(2025-02-25) ZviM Economics Roundup #5

Zvi Mowshowitz: Economics Roundup #5. While we wait for the verdict on Anthropic’s Claude Sonnet 3.7, today seems like a good day to catch up on the queue and look at various economics-related things.

Table of Contents

• The Trump Tax Proposals.
• Taxing Unrealized Capital Gains.
• Extremely High Marginal Tax Rates.
• Trade Barriers By Any Name Are Terrible.
• Destroying People’s Access to Credit.
• Living Paycheck to Paycheck.
• Oh California.
• Chinese Venture Capital Death Spiral.
• There is Someone Elon Musk Forgot to Ask.
• Should Have Gone With the Sports Almanac.
• Are You Better Off Than You Were Right Before the Election?.
• Are You Better Off Than You Were Before the Price Level Rose?.
• Most People Have No Idea How Insurance Works.
• Do Not Spend Too Much Attention on Your Investments.
• Preferences About Insider Training are Weird.
• I Will Not Allocate Scarce Resources Via Price.
• Minimum Wages, Employment and the Equilibrium.
• The National Debt.
• In Brief.

The Trump Tax Proposals

The Grumpy Economist goes over Donald Trump’s tax proposals, taking it as given this is not the big tax reform bill America needs and probably will never get (pre-AGI).

Renewing the Trump tax cuts. Yeah, yeah. Probably a good idea.

Taxing Unrealized Capital Gains

Norway doubles down on its unrealized capital gains tax strategy, including an exit tax of 38% of net assets including unrealized gains, despite having a gigantic sovereign wealth fund from its oil wealth

Extremely High Marginal Tax Rates

United Kingdom has absurdly high marginal tax rates everywhere, and also does not understand what a ‘phase-out’ is, it seems?

Trade Barriers By Any Name Are Terrible

Europe still has sufficiently strong trade barriers that they are equivalent to a 45% tariff on manufacturing and 110% for services, according to Mario Draghi. That’s without even considering the ‘trade barriers’ that exist within-countries in the form of ‘EU being the EU.’

A similar situation exists between Canadian provinces, which continues to blow my mind because not only is it a huge own goal for no reason, it is so profoundly unpopular and everyone wants to get rid of it, and somehow it is still there.

Destroying People’s Access to Credit

One serious danger with the new administration is a potential cap on credit card interest rates at 10%, with Senators Sanders and Hawley planning to work on this with President Trump. This would severely limit the ability of the poor, or those with poor credit, to access credit cards, and the alternatives to credit cards are all vastly worse.

Living Paycheck to Paycheck

We also had yet another round of people falsely claiming that 60% of Americans live paycheck to paycheck, for various reasons this claim simply will not die despite a majority of Americans having actual cash savings that can pay for 3 months of expenses, even before dipping into credit cards

Oh California

California businesses forced to foot the bill for some of the $20 billion in loans California took from the Federal Government to pay unemployment during the pandemic, after the state defaulted on payment, er, ‘failed to allocate funds

Chinese Venture Capital Death Spiral

Chinese venture capital firms are hounding failed founders, pursuing personal assets and adding them to the national debtor blacklist, which means they can’t do things like start a business, fly, take trains, stay in hotels or leave China. China has no personal bankruptcy law, so there’s no way out. If you want VC money in China, if you can get it at all, it now probably means effectively taking on personal debt

Presumably this is because the franchise value and forward deal flow of VC firms was cratered so much by government crackdowns that the firms have chosen to hound past founders despite knowing this destroys their future deal flow.

There is Someone Elon Musk Forgot to Ask

A Delaware judge again rejected Elon Musk’s stock compensation package, despite the shareholders overwhelmingly ratifying it

Paul Graham: It used to be automatic for startups to incorporate in Delaware. That will stop being the case if activist judges start overruling shareholders.

I presume Judge McCormick’s actual logic is something else entirely. I presume it is some combination of:
Elon Musk broke the rules, and potentially committed outright fraud, by using a compliant board to give him an absurd pay package. We cannot allow him to use this to create an anchor from which he will then benefit.

Should startups respond to this by reincorporating in Nevada? I have not done the research on the host of other consequences, but my assumption would be no.

Most of the time, when someone has the level of chutzpah and obviously unacceptable self-dealing that Musk has, invalidating their absurdly huge pay package is a reasonable decision. I see why people would be concerned, but I see this as a one off.

I also see this as part of the standard warning from the startup and Paul Graham crowd, or the Marc Andreessen crowd, that if anyone ever does something they don’t like, that entity will rue the day, rue the day I tell you, because either the startup ecosystem will be Ruined Forever or everyone involved will pick up their balls and go elsewhere

Should Have Gone With the Sports Almanac

Via Tyler Cowen, Spencer Jakab at WSJ asks: Would a time machine make you a good investor?

In the ‘Crystal Ball Trading Game’ players are given $1 million in play money, and 15 opportunities to see the front page from two days in the future (on the same 15 randomly chosen days) and then trade, with up to 50 times leverage, the S&P 500 and 30-Year Treasuries, evaluated at tomorrow’s close. They report that the median trader, from a mostly savvy pool, had only $687,986 left.

how does one explain the median loss of 31%? Surely being able to bet heavily on the really obvious, no-brainer newspaper headlines should make up for a few errors? In fact that proved to be many players’ financial undoing, with a not-insignificant number having negative money by the end. The first lesson from the game, then, might be to curb your enthusiasm in such cases.

Are You Better Off Than You Were Right Before the Election?

