Juliette Sellgren

Science is the great antidote to the poison of enthusiasm and superstition. Hi, I'm Juliet Sellgren, and this is my podcast, the Great Antidote- named for Adam Smith, brought to you by Liberty Fund. To learn more, visit www.AdamSmithWorks.org. Welcome back. Today on August 27th, 2025. I'm excited to welcome Derek Scissors to the podcast. He is a senior fellow at the American Enterprise Institute where he focuses on China's economy and India's economy, and he focuses on US economic relations with Asia more generally. He's the chief economist of the China Beige Book, and today we're going to be talking about China. Is it a threat? How much of a threat, what is the situation, and all of that good stuff. So welcome to the podcast. Thank you. First question, what is the most important thing that young people should know that we don't

Derek Scissors 

About China or about the world?

Juliette Sellgren 

About whatever you want, whatever the most important thing is.

Derek Scissors (1:18)

Well, I think if you're young, you're going to see in the next 20 years a completely different world. And then the next 30 to 40 years, a completely different country. And the reason for that is demographics. I grew up in, you started to grow up in a world where population is always expanding and the American population has always been expanding. The world, population has always been expanding. We are moving away from that. And it will not happen five years from now, happen 10 years from now. It's a long-term thing. But the future for young people, when they get to be as old as me, the world is going to look totally different than it does now because we will be emptier. But more importantly, we will, the population will still be quite large. We'll be emptying out. It'll be an older, emptier world heading towards less people, fewer people, less consumption by people. And that's just a completely different world than the one where we're used to. So that's probably the most important thing because it's going to shape the second half of your lives, but it's not what people are thinking about right now because it's 15, 20, 30 years off.

Juliette Sellgren (2:28)

So when you say that, the thing that immediately comes to mind for me is that programs like social, I mean Social Security, who knows what's going to happen that needs to get figured out in the next 10 years, less than 10 years I think. But what else are we thinking about? Can you see what's going to happen?

Derek Scissors (2:53)

I think about society than the economy. The economy. We are going to have a problem where we have fewer people supporting more people, more people receiving benefits due to age and fewer people supporting them. And it's not tenable. I mean, at some point things can't go on forever, they'll stop, so this will stop. But I was thinking more about society in the sense of we're going to have more empty spaces, even in this country. It's happened in Europe already. It's happening in China, it's happened in Japan, Korea, Taiwan. But it'll happen in more and more places. It'll happen everywhere almost except Sub-Saharan Africa. And so it's just going to be a weirder thing. I mean, I don't want to bring up apocalyptic emptiness, but people are used to, they're going to be more people and more stuff and we're going to use more stuff, but we're going to build more stuff and that's just going to change. And we're going to switch to a world where we use less stuff and build less stuff. And that's not, again, I don't know exactly what the audience is for this, but a generation from now, we'll be noticeably different and a generation after that will be completely different.

Juliette Sellgren (4:00)

Yeah, I'm imagining post COVID movie theaters, but spread beyond that. It's not just that people aren't going to the movies, it's that there aren't people to go to schools.

Derek Scissors (4:14)

So the COVID example is a good one. It won't be as stark as COVID, but it also won't end. In other words, it won't be suddenly everyone's gone because everyone's staying home. But when you notice that there are fewer people than you expected at a kindergarten playground, the next year there'll be a little bit fewer and fewer and fewer and fewer. And so it's more the trend that I find important than the level. If somebody says 20 years from now, well so much of the population shrank. So it'll be the same as it was 10 years ago. Okay, but 10 years ago it was rising and it's going to start shrinking and it will shrink endlessly on the trend we're on. Now.

Juliette Sellgren (4:54)

Do you think that in the same way that mouth is was kind of wrong and that he thought that necessarily the population would have to level out because otherwise we would be starving? And humans seem to just figure out a way to build more and to actually be able to sustain that, that humans will not necessarily just realize that fewer people means fewer brains, which means fewer problem solvers, which means more empty spaces, which means more loneliness probably, and stuff like that, and whatever that entails, perhaps an apocalyptic future. Do you think that there's a rebounding in giving this?

Derek Scissors (5:47)

We haven't seen it yet. I mean, we haven't seen a sign when societies start to shrink like this that they rebound. Now, maybe we haven't seen it yet. Maybe there's a critical point you get so far down the path. I think I partly agree with what you started to say, but I don't want to put words in your mouth. Necessity being the mother of invention, as we were expanding, we needed new things. And so we created new things. I don't know. Contraction doesn't look like that. Contraction might look like technological stagnation. It might look like, why do we need to innovate? We have enough housing, we just need to fix it up now that when we didn't have enough housing, we were always worried about it and we won't have enough housing for the next few years. But if we flip to the other side where for the first time in the United American history and for large parts of the world, you don't need any more housing because you get fewer people. I don't think that's, you might say endlessly growing population is not healthy. That's fair. But a shrinking population is probably going to have a lot of negative consequences in terms of technological progress, innovation coming up with solutions to problems quickly because we have to.

