But despite these promises, Americans are likely in for a period of consumer austerity no matter who wins the election. The only question is what form this austerity will take.

In somewhat simplified terms, the fundamental policy choice is between conventional or “neoliberal” austerity, progressive-environmental austerity, and what might be called “catch-up reindustrialisation” — a policy shift in favour of investment over consumption to rebuild the US industrial base and shore up America’s long-term security and economic prospects, particularly vis-à-vis China. In my view, the third option is both the necessary and most desirable choice, yet all three present their own difficulties and complications. The fact that all these choices involve some level of austerity doubtless contributes to the increasing bitterness of American politics.

Let’s start by considering neoliberal austerity. Conventional budgetary concerns have resurfaced with the inflation spikes of recent years and interest rates still near their highest levels since 2008. In the past, deficits significantly above 3% of GDP were only experienced during major economic downturns or in wartime. In 2023, however, the United States ran a roughly 6% deficit with a relatively low unemployment rate of around 4%. While paranoia about the US national debt has always proved baseless in the modern era, the limits of the present trajectory are becoming more visible, as interest payments take up greater and greater percentages of government spending.

The question for deficit hawks — today and in the past — is whether they are in fact primarily concerned with reducing the deficit. In America, this pose is often, if not typically, disingenuous — rhetorical cover for an ideological project of shrinking the state rather than responsibly balancing revenues with expenditures. Hence the most strident deficit hawks are almost invariably the most eager tax cutters. Or, perhaps more accurately, the most aggressive tax cutters often masquerade as deficit hawks but have little real interest in responsible fiscal policy.

Today, with federal tax rates at low levels, any serious deficit reduction programme would have to consider tax increases. The rates themselves may not even be the key issue: taxing corporate profits in the country where they are earned, or closing various personal loopholes, may have a greater impact at this point. But these items are largely excluded from the “deficit” agenda, especially among Republicans, who continue to indulge in fantasies that tax cuts will “pay for themselves”, despite the manifest failure of the Bush and Trump tax cuts to generate meaningful growth.

Instead, the conservative focus remains entirely on cutting spending. The problem here is that, within the realm of political plausibility, there is not all that much to cut. According to the most recent numbers from the Congressional Budget Office, “mandatory spending” (mostly Medicare, Medicaid, and Social Security) accounted for $3.8 trillion of the $6.1 trillion 2023 federal budget. Defence spending added another $800 billion, constituting almost half of “discretionary spending”. Interest costs were an additional $700 billion, contributing to a total deficit of $1.7 trillion. The bottom line is that, even if all $900 billion of non-defence discretionary spending were miraculously cut — zeroing out transportation, education, veterans’ benefits, the justice system, and scientific research — that would only reduce the deficit by about half. Significant deficit reduction must therefore involve cuts to the most politically sensitive areas: defence and entitlements.

Given China’s emergence as a peer competitor — and one with a massive industrial-base advantage — cutting defence appears to be off the table. On the contrary, the ranking Republican on the Senate Armed Services Committee, Roger Wicker, has proposed increasing defence spending to 5% of GDP, up from the current level of 3%. The reasons are clear: China built 21 submarines last year, while the United States struggled to build one; it will take up to seven years to replenish certain munitions stocks used in Ukraine, and analysts estimate that the United States would be out of some critical weapons within a week in any active conflict over Taiwan. One reason the US Navy has not been able to better protect Middle Eastern shipping lanes from recent Houthi attacks is a concern that the increased use of certain munitions there would compromise readiness for other potential conflicts.

Simply throwing more money at the Pentagon and incumbent defence contractors will not solve these problems: serious procurement reforms and broader industrial policy measures are necessary. And yet there is little doubt that America’s security situation is more perilous than it has been for generations. Legacy ideological commitments further complicate these issues. The most aggressive “deficit hawks” — such as Nikki Haley in the Republican Party or various centrist Democrats — also tend to be the most fervent supporters of interventions in Ukraine and elsewhere to uphold a “US-led liberal international order”. Although Haley and others typically prefer to imagine that foreign policy and economic policy are distinct domains, their interventionist commitments nevertheless preclude any significant cuts to defence spending.

That leaves Social Security and Medicare. Cutting Social Security is so politically toxic that Trump has completely distanced himself from the proposals of George W. Bush and Paul Ryan, once hallmarks of conservative economic policy. Republican congressional leadership also notably refused to endorse entitlement cuts in the last midterm elections. Even if Social Security cuts were politically viable, however, there has been little serious effort to think through the effects.

Significant cuts would mean workers would have to defer their own consumption, either to save more for their own retirement or to keep their elderly parents out of poverty, creating a drag on growth and complicating deficit reduction efforts. Although Social Security is structured as social insurance rather than welfare, the benefit formulas are somewhat redistributive, so major cuts would probably result in a further shift of wealth from lower-income people, with a high propensity to spend, to affluent savers, with a lower propensity to spend.

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In the past, advocates of “privatising” Social Security sometimes argued that allowing individuals to manage their own retirement savings would enable higher returns and boost growth. But the Social Security programme functions less as a professionally managed pool of capital, like the public pension funds common in many other countries or in US states, and more like debt-funded consumption stimulus. Eliminating Social Security, therefore, is not simply a matter of distributing a pool of assets to individual accounts. Furthermore, if the goal were simply to maximise returns, the Social Security “trust funds” could be authorised to make public and private investments beyond US Treasury securities. But the same small-government ideology that calls for cutting Social Security also resists giving the government the authority to make such investments, which could distort “market signals”. Devolving all responsibility to individuals, on the other hand, would magnify the impact of market volatility for each household and likely require further increasing savings. At the same time, the government would probably still be called upon to bail out retirees — whether they saved prudently or not — during major stock market crashes.

