Category Archives: Finance

Opportunity Costs in Civilization 6

One of the most important concepts I learned in economics is the idea of opportunity costs.  Every action we take has a cost, not just the cost of the action itself, but the cost of *now not being able to do something else* with either the time or money or both that we just spent.  

A simple example: a company only has 100$ to invest in a machine.  If they buy the machine that makes blue widgets, they can’t also buy the machine that makes red widgets.  Thus, buying the blue widget machine doesn’t *just* cost 100$, it also has the *opportunity cost* of not buying the red widget machine.

There are also opportunity costs with time, if you decide to go to Europe for your holiday vacation, you can’t also go to South America at the same time.  So the cost of going to Europe isn’t just the cost of the time and the tickets, it’s also the opportunity cost of not going to South America (or anywhere else) as well.

As an aside, this is why for some people it can make sense to NOT go to college EVEN IF college were totally free.  The cost of going to college includes the *opportunity cost* of not having a full-time job (if you’re a full-time student).  

A comedian once made a joke that, after graduating college he couldn’t find any work “because the dropouts already had the jobs.”  A funny joke, but it demonstrates a point:  You spend 4 years getting a degree, but if that degree doesn’t measurably increase your employment prospects, you could have been better off spending those 4 years getting work experience at a full-time job.  You could not only get the money that a full time job gives you, but the experience itself would increase your employability and ability to get better jobs.

So the education and degree you’re seeking needs to increase your employability *more* than just doing 4 years of work.  If not, then it’s a net loss *even if your education was free* because you had the *opportunity cost* of not getting those 4 years of work experience.

But I didn’t want to blog about college, I wanted to blog about Civilization again.

The non-gamers in my audience may be tired of my gaming blogging, but I’ve spent a lot of this holiday season playing Civ IV and Civ VI with friends, so I’ve been thinking about this.

I complain that in Civ VI, some of the leaders seem to have traits that are utterly worthless, they don’t feel like they improve your Civ’s abilities any more than having a vanilla Civ with *no* traits.  Eleanor of Aquitaine is one of these, her ability to culture-flip cities feels very underpowered and completely useless, and doesn’t make her any more powerful than a Civ that doesn’t have any abilities at all.

My friend shoots back at this by saying that if you put a lot of resources into it, you can set up a situation in which you culture-flip whole continents in an instant.  And yes, this is theoretically possible.  Does that mean Eleanor is “very powerful in the right circumstances?”  No.  Because of *opportunity costs*.  

See, the cost of putting all your resources into Eleanor’s culture-flipping ability is that *you can’t put those resources into other things*.  You can’t research technologies or build military units if you are instead spending your entire GDP on culture buildings.  Culture isn’t free, and it doesn’t just cost what it costs to produce it, it has the *opportunity cost* of not doing anything else with that money and production.

So in any situation where Eleanor can “culture flip a continent” by spending an absurd amount of resources on culture, any other Civ could just use those resources to win the game with military, or science, or even diplomacy.  

Eleanor’s ability is useless not because you *can’t* use it to do things, but because the amount you have to spend to make her ability not-useless could instead be better used to win the game in *any other way at all*.  Her ability has an *opportunity cost* in that if you try to use it to its fullest, you are by definition not using those resources on better strategies that will win you the game more easily.

And that’s what I feel about a lot of the Civ VI leaders.   Some  leaders have abilities so minor they don’t feel impactful.  Some have abilities that completely change the nature of the game.  And some like Eleanor have these abilities that are actually traps, because the opportunity cost of trying to use their ability to its fullest makes you worse off than if you’d ignored their ability and played the game normally.

People didn’t like Civ IV’s leader system because every leader drew from a limited pot of abilities.  Gilgamesh is Creative/Protective, while Catherine the Great is Creative/Imperialistic.  From my perspective, that’s unique, *no one but Gilgamesh has that specific combination of traits*.  From other people’s perspective though “they’re both creative so they’re too similar to be cool.”  

These people who say this seem to really be drawn to Civ VI because every leader has *completely unique abilities* not seen anywhere else.  But from my perspective “many of those abilities are worse to use than just ignoring the ability and playing the game normally.”  Leaning into your “special ability” can have an opportunity cost, and no one but me seems to recognize this.

