Chris Sims, the influential macroeconomist who recently passed away, leaves behind a body of work that continues to reshape economic theory. His contributions to the Fiscal Theory of the Price Level provide crucial insight into understanding how government debt impacts inflation — a relationship that recent research has confirmed with striking clarity.
The Grossman-Stiglitz Paradox Comes for AI
One of the most fascinating results in theoretical economics is the Grossman-Stiglitz Paradox. The Efficient Market Hypothesis suggests that financial market prices already incorporate all available information about underlying assets. But in 1980, Sanford Grossman and Joseph Stiglitz demonstrated why this hypothesis cannot be entirely correct. It takes effort to find information. Who would spend time discovering what stocks or bonds are truly worth if they cannot profit from that knowledge? Yet without such effort, how can information ever become incorporated into prices? The conclusion: financial markets must be at least somewhat inefficient.
Daron Acemoglu, Dingwen Kong, and Asuman Ozdaglar have applied this same logic to artificial intelligence. Their research posits that if generative AI placed all the world's information at people's fingertips, individuals would have no incentive to learn new things — which would prevent them from accidentally discovering knowledge that could expand society's total information base.
Acemoglu et al. argue that humanity learns collectively when individual humans reinvent the wheel — discovering things independently rather than simply looking up answers. This process wastes effort but simultaneously expands the overall knowledge stock. AI makes everyone lazy: instead of writing code from scratch or proving a theorem independently, people ask AI to do everything for them. The result is that people obtain correct answers to questions whose answers are already known, contributing nothing novel.
The implications extend beyond AI itself. People could ask an LLM to teach mathematics or write code, but they could also consult Math Exchange and Stack Exchange — even before large language models existed. If all the world's knowledge sits at one's fingertips, there's no reason to waste time reinventing the wheel. Neal Stephenson observed this phenomenon as early as 2011: it leads to a lack of novelty as everyone simply copies what has been done before.
Website traffic is already collapsing as people read AI instead of visiting websites. Tech publications are rapidly losing readership. Using AI to code causes programmers' skills to atrophy. Yet if AI could produce new knowledge through its tendency toward hallucination — random errors that occasionally discover something new — perhaps the technology could expand rather than shrink the total knowledge stock.
What Happens When the Strait of Hormuz Closes?
The Iran conflict is causing fear about the Strait of Hormuz — a critical maritime choke point through which significant global oil passes to reach world markets. Iranian strikes and mines have effectively closed the strait, and European countries refuse to help America reopen it given Trump's threats to seize Greenland and his withdrawal of aid from Ukraine. Oil prices have skyrocketed as a result.
Macroeconomists can actually make predictions here. Closure of key shipping routes happens occasionally, and examining short-term effects reveals a clear picture of economic impact. Diego Känzig and Ramya Raghavan examined similar incidents in their 2025 paper "The Macroeconomic Effects of Supply Chain Shocks: Evidence from Global Shipping Disruptions." Commodity prices rise, inflation follows, and U.S. industrial production suffers.
One significant change compared to past disruptions: thanks to the shale oil boom, America is now a net oil exporter rather than importer. American oil companies will see substantial windfall from conflict. However, the inflation bump from higher input prices will still occur, and oil-consuming industries like chemicals and transportation will likely suffer.
Government Debt and Inflation
Governments worldwide are accumulating enormous debt levels, making it crucial to understand the risks. Central banks can lower interest rates to ease government debt refinancing or print money to buy government debt directly. Yet this can cause inflation to rise.
The Fiscal Theory of the Price Level — a macroeconomic theory drawing heavily from Chris Sims' ideas — predicts a tight relationship between government debt and inflation. Progressive macroeconomists typically downplay this danger, pointing to cases like the Great Recession or Japan in the 1990s and 2000s where soaring government debt didn't lead to inflation.
But Covid may prove a counterexample. Several recent macroeconomic papers establish what appears to be a link between Covid borrowing and subsequent post-pandemic inflation. Barro and Bianchi (2024) find that government spending has substantial explanatory power for recent inflation rates across twenty non-Eurozone countries and an aggregate of seventeen Eurozone countries. Reis (2026) finds that the unexpected worsening of fiscal deficits during and after the pandemic correlates strongly with unexpected inflation increases.