A more practical approach might aim to maximise the value derived from the existing programme rather than cutting it. Senator Vance was roundly criticised for saying that more should be done to enlist grandparents to assist with childcare. Yet there are a number of serious proposals to use Social Security to incentivise childcare or otherwise better support the sharing of resources within extended families.

The other major area perpetually on the chopping block is health care. This would appear to be more fertile ground: the United States spends 17–18% of GDP on health care, by far the most in the world, to achieve overall public health outcomes that are decidedly mediocre. Spending on health care programmes composes about a quarter of the federal budget. Surely, the system could be more efficient?

The problem, once again, is that ideological motivations are at odds with practical solutions. Those most eager to cut health care spending tend to be those most committed to “market fundamentalist” ideology, who tend to ignore the possibility that increasing state intervention might be necessary to control costs. But marketisation, in practice, has generally failed to control costs and, in theory, there is little reason to expect that it should. As the economist Kenneth Arrow demonstrated back in 1963, normal market dynamics do not apply to critical aspects of health care. Ordinary competitive and pricing dynamics are often absent, and the sector is characterised by deep information asymmetries and network effects.

The irony is that even practical incremental steps to reduce health care costs, such as government negotiating prices with pharmaceutical companies or hospital monopolies, or better regulating parasitic middlemen such as “pharmacy benefit managers” (PBMs), are generally resisted by the same people who claim to be most concerned about reining in spending. As a result, “marketisation” in the US context has simply meant a refusal to employ the state to control costs, contributing to a cycle of expanding subsidisation.

In sum, the concerns of deficit hawks are real enough when it comes to health care, Social Security and defence, but the politics around these concerns remain insincere and ineffective.

A similar pattern prevails in progressive environmentalism, another sphere in which legitimate concerns have been pressed into the service of a counterproductive politics. In the United States, unlike in Europe, true “de-growth” austerity has become so discredited that most politicians have run away from it, though the impulse still exists among many NGOs and activists. Yet even if American progressives, for the most part, are not looking to shut down modern agriculture, discourage having children, or revert to hand-washing their laundry to stop climate change, they are eager to restrict consumer choices and divert public resources to promote renewable energy and electric vehicles. The Inflation Reduction Act, which includes most of the climate-related subsidies passed during the Biden administration, is estimated to cost somewhere between $800 billion to $1.2 trillion over 10 years. The actual cost is unknown, because some of the IRA’s tax credits are uncapped and theoretically unlimited — but the “energy transition” is certainly expensive.

The necessity of such costly carbon reduction efforts is often presented as beyond ordinary politics — only pathologically greedy science-deniers would oppose taking action to avert a global climate emergency! Yet while environmental concerns are seemingly universal, the environmental movement remains deeply partisan. There is no getting around the fact that climate activists frequently demand sacrifices from ordinary people while ignoring the behaviours of ultra-wealthy donors and displaying clear sectoral biases. The farmer, the coal miner, the exurbanite, and so on are all called upon to make difficult adjustments to meet various arbitrary emissions targets. But the billionaires who shuttle between multiple estates on private jets are never expected to change their lifestyles to save the planet, except perhaps to donate to the climate NGO complex. Wind and solar fields are supposedly essential — but not within sight of Nantucket. Fossil fuel companies are demonised, but tech giants whose server farms consume more and more energy are largely exempt from such criticism, as long as they make the right noises on ESG. Likewise, the environmental movement has fought to impose more and more regulatory burdens on manufacturing and heavy industry, all while turning a blind eye toward pollution offshoring to China and elsewhere.

In fact, the history of the American environmental movement and its political alliances is rather sordid. In its earliest days, environmentalism was associated with population control and even eugenics. After rebranding as an emissions control movement in the second half of the 20th century, environmental groups first teamed up with coal and utility deregulators against nuclear power. Then they took money from natural gas and Enron for campaigns against coal. Recent years have seen a turn against all fossil fuels, though nuclear has once again been grudgingly readmitted to the decarbonisation push. Ironically, the most significant opponents to new renewable energy construction are often legacy environmental groups, who helped construct a legal regime in which it is relatively easy for third parties to challenge any new energy installations on environmental grounds. This is one reason why far more solar fields have been built in red states like Texas compared to ultra-progressive states like California.

Beneath all the moral preening, then, the green movement is fundamentally just another interest group pursuing a relatively narrow, partisan agenda. It is, and always has been, primarily composed of affluent and professional-class individuals in “asset-light” corporate sectors, as well as opportunistic energy players. In many ways, it is the ultimate neoliberal coalition: a global, post-political orientation, overseen by technocrats operating through nondemocratic transnational organisations and financial markets.

To be sure, the fact that the environmental movement is a self-interested lobby does not necessarily mean that its core claims are false, even if some activists have engaged in alarmism and exaggeration in the past. Indeed, the absence of effective environmental policy is already imposing its own form of austerity, as seen in rising home insurance prices across the United States, to which climate change is almost certainly a contributor. Yet being right about some things does not make the environmental movement any less of a lobby.

Oddly, the green movement would probably have more success in the United States if it simply accepted its corporate-lobby character. Certainly, a movement that focused less on moral preening and NGO fundraising probably would not have made the mistake of trying to pursue decarbonisation while demonising nuclear energy for decades. It also might be more practical about encouraging the transition to clean energy and electric vehicles.

The current push into EVs, based on a combination of tax subsidies and state-level mandates, is already sputtering. Sales growth has slowed dramatically, and auto companies have shelved plans for new models. A more serious approach would recognise that the United States — unlike, say, Norway — is a large country with a weak rail network; people regularly drive long distances; and combustion vehicles’ rapid refuelling remains a significant advantage. At the same time, the United States — unlike, say, China — has little capacity to enforce top-down changes in consumer preferences and infrastructure construction. Two years after Congress appropriated billions for charging stations, not a single one has been built. A more practical agenda would have emphasised vehicles such as plug-in hybrids, which could have a major impact on emissions and would create incentives for the private sector to add more charging stations, while also appealing to consumers who desire flexibility. Such thinking, however, would require the green movement to abandon the pretence of moral purity and accept the compromises and coalitional balancing of any industry lobby.