Juliette Sellgren (6:57)

And whatever culture that creates, because maybe I'm just into econ, I think that the need to innovate is a motivating and purpose providing thing. And so without that, what do people do?

Derek Scissors (7:16)

All of modern economics is created with scarcity in mind. There's always, we need to figure out how to do this better because there's more people coming down the road and we don't have an economics of contraction. And so like I said, it's not 20 years from now, 20 years from now, people will notice, but it won't be transformative. But in the lifetimes of younger people listening to this, it will be transformative. And it's something, I don't know, the black plague in Europe, of course, that wasn't the whole world. It's something unprecedented and most for recorded human history, let's put it that way.

Juliette Sellgren (7:59)

So I'm going to not so subtly transition us as screwed as we are because our population is declining. China is screwed first and maybe more. Am I right?

Derek Scissors (8:12)

Yeah. One of the things that's weird to talk about with China is I think China right now is a rising threat to the United States and to certainly it's neighbors, but at the same time, I also think in the long term the Chinese are toast and people have a difficulty reconciling those two. But the way you reconcile them, the principle way you reconcile them is also, again, demography. It's not an accident. I came up with demography as a long term factor. China has already started to empty out. The UN, which is generally conservative, thinks the population will drop by half in the next 75 years. This is really hard to imagine- in half. And like I said, their estimates, their current estimates are conservative. They may turn out to be right because there may be a rebound or some sort of threshold, but as you have fewer young adults and you have fewer marriages and fewer babies, and then the basis of that, they become fewer young adults and so on.

That's the path that China's on. Japan's already well down that path. Korea's following them, Russia as well, parts of Western Europe. And so we can argue about, alright, it's not going to matter to China until 2040. Okay, so then we have a period of 15 years if you buy that argument where we have to worry about Chinese aggressiveness. But in 50 years people will be looking back at my career and saying, why the hell did that guy study China? What a waste of time that was. What was he thinking? Because China will be not important as a factor in the world. You can't have the population shrinking that much and maintain any sort of vitality as a country. Now 50 years, there's an opportunity, oh, they're going to try to boost births and that we'll start changing things 18 years from now, haven't seen any evidence of it yet, but the track that they're on is unprecedented peacetime population collapse. And your society doesn't get through that looking the same as it did.

Juliette Sellgren (10:22)

Yeah, I mean there's also the question of whether that's sort of what policy levers you could actually use to increase population. Now if you're using a gun, that might be kind of effective, but if you are paying people kind of ambiguous how much that actually helps now in a different context, in a different culture, maybe. I don't know.

Derek Scissors (10:458)

No, they're so far away. I mean they're talking about giving people 5,001 credits, which is $700. Nothing. Raising a child in a city in China, $700 is an afterthought. So China is very good at marshaling resources. It's a partly command economy. Of course, if they decided to devote a huge amount of resources to this, then they could address it. But Xi Jinping doesn't want to devote a huge amount of concurrent resources to helping some future leader of China after he's dead. So we have this problem, everybody has this problem with education. The payoffs for education are long-term, and so people don't want to put in additional resources in education. And there are also issues of whether you're wasting the resources, no question. But even if you knew you weren't wasting the resources, if you're a current national leader and you think, oh, this is going to be so good for everybody 25 years from now we'll have a better educated workforce, you might not care. Xi Jinping has the same problem. They could do more to encourage births, but that is resources taken away from his current goals and it's a payoff for someone else. So they're not doing it.

Juliette Sellgren (11:57)

So that leaves us with at least the short- and medium-term time horizon where you say China's a rising threat. What does that actually mean? Why has it been increasing as a threat? It's the sort of thing where no matter how much I hear about it, for some reason it has a little bit of a difficulty translating in my mind maybe because I've never been there because the idea of a country being a threat is not like a person. Foreign policy is not my natural way of seeing the world. And so I'm just wondering how would you explain this to someone so far away from being able to understand what that means, as scary as that potentially could be, and as bad as that could be for my life.

Derek Scissors (12:50)

So let's take the isolationist view of this, which I think President Trump has a good deal of, a good dose of which is why should China be a threat? Why don't we just give them what they want and then they won't be a threat and it really doesn't matter to us, and the US could pursue that strategy. There are things we could offer to China that would neutralize most of the threat. There's always a risk when you offer a brutal dictatorship favors that it will just demand more and more and more. But I also think that as I've said, I mean China is headed towards a demographic, serious demographic problem. It has debt problems now, it has limited natural resources. Xi Jinping is going to live forever. You could certainly reduce the Chinese threat by just giving them stuff. So I think it's fair for Americans to think, well, why do we care about Taiwan?

