As global chaos erupts — from Iran to immigration raids in Big Box parking lots — James Carville’s famous dictum echoes louder than ever: “It’s the economy, stupid.”

While next week we will turn our focus to the Middle East upheaval, this week’s economic data demands immediate attention — consumer spending down, housing starts declining, unemployment creeping upward. In a world where CNBC reveals more about global stability than CNN, understanding economic fundamentals becomes survival knowledge.

Despite the mounting warning signs, the US economy displays puzzling resilience. To try and sort it all out, economist Noah Smith joins us on this week’s WhoWhatWhy podcast. Smith, author of the widely read substack Noahpinion, argues that US resilience so far reflects deep institutional strength built over generations — great businesses and economic frameworks that won’t crumble overnight from policy shocks. 

Yet beneath this surface stability, Smith identifies troubling undercurrents — such as the “TACO” phenomenon (Trump Always Chickens Out) — that create dangerous policy uncertainty and curb long-term investment.

More alarming still is emerging capital flight — foreign investors questioning US economic seriousness for the first time since the 1970s. The traditional dollar-treasury bond relationship has decoupled, signaling unprecedented loss of confidence in American economic management.

Smith traces much of this dysfunction to social media’s destruction of American solidarity, creating tribal fear that technology will empower “enemy” groups rather than benefit all Americans. 

The conversation includes Smith’s stark warning: Without immediate fiscal austerity, spiraling debt could trigger sovereign default — an economic catastrophe that would require generational recovery. The question remains whether political will exists to prevent this scenario.

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Full Text Transcript:

(As a service to our readers, we provide transcripts with our podcasts. We try to ensure that these transcripts do not include errors. However, due to a constraint of resources, we are not always able to proofread them as closely as we would like and hope that you will excuse any errors that slipped through.)

[00:00:15] Jeff Schechtman: Welcome to the WhoWhatWhy podcast. I’m your host, Jeff Schechtman. If the US economy were a patient, some paramedic might feel it needed to be rushed to intensive care. The future of interest rates are a question mark. Tariffs are rewiring global trade patterns. Housing markets are stalling and home values declining. Research and innovation is grinding to a halt. Foreign students, the lifeblood of our universities and innovation pipeline, are barred or discouraged from entry. And unemployment is creeping steadily upward. Layer onto this economic turbulence the global perception of America as increasingly unserious, seemingly turning its back on the very technological and entrepreneurial innovation that once made it the envy of the world. How then, despite this cascade of crisis, is the economy still standing? Perhaps the answer lies not in conventional economic metrics alone but in a deeper resilience, a stubborn underlying dynamicism in American markets, businesses, and households, while perhaps we’re coasting on past success, tapping reservoirs of wealth, confidence, and institutional stability built over generations yet unable to renew them as they diminish.

If so, are we merely postponing an inevitable reckoning, or is this genuine strength and adaptability still present in the American economy? To unravel this paradox and peer through the noise, I’m joined by economist Noah Smith. Smith is one of our sharpest economic observers, a prolific thinker whose writings on his widely read substack, No Opinion, offer clarity amidst confusion. With deep insights into global trade, labor markets, technological innovation, and macroeconomic policy, he’s uniquely positioned to help us understand whether we’re teetering on the brink or simply facing another turbulent turn in America’s long economic story. It is my pleasure to welcome Noah Smith here to the program. Noah, thanks so much for joining us once again here on the WhoWhatWhy podcast.

[00:02:26] Noah Smith: Thanks for having me on.

[00:02:27] Jeff Schechtman: Well, it is a delight to have you here. Is the economy just remarkably resilient, or is there something else going on that we don’t understand, given how strong that it has been — the economy, the markets, et cetera — in light of a lot of potentially disturbing news?

[00:02:44] Noah Smith: Well, so first of all, you’re right that the American economy does have a tremendous amount of underlying resilience. We have basically great businesses, great institutions economically in America. And we spent 100 years building those. And it’s not going to be destroyed in a day. You’re not just going to flip on some tariffs, and then the whole thing just crumbles. America is not like that. And we’ve seen… We’ve had really big disruptions. We had COVID. We had the Great Recession. And those fundamentally failed to topple the US economy. And not only that, each time, we came back in many ways stronger than before. And so I don’t want to doubt the resilience of the American economy because it is tremendous.

However, that said, it’s also the case that the policies that Trump is doing, especially tariffs, are quite bad ideas and that currently there’s two main reasons why we haven’t seen much pain from this — yet.