The more likely outcome is the continuation of the status quo, in which lavishly funded NGOs persist in their attempts to push badly designed policy on a reluctant populace. Whereas neoliberal austerity is essentially an ideological movement trying to appropriate the rhetoric of economic interest, progressive environmentalism is a class- and sector-based lobby seeking to brand itself as a moral-ideological cause. Both will remain ineffective as long as they continue to labour under these self-delusions.

The third option is, for lack of a better name, catch-up reindustrialisation. As with environmental “austerity”, this does not involve conventional budgetary austerity — it may in fact require more public spending — but it does entail a shift away from maximising consumption and towards increasing investment in productive capacity. Trade measures such as tariffs intentionally raise prices, at least in the immediate term, while funding for industrial policies may come at the expense of other budget priorities.

The need for a serious industrial policy programme has become more pressing for various reasons. The first is national security. As discussed above, America’s defence industrial base has eroded considerably. By contrast, China’s manufacturing advantage is overwhelming, which has created supply-chain dependencies in a number of critical commercial areas as well. Surrendering sectors to foreign competitors often entails losing more than “commodity manufacturing”; it also means losing technological prowess and workforce skills. The United States need not look to dominate every manufacturing sector, but it will be impossible to fix the defence industrial base without improving the broader industrial base.

In addition, it is slowly dawning on American politicians that it is impossible to avoid having an industrial policy; the only question is whether to pursue one’s own, or to accept the imposition of someone else’s. China, in particular, by massively subsidising capital investment and export industries, has disadvantaged and discouraged investment in manufacturing and capital-intensive sectors in the United States. And by refusing to intervene, the United States has simply allowed Beijing to pick winners and losers.

Moreover, the fact is that, even without a self-conscious industrial policy, the US government has had to subsidise fallen national champions such as Boeing in recent decades. What has been missing is a serious plan to maximise the effectiveness of these investments, in large part because the post–Cold War neoliberal consensus precluded any open consideration of industrial policy.

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According to this conventional economic theory, industrial policy will always be inefficient, value-destructive, and a drag on growth because it interferes with market-driven capital allocation. If private-sector actors require government support or prodding to make an investment, the theory goes, then it must be a poor investment, even if necessary for non-economic reasons such as defence. These models assume, however, a form of economic rationality in which firms operate to maximise profits. In reality, firms operate to maximise shareholder value. The two may occasionally overlap, but they are not the same. As a result, firms often maintain hurdle rates well in excess of their cost of capital, and pursue financial engineering strategies instead of investment. This behaviour may be irrational in the sense of forgoing profits, but it is often eminently rational in the sense of maximising equity valuation. The net result, from a national perspective, is chronic underinvestment, particularly in capital-intensive sectors where foreign industrial policies drive down returns. This is one reason why the relationship between financial returns and productivity breakthroughs has always been more tenuous than standard models would predict, and why industrial policy can spur economic development by dislodging financial rentierism.

Government investment promotion, therefore, is not necessarily value-destructive. It may in fact enable investments whose returns, while below private sector hurdle rates, are still positive. These investments, in turn, can form the basis of new companies, technologies, and industries, as the many historical examples of successful industrial policies attest, from Korean autos to Taiwanese semiconductors to early Silicon Valley.

From this perspective, successful industrial policy is perhaps best thought of not simply as consumer austerity but rather as “deferred gratification”, or investment in the future. Notably, the Chinese government has actively suppressed domestic consumption in favour of industrial investment throughout the last several decades, and yet, contra Western economic orthodoxy, has presided over a miraculous rise in living standards, in addition to its growing geo-economic power.

That is not to say, however, that the path forward for the United States will be easy. On the contrary, American industrial policy faces a number of obstacles and complications. First, US government agencies have relatively little expertise in designing and executing industrial strategy, certainly when compared to their Asian counterparts. The US government itself is poorly structured for this end, with limited institutional capacity to integrate foreign policy and economic policy.

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Second, advocates of US industrial policy often have diverging goals in mind. Some focus on the defence industrial base, others on the “energy transition”, others on “creating jobs”. In a Venn diagram, these circles would intersect, but they are not identical. Such diffuse ambitions may impede both the passage and implementation of successful industrial strategy, as previous criticisms of “everything bagel” industrial policy have shown.

Third, the largest corporate and financial actors in the US are at best ambivalent about industrial strategy. They are deeply dependent on China, and are also prime beneficiaries of the “fissured economy” model in which intellectual property rents are separated from capital investment and labour. Furthermore, policies like the Chips Act passed in large part due to the support of incumbent industry lobbies, though policy design suffered in various ways as a result. It remains to be seen whether the United States can pursue industrial policy in critical areas that, unlike semiconductors, do not have powerful incumbent lobbies.

Finally, and perhaps most importantly, a critical ingredient present in the canonical East Asian industrial policy success stories is absent in the United States. Namely, the “Asian Tigers” each used global export markets, particularly the US market, as a competition check: companies that increased export share received more industrial policy support; those that did not were cut off. Without the export-market check, there is an increased temptation to subsidise “zombies”, rather than orient industrial policy investments toward improving productivity and competitiveness. US industrial strategy, therefore, may need to place greater emphasis on stimulating domestic competition. Another option involves using government procurement and investment to create milestone-based contests. In Operation Warp Speed, for example, the government offered contracts only to vaccine developers who met certain thresholds, such as Moderna and Pfizer. Unfortunately, such contracting models remain more the exception than the rule in US policy.