And if China gets more aggressive in the East China Sea and the South China Sea, that's Japan's problem, or South Korea's problem or the Philippines problem. Why do we even care about this area of the world? Why do we care about problems on the Chinese Indian border? That's their problem. Even if they use nuclear weapons, it'll be against each other or far away. So if you just say, forget it, I don't care about East Asia and Southeast Asia, then you can reduce the threat if you do care about East Asia and Southeast Asia, if you want a Taiwanese democracy not to be subjugated by a Chinese dictatorship, the way Hong Kong, which was once an open society was subjugated. If you don't trust that China will not disrupt sea lanes that supply many people, not just Taiwan, hundreds of millions of people in East Asia and Southeast Asia coerced them. In other words, if you look at Xi Jinping who thinks, who continues to claim that the US caused COVID, and you trust him to be satisfied with a few concessions, but if you don't, then you want to have the conflict not be located near America, not involve the United States. We want to support our friends, stand up for democracies, and that's where the threat comes from and the threat in that world where you don't want to say, let's give the dictator what he wants and hope that satisfies him.

In that world, you have a multidimensional Chinese threat. Of course, you have an increasingly modernized Chinese military with a much larger force and growing force of nuclear weapons. You have a Chinese Navy which is now much larger than the American Navy. So you have a military threat. I'm not really an expert on the military threat. You have an information threat. A lot of things that I read, I look for news about China, and I read the Chinese news every day, and there's an amazing coincidence with what the Chinese news is saying in these bots that have names like Go America, exclamation point. And then it's exactly what was just in Xinhua. I don't know if there's something called Go America, I mean that they are, it's Chinese information being masked in patriotic language. And I happen to know it's Chinese information because I read the original, but most Americans probably don't.

(15:58)

So there's an information warfare here where the Chinese have tried to convince people of many, many lies throughout the last few decades. And because of the nature of the internet and cyber-attacks and so on, the information threat has become quite large. And if you're interested in this, even if you think I'm completely out to lunch and we should just give the Chinese Taiwan, and maybe that'll do the trick, I would still urge you, make sure you understand what you're reading because there's a lot of misinformation. And I'm sitting in Washington, I've heard members of the US government repeat the misinformation. It's not just a function of, oh, all the people who know, they know not to read this. It can be quite tricky. I mean for a long time they're a little more careful about it now. Or a story would show up in Xinhua, which is the Chinese national news service.

It would be picked up by the wire service, international wild services and parts of the store would show up in American newspapers. And now they don't do that as much now they just have their own websites with lots of fun stuff on it. If you want to, I'm going to get more controversial now. TikTok is a good way to spread misinformation in the United States. I don't mean that the majority of TikTok videos spread information. The majority of TikTok videos of course don't spread information. I just mean that ultimately the owners of TikTok are responsible to Chinese Communist Party or there are dead men walking and women. And that means if they want to spread misinformation, they have a wonderful platform to do it. So if you are using TikTok and you hear something about American politics or international politics or whatever that might be sensitive to the Chinese Communist Party, you're not hearing the truth.

You're hearing a censored version of the truth. So information warfare is another threat from China. And then the economic side, the side I know best is there are a lot of drugs that would disappear from Shell if the Chinese stopped producing for their suppliers. The Chinese directly supply a lot of drugs in the United States. They supply Ireland and India, which are two major import sources with the chemicals used for those drugs. We recently had an issue which maybe people didn't pay that much attention to where the Trump administration was forced off of its trade policy towards China because the Chinese said, we're not providing magnets that are used to control electric motors and cars and in other applications anymore. So that's the supply chain threat. It's not just buying Chinese goods. Hey, we buy a lot of Chinese goods, they're closed, they're toys. That doesn't seem that important.

But Chinese goods are needed in a lot of consumer electronics, even when they don't make the consumer electronics. They're needed in cars, they're needed in pharmaceutical products. China is trying to push itself up to be a net exporter of semiconductors, and if it becomes a net export of semiconductors or semiconductors will appear in almost everything that we use, and then we will need China to make those things. So that's the economic threat. The economic threat is that goods will disappear from ourselves. The information threat is that you're getting misinformation regarding not just China, but also the United States and the military threat is China. China's creating a military in order to be able to forcibly take what it wants in East Asia and keep the United States out of it by frightening us essentially.

Juliette Sellgren (19:13)

I think I see this line of something that appeals to me from the economic aspect just of thinking about this sort of conflict. We are so integrated in this global system, it's our system, but everyone is integrated and that's good because it means gains from trade. But the problem is that's part of why we care. I mean there's humanitarian reasons, but even just purely for Americans wellbeing, there is an economic case for caring about other countries. Taiwan semiconductors very easy to draw that connection,

But it's hard when it comes to what to do about it. So of course we don't want to not have China produce the things it produces from an economic viewpoint. If we're only looking at what the benefit is from that trade happening on a one-on-one basis, that's good because the person buying the thing is better off and then whoever's in China is better off. But it gets complicated when the regimes are actually different and have different goals. It's not actually about necessarily the person producing whatever it is that Americans are buying or the things like drugs and magnets and all of that stuff. How do you think about trade and our economic relationship with China or almost any country that has a different type of regime, how should we care size them up? I have a hard time thinking about this.