Reis blames America's borrowing binge — primarily Trump's CARES Act and its follow-up bill, plus Biden's American Rescue Plan — for America's higher post-pandemic inflation rate. How much did public deficits contribute to the 2021-24 inflation surge? A popular argument notes that U.S. inflation rose almost as much as in other OECD countries. Yet America had large fiscal stimulus in 2021 that most other nations did not.
Using expectations data, Reis compares unexpected high deficits with unexpected high inflation terms for OECD countries using common units of their impact on public debt. For countries running higher unexpected fiscal deficits, inflation was also unexpectedly higher.
Olivier Blanchard predicted the inflation surge in advance simply by examining how much America was borrowing back in 2021. Progressive pundits and Democratic think-tankers who dismiss deficit dangers need to reconsider their position. Americans are concerned about cost of living, and if Democrats borrow increasingly more, it could worsen the problem.
Japan, Still the Land of Robots
Noah Smith wrote a book about foreign investment in Japan. When he toured last year, audiences repeatedly asked what industries foreigners should invest in in Japan. His answer remained consistent: robotics. In a world where software is increasingly ruled by AI, robotics represents the next frontier — though combining AI techniques with hardware know-how proves far trickier.
Many believe this know-how resides primarily in China due to charts of robot adoption. China has many factories and cheap bank loans for robot purchases, so China buys many robots and becomes more self-sufficient in the industry. But this doesn't mean China has caught up or dominated robotics the way it has dominated electric vehicles. Most Chinese robots remain low-end mass-market products; high-end robotics require years of careful practice and accumulated tacit know-how. Japan possesses this expertise.
As AI increasingly pushes into robotics, Japan becomes an increasingly important partner for America. James Riney of Coral Capital explains why Japan's robotics expertise perfectly complements America's AI strength: if the U.S. wants real functional robots that can survive a 10,000-hour duty cycle in a factory rather than a five-minute demo, Japan provides the solution.
The body of a humanoid robot is an engineering nightmare of competing constraints: strong but lightweight, blinding speed but sub-millimeter precision, massive heat dissipation without cooking its own battery. It must perform millions of times without fatigue. This is where Japan excels — Japanese companies like Harmonic Drive Systems and Nabtesco have spent fifty years solving these problems, mastering the black art of tribology, metallurgy, and heat treatment.
Most entrants from the software-first ecosystem and many low-cost Chinese clones fall off what Riney calls "the Reliability Cliff" at around the 1,000-hour mark. Their gears develop backlash, lubricants break down, and positional accuracy drifts. Japanese companies have mastered these problems. If one peels back the skin of almost any humanoid robot on Earth, Japanese components power it.
Paul Ehrlich's Bad Ideas Live On
Paul Ehrlich, author of The Population Bomb and relentless population control advocate, has died. One general rule of punditry suggests not speaking ill of the dead. But what if the dead held genuinely terrible ideas? Everyone knows why Ehrlich was wrong. He predicted world food shortages producing catastrophic famines in the 1970s, then called for cutting emergency food aid to India — reasoning that saving people from starvation today would simply mean more people dying later.
But new farming techniques known as the Green Revolution created enough calories to feed the whole world with plenty to spare. The Population Bomb came out in 1968; by then famines were already essentially over. Fertility rates fell without the draconian dystopian population controls Ehrlich constantly advocated. China was the main country listening to Ehrlich, and their One-Child Policy proved unnecessary for reducing fertility — while being totalitarian, cruel, and dystopian.
What people don't realize is how relentlessly Ehrlich kept promoting his ideas and dismissing critics, even after it became clear he had been completely wrong. A man who endorsed nightmare policies in service to a broken theory never reckoning with this failure continued self-aggrandizing and evangelizing for his old mistakes.
Ehrlich's bad ideas have survived and thrived in the "degrowth" movement popular in the UK and Europe. Today's degrowthers call for immiserating the developed-world middle class rather than starving India and throwing people in prison for having too many children — an improvement, perhaps. But the idea remains fundamentally based on the same old fallacies Ehrlich never stopped pushing: that humanity has overstepped its bounds and must be forcibly diminished.