So in the future, please think about opportunity costs, both for college and for your video games.  Making a nation have a super special ability isn’t actually cool if leaning into that ability makes you worse off than if you’d ignored it and played the game normally.   Opportunity costs are real, even if not everyone understands them.

Amazon will not be part of the “Resistance”

I wanted to write this half a year ago, but with Trump’s tariffs back in the news, I figured I’d give it another go.

When Trump first enacted his so-called “Liberation Day” tariffs, many experts (mostly partisan experts though) predicted the apocalypse. It was bad enough that many news sources started educated their readers on the Smoot-Hawley tariffs, which anyone who watched Ferris Bueler’s Day Off will know were the tariffs enacted during the Great Depression. These tariffs have been blamed for contributing to the depth and intensity of the Great Depression, and naturally partisans wanted voters to make that connection to Trump’s Tariffs.

I myself also started watching out. I live in a major city with a major train hub, and as I commute past it I like to look out and check how many boxcars are being loaded and unloaded by trains. Earlier this year it seemed the tariffs might have actually been apocalyptic, the train yard was empty on some days. But despite partisans stoking fears of COVID-level shortages, tariffs have seemed to have a marginal effect on the US economy. Growth has remained strong in 2025, with the US well ahead of pretty much every advanced economy on earth in terms of growth rate. The EU may be a massive free trade area, and the USA may have become an increasingly protectionist autarky throughout the Trump-Biden years, but that hasn’t been enough to make the EU more competitive or the US less.

It’s likely because the tariffs are indeed marginal. Tariffs are a tax on imports, but like any other tax they can be avoided and mitigated by changing behaviors. Companies have shifted to sourcing their products from areas with lower tariffs, changing their production line to build more things in America, or in some cases are simply accepting lower profits and not passing the cost of the tariffs onto consumers because they need to maintain market share. In other cases the tariffs *are* leading to a rise in prices, but consumers still have the chance to substitute tariffed goods for other goods or just stop buying alltogether.

The tariffs have likely contributed to inflation remaining well-above target, and have likely made certain consumers much poorer without realizing it (as they purchase tariffed products and can’t find substitutes), but the tariffs have not had nearly the destructive effects that I and many others believed they would.

But the biggest problem for Trump’s detractors is highlighting the adverse effects of Trump’s tariffs. Remember that the American people seem to broadly like tariffs: Biden expanded Trump’s tariffs, Bernie surged in the Democratic Party by denouncing Clinton’s pro-corporate policies (which were usually also pro-trade policies) and Trump has completely remade the GOP into a protectionist party. America’s two parties are dominated by protectionists, and many free-trade Democrats have been furious that 2028 hopefuls have mostly denounced Trump’s tariffs as being “too high, too broad,” rather than hitting out that “tariffs are just plain bad and shouldn’t be used.”

It seems that Americans really do like tariffs, so trying to attack Trump for his tariff policy doesn’t hit as well as it “should.” This is a big problem for free-trade Democrats because to them it’s patently obvious that Trump’s tariffs have led to higher inflation and lower growth, but Americans aren’t necessarily buying it.

Enter Amazon. As the foremost distributor of direct-to-consumer goods, Amazon is acutely sensitive to trade policy. Any raise in tariffs will cause a raise in prices for imported goods, causing consumers to purchase less and that hurts Amazon’s bottom line. Amazon has every reason to lobby as strongly as possible *against* tariffs, and as a consumer-facing company that everyone knows, free-trade Democrats thought they’d found their edge.

The idea went like this: what if Amazon *shows consumers* how much higher their prices are because of tariffs? What if every time a consumer buys a 100$ imported product, Amazon shows its base cost but then hits them with a “+15$ because of tariffs” fee at the checkout? Consumers would be furious at these hidden costs, but their fury would be directed at Trump and his tariffs. The tariffs would become unpopular, Trump would become unpopular, the free-trade Democrats and Amazon would be the big winners in 2026 and 2028 when (hopefully) less protectionist Democrats would be swept into power on a wave of consumer backlash.

