Longreads + Open Thread

Longreads

• Tyler Cowen interviews economic historian Sheilagh Ogilvie. Ogilvie has written about many different topics (I'm coincidentally about halfway through her book on guilds), but her most recent work has focused on pandemics and how different institutions respond to them. There are some quibbles to be had here—at one point she cites a 90% drop in postal system use during a 17th century plague as a proxy for economic activity, but in most economies information transmission rises superlinearly with economic activity—think of how many kilobytes of asset price data were produced per day a hundred years ago and how many terabytes are produced today. One of the most interesting riffs is on religion as a carrier for other parts of culture, but this also means that the bundle on offer does the natural bundle thing, of expanding and getting difficult to manage.
• Conrad Bastable on manufacturing and de-industrialization. A long piece, and the key point is that there are some investments that are high-risk, have a long-term payoff, and produce disproportionate positive externalities, which the private sector is unlikely to capture. (The software business is partly good because it has zero marginal cost, but so does media, and not every media business is great. The other thing that makes software so good as a business is that it enables such extreme price discrimination, allowing for a lot of value capture after the value creation.)
• Alice Atkins in Bloomberg on a brand new tail risk to be worried about: liquidity providers in foreign exchange seem to broadly agree that the market is far less liquid than it looks, but that they can't really estimate the magnitude of this. FX is a great case of a market that is in one sense entirely abstract and purely financial—money is by far the most common thing purchased with money, because these markets have turnover many multiples of GDP—but in another sense entirely literal, since currency fluctuations can easily be the reason someone loses a job in Bangladesh and gets one in Guatemala instead. So there are systemic risks if it's possible for a trader to fat-finger a currency down 50% overnight or something. On the other hand, that same real-world connection means that there's immense pressure from nontraditional arbitrageurs: if any currency price gets out of whack, everything that country sells is instantly the low-cost provider by a huge margin, so it drives a temporary surge in exports and perhaps foreign direct investment, both of which push the currency back towards where it was before. (And that process is in a race with the Fed, which has been willing to supply emergency liquidity other countries when they need it.) So at the timescale at which countries go in and out of recessions, this probably doesn't matter. But at the timescale of firms on the wrong side of the trade going out of business, it very much does.
• Dean Ball on the AI impact of agents. One underrated aspect of AI automating various roles is that sometimes, the limit on performance is a lack of feedback, and sometimes, the best source of feedback is interactions with end users. So whenever AI agents in a given category improve just enough to be competitive with some human workers, they suddenly have access to vastly higher-quality feedback and can learn correspondingly faster.
• Tanner Greer on policymaking tribes within the Trump administration. The piece is nominally focused on China, but also points out that "China" is mostly invoked as a prop, and isn't core to many groups' policies. This piece is a good resource for disambiguating certain mixed messages from people in Trump's orbit: they often disagree with each other and have conflicting models of the world that happen to all intersect with Trump's in some way. And it also notes that this factionalism means that there are checks and balances within the executive branch, even if they're informal ones.
• In this week's Capital Gains, we look at the idea of economic surface area: some companies get a lot more visibility across supply chains than others.
• In this week's episode of The Riff: Tariff Time, AI and org charts, and how people who hate AI-generated images convinced me that they're art. Listen with Spotify/YouTube/Apple.

Open Thread

• Drop in any links or comments of interest to Diff readers.
• There are interesting defenses of tariffs in general, and of course there’s a solid argument for free trade (the axes of disagreement here have to do with spillover effects from industry location, the value of controlling more of a supply chain, what experience curves and economies of scale look like in various industries, etc.). What’s the best steelman of the current set of tariffs? 

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