The first reason is that these things take time to materialize. And although I think that I wouldn’t go so far as to say our economy needs to be rushed to intensive care, I’d say that a better metaphor might be that the air is slowly going out as a result of the tariffs. And you mentioned some of the warning signs, the worrying signs that are starting to crop up throughout the economy. And those are all there. There’s a bunch more purchasing managers’ surveys looking negative — expansion plans. You know, because tariffs, the tariffs that Trump has put on foreign goods haven’t really had time to even show up in the data yet, much less work their way through the system. A lot of the way the tariff harm manifests is that, for example, manufacturers can’t get the components and the supplies and the parts that they need. And so they stop making stuff. But that takes a few months. And logistics takes a couple months to really get hurt. So some of this is coming down the pipeline.

But the other reason why we’re not seeing things be as bad, especially in the markets as we had anticipated back in April after the Liberation Day tariffs were announced, is because of TACO, which is an acronym that some Wall Street guys  [Jeff laughs] made up meaning Trump Always Chickens Out. And Trump has paused the bulk of his tariffs so that now you’ve got a few tariffs, maybe the total trade weighted tariff amount if you weight relative to all the stuff that we buy is about 15%, which is high, but not nearly as high as Liberation Day tariffs were going to make it. Those were going to send it to closer to 40%. And so they’re only 15%-ish right now. And there’s the sort of jubilant sensation that Trump will always simply do whatever it takes to keep markets buoyant by pausing any tariffs that he announces as soon as the markets dip.

[00:05:41] Jeff Schechtman: There is the danger, of course, that as he does these things, each one of these things, even if he reverses himself and does this TACO routine, that each time it happens that it leaves some kind of a scar and that it will have some kind of cumulative impact.

[00:05:58] Noah Smith: That’s right. And so I think that there’s a few kinds of scars that can be left. The first kind is policy uncertainty. If you are a CEO or CFO or someone planning, you know, doing major capital budgeting decisions for big corporations, the more uncertain policy is, the less likely you are to commit to large five-year-long capital budgeting decisions. And so that will curb investment.

And when you curb investment, you curb hiring and you curb wages and you curb growth, and you curb all the things that are good in the economy. Investment is the most volatile part of the American economy. And so when you curb these things, you set the economy up for slow grinding sort of slowdown instead of an abrupt crash. And I think that we’re starting to see the results of some of that because policy uncertainty is just through the roof and historically is correlated with lower investment.

I think the second scar that you can leave is the international capital. So the people who decide where to park their money, which mostly bonds, right, which bonds to buy, have classically viewed the United States as the ultimate safe haven, even during the Great Recession, which was this massive worldwide economic crisis created by America and by the collapse of America’s financial system. Even during that, people were buying US Treasury bonds as fast as they could because that was the risk-free asset. It was this flight to safety, this flight to quality. We’re not seeing that anymore. We’ve seen interest rates and the dollar decouple. And that’s a wonky term. So let me explain what that means.

Usually, when US interest rates are higher, it means the dollar is stronger. The reason being because high interest rates lure bond traders to buy US bonds because they’re only thinking about the interest rate they can get. They’re not thinking about the default risk of the bonds because they believe America has no default risk. That was then. This is now. So what’s happening now is that we’re seeing the dollar fall even as Treasury yields have gone up. (A yield is an interest rate.) So Treasury interest rates have gone up, which means that this means that people are pulling their money out of America because they’re worried.

Now, it’s not a flood yet. It’s just a trickle. But capital flight, people deciding your country is a bad bet and just losing confidence in your country’s ability to manage itself and pulling their money out, capital flight is very bad for a country. And it’s usually something that we see in developing countries. And we rarely see it in rich countries. Once in a while, we do. We saw it a little bit after some things Nixon did in the ’70s. That’s the last time we’ve seen anything like this in America. But we’re starting to see a little bit of capital flight. And that is worrying. And that perception of the United States as a fundamentally unserious or unstable country is something that can linger long after Trump pauses all his tariffs.

[00:08:58] Jeff Schechtman: And one of the other impacts of that, one of the other things that is driving that, which you’ve written quite a bit about, is what it means for the future in terms of turning our back on technology and science and research and researchers coming from around the world.