It all seemed so perfect, leaked reports even claimed that Amazon was openly considering this idea.

But then Amazon made an official statement that they would not under any condition display tariff prices. Their statement said that while such a move was considered, it was never approved, which isn’t unusual as companies are constantly considering many thousands of moves that are never approved. Furthermore Amazon spokesmen pointed out that the company had never shown consumers the cost of tariffs during the Biden administration, even though Biden had hiked tariffs to their highest point since Jimmy Carter.

Amazon felt the move would damage its own brand, worsen its political position, and bring basically no benefit. If Amazon was an arm of the Democratic party, then maybe it would make sense. But as a profit-maximizing entity, pissing off your customers with hidden fees *and* wading into the political arena with a nakedly partisan endorsement of the opposition (by blaming the current administration for high prices) just doesn’t make sense.

So Amazon will *not* be part of the Anti-Trump Resistance. As Michael Jordan once said, Republicans buy sneakers too, and most profit-maximizing companies find it best to *not* piss off half the country by taking overtly partisan stances. They may try to take political stances, but they will always present themselves as non-partisan to consumers, because they don’t want to lose business from angry voters. And directly blaming Trump’s Tariffs for high Amazon prices, after 4 years of never doing such for Biden’s Tariffs would indeed be an overtly partisan act, because it’s an attempt to blame Republicans for high prices and push consumers towards supporting the Democrats.

This then made Amazon a target of April’s 2-minute-hate in the eyes of free-trade democrats. These Democrats don’t see “showing the cost of tariffs” as partisan at all (because people always believe their own beliefs are just “the obvious truth,” and not a partisan stance). Rather, when Amazon *refused* to show the cost of tariffs, it was blamed for kowtowing to a “fascist” government, comparisons to 1930s German companies were ever-present, and Bezos himself was derided as a coward and a collaborator, rather than the profit-maximizing businessman that he is.

The simple fact is that obviously no multinational company is going to want to lose half its customers, so no multinational company is going to make their storefront an advertisement for the Democrats and against the Republicans. I’m sure Amazon is lobbying the administration on reducing tariffs, it was widely reported that tech giants did this exact same lobbying last time Trump was in power. But just because Amazon doesn’t like tariffs doesn’t mean they want to torch their credibility with Republican consumers. Because Republican consumers might angrily ask why Amazon is sourcing products from overseas (and showing people a tariff) rather than sourcing *American* products like Trump (and Joe Biden, and Bernie Sanders) would prefer they be doing.

Anyway I’ve found a dozen ways to restate this one point: Amazon is not going to become part of the Resistance, it will not show consumers what the price of Trump’s tariffs are in part because that would be a partisan move that would invite blowback and boycotts from Republicans: “why isn’t Amazon buying American instead, and why didn’t Amazon do this stunt during the Biden administration?”

But I wanted to note one additional reason Amazon won’t be showing consumers the price of tariffs, and it’s isn’t because of what Amazon wants, it’s because of what their suppliers want.

The relationship between Amazon and its legion of medium-sized suppliers is a tricky one. On the one hand some random clothing store like Shoes&Shirts LLC (fake name) probably likes that Amazon gives them a massive amount of customers to sell to. Amazon’s global consumer base makes it easier to scale up by just having a single contract with Amazon, rather than having to negotiate multiple deals with brick-and-mortar stores in every single country.

On the other hand, Amazon’s dominance of the market gives them a lot of power over their suppliers, they can negotiate a large cut of the proceeds, demand suppliers abide by Amazons rules and regulations, and overall an agreement with Amazon can be like a pair of golden handcuffs. If you’ve seen how indie developers complain about Steam, you’ll understand how small and medium suppliers complain about Amazon.

The situation can be even worse, since Amazon competes directly with its own suppliers. Say Shirts&Shoes LLC has a new style of Comfy Sweater that is flying off the digital shelves. Amazon can see this, and see that another company makes a nearly identical sweater for a fraction of the cost. Amazon can then source their own Comfy Sweater from this other company and try to undercut Shirts&Shoes LLC on price, fulfilling the orders themselves and taking Shirts&Shoes’s business out from under them.

