were white, all the old incumbents were white, that meant that suddenly the younger, more diverse people, the Hispanics and Asians, Black people got shut out of that. And so in this case, it wasn't an elite overproduction so much as just diversity being ignored.

Smith: So I think we had a deficit of respect. And you add on the natural lack of respect that our society affords to working people, to just regular people who work at Starbucks or whatever. In the age when human capital mattered the most, you can call it the neoliberal age if you want, but the age when only college people were real people, everyone else was just a loser. And if you went and you failed out of college and you didn't complete college, you were relegated to the service industry. You were a bottom feeder and a loser for life. And we didn't respect those people. We didn't respect them. We didn't give them good wages. We made them work at irregular hours.

Smith: And we didn't give them social respect either. We treated them poorly. We still treat them poorly. We're treating them poorly now. I'm hoping the new labor movement can fix this, because this is a huge problem. So we had class disrespect. We had racial disrespect. And of course, you have the problem of police had become increasingly brutal over the 2000s and early 2010s. You see that police killings, which had been declining in the 1990s, police killings started to rise again in the 2000s, even though crime continued to decline. And so you just had police become more and more aggressive in the 2000s and early 2010s. I think BLM was a backlash to that, very predictable backlash.

In the age...when only college people were real people, everyone else was just a loser. And if you went and you failed out of college and you didn't complete college, you were relegated to the service industry. You were a bottom feeder and a loser for life. And we didn't respect those people... We didn't give them good wages. We made them work at irregular hours. And we didn't give them social respect either. We treated them poorly. We still treat them poorly...I'm hoping the new labor movement can fix this, because this is a huge problem.

Smith: And so you had all these ways in which American society hadn't kept up with the changes where it backslid in some ways. And I think that wokeness was a very old ideology that reemerged in response to those pressures and those challenges. And that's not to say that I think that everything woke is great. I think that wokeness gets very silly a lot of times, especially online or in activist spaces. I think that there's some woke stuff that has been bad, like defund the police I think was not a proper policy response to police violence. We needed a policy response and that wasn't it. So I’m not just going to bat for wokeness here, but I'm saying that I understand why it happened and it was very predictable that this old American ideology would reemerge.

Beckworth: So Noah, when I see all these stories here, to me it looks like a perfect storm coming together. You've discussed the elite overproduction hypothesis. A lot of unhappy people after the Great Recession in 2008 didn't fulfill their dreams. They're itching for something better, and so they become restless. They get engaged in endeavors that maybe give them meaning. But also they're very resentful. The rise of wokeism, there's structural problems in the economy, lack of respect, as you'd say. I mean, you could see some of these groups overlapping, but there's this other force coming on.

Beckworth: And I would just add, to underline a lot of this is just the weak recovery from the Great Recession. And I know in a previous podcast we talked about an article in the European Economic Review called, *Going to Extreme Politics After Financial Crisis: 1870 to 2014.* And it just shows when you've had a recession that's caused by financial crisis, it often leads to a rise of populism and unrest. And it just seems like that decade after the Great Recession was this perfect storm where a lot of different discontent or concerns about structural problems rose to the surface. And I think you've touched on a number of them in the show today. Any final parting words before we wrap up the program?

Smith: Well, about what you said about big recessions, lost decades, and populism and stuff like that, I would say it may contribute, but I think it's neither necessary nor sufficient, because in Japan you have an even more lost decade and you saw nothing of the kind. People just became apathetic and made a lot of art. And then in the 1960s, our greatest decade of growth precipitated an era of unrest, a very big era of unrest that began in the late '60s and only petered out in the late '70s. But when that unrest began in 1965, we were in the middle of our greatest growth spurt since the 1800s. It was just an amazing decade, everyone was leaping ahead economically, and yet you still saw unrest explode. So I'd say it's neither necessary nor sufficient, even though it can be a contributing factor. How's that?

Beckworth: Okay, I'll take it. Alright, our guest today has been Noah Smith. Noah, thank you for coming on the show.

Smith: Thanks a lot.

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About Macro Musings

Hosted by Senior Research Fellow David Beckworth the Macro Musings podcast pulls back the curtain on the important macroeconomic issues of the past present and future...