[00:09:13] Noah Smith: Exactly. So those are just more signs that America is no longer serious about its own material wellbeing. I think that there was this idea that after the turbulence of the 1970s, America got its head screwed on straight. Central bank independence was solid. The Fed’s independence was solid. And the Fed would never really let inflation get out of hand. And while our government would borrow a lot of debt, the ’90s convinced people that if we really needed to, we could do austerity, and we could get the deficit under control. And then I think that those things are all being questioned right now, the fundamental bedrock ideas. Also, we were open to the human capital of the world, the smart people of the world. And that enmeshed us with the global system of knowledge industries and knowledge production, which is the most valuable part of a global economy. We held the commanding heights of the global economy, which is the knowledge production. Ideas came from here. Inventions came from here. Knowledge industries came from here. Tech was here. Biotech, advanced manufacturing, pharma, things like that. And also finance, you know, finance, too. Whatever you think of the finance industry, certainly, it’s economically important. And oil. We are the people who knew how to get oil out of the ground. Anything that smart people could do with money was here. And Trump is attacking this because a lot of the… Not all, obviously, and sometimes not even a majority, often not a majority, but many, many, a disproportionately large amount of the smart people putting money to good use in America are foreign. They’re immigrants. They’re people who came here to work. And Trump is striking directly at the heart of America’s most valuable economic activity.

[00:11:02] Jeff Schechtman: We also seem to have taken on this negative attitude about technology, that somehow we have made technology and progress kind of a social issue. Talk about that.

[00:11:14] Noah Smith: That’s right. So, traditionally, America was a very techno-optimist country. We embraced the Internet before anybody else did. We embraced computerization before anybody else did. We invented the semiconductor and all kinds of other stuff. We embraced aircraft before anyone else did, if you want to go back a hundred years. And biotech: We did the genomics revolution, the human genome project, and all kinds of medicines. We would embrace new medicines before other people would. Japan was ahead in flip phones… 3G flip phones. And then we just decided, “OK, we have to be first in that.” So we just raced ahead with the Smartphone and eventually got even ahead of Japan again. Japan was probably number two in terms of techno-optimist countries, but we were number one. And this lasted for over a hundred years, I’d say 150 years, almost, that we were always number one in new technologies, maybe even longer than 150 years.

And now it’s changed. If you look at AI, America is one of the most skeptical countries in the world when it comes to AI. So basically, if you just look at attitudes toward AI, you’re not looking at policy, right? AI policy has been a little bit, a tiny bit restrictive, but not really. Trump repealed even the restrictions that were there. So in terms of policy, AI is not really doing anything. But in terms of attitudes, people are scared. Everyone’s scared AI is going to take their job. And if you look at China, they just zoom ahead.

But the real thing that we’re scared of in America is electric technology: batteries, solar. Americans refuse to believe in the power of solar power that China is embracing wholeheartedly. We refuse to believe in batteries and EVs. Trump is making fun of American EVs. He’s making fun of Elon and saying no-one wants to buy EVs. But he’s wrong. EVs are the future. Batteries have improved. And Elon understands technology in a way that Trump does not. But then Trump and the sort of right wing kind of atavistic, barbarian right that Trump has resurrected and overthrown the old Reaganite right wing that respected technology. Trump has taken over.

And it’s basically a bunch of people who really don’t have that that positive view of American business. And so they… We’re the most important technology that Americans do not appreciate is the battery. The battery is going to take over everything in America. We just don’t understand it yet. It hasn’t entered our collective consciousness yet. So the most important thing we can do in terms of getting America to embrace technology is to evangelize the power of batteries, how batteries are eating the world.

[00:14:17] Jeff Schechtman: But the problem is even bigger than that in that it is the opposition, the fear, as you talk about, it’s not just coming from the MAGA right, but it’s coming from the left, as well.

[00:14:27] Noah Smith: Yes, it’s coming from the left, as well. Yes, absolutely right. I would say that in general, you see a pattern where the left is scared of software, and the right is scared of hardware. It doesn’t always hold, but that’s a general pattern. So you see the left being scared of social media platforms that they think will cause right wing misinformation to flourish and will put journalists out of work and stuff. And you see them scared of AI, which they think will put artists out of work and put writers out of work. And basically all the sort of artists and writers and people like that who are overwhelmingly on the left, they’re afraid that all those people will be put out of work and that there’ll be all this disinformation, misinformation, whatever, spread on Facebook and stuff like that. And they’re afraid of the monopoly power of tech companies, of software companies. Whereas on the right, you see fear of solar power overtaking the oil industry. You see fear of batteries like, “Oh, my God, it’s just a new thing.” It’s they don’t understand the power of batteries. And you see fear of vaccines. You see, fear of vaccines used to be a hippie, crunchy, lefty thing. And now it’s moved to the right. It’s RFK. It’s all the right wingers are scared of vaccines since COVID.

[00:15:38] Jeff Schechtman: So what becomes the unintended consequence of all this? There’s the short term consequence in that China gets ahead in all of these areas, when we think about what the long term consequences are and even consequences that we might not see. Talk about that.