Thirty years after the end of the Cold War, it is clear that the United States squandered its unipolar moment, not only via quixotic foreign policy interventions but also through imprudent economic policy. Deluded by abstract and idealistic theories, American leaders offshored the country’s industrial base to what is now its greatest rival, in order to support debt-funded consumption and financial asset bubbles. The result is a new era of great power competition, massive public and private debt loads, and an economy dominated by software monopolies that have done little to improve productivity. In the next few decades, America will have to commit more resources to addressing these problems. If it fails to do so, an even more drastic austerity will eventually be imposed upon it, as an already strained empire collapses completely.

Perhaps these developments merely represent the swinging of the culture war pendulum back from the “Great Awokening” of 2020. But it’s worth exploring another possibility: that something larger is happening, outside the culture wars, motivating shifts in attitudes beyond the usual conservative audiences. It should not be forgotten that the incident precipitating the latest round of campus controversies — Hamas’s October 7 attack against Israel — was a foreign policy issue. In the United States, Israel-Palestine tends to be treated almost entirely as a figment of the domestic culture war, as has been in this case. But the latest round of violence takes place in a context very different from that of the recent past: America no longer has unquestioned military supremacy, primarily because of its declining industrial base. The Russia-Ukraine war has now lasted for two years, and replenishing US ammunition stockpiles used in that theatre could take up to seven. Estimates suggest that, in a military conflict with China, the United States would be out of critical ammunition in just a week. China built 21 submarines last year; the United States struggles to build more than one. In sum, America is not prepared for a major conflict anywhere, and in the face of coordinated attacks from Russia, China, and Iran and its proxies, US and allied forces could quickly run out of materiel.

These statistics may seem far afield from campus politics. But it is worth recalling that foreign policy issues — the Cold War battle for technological supremacy against the Soviet Union — were critical in shaping American higher education as we know it today. Now that great power competition has re-emerged, academic culture wars may take on new dimensions. This historical perspective might also offer some insights on reforming educational institutions, a revolution extending well beyond culture war sniping on DEI, and into the entirety of the American political economy.

The Second World War and the Cold War shaped American education in profound ways, including in its most controversial and contradictory social valences — meritocracy and affirmative action. The need to educate the best and brightest from all backgrounds to ensure technological leadership featured prominently in Vannevar Bush’s Science, The Endless Frontier, the 1945 report which laid the foundations of the modern American research system, giving rise to institutions such as the National Science Foundation and similar bodies. Bush placed universities at the centre of national technology research, called for increasing their funding, and argued: “If ability, and not the circumstance of family fortune, is made to determine who shall receive higher education in science, then we shall be assured of constantly improving quality at every level of scientific activity.”

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Bush’s vision would be realised in the ensuing decades. The combination of the GI Bill of 1944 (which covered tuition for veterans), and the post-Sputnik National Defense Education Act of 1958 greatly expanded attendance at and funding for colleges and universities. And although the SAT originated in the Thirties under Harvard president James Conant, standardised testing became increasingly prevalent as higher education was “democratised” and “rationalised” during the Cold War. Thus, driven in large part by great power competition, university education went from a narrow, elitist pursuit — led by the Ivy League and “Saint Grottlesex” feeder schools, along with regional replications — to a national and meritocratic endeavour. In 1940, around 5% of the US population had college degrees; that number has increased in every decade since and approaches 40% today. Meanwhile, Cold War competition also played a role in the advent of affirmative action, which has since evolved into “diversity, equity, and inclusion” programmes and the broader phenomenon of “wokeness”. Although foreign policy was certainly not the primary motivation of civil rights legislation, national security arguments were frequently used to justify it. Conservatives tend to locate the origins of wokeness in the critical theory of the Frankfurt School, while progressives focus on centuries-old legacies of racism, as in the “1619 Project”. But perhaps neither side has given sufficient attention to the role of great power competition in the mid-20th century.

To summarise a well-known history, segregation quickly became an international problem in the Cold War context. Soviet propaganda exploited the persistence of Jim Crow among audiences in the Global South, which glaringly undermined America’s own efforts to present an image of freedom, opportunity for all, and human rights. For hawkish liberals, civil rights was very much a foreign policy issue. Furthermore, although the origins of affirmative action are controversial — there is still some debate over what President Lyndon Johnson meant by the phrase — administrations of both parties highlighted such policies for international audiences when responding to the Soviets.

To some extent, then, the modern American education system was built to defeat the Soviet Union, both in terms of science and technology leadership as well as moral authority. It is also not surprising that both meritocratic education and affirmative action would drift from their original intentions as the Cold War faded into the “end of history”.

In the decades since Vannevar Bush’s report, the idea of meritocratic universities, open to all, gradually metamorphosed into “college for all”, and even “Yale or jail”. In light of America’s deeply entrenched small-d democratic passions, it was perhaps inevitable that the notion of universities being open to anyone with ability would eventually come to mean that everyone should attend one. If college is open to anyone with ability, after all, then anyone who does not go to college must be lazy or an imbecile. So American primary and secondary education became explicitly oriented around “preparing students for college”, meaning a four-year liberal arts degree, which came to be seen as essential for simply entering the middle class. Vocational tracks were stigmatised as casting children into intellectual and professional oblivion — and, besides, why go to “trade school” when the trades were in decline?

The neoliberal turn further entrenched the “college for all” mentality. The Chicago school of economics notion of “human capital”, which conceptualised training as a form of input capital, gained prevalence as deindustrialisation progressed. In theory, human capital simply means that the knowledge, skills, and other attributes of workers have economic value. In practice, it promised that education could substitute for physical and investment capital, and conveniently rationalised the notion that “more education” would address the challenges related to deindustrialisation and the “fissuring” of the US economy (and seemingly just every other economic problem). For various reasons, politicians and business leaders on both Left and Right embraced the sectoral shift away from capital intensive “Fordist” production in the late-20th century. The story that they sold to voters — and told themselves — was that, although nothing could or would be done to “bring the factories back”, the government would support more education for “the jobs of the future”. Americans would do the brainwork in the new “information economy”, while “commodity production” was offshored. In this paradigm, of course, the apparent value of university education only increases.