As always, the answer to whether you’re financially better off than a year ago shifts 15 points the moment the election is over. So take people’s answers appropriately seriously.

Are You Better Off Than You Were Before the Price Level Rose?

Did inflation make the median voter poorer? Zachary Mazlish argues that it did, but what he actually argues is more that the median voter got poorer overall. Which is also an important point, and while I quibble below, overall it is a very good post.

Inflation did make the median voter poorer during Joe Biden’s term.
In no part of the income distribution did wages grow faster while Biden was President than they did 2012-2020.
This is true in the raw data, and even more stark after compositional adjustment.
In particular, the change in median incomes was well below its 2012-20 run-rate.

But, the change in median wages is not what matters; it is the median change in wages that does. And this metric was even weaker under Biden: lower than any period in the last 30 years other than the Great Recession.

Why should we care what the median change was, instead of some form of mean change, or change in the mean or median wage? Unless the claim is that voter perception is shaped primarily by their own change in income. That could be a political story but it isn’t a story about economic reality.

So we’re saying that what is happening here is that voters are evaluating income post taxes and transfers, purely for themselves, and then blaming the result on inflation? Perhaps they are indeed doing that, and you can’t do that. I mean, obviously you can, but it’s not a map that matches the territory, again unless the territory you care about is perception.

This seems to me like a well researched story about voter psychology, that is then being portrayed as inflation making people actually poorer, when we can’t even attribute the voter psychological reaction to the inflation, without knowing the counterfactual.

The third point makes clear a lot of what this was about:
Point 3: Post all taxes and transfers, the median household’s real income collapsed while Biden was in office — due to the timing of the Pandemic stimulus.
Yes, exactly. The story is that the big subsidies happened under Trump, and then got taken away, and voters blamed Biden for the difference.

Could Biden have done anything about all this? To some extent absolutely. There were any number of pro-growth policies he left on the table, and ways he actively got in the way of growth, and he overspent. But he was also, as many have noted, dealt a rather terrible hand on this, with the timing of the stimulus and resulting inflation.

Most People Have No Idea How Insurance Works

People think insurance should be some sort of magic thing, and complain when insurance companies price their products based on their costs plus a profit margin

Jeremy Kauffman: The degree to which society functions despite massive swathes not understanding even rudimentary aspects is a huge testament to capitalism.

Do Not Spend Too Much Attention on Your Investments

Duderichy: People vastly underestimate the alpha you have in your career!
If you’re in tech, you should be focusing on locking in a $500,000+ (BigTech) staff job instead of getting an extra $20,000 per year off your investments.

You can make a lot off your investments, but it’s hard to turn a lot of extra time into a lot of extra alpha, especially when your net worth is not large compared to your earning potential.

You do want to put in enough time to do something ‘reasonable'.

find the right place to live, have an emergency savings account and then buy index funds, maybe buy index funds in industries that look promising and throw in some individual stocks and then forget about it.’ (personal finance)

Beyond that, if your shower thoughts are focused on your investments, that will usually be a mistake until your investments are large compared to your income and career potential.

Preferences About Insider Training are Weird

This study of insider trading regulatory preferences is bizarre. It says outsiders prefer insider trading be allowed because it increases liquidity and price efficiency, but that seems wrong?

Who do you think is paying the insider traders their profits?

I Will Not Allocate Scarce Resources Via Price

Apollo Bagels is fighting an attempt by the landlord to evict them over long lines. Whatever could a Bagel store do when the demand got so large that people were forming very long lines

Minimum Wages, Employment and the Equilibrium

Alex Tabarrok asserts an evolving new consensus on the minimum wage, that effects are heterogeneous and take place on more margins than employment

The National Debt

Whenever I see warnings about the national debt, like this one by Arnold Kling, they usually employ calculations like this one, where Kling quotes Cowen pointing the Rauh.
Joseph Rauh: if I use CBO projections to calculate the interest-to-revenue ratio, it reaches 22.9% by 2034.

The important warning that Kling is the latest to reiterate is that the bond market is currently in the good but unstable equilibrium of everyone expecting the government to pay its debts in valuable dollars, at least on a rolling basis. That means interest rates are reasonable. If we shift to the bad equilibrium...

When we take on more debt, we raise both the danger that this happens, and the damage it would cause if it did happen. The good reason not to take on more debt is this tail risk.

There are remarkable similarities to things like AI existential risk – we know that going down this road will at some point start introducing steadily increasing risk of catastrophe, but until then we likely enjoy good times. There’s huge value in taking on a non-trivially risky amount of debt

How much debt is unsustainable?

Can the good equilibrium be sustained? If we retain the ability to borrow at the risk-free rate of interest, or something not too far above it, can we keep the debt-to-GDP ratio from rising?

the answer here is more about demand for market priced safe government debt than it is about market price, similarly to the situation in Japan. My expectation is that the limiting factor here is that the ‘giant pool of money’ chasing safe assets is only so large. For now, demand exceeds supply by a lot, so we’re fine

brings us back to the question of multiple equilibria. The debt is fine, except for the risk that suddenly it very much isn’t. How far dare we go?

In Brief

Arguments and data in favor of the Peter Principle, that employees get promoted to their level of incompetence. To me this is one of those principles that is obviously true, the question is magnitude. The idea that ‘oh firms know about that, they’d successfully control for it so it wouldn’t happen at all’ is Obvious Nonsense

Our tax code continues to punish married couples when both parents work, or alternatively it relatively rewards ‘traditional’ one income households. Given we do not seem to culturally agree with this on reflection, we should fix it.