Amazon suppliers are therefore very very cautious with what information they give to Amazon. They do *not* want to tell Amazon the price it costs them to make something, they only want to reveal the price they’re selling it for. Giving away the price to make something makes it even easier for Amazon to undercut them.

If Shirts&Shoes’s sweater is selling for 100$, and you can source it for 60$, you still don’t know for sure if you can undercut them. Maybe Amazon lists their own sweater for 75$, but Shirts&Shoes responds by cutting the price down to 50$ because they can actually make it for even less than that. Amazon would be putting a lot of money into a failed attempt at capturing new market share, Shirts&Shoes would be furious at the attempted betrayal, AND both would now be making less money because the shirt is selling for less so both sides get less of a cut. The only winners would be the consumers.

So Amazon’s suppliers DO NOT want to give Amazon any information more than they need to. And that by the way includes the price of tariffs.

When Shirts&Shoes brings a shirt into America, customs charges them a tariff based on the declared value of the shirt. Shirts&Shoes then has to set the sale price at a level high enough to cover not only the cost of the shirt, but also the cost of the tariff. If the value of the shirt is 20$ and there’s a 100% tariff, then they can’t sell the shirt for less than 40$ without taking a lose.

But they may be selling the shirt for 100$ anyway and taking 60$ of profit. Now, the shirt’s price may have gone up because there used to be no tariff and now there’s a 100% tariff. So the free-trade Democrats would love if the shirt was listed on Amazon for a price of 80$, but had an extra 20$ “tariff tax” at the checkout that would be directly blamed on Donald Trump.

But Shirts&Shoes doesn’t want to reveal that the base cost of their shirt is 20$ with a 20$ tariff on top. Because at that point if Amazon can source the same shirt for 35$, then they can undercut Shirts&Shoes and steal their business, and both sides know it. Instead, Shirts&Shoes would like the costs going into the shirt to be as obfuscated as possible.

They’d probably like their customers to think that it costs them 90$ to make a shirt and they’re selling it for 100$, because that way they don’t seem to be making “too” much profit. If customers knew Shirts&Shoes had such a high mark-up, customers might think they were getting ripped off, and would make nasty posts on the internet to complain about Shirts&Shoes’s prices. This could harm Shirts&Shoes’s brand.

And they’d probably like Amazon to think that it costs them 5$ to make a shirt and they’re selling it for 100$. Because they don’t want Amazon to attempt to undercut them and either steal their business or initiate a price war which harms their profit margins.

So ambiguity is entirely in Shirts&Shoes’s interests, and so they don’t want to reveal any tariff information to Amazon. That in turn means that even if Amazon wanted to, it wouldn’t be able to reveal tariff information on any third party products, only on products it sources itself. That could backfire if Amazon even decided to reveal tariff prices, as *only Amazon’s own goods would show the tariff as a hidden cost*. Buy a good sourced by Shirts&Shoes? What You See Is What You Get. Buy a good sourced by Amazon? You have no idea WHAT the real price will be.

To summarize, Amazon (and other profit-seeking companies) will NOT be part of the resistance, as they do not want to damage their brand in the eyes of partisans. Likewise, it’s not even a simple thing for Amazon to JOIN the resistance and reveal to customers the true price of tariffs. They’d be pissing off their own customers by making customers feel like the price is a bait-and-switch, they’d be demanding information from their suppliers that the suppliers don’t want to reveal, and if the suppliers DON’T reveal that information, then only Amazon-sourced products would show a tariff anyway, meaning Amazon gets all of the blowback for “high prices” while their suppliers can claim “Same Low Prices As Ever,” even if prices everywhere are actually rising.

Partisans think everyone should join their fight, and that the only reason not to is base cowardice. They’re usually wrong.

Draghi wants to unify Europe’s capital markets 

Note that this one’s more rambly than I wish, but I have a lot of thoughts and am not good at editing.  Suggestions for how to cut this down are appreciated if you want to leave a comment or an email. 