Derek Scissors (21:10)

It's a truism in economics that free trade is supposed to be always the best strategy. Obviously the best outcome for everyone is free trade. But even if your partner is not practicing free trade, it's better for you to practice free trade. And you can have a lot of models that show this. And the problem is it's not a dynamic explanation because let's say you are dealing with this partner has to be important to you. It can't be a small trading partner. They don't really matter one way or another, good or bad, and a partner that matters to your economic welfare and they're not really good free traders, but you have a pretty good trade relationship with each year. Every year you think, I really wish they would change. This bothers me, this bothers me. These are real problems. But on net we're benefiting. What happens if that partner just says, we're not trading with you anymore, and your dependence on them that is accumulated through your practice of free trade leads to a depression, leads to mass shortages, leads to premature deaths, which would happen in the case of drugs.

Now, you could maybe have to knuckle under politically and except their economic coercion, but just in the economic story at each year as you were describing, it's been better for you economically to trade for this country. Even though there are problems, it's still been better on a net basis, but suddenly that sequence of years where it was better for you has turned into a collapse. And now was the whole time period better. And this is something that I'm a pre-market economist, but in the discussion of open markets, we don't think of predators that cannot be stopped by law enforcement that matter tremendously to our economic wellbeing. We think of a rogue firm or something that the government could control. China is neither of those things. And so we have to balance on a daily, monthly, weekly, monthly, annual, even a decade long basis. Alright, the Chinese aren't good trade partners, but we still benefited from trade with them.

Well, what happens if it stops? And when you have a brutal dictatorship under a person who wants to rule for until he is dead, which is the case in China, you have to consider that risk to be high, not 50%. But that changes the idea of well, you should just be able to trade. I mentioned in a paper that was published yesterday, free trade with reliable partners is always the better option. And then when we model this, we just assume the partners are reliable, they're going to do what's best for them in the short term. But what the Communist Party, getting to your point, thinks is best for it in the short term is not what an economically rational actor thinks is best. The party isn't trying to maximize wealth, it's not trying to maximize economic welfare. It's trying to maximize its probability of continuing to be in power.

(24:13)

And that is a different set of goals and it's a goal that could lead to an abrupt termination of US-China trade that would make our increased dependence on China look like a foolish long-term strategy. So the answer is when the regime is different, what are the regime's goals? There are dictators, of course, who want to make people richer to make them happier so that they're happier with a dictatorship. You may not want to deal with 'em for moral reasons, but their goals aren't that different. Xi Jinping is clearly not trying to make China as wealthy as possible. He is not. He has other goals and those goals can lead to a situation where we have a sudden loss of goods from China that would make it questionable as to whether all these years of trade were a good idea.

Juliette Sellgren (25:02)

So this is something that I have been struggling with. Obviously everything that has been happening politically and economically is kind of feels as though everything I used to know about our political order and our internal domestic, everything is now confused. So we'll get to that in a minute because that's relevant. But you look back at accounts of World War II and every one of our opponents, they were all shocked at how quickly America could actually rally and produce an enormous amount of really important stuff. And sure you can have the arguments that we were more of a manufacturing economy and blah, blah, blah. Is that where a hypothetical battle would be fought today? Less than it would've been otherwise? Okay. Not actually the conversation we're having right now, but that's something, put that aside, our regime has always been part of our power. Our economic order has been part of where we derive our power. And so how do you deal with the fact that on the one hand we might not want to trade with them for all the reasons you just outlined, because it actually, in the long run, really might end up making us look like we got the sore end of the deal.

But also if we don't do that, we're kind of abandoning the very thing that has been America's source of power, at least from what I can tell for so long.

Derek Scissors (26:40)

That's where I would disagree with you. 1999, when perhaps you were not quite aware of the economic situation, we ran a trade surplus and we had the highest combined female and male labor force participation on record. And we had a very small- compared to now- economic relationship with China. Now someone's going to say the economic conditions in the United States in the world are very different now than in 1999, but it is certainly possible that the US can be economically healthy without China because we were economically healthy without depending on China for the first 240. That's too much, 230 years, sorry. Yeah. Of our existence. So we don't need the Chinese to prosper. And when we're talking about our principles, our principles were originally trade with like-minded countries.

The regime that was created after World War II was not like bring the Soviet Union in, because they didn't want to be in. It wasn't everybody gets to join no matter who rules their country and how they treat their people much as how they organize their economy. So if you look at 50, 55, 60 years after World War II, we have the right system. And what happened was after the Soviet Union collapsed, we got carried away and we thought a phrase, I'm sure people have heard, “the end of history” had arrived and it hadn't. And so we went globalist and universalist and everybody should join the World Trade Organization and we're all going to be best friends forever. And that was stupid. It wasn't obviously stupid, but it turns out to be stupid. And that was the mistake. We've had 25 years of mistake in my opinion, the 25 years of mistakes, roughly you could say it's 20 years, that's fine after 60 years roughly of success and we can go back to a system that fits our principles and benefits our country, but we have to break the addiction that we have now and we are having trouble breaking that addiction.

