(2024-09-10) ZviM Economics Roundup #3

Zvi Mowshowitz: Economics Roundup #3. As always, remember that there are plenty of really stupid proposals always coming from all sides. I’m not spending as much time talking about why it’s awful to for example impose gigantic tariffs on everything, because if you are reading this I presume you already know.

The Biggest Economics Problem

Tess: like 10% of people understand how markets work and about 10% deeply desire and believe in a future that’s drastically better than the present but you need both of these to do anything useful and they’re extremely anticorrelated

In my world the two are correlated. If you care about improving the world, you invest in learning about markets. Alas, in most places, that is not true.

if you see a government intervention that does not have an obvious explanation, your first thought should not be to assume the policy is there to sensibly correct a market failure.

No Good Very Bad Capital Gains Tax Proposals

Kamala Harris endorses Biden’s no-good-very-bad 44.6% capital gains tax rate proposal, including the cataclysmic 25% tax on unrealized capital gains.

One might think that ‘private illiquid business’ is an edge case here. It’s not. Owen Zidar: The discussions of unrealized capital gains for the very rich (ie those with wealth exceeding $100M) are often missing a key fact – two thirds of unrealized gains at the very top is from gains in private businesses.

64% of gains for those worth over $100m are in shares in private business, versus only 26% public stocks.

Here Dylan Matthews gives a steelman defense of the proposal. He says Silicon Valley is actually ‘exempt,’ so they should stop worrying, and their taxes can be deferred if over 80% of your assets are illiquid. That’s quite the conditional

Certainly the distortion here is massive. I do agree this is a problem. I like the realistic solutions even less, especially as they would effectively make it impossible for founders to maintain control.

Perhaps in some narrow circumstances there is something that could be done, and one could argue for taxing unrealized gains on some highly liquid and fungible investment types, so you avoid perverse outcomes including sabotage of value

But would that come with a reduction in the headline rate?

And also of course if you tax liquidity you get a lot less liquidity. Already companies postpone going public a lot, we have private equity, and so on

We should not be shocked that Silicon Valley talked about the consequences of a proposal while hallucinating a different proposal. They have a pattern of doing that. But it is not like the details added here solve the problem.

When you look at the details further, and start asking practical questions, as Tyler Cowen does here, you see how disastrously deep the problems go

Tyler Cowen successfully persuaded me the proposal is worse than I thought it was, which is impressive given how bad I already thought it to be.

Here the CEO of Dune Analytics reports on the exodus of wealthy individuals that is Norway, including himself after he closed a Series B and was about to face an outright impossible tax bill

The most ironic part of this is that the arguments for taxing unrealized capital gains are relatively strong among people with much lower net worths, if you could keep the overall level of capital taxation constant. You encourage someone like me to rebalance, and not to feel ‘locked into’ my portfolio, and my tax planning on those assets stops mattering

Also a 44.6% capital gains tax, or even the reduced 33% later proposal, is disastrous enough on its own, on its face.

The good news is I don’t see this actually happening. Neither do most others, for example here’s Brian Riedl pointing out this isn’t designed to be a real proposal, which is why they never vote on it.

The better news is that this could create momentum for the actually good proposals, like ending the capital gains step-up on death or taxing borrowing against appreciated stocks

The more I think this, the issue is we fail to close other obvious tax loopholes that are used by the wealthy. In particular, borrowing against assets without paying capital gains, and especially doing this combined with the step-up of cost basis at death.

Scott Sumner uses this opportunity to ask why we would even tax realized capital gains, with the original sin being taxing income rather than consumption. I strongly agree with him. Given that we are stuck with income taxes as a baseline, we should strive to minimize capital gains as a revenue source.

Hot Tip

We can now move on to talking about ordinary decent deeply stupid and destructive ideas, such as the Donald Trump proposal, now copied by Harris, to not tax service tips. Alex Tabarrok: If tip’s aren’t taxed, tips will increase, wages will fall, no increase in compensation.

The potential catch on total compensation is if the minimum wage binds.