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Unfortunately, many of these illusions have not survived contact with reality. The “information economy” jobs of the future never materialised at the levels promised. The tech industry, relative to its profits and market capitalisation, employs relatively few people — unless one counts driving an Uber — and has delivered notoriously underwhelming productivity gains. Perhaps simply by the logic of supply and demand, the value of college degrees appears to decline as they become more common. While still significant, the economic advantages of a college education have fallen over time, even as student loan debt has exploded. Furthermore, the record of universities — fundamentally medieval institutions — at preparing students for the workforce is questionable at best. Increasing university enrolment has not always meant that more students were meeting higher standards, but rather that academic rigor and quality were being sacrificed to accommodate more tuition-payers. At any rate, it would be hard to argue that the quality of American intellectual life has improved with the expansion of university education. Instead, the entire college apparatus has become a bloated system that seems to badly misallocate resources while heightening inequality. Meanwhile, the original objective for expanding the universities — competition with the Soviet Union — disappeared during the end of history.

The affirmative action component of education, likewise, quickly evolved beyond its original justifications. Initially conceived as an understandable if somewhat ham-fisted attempt to rectify legacies of slavery and segregation, the intended beneficiaries were African American descendants of slaves. This group was essentially the entirety of the black population in the United States in the Sixties, which was then a little over 10% of the total US population. But around the time of major civil rights legislation, new immigration laws were also passed, dramatically expanding immigration. The non-Hispanic-white share of the population fell from about 85% in the Sixties to 58% today (among American children, the share is now less than half). The black population has also shifted, including many African immigrants who were never victims of slavery or segregation; today, Nigerian immigrants have above-median earnings. Nevertheless, affirmative action continued to expand along with the non-white population: from a relatively targeted programme aimed at about 10% of Americans, who had experienced state discrimination in the immediate past, it became an elaborate system for managing “diversity” in an increasingly “majority-minority” country. As globalisation gained momentum, foreign students could also benefit from simplistic racial categorisation, with the added benefit, for universities, that many paid full tuition.

Other emanations from civil rights had unexpected effects on education. The Supreme Court decision Griggs v. Duke Power Co., known mostly for establishing that seemingly neutral employment practices could be in violation of the Civil Rights Act if they resulted in a “disparate impact”, directly concerned employment testing. With the decline of such testing, employers increasingly turned to college degrees (and the relative ranking of universities) as indicators of graduate ability. This solidified the economic importance of the university system and its hierarchies. Meanwhile, other court decisions (and some state referenda) barred hard racial quotas and other forms of affirmative action. Universities did not abandon these programmes, however, but pursued them through ever-more opaque methods (applicants were credited for “overcoming adversity”, or universities were allowed to consider the effects of diversity on the student body). The result was that the substance of the “diversity” regime remained intact, but its logic appeared increasingly obscure and arbitrary.

Decades of mission drift have thus left universities in an impossible position. On the one hand, they function as the main sorting mechanisms for employers at the high end of the economy. On the other, they are supposed to be the main sources of “human capital” for all of society, saving the middle class through “more education”. They also retain, at least in theory, the goal of advancing science and technology, and have added functions around applied, corporate-funded research with the disappearance of the large corporate labs (e.g. Bell Labs). Some consider themselves start-up incubators as well. At the same time, they have appointed themselves to manage the diversity of an increasingly fractured populace, even though they cannot explicitly articulate or openly pursue that purpose. It is probably not a coincidence that wokeness erupted amid this confusion, and after the original rationale for meritocracy — great power competition — seemed to have vanished. To be charitable to academia, one could argue that society expects far too much from universities today, and it is little wonder that they seem to be performing worse and worse at each task.

In light of this history, the reform proposals of both anti-woke liberal and conservative critics seem inadequate. Even if this provisional anti-woke alliance can rein in progressive excesses, the deeper confusion surrounding the universities’ purpose cannot be resolved entirely on the culture war battlefield — or even by reforms limited to the universities themselves.

Harvard professor Steven Pinker, a prominent representative of the liberal camp, illustrates the limitations of the liberal perspective in a tweet proposing five reforms. Some of his recommendations, such as bolstering free speech policies by prohibiting forceful takeovers of buildings and interruptions of lectures, seem like basic common sense. Others, such as disempowering DEI bureaucrats, should be. But two of them are inherently in tension: discouraging the groupthink associated with intellectual “monocultures” will at least occasionally require abandoning his call for institutional political neutrality. Left to its own devices, the Harvard faculty will almost certainly remain a political monoculture, as it already is. To remedy this, Harvard’s administration would have to undertake some direct or indirect affirmative action for conservatives. The question of ideological diversity, then, seems to recapitulate the liberal dilemma over racial diversity. Is actively promoting diversity merely levelling the playing field, or benefiting the whole university community through exposure to under-represented viewpoints? Or is it just unfair discrimination, enforced by, in Pinker’s words, “bureaucrats responsible to no one”?

At the level of intellectual diversity, discouraging monocultures becomes even more complicated. There are no phrenologists at Harvard, for example, and few, if any, climate sceptics, creation scientists, or “human biodiversity” scholars, not to mention orthodox Freudian psychoanalysts or Marxist economists. Should the administration intervene to employ professors with these views? The faculty would doubtless say that the science is settled on these topics, and inviting dissident voices would only promote error over truth. But who gets to decide? How does one determine which monocultures are pernicious and which ones happily represent the triumph of truth over falsehood. Liberals do not really have an answer, which is one reason why their institutions have all deteriorated in recent decades. Ultimately, liberal value neutrality is always a fiction. It may be a salutary and desirable fiction, and probably would be a beneficial one for universities to recover. But such neutrality only functions within a horizon defined by a shared purpose — its own monoculture. Vannevar Bush and the Cold War liberals had such a purpose; today’s liberals do not, or at least have not been able to articulate one.