Juliette Sellgren (28:54)

Yeah, I mean that's kind of exactly the next question is sure back then, let's say you had the foresight to see what happened that was organic, what the situation was in 1999, at least with respect to China, from what I can tell, given that you just gave me this information I didn't have before. I could be wrong, but it seems somewhat organic. I mean China really had Mao, so they really weren't industrializing or producing anything of actual good quantity or quality or value because he made them melt forks in order to make stuff out of metal. So quality

Derek Scissors (29:38)

China was incredibly poor through the right.

Juliette Sellgren (29:42)

So if that was an organic situation, how you basically have to push the button and get rid of a relationship that now, I mean, yeah, you say we're addicted to it, it would cost a lot and it's easy I think if we were there to, maybe not. But now that we have this relationship and we've had these gains that have a potential to really hurt us, what do we do about that? And what can you do that is less distortionary? Because the thing is no matter what, if you acknowledge that, then there are going to be costs. So what next? There are a lot of things floating around ideas of what to do, things that have been attempted, what works, what doesn't.

Derek Scissors (30:46)

We're going to either get very lucky if you want to rely on luck, we can do that. Or we're going to get in a confrontation with China where they attempt to economically coerce us and we're going to have to give in or we're going to have to pay the costs when they decide. And a superior strategy would be to make the adjustment of our own choice. We should have made it a while ago, but better late than never to start making the adjustments so that they cannot coerce us and that the cost will be reduced over time. So the answer and a term that people have already gotten tired of with good reason is to decouple us- to separate ourselves from the Chinese, not to punish them, not to threaten them. It's just to say there's no right that says you get to supply us with 400 billion worth of exports a year, right?

That isn't enshrined anywhere. You're a bad trading partner, you're a horrible dictatorship. It's just the Communist Party of China is a bad organization. We're going to trade less with you. And if you do it of your own volition, you get to phase in the changes. And if you do it of their volition, they become much more quickly and painfully. There are going to be costs of course, and there are large costs. I do think that there's an addiction comparison here. The American economy will have, some will go into a little bit of shock, but there are plenty of arguments that the shock will last if we do this properly a few years and we will be much better off coming out the other way. Let me give you a specific example. Instead of making all these health references, as China has become, there are various measures that measure Chinese importance in the world, but as China has become more economically important in the world, you can see the depressing effect on US research and development spending.

And the answer, why is there a depressing effect on research and development spending? For one, US firms are being killed off by the Chinese and these are subsidized Chinese output ends American firm. So that hurts research and development when your firm is dead. But the other thing is that Chinese don't respect intellectual property, so your return to creating your own intellectual property is reduced. So of course you do less of it. And so we would be in a healthier technological environment. China is very good at turning technology development into commercial application, but it does so at the expense usually of the firms that created the technology in the first place. And we would be in a better technology environment if we were shielded by our own actions from Chinese predation. Innovation would work faster. It wouldn't be cheaper. That's definitely not true, but it would work faster and healthier with the right firms being rewarded and less Chinese control over the process if we cut the Chinese out.

(33:47)

So yes, when we make, we can stop buying things from China that we don't care about right away, it doesn't matter. But when we make the decision where we say something, if we were to say something like, well, I'll give you two examples that fit your story about, we could have done it then and we can do it now. We're already in trouble in pharmaceuticals. If we cut the Chinese out of the pharmaceutical supply chain, the price of drugs is going to go up. And that's why we haven't done it because Democrats and Republicans immediately start pointing at each other and saying, you have to absorb the price of the, you have to be the one that says people should pay more. No, the government should pay more. And we have a political divide. Whenever you bring up pharmaceuticals in private members of the US government, members of Congress, members of any administration are very worried. But when you get to the point of drug prices go up, they just stop and then nothing happens.

We're already stuck. We're already going to have to figure out a solution if we don't want the Chinese to be able to coerce us through the drug supply of how to deal with loss of Chinese inputs into the drug supply. We are thinking about and we're working on something that hasn't happened yet, which is semiconductors. What the Chinese want to do is dominate world low end semiconductor production, maybe high end too, but certainly low end. Why? Because low end semiconductors are the semiconductors that we use in everyday products, which means you can't make those products without China, and we need to stop them from getting to that position and we're taking some action to do that. We started in the Biden administration, a bill passed by Congress, not by executive order. The Trump administration is talking about taking action along these lines. We have to see the final result yet, but with semiconductors where the Chinese don't yet have this hold, we're acting in pharmaceuticals where they already have it, we're afraid to act.

And that's part of the story about preventing the cost from accumulating or paying the price. We don't want to pay the price, but let's say there's peace. We've already answered what's going to happen. China's not going to be able to maintain its contribution to global supply chains. They're not coercing us. Xi Jinping drops dead of a heart attack tomorrow. He's replaced by somebody who's boring. Fine, that's good. That's really, really good. There's much less chance of war and loss of products from US shelves that are important to our lives. Even so China's going to phase itself out because it's going to get too old. You already have foreign businesses not investing in China anymore because they've already seen the start of this process. So what we're talking about is speeding up and getting control of a process that's going to occur anyway, either rather suddenly and painfully because initiated by a US China conflict or a Chinese attack on one of our allies, or slowly because it's caused by Chinese demographic contraction. So it's kind of a false choice to say, it's too hard to do anything. Let's do nothing. Well, that pushes it off to someone else, which is of course what many members of the US government want to do. But we are going to have to make this adjustment either quickly or slowly, regardless of whether we decide to face it head on or not.