You might as well be lighting your money on fire…

When talking about the American vs European economies, the discussion always turns towards Tech.  “Europe missed the Tech boom” is a true, but surface level description of Europe’s stagnation in high tech industries.  Cloud computing, social media, AI, all the buzzwords of the last 20 years have been American, and some wonder why Europe doesn’t have trillion-dollar companies like Apple and Microsoft.  I’ve already pushed back on the “cultural” explanations for this, but I want to look deeper at some of the proposed solutions for helping Europe’s economy catch up. 

If you ask why Europe has a smaller Tech industry, there’s a few common answers given.  One is that Europe is fragmented linguistically, most people don’t speak each other’s language, while America has 300 million people all speaking one language.  But I’ve never been convinced by the argument that tech companies stop at the border.   

You can maybe make the argument that social media spreads fastest among people who speak the same language, but I’ve never seen this argument be well-quantified.  Facebook is used by half the earth’s population, they don’t all speak English, so why did it spread so easily even after maxing out in the English-speaking world?  And TikTok has been a viral hit among westerners, even though it started in China.  The language argument is often presented as obvious but without any evidence to support it, and I don’t think it’s reasonable until I see some evidence. 

Furthermore, social media is just a tiny piece of the Tech industry.  Apple, Microsoft, Spotify, Samsung, these aren’t social media companies.  So what explains why half of them are American, and the non-American ones aren’t even in the top 10? 

Another argument is that Europe is fragmented economically.  Still, I don’t really buy this.  It’s true that Europe is not wholly unified, different countries have different regulations.  But the EU is a common market of goods and services, overwhelmingly products sold in one country can likewise be sold in another.  If there was a European version of Apple or Samsung, their smartphones would almost certainly be buyable in any EU country.  Indeed, the market fragmentation never stopped Nokia from its 1-time dominance of cell phones, so why did this fragmentation prevent the emergence of a European smartphone company, if it never stopped the top European cell phone company? 

The final common answer is the one I want to discuss today: European investment is low because there is no unified capital market.  German investors invest in German companies, French investors in French companies, and this drastically limits how much capital is available for startups.  While Europe is trying to have 27 different capital markets, American capital is clustered in just 1 (Silicon Valley) or 2 (if you count Boston, New York, or one of the other “also rans”). 

I buy this argument more, but I want to start with some clarity on what it *really means* for a capital market to be “unified.” 

We’d say a market is unified when investors from one area are equally capable of investing in any other area.  Why might investors not invest across the border?  Tax and regulation mostly.   

Taxes don’t have to be *higher* to deter investment, *different* is more than enough.  Think of capital gains tax when an investor sells something they’ve invested in.  Some places allow a lower tax when you hold the investment longer (long-term capital gains), while others don’t make a distinction.  This may lead to a lower tax burden overall, but more tax-season headache in proving how long each investment was held, and proving it was held in the correct jurisdiction which allows this long-term capital gains distinction.  Sometimes it’s better to just invest everything in one place and hire less accountants. 

Different regulations would also be self-explanatory, there’s more bureaucratic overhead in understanding and applying different regulations for each different investment.  But here we come to the difficult part, and why I think Draghi’s drive for unification will face stiff headwinds.  Regulations have a moral component for lack of a better word.  When discussing regulations online, it’s not uncommon to see “regulations are written in blood” as an emotive argument put forth against deregulation.  Any attempt to pair back anything in the way of “red tape” faces a mountain of pushback from voters, and unifying the regulations will require *some* deregulation.   

*Some* country’s regulations will have to be cut, even if they’re simply replaced with those of another countries.  Even if regulations are “harmonized” by trying to bring them closer together, that still means some things get cut and some things get added.  And this will necessarily inflame the passions of the voters and commentators who say that “regulations are written in blood.”  Because while regulation of the capital markets might not have to do with healthcare and worker’s rights directly, they do have much to do with bankruptcy and ownership, which can be even more emotive. 

Trump is often jeered for his numerous corporate bankruptcies.  He in turn calls bankruptcy a smart business move when needed.  It’s true that an investor can expect 9 investments to go bust for every 1 that succeeds.  And it’s true that American bankruptcy laws are quite lenient.  And it’s also true that a smart investor be foolish to not take advantage of any edge the law can give them, lenient bankruptcy is one such edge. 