The straightforward and obvious issue is this is stupid tax policy. Why should the waiter who lives off tips and earns more pay lower taxes than the cook in the back? This does not make any sense, on any level, other than political bribery.

Gouging at the Grocer

On the question of food and grocery store prices, they aren’t even up in real terms. Dean Baker: Contrary to what you read in the papers, food is not expensive. In the last decade, food prices have risen 27.3 percent, the overall inflation rate has been 32.0 percent. The average hourly wage has risen 43.3 percent.

Your periodic reminder that an hour of unskilled labor buys increasing amounts of higher quality food over time. Food prices are something people notice and feel. They look for the ones that go up, not the ones that go down.

I do not sympathize with those warning about ‘price gouging’ or attempting to impose anything remotely resembling price controls, especially on food

John Cochrane fully and correctly bites all the bullets and writes Praise for Price Gouging.

Noncompetes Nonenforcement Cannot Compete With Courts

The FTC’s attempted ban on noncompetes is blocked nationwide for now, with the Fifth Circuit (drink?) setting it aside and holding it unlawful, that the FTC lacks the statutory authority. The FTC does quite obviously lack the statutory authority, and also as noted earlier IANAL and I doubt courts still think like this but to me this seems like a retroactive abrogation of contracts

We Used to Be Poor

We are vastly richer than we were. We consume vastly superior quality goods, in larger quantities, with more variety, even if you exclude pure technology and electronics (televisions, computers, phones and so on), including housing. An hour of work buys you vastly more of all that. Those who dispute this are flat out wrong.

Then there are the things that actually did get vastly worse or more expensive. Housing (we end up with more anyway, because we pay the price), healthcare and education are vastly more expensive, and all mostly to stay in place.

On top of that, various forms of social connection are much harder to get, friendship and community are in freefall and difficult to get even with great effort, atomization and loneliness are up, attention is down while addiction is up, dating is more toxic and difficult, people feel more constrained, freedom for children has collapsed, expectations for resources invested in children especially time is way up, and as a result of all that felt ability to raise children as a result of all of this is way down.

As a result, many people do find life tougher, and feel less able to accomplish reasonable life goals including having a family and children. And That’s Terrible. But we need to focus on the actual problems, not on an imagined idyllic past.

Everywhere But in the Productivity Statistics

The Revolution of Rising Expectations, and the Revolution of Rising Requirements, are the key to understanding what has happened, and why people struggle so much.

I would definitely take 2024 over any previous time (at least ignoring AI existential risks), but the downsides are quite real. People miss something real, but they don’t know how to properly describe what they have lost, and glam onto a false image. That’s why I emphasize the need to consider what an accurate ‘Cost of Thriving’ index would look like.

They Don’t Make ‘Em Like They Used To

And that’s more often than not a good thing.

Jeremy Horpedahl has some things to say about J.D. Vance’s 40 year old fridge. (appliance)

fridges are much cheaper today. How much? Almost 5 times cheaper…

the 2024 fridge only uses about 647 kWh per year — only about 45% as much electricity

In 1990, just 8.4% of households used a fridge that was 20 years or older. In 2020, this was slightly lower: 5.5%.

Disclosure of Wages Causes Lower Wages

I continue to think this gets the mechanism wrong. Wage disclosure does not primarily assist employers in suppressing wages. What it primarily does, as I’ve discussed before, is give employers much stronger incentive to suppress wages.

In Other Economic News

National industrial concentration is up, in the sense that within industry concentration is up, but the shift from manufacturing to services means that local employment concentration is down. I notice I don’t know why we should care, exactly?

The 2002 Bush steel tariffs cost more jobs due to high steel prices than they protected, including losing jobs in steel processing

New study on changes in entrepreneurship on online platforms like Shopify, with minority and female entrepreneurs especially appreciating the support such platforms bring despite the associated costs. A lot of businesses saw strong growth

The Efficient Market Hypothesis is (Even More) False

I find the evidence here for less efficient markets unconvincing. I do suspect that markets are indeed less long-term efficient, for other reasons, including ‘the reaction to AI does not make sense’ and also the whole meme stock craze.