Anti-woke conservatives, on the other hand, have a clear goal: they seek to use the universities to inculcate conservative values, whether by refashioning red-state universities, starting new ones, or other means. The problem is that this vision is too narrow; it ignores the structural sources of universities’ power and the system’s underlying problems. Although Democrats are the party of education, conservatives often have far more romantic notions of the power of universities and professors. Look no further than the common conservative critiques of wokeness, which emphasise the role of academia. Not surprisingly, then, conservatives tend to imagine that hiring more conservative professors is the main thing required to reshape American culture.

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In reality, however, most evidence suggests that professors have relatively little influence on students’ ideologies, and there is little reason to think that more conservative faculty or academic institutions would make much of a difference beyond the campus. It is worth recalling that conservative colleges already exist, such as Hillsdale College, and there are more outside-funded conservative student organisations operating at, say, Harvard today than there were 20 years ago. Yet while Hillsdale is important to conservatives, and its students are well-represented among congressional staff, the brutal fact is that its influence on larger elite opinion is negligible. Likewise, while conservative campus organisations may be important nodes of personal networking, they obviously have not done much to change the trajectory of elite universities.

Conservatives’ inveterate idealism tends to blind them to the real functions and sources of the power of elite universities. The status of top institutions is not derived from their stellar humanities departments or pedagogical commitment, but rather from the signalling value of their credentials, the wealth of their alumni networks, and their relative importance to corporate and government research apparatuses. Everything else is marketing. Thus, changing university culture without changing any of the system’s underlying dynamics, which seems to be the current conservative approach, seems unlikely to succeed. Moreover, even if such an approach were to succeed, it would offer little to those who are not cultural conservatives: substituting identitarian progressivism with Straussian political theory or some other conservative hobbyhorse would do little to create a better prepared workforce or advance science and technology.

Instead of an exclusive focus on superficial culture war issues, educational reformers today should recall the last major, intentional reorganisation of the American university system that occurred during the Cold War. We must be cognisant of how that legacy has contributed to current problems, but should also recognise its value. Reforms that meet the needs of great-power competition are more likely to be far-reaching and enduring than endless battles over the universities’ symbolic orientation.

The primary difference between then and now involves the shifting demands of great-power competition. After the Second World War, US manufacturing dominated the world, but American primary research and basic science needed to be strengthened. The reforms of Vannevar Bush and the post-Sputnik legislation thus increased the funding for and importance of universities. Today, however, the situation is essentially the opposite. Basic research is still important, of course, but America’s main vulnerabilities lie in its supply chain and manufacturing dependencies on China. Its leadership in pure research is also most at risk in capital-intensive sectors that have been commercially abandoned due to foreign manufacturing subsidies, such as shipbuilding, nuclear reactor components, and perhaps even commercial aviation. Further strengthening universities will do little to address these problems; the focus should shift to other institutions.

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Affirmative action's fatal flaw

By Ayaan Hirsi Ali

Americans in the mid-20th century probably could not have imagined the country’s loss of manufacturing dominance. They also underappreciated the importance of corporate labs, which Bush considered too focused on incremental improvements rather than fundamental breakthroughs. But institutions like Bell Labs — whose scientists won 10 Nobel Prizes — RCA Labs, Xerox PARC, and others made immense scientific contributions. These labs were lost in the late-20th century as a result of increasing foreign competition, the growing capital intensity of research, and shareholder demands for short-term financial returns. Universities, by default, picked up many of their functions, but university research productivity has been on a declining trajectory for decades. Instead of funnelling ever more money into dysfunctional universities, government and corporate funders should look to recreate, at some level, the major corporate labs. Such labs are better suited to work that combines innovation with production and manufacturing, and they could allow for better collaboration between multiple universities as well as researchers from corporations and start-ups. Insulating this research from faculty politics as well as undergraduate admissions and credentialing could also reduce pressures against meritocratic hiring.

The Bell Labs of 1950 is not coming back, of course, because Bell Telecom is not coming back. Large corporations are no longer incentivised to invest in quasi-independent research labs, and start-ups lack the capital for such projects. Nevertheless, government could work with the private sector to pioneer new labs and research facilities that could fill the holes left by the lost corporate labs. Another model is offered by the Broad Institute, a collaboration between Harvard and MIT, which was a leader in the development of CRISPR technology. Such institutions could be co-located with universities, and share personnel, but institutions with their own unified and coherent research missions, along with their own independent governance and funding structures — separated from undergraduate admissions and credentialing — would be an improvement over housing more programmes within already sclerotic universities.

At the same time, policymakers should continue existing efforts to reduce the importance of universities in employment credentialing. States such as Utah and Pennsylvania have already removed bachelor’s degree requirements for state government positions; hopefully other states will follow suit. Moreover, contra Griggs, direct employment testing should be encouraged to open up pathways to hiring at top-tier companies outside of elite college recruiting. Allowing five or 10 universities to be gatekeepers of the highest echelons of the U.S. economy has hardly improved “equity” and “inclusion”. If universities were less central to elite credentialing, the importance of micromanaging the “diversity” of their admissions would also decline.

Finally, instead of focusing on replacing the faculty of liberal arts institutions, or starting new ones, such as UATX, reformers should seek to build institutions that meet workforce or other practical education challenges. Elon Musk has floated the idea of starting new K-12 math and science schools, and this approach also seems more likely to succeed at the higher education level than churning out more underemployed liberal arts graduates, whether woke or anti-woke. To be sure, politicians have lavished praise and funding on community colleges and vocational training for decades, to little avail. The existing community college and apprenticeship tracks, even if some students can go on to do relatively well financially, do not offer access to prestigious professions. But a new set of applied science training institutes might have a better chance, especially if they solve an actual workforce challenge and are part of a larger ecosystem for training and credentialing outside of the universities.