But bankruptcy stirs passions because someone’s left holding the bag.  If Europe is going to unify its capital markets, it’s going to inflame those passions.  When the banks went bankrupt in 2008, it stirred immense passion because of who had to pay and who was left holding the bag.  Changing these laws raises the specter of the financial crisis, and any recent bankruptcies will get put under a microscope to point out how things would be different in a unified EU capital market.   

To put some meat on these bones, let’s say a car company is going bankrupt in Bulgaria.  We’ll call it “Bulgarian Cars,” its owner and CEO is Mr Car, its workers belong to the “United Car Workers Union,” UCWU.  It has purchasing agreements for steel with “Steely Corp” and its sole creditor is “Big Banking,” who is unfortunately unaware that Mr Car is about to go bankrupt. 

Under the current Bulgarian system, Big Banking can (if they desire) simply take possession of all the “Bulgarian Cars” assets, and sell them in a fire sale to get back the money they are owed.  This means the factory, the showroom, and anything else could be closed down in an instant.  Big Banking gets back their money, Mr Car is broke, UCWU are out of their jobs, and Steely Corp lost its biggest customer. 

But how would this situation be effected by Draghi’s directive to unify EU capital markets?  How would the bankruptcy be altered?  Who would win, and who would lose? 

Draghi has already signaled that unified EU bankruptcy must allow for “debtor in possession,” meaning Mr Car can keep control of his company while working out a repayment plan with Big Banking.  This system allows Mr Car (or any investor) to try to rescue their company, even in bankruptcy. It’s part of what made Trump’s bankruptcies so painless. 

In France, a debtor is immediately granted relief from creditors upon filing restructuring plans.  In Germany, the debtor may *request relief*, but it isn’t automatic.  But if the capital markets are to be unified, Bulgaria must follow the direction of France and Germany and give Mr Car a reprieve from his creditors.

But should Mr Car even be *granted* relief?  He drove the company into the ground in the first place!  Why does he get to stay in charge, paying himself an obscene salary all the while?  Draghi’s unified capital markets would allow a lot more “Trump-like” bankruptcies ripe for this kind of outrage-bait, with a villainous CEO stiffing creditors, unions, and business partners while still bringing home fat checks. 

And what happens to UCWU?  They just finished negotiating a new contract with Bulgarian Cars. The contract included conditions and a long notice period before a new contract can be renegotiated.  But most EU countries allow the suspension of a union contract to help the company exit bankruptcy.  So Draghi’s unified capital market raises the possibility of workers losing out so that bankers and executives can keep the company going.  Workers’ pain for bosses’ gain. 

And through all this, what about Steely Corp, who just lost its biggest customer?  Bankruptcies are always politically fraught as they can cause a domino effect into other industries.  This is why some nations focus so much on business continuity, even if it comes at the expense of creditors and workers.  Steely Corp will want to lobby the government that UCWU and Big Banking can go to hell, they want to ensure that Bulgarian Cars returns to solvency no matter what.  Otherwise Steely Corp itself may go under, and the national news will blame the Government for letting not one, but *two* major employers go bankrupt.   

How much will Draghi’s unified capital market allow Governments to “save” companies this way?  Under certain restructuring scenarios, the Government will essentially be picking winners and losers in the market.  Demand Big Banking take a debt restructuring, demand UCWU accept a new contract, and you’re making banks and workers lose so that car and steel companies can win.  This doesn’t always fly with EU rules around fairness, and certainly won’t fly with some sections of the commentariat. 

This post was a lot less focused than usual, but it’s been in my mind for weeks.  “Unify the EU’s capital markets” sounds so obvious, why haven’t they done it?  They haven’t done it because it involves politically fraught trade-offs about ownership and hierarchy.  “Who wins and loses in a bankruptcy case” is just the top of the mountain.  Questions of equity investment, investor’s rights, corporate governance, union rights, these are also fraught questions that will have to be answered in a unified capital market.  Whatever answer is chosen will inevitably piss *someone* off, which is why countries are so slow to change these laws.  But until countries are willing to make big changes, the EU capital markets will never be unified. 