[00:15:54] Noah Smith: Yes. If you look at the past and look at all the technologies that we embraced, they all led to good things in the end, even if it wasn’t what we predicted, or they led to things that made Americans richer and more powerful, in general. We didn’t know what the semiconductor was going to be good for, but it created everything from precision weaponry for our military that allowed us to overawe the Soviet Union and win the Cold War to the computer revolution that created this productivity boom in the ’90s and early 2000s and increased wages a lot to the Internet and things downstream of that. So just technology creates more technology. Technology is downstream of other things. It’s recombinant. When you figure out how to do one cool thing, that’ll help you figure out how to do other cool things. And so that’s the basic story.

[00:16:50] Jeff Schechtman: Where does that leave China in all of this? And how does that have a larger impact on the global economy?

[00:16:56] Noah Smith: China is the most techno-optimistic country in the world. And Chinese people have experienced for their entire lives nothing but riches and wealth and power from new technologies. They’ve harnessed one new thing after another, often copied or sometimes even stolen from rich, developed countries. But then, all the same, new technology means better for Chinese people. And so, as a result of this positive experience, they are the most techno-optimistic country. So they are building solar power at a massive rate. They’re building nuclear, but they’re building solar power even faster. And they’re building batteries like crazy. They are now the leaders of electric cars. They’re the leaders in drones, which are taking over the battlefield in Ukraine, as we just saw Ukraine destroying Russian nuclear bombers with just a bunch of little Chinese toy drones. They’re create China, the leader in drones, the leader in batteries, the leader in electric cars. And they’re trying hard to be the leader in AI too. China is going to become the leader in robotics pretty soon. They’re not yet, but they are going to probably become the leader in robotics because building a robot is so similar to just building a phone, a drone, an electric car. It’s all the same tech stack. It’s a battery. It’s an electric motor, which China is number one in. It’s a battery. It’s an electric motor. And then it’s just some computer chips. You know, not even that advanced computer chips. So it’s China’s number one in batteries, number one in motors, and batteries and motors are eating the world. You can make a robot. You can make a drone. You can make a car. You can make pretty much anything an appliance. You can make anything with just a simple electric tech stack that China dominates.

And they’re doing it because they believe strongly in the power of the new in a way that America used to up until the 2010s and no longer does.

[00:18:44] Jeff Schechtman: What is it that changed in America to do that, do you think?

[00:18:48] Noah Smith: Social media. That is what changed  America was this big, diverse country. And our strength is always that you could spread out, and we could coexist by spreading out. Good fences make good neighbors. That’s a line from an American poem. It’s a very powerful line. I think it’s Robert Frost who wrote that poem. But then it’s a very powerful line.

So what happened was that in in 2010, you could go live in Alabama or Texas or whatever, and then you could live in a conservative place, or you could go live in San Francisco or Massachusetts and live in a liberal place, and we could coexist. Everyone thought they’re part of the same country because they didn’t see each other on a daily basis. Then Twitter came along. And I say social media. And for a year or two years, it’s like Facebook was big into making everyone argue about politics on Facebook. But really, it was just Twitter, and everyone who mattered in politics — all the journalists and the academics and the activists and the politicians — were all on Twitter all day long. And suddenly no one could spread out anymore. Everyone was in the same room together.

And we hadn’t prepared for that. We were a society based on spreading out and sorting ourselves. And then we threw ourselves with this new technology all into the same room with each other. And we couldn’t handle it. And because of this, everyone started to fear their place in American society because suddenly their whole day was occupied by hearing from people who wanted to kill them or wanted to disempower them and to impoverish them, when that had never been true before in America. And so because of that, our solidarity collapsed in the 2010s after the introduction of the Smartphone and Twitter. Our social solidarity, our trust in institutions collapsed because of this technology that we invented that to some degree enriched us and that we could not handle the social implications of. And because of this, everyone in America started to make an enemies list of groups they thought were the enemy. Is it the rich? Is it black people? Is it white people? Is it Jews or Asians or everybody had their list of of enemies. Trans people? Who’s the enemy? And then because of that, we started to fear technology because there was this fear that technology will disempower our group and will empower the enemy groups. It’s going to be the enemy dominating AI. It’s going to be the enemy dominating social media. It’s going to be the enemy dominating solar and batteries. That’s what happened to us, I believe.

[00:21:18] Jeff Schechtman: And is this cyclical? Will this fever break at some point?

[00:21:22] Noah Smith: I don’t know, but I think it’s a positive sign that people are getting off Twitter specifically, and people are getting off Twitter-like apps in general. Fewer people are using these apps. Conversation is moving to direct messages, private messages, groups, discords, chats, and then things like Reddit — forums and spaces that are more segmented, they’re more curated, where we can once again spread out, and we don’t have to see the people who hate us all day long, every day.