On the whole, “college for all” has been a disaster economically, intellectually, and politically. Too many people, too much money, and too many research functions have been pushed into universities that have no business being there. It may have been reasonable, in the Forties and Fifties, to believe that strengthening universities was necessary to maintain America’s technological and economic leadership. But today, the opposite course is required. We need the universities to do less, not more. A common objection to this argument is that technology has become so much more complicated and specialised that more education is simply necessary. But the connection between “more education” and the “information economy” has always been overstated. One does not need a four-year degree, much less a postgraduate degree, to become skilled at “coding”. Two of America’s most successful computer technology entrepreneurs — Bill Gates and Mark Zuckerberg — famously dropped out of Harvard. Many successful recipients of the Thiel Fellowship intentionally avoided college.

Conservatives and liberals who remain devoted to more Romantic conceptions of the humanities will doubtless object to this ruthlessly instrumental approach to education. But breaking the university monopoly on credentialing and applied science has benefits for liberal arts purists as well. The “right-sizing” of universities would allow liberal arts colleges of various ideological orientations, whether Hillsdale or Oberlin, to compete with Harvard and Stanford on more equal footing. All of society would benefit if universities lost some of their exalted status. They are not the preservers of civilisation, guardians of truth, or reservoirs of moral purity. The more they are seen as practical institutions with practical functions, the less we need to worry about their ostensible values.

Although today’s crisis of higher education manifests primarily as another culture war battle, the issues go much deeper. Decades of institutional drift have left that system with multiple, contradictory purposes, none of which are being served effectively. If it is to be successfully reformed, American higher education must be reorganised to address the exigencies of great power competition that are emerging in the present.

The conventional inflation narratives are both flawed, however, and are increasingly deployed to cover a retreat to the comfort of traditional ideological divides. Summers and Furman, for example, are aggressively pushing to eliminate tariffs to counter inflation, even though Trump’s 2018 tariffs cannot account for accelerating inflation in 2021, and their repeal would offer at best small and temporary relief. Likewise, Democratic rhetoric against “corporate greed” and “price gouging” mostly takes the form of moralistic posturing and only obscures more serious concerns about industry concentration and lack of competition.

Moreover, each side’s preferred explanations for inflation seem at odds with their perceptions of its severity and staying power. If, on the one hand, a one-time spending bill is the main culprit, then the Fed should easily be able to manage inflation through interest rate hikes (already underway), and there is little reason to fear an out-of-control inflationary spiral. In an April 2021 interview, Summers argued that a one-off stimulus would alter long-term expectations and lead to persistent inflation because it signaled the advent of  “a new era in progressive policy”. But a year later, any such progressive paradigm seems dead and buried, and unless Democrats pull off a miracle in the midterms, it is likely off the table through at least 2024.

On the other hand, if “corporate greed” — read charitably as underlying structural problems in the economy — is the main driver of inflation, then it seems unlikely that the Fed will be able to contain it, except perhaps at the cost of a severe recession. If that is the case, then any future progressive fiscal expansion would have to be ruled out, given its devastating inflationary consequences, unless those problems are addressed.

Indeed, the question going forward is whether there are structural issues — aside from idiosyncratic supply chain problems — that will cause inflation to remain elevated and lead to stagflation (high inflation and low growth). Here, there are reasons for concern, although they do not fit neatly into either conventional narrative and so have received relatively little attention.

The most intriguing and potentially alarming trends are visible in the oil market. In December 2019, before Covid, global oil consumption was about 100 million barrels per day, and the price of West Texas Intermediate (WTI) crude hovered around $50-$60 per barrel. At that time, the US operating rig count was around 800 (around 2,000 globally), according to Baker Hughes. After the pandemic hit, in 2020, global oil demand fell to about 90 million barrels per day, prices collapsed and briefly went negative, and the US rig count hit a low of around 250. Oil demand recovered about half the lost ground in 2021 and is expected to return to 2019 levels of 100 million barrels per day this year. In December of 2021, WTI spot prices were around $75, rose significantly after the Russian invasion of Ukraine, and currently sit around $110. Yet the US rig count is still around 700 (of 1,600 globally). The last time oil prices were above $100, before the crash of 2014, the rig count was over 1,800 (3,600 globally).

This trajectory is difficult to square with inflation accounts based on excessive demand. Oil demand has still not exceeded pre-pandemic levels; it is supply that has lagged. Meanwhile, far from being “too greedy”, companies seem to not be greedy enough — at least in the conventional sense of maximising profits. Instead of reinvesting their earnings in drilling new wells, even at profitable oil prices, companies have returned cash to shareholders.

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Neoliberalism died before Ukraine

By Gary Gerstle

Some have argued that oil companies are not drilling because of the Biden administration’s environmental regulations. As a critic of those policies, I am sympathetic, but they cannot account for the larger phenomenon, including international drilling. Others have suggested that ESG investing requirements have prevented the oil and gas industry from accessing capital. While there is no question that ESG as presently constructed is a disaster, this does not explain why companies are not reinvesting their own earnings. There are some time-lag issues — wells cannot be drilled overnight — but prices have now been elevated for months. Oil futures are also over $80 through most of 2024, meaning companies can hedge future production.

The best explanation is, therefore, the simplest one: shareholders prefer that companies return cash rather than invest, a preference widely discussed among industry participants and observers. Oil companies, to quote Bloomberg’s reporting on this issue, have “responded to investors’ persistent insistence that they return cash to shareholders and not spend their cash flow on capex. . . . That means that we have under-invested in oil, which helps to lead to a higher oil price, but it also means that those companies do have much more free cash flow.”

Any serious analysis of today’s inflation must recognise the different dynamics at play across various sectors. The oil industry is not the same as the housing market, semiconductors, shipping, and so forth. Nevertheless, across industries, the trend of shareholders preferring cash returns over investment has been prevalent in recent decades. Corporate share buybacks, which dropped from previous highs during the pandemic, returned to record pace in 2021 and 2022, according to Goldman Sachs.