Juliette Sellgren (36:52)

What's so odd to me in a way about the politics surrounding drug costs and the potential effects of that is that Americans don't actually see drug prices really. And we do through proxies, but the market isalready so messed up that and they're already all arguing that the government should pay for it anyways. That I don't really fully see how there's a political issue there, I guess because it's not full and maybe because it's not cute and because someone has to pay for it also. So someone will know, right?

Derek Scissors (37:34)

I mean, we have extremely distorted healthcare prices in the country. I mean, the price of a hospital bed is not actually what gets charged, but you can charge that because someone else is going to chip in and pay for part of it rather than just the user of the hospital bed. And so you can imagine a system where we don't pass along any of the price increases, but that requires a political decision. And the political decision requires a loud debate. And healthcare has been a flashpoint politically. So you can argue that it's an economic issue who's going to pay the price, but it's probably more a political issue. Who's going to get blamed? And I've told this story many times. I was having a private conversation with a Super Hawk in the US Senate. This is somebody who really, really is tough on China, or says that he is.

And when I said what the price of the biggest cost of my proposals to decouple the US from China was, I said, oh, and this is at the time, it's out of date. I set up about 15%, 20% drop in NASDAQ and it'll recover, but it'll take some time. He said, well, I don't want to do that. And the answer was, I don't want to have there to be any price for the political actions that I'm saying I support. And that's why we end up doing nothing, that even the people who say they want to want to protect us from the Chinese threat, they don't actually want to do anything because of these costs. And in healthcare,

Juliette Sellgren (38:58)

That's a huge cost.

Derek Scissors (38:59)

There's going to be some sort of cost and whatever, it's maybe it's not higher prices for consumers, maybe it's higher premiums, whatever, there's going to be some sort of cost and no one wants to pay it.

Juliette Sellgren (39:11)

So then let's look at the benefit or I guess the effectiveness.

What does decoupling look like to me when I hear decoupling, I think of industrial policy effectively because we can't really convince another country to do it. The easiest thing for us to do is say, well, we'll pay someone to do it here. And we kind of did that with chips. But from what I can tell it actually, obviously it's not as effective as a regular market. Doesn't mean there's no progress, but it's taking a long time. How effective- slash- how worth it is it? How do we kind of evaluate? I mean obviously you must be for it to a certain extent. If decoupling is really your aim, how do we think about how effective these policies really are on at achieving those goals?

Derek Scissors (40:12)

The US is not in a position to replace itself. All Chinese production. We can't just say, well, if it's made in China and now it's going to be made in the United States, they have a bigger population. They have people willing to take jobs with very low wages, which we do not have numbers of. So in part of what a lot of people find it unsatisfying is they want make it America. Well, we can make more in America, but we can't make it all in America. Some of it's going to be made in other countries that are less threatening to US than China. And we have our biggest two biggest trade partners in 2024 were Canada and Mexico for obvious reasons. They're our neighbors. We can trade more with Europe, we can trade more with Japan. We can trade more with Indonesia, with Vietnam, those Indonesia has a population of close to 300 million.

It will not be as, the goods will not have the same price quality combination as in China. So maybe the quality will be just as good and the price will be higher or the quality won't be as good and the price will be the same. There's a reason we buy things from China as they're better at producing than other countries in most cases. So there's going to be a cost. We can make more here and capture more of the benefit of production here. The price will go up of these goods. It does require some form of industrial policy. So the first question is, well, what form do we want to use tariffs? Mostly that's President Trump's approach. Do we want to use tax credits? Mostly that would be my approach to encourage production here. CHIPS is a good example, even in its weaknesses. So what CHIPS has done is increased private investment in the United States in semiconductor production by a lot. And that's what you want. You want some public money to lead to a lot of private spending success, but as you said, it's a success that takes years. You can't recreate all this production in the us, but President Trump sometimes seems to think I'll put a tariff on and then bam, magic that will be production in the us. Actually, what will first happen is prices will go up

Juliette Sellgren (42:16)

And prices haven't even shifted to beyond consumers yet. So who knows what's going to happen when that happens. 

Derek Scissors (42:23)

The effective tariff through July, if you just use US trade data and tariff revenues 5.5%. President Trump wants it to be 30 or 20, he wants it to be much higher. We're going to feel the effects later. There's a long-term payoff where production does come here, but it doesn't happen immediately. So that's a cost. And then the other part of this is let's say we thought, you and I are talking two years from now and chips, we just agreed CHIPS is a fantastic success. That's fine. It doesn't mean that other programs will be a success. One of the reasons CHIPS is a success is the US always had the technology to do this, and we just didn't locate the production here because it was too expensive to locate the production here. But it wasn't a question of whether we were capable of it. Well, in ship building, ships rhymes with ships. Congress really likes that. In ship building, we actually don't have the labor force to do it. We don't know how to build commercial shipping anymore on a large scale.