“No more austerity! The Government needs to invest!”

“Government” is capitalized here because we’re talking about the UK today. I meant to write about it earlier, but Keir Starmer and Rachel Reeves have been announcing that benefits cuts will hit the UK this year. On top of last year’s tax hikes, this has raised the specter of Austerity, and fears of another Lost Decade in the UK, only this time with Labour at the helm.

Critics of the cuts abound, bringing complains and counsel:

“What happened to the tax rises from last year?!?”

“Austerity failed already! We can’t keep cutting!”

“Tax the rich! Don’t cut off the poor!”

And finally: “We should invest, not cut!”

Let me address these one by one. First, as much as the left-of-center despises the Laffer Curve, it is still an accurate reflection of reality. Raising taxes increases prices and reduces demand. This nearly always leads to a tax rise bringing in less money than the government predicts. They may claim to be modelling the demand reduction, but governments that raise taxes are heavily incentivized to make broad claims about bringing in lots of money to balance the books. Accurate modeling plays second fiddle.

And this has been the case in the UK, the 40 billion pound tax rise announced last year isn’t expected to bring in quite that much. For instance, a tax on private school education was expected to raise money while affecting a minimal number of pupils. But the government underestimated how many families would be unable to afford the tax, pushing those kids back into the public schools, where they aren’t paying the tax and the government will have to pay for their education.

So the government’s tax rise didn’t bring in near enough, and they even raised spending on top of it. The UK now faces a yawning deficit, nearly 5% of GDP. With Debt to GDP already over 100%, the government is finding borrowing unaffordable. The cost of financing all that debt is soaring, it’s 25% higher than it was a year ago at more than 100 billion pounds a year. Remember, that 100 billion pounds is *just the cost of the interest payments*, assuming no money is spent actually paying down the debt. Labour is then adding that 5% deficit on top of that, which will need even more borrowing.

So borrowing is going to cost way more than Labour expected. If they don’t want to enter a debt spiral, they need to manage that deficit.

“But Austerity failed already!” When did the UK ever implement austerity? It was the word of the decade under the coalition government, but despite the tough talk and tax rises, total spending increased every single year of the coalition, and never went down. And this wasn’t “cuts in real terms either,” *real spending* ie inflation adjusted spending, never went down during the Coalition government. It grew more slowly than under Blair/Brown, but it never went down. Boris Johnson has the (dis)honor of overseeing the only year on year reduction in real Government expenses, thanks to the massive pandemic spending that then petered out.

The UK hasn’t done austerity, and it isn’t doing austerity now. The announced cuts aren’t actual reductions in spending, they are really just slowing the rate of spending *increase*. Labour promised massive spending increases last year, and a few of those are being paired back into a smaller increase. This is still an increase in real spending, just less of one than what was promised. This isn’t austerity.

And what of taxing the rich? They’re already pay all the tax. The top 10% of UK earners pay 60% of all taxes, the top 1% pay half of that (ie 30% of the total). The bottom 50% of earners pay 17% of tax. About a third of working age Britons pay no tax at all.

And that is significantly more progressive than on the Continent, the German 10% pay a little over half of their country’s taxes, the German 1% pay a little under a quarter. By and large, the UK taxes the rich more and taxes the poor less than in the rest of Europe.

Of course, the real definition of “rich” is “1 standard deviation above my personal income.” Everyone agrees that someone *else* must pay more, but will the British economy really be improved by chasing off its last remaining high earners to America? Europeans have boasted that Trump will set off a “brain drain” of wealthy Americans, but the difference in after-tax earnings means historically that brain drain has only happened in the America-ward direction. Further tax hikes will only enforce that paradigm.

Finally, shouldn’t the Government *invest* rather than *cut*? The private sector does it all the time! They take out eye-watering amounts of debt and yet somehow come out on top, the public sector should too!

But the Government doesn’t really invest. It spends money, and it uses the language of the private sector to claim that the money is spent well. But the Government doesn’t have the profit incentive that the private sector does, it’s overwhelming incentive is for optics and votes. So as Biden showed us, Government “investment” never really generates a return.