The oil industry is actually a late adopter of this cash-return model. Previously, exploration and production companies were typically managed to maximise their “net asset value”. This meant that, in the American shale boom of the early 2010s, companies were investing in drilling at levels far above their operating cash flow, using debt financing to fill the gap. After the crash of 2014, however, Wall Street gained additional influence over the sector. Ever since, the industry has maintained “capital discipline” and avoided negative cash flows.

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The West can learn from China

By Marshall Auerback

Economic theory assumes that companies are managed to maximise individual firm profits and, therefore, that they will invest to expand operations as long as expected returns exceed the cost of capital, and that they will compete with each other until profit margins approach zero. But economic theory has refused to grapple with the fact that maximising shareholder returns is not identical to maximising firm profits.

Financial market incentives may discourage competitive investment in favour of shareholder returns, as seen in the oil industry; indeed, the gap between firm hurdle rates and cost of capital is a distinguishing feature of recent economic history. In short, what economic theory presumes to be “rational” for a single firm may not be “rational” from the perspective of a diversified institutional portfolio manager. If anyone is too “greedy”, in other words, it is not corporations but shareholders. Or, more precisely, the incentives of financial managers may not be consistent with maximising overall output. This trend has led to an erosion of productive capacity and supply buffers, which has become painfully evident in recent years.

The same forces also encourage industry concentration through mergers and private equity “roll-ups” to preserve pricing power, as well as the separation of high-value intellectual property rents from capital and labour costs. The result is a bifurcated economy with high-margin “superstar” firms on one side and low-profit “commoditised” firms on the other. In an inflationary environment, this means that firms with large profit cushions, like superstar firms built on intellectual property rents, probably have the pricing power to maintain high margins. Firms without pricing power, like small-business restaurant franchisees, often have no profit cushions and must raise prices out of necessity.

Fears of stagflation have focused on a Seventies-style wage-price spiral, but the above considerations suggest that a greater concern today may be the threat of a “profit-price” spiral. In the Seventies, investment was discouraged by high taxes, strong unions (which directed profits to labour), and relatively robust antitrust enforcement. With low investment, increasing demand only led to more inflation rather than growth.

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The cost of liberal economics

By Mary Harrington

Today, we have low taxes, weak unions (although tight labour markets), and high industry concentration. These conditions, combined with shifts in corporate governance and financial management, have also discouraged investment — by facilitating extractive financial engineering, as in the case of the oil industry example. A scenario in which companies maintain returns in a stagnant economy by preserving margins while avoiding competitive investment is also more consistent with recent empirical findings. Corporate profit margins achieved a record in 2021 (though they seem poised to retreat somewhat in the coming quarters), and studies have found that rising corporate profits have contributed significantly more to inflation than labour costs. Employees may be able to manage some concessions in a tight labour market, but the data hardly suggest that is the dominant factor.

This sort of firm behaviour has a telling precedent: the modern tobacco industry. Since cigarette consumption began dropping in the Eighties, the basic model of tobacco companies has been to offset sales volume declines with price increases. This strategy works because tobacco companies face little competition due to industry concentration and regulations prohibiting advertising. Thus cigarette price inflation has averaged about 7% per year since 1997, while overall inflation during that time has been slightly above 2%.

The example is revealing because tobacco companies’ high cash returns and low capex requirements have historically made them attractive to financial investors, despite modest growth or innovation. Because of its dividend, Philip Morris was the highest performing stock of the 20th century, beating out far more technologically significant rivals. Guided by the incentives of financial markets, it would not be especially surprising to see more industries adopt the “stagflationary” behaviours of Big Tobacco.

To the extent that is the case, monetary policy alone will not be sufficient to heal the economy. Low rates since the financial crisis have supported asset bubbles but not high investment. Nor will demand-side policies work. As the last several months have shown, further stimulus payments are likely to allow companies to take profits without supporting sufficient investment or wage growth.

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Do we need a capitalist civil war?

By Joel Kotkin

Given the immediate-term salience of monetary policy debates, it is often forgotten that escaping the stagflation of the Seventies required not only a sharp rise in interest rates but also the “supply-side” reforms of Ronald Reagan. In this respect, an overlooked element of Summers’s critique of the Biden stimulus bill — that it was not simply too large but too weighted toward transfer payments — is especially apt, as is his call for “a kind of progressive supply side economics that emphasizes . . . public investment.”

Conventional supply-side policies like tax cuts, typically associated with Republicans, fall prey to the same financial dynamics described above, and have led primarily to increased shareholder returns and asset bubbles rather than increased investment in recent years. New supply-side approaches are required, such as the proposed funding for manufacturing investment contemplated in the COMPETES/USICA conference bill. The administration has also proposed other supply-side measures in areas such as housing, but previous efforts along these lines were weighed down by unpopular progressive wish-list items. Rumours that the administration is considering a cancellation of some student debt — with no accompanying reforms to higher education policy — suggest progressives still remain trapped in old welfarist paradigms.

Contrary to neoliberal disdain for tariffs and “hipster antitrust”, however, prudent competition and trade policy reforms will be necessary to boost domestic investment in a highly concentrated economy whose industrial base has eroded. And although progressive proposals for a windfall tax on profits would do nothing to solve supply-side problems, a tax on “windfall buybacks” may make corporate earnings reinvestment more attractive.

Even if inflation subsides more rapidly than expected, a new policy focus on the supply side is necessary. Avoiding stagflation simply by returning to “secular stagnation”, as Summers would put it, would only lead to further decline and likely a repetition of the same cycle in the future. Also required is the recognition that fundamental assumptions of economic theory — and the ideological approaches they inspire — no longer match the realities of America’s financialised economy.