And so the cost of that program, if you say we need to have to build more ships here, I understand that point, but the cost of that program would be higher than it would be for chips. And so this isn't a situation of snap your fingers. All the industries come back here. Some of them will go to other countries, not China. Some of them will come here. And we're going to have to decide, well, how much in the way of a burden are we going to face to relocate production? But it's like an insurance policy. Nobody wants to pay for insurance. And I know young people really don't want to pay for insurance, and that's fine. I have to pay rent.

Until you get to the point where you have an asset that you think, if my house burns down, what the hell am I going to do? I can't handle that, but I can handle the payments for insurance to protect me in case my house burns down. And a 25-year-old might not think of the American economy as their house, but it is their future. So it is a way their house, there needs to be an economy that has good jobs at good wages and places you want to live. And that's what we're doing here. We're paying the price for insurance. So the Chinese can't burn down the house, but there is a price, and the price will be, the quality of goods may drop or may be stagnant when it would otherwise rise. The price of goods may rise. Not all the production will come back here. There will be more jobs for Americans, but not all of them. And we'll have to pay, there'll be taxpayer support for these jobs. And all of that is to say, if we started implementing a decoupling strategy tomorrow, next year, 2027, 2028, we're going to pay costs and we're not going to see much benefits. But if we don't implement a decoupling strategy tomorrow, we might be looking at the worst crisis in a hundred years in the 2000 thirties. And that's the trade off.

Juliette Sellgren (45:11)

I mean, I think this goes back to what you were saying earlier in the conversation though. It's not just 25 year olds and it's not just taxpayers. For politicians that sounds like suicide. That just does not sound politically safe. And so A, is this feasible? And B, how do you ensure against the insurance in a sense, making sure if you can, that you don't put your money in ship building, but rather you put your money in something, even if it costs at the beginning, that will actually give rewards in the end.

Derek Scissors (45:56)

So you're kind of asking two contradictory questions, but the contradictions are useful to think about. So the first one is yes, when you tell a politician, we need to save the country from being coerced 10 years from now, most of them, well, I mean I think 70% of the Congress will be over 70 and before their next election, I don't remember exactly. There's a cute number there. And when 10 years from now to them is like, well, will I be here in Congress? Will I be alive? They don't care that much about the future. And we see many examples of 'em. You referenced Social Security and entitlement programs before they need to be put on a sounder footing, but that problem is always a future problem, so it never gets done. So yes, there is a political feasibility problem. It's exacerbated by the fact that we have an old president.

Our previous president was even older. We have old people in the Congress at the national level, some of them shockingly old and dysfunctional. And you really need someone who's willing to think about the future and they are not. Now oddly, one thing they're generally willing to do is have taxpayer money subsidize new economic activity in their states. So they actually like industrial policy. As long as it's the right industrial policy for them politically doesn't mean it's the right industrial policy for the country. So you have a lot of support for the CHIPS act based on local politics, not based on semiconductors are ubiquitous. That's the one area where you're not really picking winners and losers. And yet now we have Intel singled out as, oh, it needs a government support. Intel should be like any other company. And so you get an illustration of politicians don't want to pay costs.

They like industrial policy in general because they think the benefits will accrue to them and the cost will be paid by someone else, but it opens the door to bad policies. If I were able to convince everyone that chips is an unqualified success, which I don't believe, but if I did believe it and we convinced everyone, you immediately open the door to, oh, this is going to be a program just like CHIPS. But the conditions of the industry are different and these aren't as important as semiconductors. What's important? It's important to our majority in controlling the Senate and so on. So yes, you can go off track in industrial policy if this may be getting a little too technical, but I can describe it in words. My preferred outcome is just forcibly cut the Chinese out of every sector that we care about. We don't have subsidies, we don't have tax credits.

(48:34)

Those are if you want to use them, it's just to tell everyone, if you want to sell in the United States, China cannot be in your supply chain. You have three years to make this adjustment. Now, that is economic shock therapy, and I would expect politicians to have handouts on top of that to make it better. But the most efficient thing to do would not be to guess which industries are right for the United States. It would just say, let's have a market that China can't distort, and then we'll let the chips literal, in this case, poker chips, not semiconductors, fall where they may. So there are different approaches to industrial policy, some of 'em more economically efficient, some of them are more politically feasible. They all have drawbacks, and you have to measure them against the drawbacks of is Xi Jingping going to go quietly into the good night, or is he going to try to make a bid for greatness before he leaves? And what does his bid for greatness look like for the United States,

Juliette Sellgren (49:29)

And how much time does he have left? That's a good question.