[00:21:49] Jeff Schechtman: I want to come back to the economic consequences of all of this. And one of the things that has crept up over the past couple of days, even, is how accurate the information we’re getting from the government is going to be going forward in terms of economic numbers and what that means.

[00:22:07] Noah Smith: We’ve seen some signs in recent days of the Trump administration trying to suppress economic statistics. And if they continue doing that, it will be very bad. China is doing this right now. It’s not clear whether they’re suppressing them internally, but they’re certainly suppressing them externally, so nobody can know what’s going on. The Trump administration may even be cutting themselves off from economic statistics, and China might be doing that. But this is a hallmark of ineffectual regimes. When you stop being able to tell how the economy is doing, you stop being able to make the economy do better.

And it’s of a piece with the rest of Trump’s economic policies, which just really do not care about how prosperous Americans are. They really just disregard it. And so this is another thing that will make us less prosperous. It’s corrosive kind of thing will make us less prosperous.

[00:23:03] Jeff Schechtman: And at what point do the markets begin to respond even more to that?

[00:23:08] Noah Smith: It’s hard to say because markets have patterns where they exhibit excess volatility in the short term. So basically, massive pessimism when Trump announces of tariffs, massive euphoria when he pauses the tariffs. But then you won’t really see the real impact until over time because when markets slowly rise or slowly go down over time, and then it’ll be difficult to disentangle that impact from the impact of other things that were happening concurrently, and people will argue about this till the end of time. What really happened here?

[00:23:35] Jeff Schechtman: What are the things that you worry about? What keeps you up at night worrying about the economic side of this equation?

[00:23:42] Noah Smith: The debt, the spiraling debt. Elon Musk is absolutely right about this. The congressional bill that Trump supported — “one big beautiful bill” — is just debt. That’s all it is. You know, it’s just massive, massive debt. And interest rates are not going to become zero forever like they used to. And if we try to push them to zero with the Federal Reserve, we’ll cause inflation this time. And so we’ve lost that “get out of jail free” card of low interest rates. And we have this huge stock of debt from past crises that we never paid down. And we’re just throwing fuel on the fire. Long term interest rates will go up and up, if they keep doing it.

[00:24:17] Jeff Schechtman: And what are the broader economic consequences for the country from that?

[00:24:21] Noah Smith: Higher, longer term interest rates. Higher, longer term interest rates make it harder for companies to borrow, and they suppress investment. They also make it harder for the US government to pay its bills because then it has to pay higher interest on top of everything else. And if they’re not in an austerity-minded mood, then what eventually happens is a sovereign default. Now, a sovereign default is an economic catastrophe that would cause an extremely steep, severe recession and which we would not completely recover from within our lifetimes.

[00:24:45] Jeff Schechtman: And talk about what might get us out of this. What would be the positive potential?

[00:24:50] Noah Smith: We need austerity. We need austerity. We need to raise taxes, and we need to cut spending. And we need to do that right now to get these deficits under control.

[00:24:59] Jeff Schechtman: Do you think there’s any political will to do that, Noah?

[00:25:02] Noah Smith: No, although Elon is screaming his head off about it right now. So maybe he can do something positive. And I will say that in the late ’80s and early ’90s, we switched to austerity mode. And if you looked at candidates in the 1992 Democratic presidential primary, every single one of them was yelling about the need for austerity. And Ross Perot was yelling about the need for austerity. And George HW Bush in his reelection campaign was promising austerity. In fact, he even raised taxes, violating his pledge for no new taxes, even raised taxes to do austerity. It was a good thing he broke that promise and raised taxes. So America as a whole was extremely austerity-minded in the late ’80s and early ’90s. And we could go back to that bipartisan political consensus for austerity. Deficits bad, but we need to do it quick.

[00:25:48] Jeff Schechtman: Well, that’s an optimistic note to end on. Noah Smith, you could read lots more of him in his substack, No Opinion. Noah, I thank you so much for spending time with us here on the WhoWhatWhy podcast.

[00:25:58] Noah Smith: All right. It was great to be here. Thanks so much.

[00:26:00] Jeff Schechtman: Thank you. And thank you for listening and joining us here on the WhoWhatWhy podcast. I hope you join us next week for another WhoWhatWhy podcast. I’m Jeff Schechtman. If you like this podcast, please feel free to share and help others find it by rating and reviewing it on iTunes. You can also support this podcast and all the work we do by going to whowhatwhy.org/donate.