Derek Scissors (49:35)

I have this thing now since I'm not that old, I'm sure this is foolish on my part, but old people seem to be able to stubbornly stay on the political scene when I wish they would leave. And so he certainly tends to be around through until the 2037 party Congress, which is 12 more years, right? There's a 2027 party Congress where he'll be affirmed again as the great leader, and then the 2032 party Congress might be a little dicier. He is older, but he intends to be around for another 12 years at least. That would put him well into his eighties. I will argue that at some point everybody starts declining and you're kind of happy that they're your opponent because they're too old. But I do worry in these next 12 years through, let's say through the end of the 2000 thirties, there is a risk from a cult to personality dictatorship, which is what he's established in China.

Now, could his successor be worse? I doubt it. Could his successor be just as bad? Maybe. But the whole idea of these kinds of people is they get rid of all potential successors, and then it's hard to have that transition. I think there may be a threat from China afterward, but I think Xi Jinping's seventies, which is eight more years I believe, are the big threats to the United States. And after that, on 80th birthday, if he's still around, but we'll get a decline in that threat as he ages and the party faces its own instability fears.

Juliette Sellgren (51:14)

So just really quickly, what you were saying about the three years to just cut him out of the supply chain, is that less costly, do you think, than straight out, we will subsidize your US production, which one actually costs more money?

Derek Scissors (51:38)

Well, I'm not sure. I will tell you that the efficient result is to cut the Chinese out and let the market work from there.

Juliette Sellgren (51:46)

It's one intervention. Effectively, I mean, it's a lot of interventions, but it's one move and

Derek Scissors (51:51)

It's an intervention that reduces distortions. The cost, though it depends on where you're standing, right? I mean, my concern about the subsidies is I'd rather the government not choose. Now, this is from somebody who supported CHIPS, but I also think there are not very many obvious choices after CHIPS. There's pharmaceuticals because I think that is a threat to the US politically. Some people would say there are critical minerals, of course, that begs the question of which minerals are critical. Some minerals are and some aren't. We used to think oil was absolutely the most important thing in the world. Now we have tons of oil, we not the world and don't care about as much anymore. The US Geological survey just was wanting to say that silicon and copper or critical, but they're not critical. The refining capacity might be critical, but the minerals themselves are not critical.

So there's a lot of argument on the subsidy side that I don't want to have, but in terms of how much subsidization would it take to get the Chinese largely out of our market, it might not. I think that there's a subsidy path that is comparable to the decoupling path where you just kick the Chinese out. It's just more that the government, the one is very simple and easy for the government to follow. They may never do it, but it's simple. They're not going to blow the execution if they choose that, it's easy to do. And the subsidies path, which is the one they're more likely to choose, is more likely to go off the rails. You can see something like you have a Republican president who thinks these are the industries that subsidize, and the Democratic president comes in and yanks those subsidies away and gives 'em to other industries. We've just had this in reverse what I just said with green energy. But the Biden people were subsidizing green energy, and the Trump people have pulled this away. And so all we did was waste that money. And that's why I prefer the decoupling. But politically, if somebody said, look, you can argue for decoupling all day and all night, or we can pull the trigger on subsidies right now, I'd bite my lip and say, pull the trigger on subsidies.

Juliette Sellgren (54:04)

Like an economist. Of course, you understand trade-offs and you put it in those terms, which I appreciate. Thank you so much for taking the time and for sharing all your wisdom and knowledge. I have one last question for you. Rapid fire. What is one thing you believed at one time in your life that you later changed your position on and why?

Derek Scissors (54:25)

It's just depressing. Sorry. I started in policymaking. I don't mean to say that I was making policy, but I started being a part of that process, a cog in a small cog in the wheel in 2008, which was a pretty intense time because it was a global financial crisis. And I disagreed with a lot of people who said we had to bail out the financial system. I thought we had already bailed out the financial system by the time they were handing out money to banks. I didn't trust the people in charge, yada, yada, yada. So I didn't like that.

But when I was arguing with people, it felt like they mostly believed what they said. I thought they were wrong, but they believed what they were saying. They really felt like we have to do this and this is the right way to do it, and this will make things better. Whereas in 2024, I thought most of the people that I encountered and were arguing with had no principles whatsoever. It was just selfish gain for themselves. And you're supposed to think that when you're young, right? You're supposed to think all those people in charge, they, they're so corrupt. And I didn't think that 16 years ago, and now I do. And so either I was stupid 16 years ago, absolutely possible, or there's been a change in politics at the national level and in the United States that has been a negative one. But I used to think that politics was about people having good faith arguments where one or both sides are wrong. And there are plenty of times when both sides were wrong, and now I don't think that anymore. I think one and a half sides are wrong, out of the two. One is wrong, and the other one is instead of opposing the wrong side kind of hedging and deciding that they're, it's not really worth it to me to oppose this side, fine. So I've become much more cynical about politics. I was wrong about that.

Juliette Sellgren 

Once again, I'd like to thank my guest for their time and insight. I'd also like to thank you for listening to the Great Antidote Podcast. It means a lot. The Great Antidote is sound engineered by Rich Goyette. If you have any questions, any guests or topic recommendations, please feel free to reach out to me at great antidote@libertyfund.org. Thank you.