Labour is right to cut spending. They’ve already hiked taxes, and they need to get borrowing costs under control somehow. Besides, Government spending as a proportion of GDP is already nearly 50% in the UK, about 17,000 pounds per person. Just over 10% of the population (people making more than 50,000 pounds) are putting in more money than they’re getting out. The Government already spends a lot of money, and not well. More money in the fire won’t necessarily help.

But like Nigeria’s president Tinubu, Keir Starmer has talked a big game on growth without having the stomach to follow through with it. So again, here’s my unsolicited policy advice:

Keir Starmer should liberalize (liberalise?) the UK’s labor (labour?) laws. UK companies are significantly constrained in their abilities to fire, and this generates a reluctance to hire. The UK has stiff requirements on minimum notice before firing, minimum compensation when you get fired, and if you work there for 2 years a company needs to jump through significant regulatory hoops to be allowed to fire you. These laws should be liberalized to make it easier to fire, and therefore incentive companies to hire.

I know this proposal doesn’t sit well with any of my readers. We’re all workers, I doubt any of us is an owner. But here’s the rule of labor markets: easy go, easy come. The easier it is to fire a worker, the more willing a company will be to hire, and the more nimble a company will be at navigating a changing market.

If a UK company wants to expand, they have to do so very slowly and carefully because any new hire becomes a big liability after 2 years. UK Companies can’t downsize to adjust to market conditions, and so they are hesitant to upsize even during the good times. That makes them grow more slowly, and believe it or not it reduces wages.

Let’s look at Meta as an example: they laid off tens of thousands of employees when the “metaverse” was proven to be a bust. They were able to lay off quickly and adjust their company focus because those metaverse employees weren’t guaranteed a silver parachute. If firing was harder, they might have held on to their losing bet on the metaverse for much longer, because the cost of firing mitigated the upside potential in changing tactics. Then again if firing was harder, Meta might have never made a big expensive bet on the metaverse to begin with.

See the metaverse was a big, expensive failure, but US companies have to expect that most of their bets will fail. But some bets will succeed and wipe out all the loses from the failures, and so US companies are very quick to hire when they’re chasing a big bet.

The ballooning wages in Tech are a symptom of this. Companies like Google and Amazon have made big bet after big bet in the last 20 years, and to when those bets pay off the company starts offering higher and higher wages to expand the company on the success of their big bet. Sometimes those bets go bad and you get layoffs like at Meta. But many of those bets go good and you find that starting salaries in America become higher than mid-tier salaries in most of Europe.

And while Tech is the most famous example, this is endemic in every American industry from energy to pharma and beyond. Liberalized labor markets mean companies are willing to make big bets, meaning some of those bets pay off and the workers get chased by higher salaries. The workers are ultimately the ones who benefit here, that’s why America is such a magnet for high-skilled immigration (on top of its attractiveness for all immigration). Even with Trump in power, tens of thousands of highly skilled immigrants will continue to come to America every year he’s in office, the salaries are just too good to pass up.

That was a lot more than I expected to write on labor markets, but I’ve got more if you’re interested. Stay tuned for the next exciting installment of “if I ruled the world.”

If the government doesn’t do this, no one will

I’m not exactly happy about the recent NIH news. For reference the NIH has decided to change how it pays for the indirect costs of research. When the NIH gives a 1 million dollar grant, the University which receives the grant is allowed to demand a number of “indirect costs” to support the research.

These add up to a certain percentage tacked onto the price of the grant. For a Harvard grant, this was about 65%, for a smaller college it could be 40%. What it meant was that a 1 million grant to Harvard was actually 1.65 million, while a smaller college got 1.4 million, 1 million was always for the research, but 0.65 or 0.4 was for the “indirect costs” that made the research possible.

The NIH has just slashed those costs to the bone, saying it will pay no more than 15% in indirect costs. A 1 million dollar grant will now give no more than 1.15 million.

There’s a lot going on here so let me try to take it step by step. First, some indirect costs are absolutely necessary. The “direct costs” of a grant *may not* pay for certain things like building maintenance, legal aid (to comply with research regulations), and certain research services. Those services are still needed to run the research though, and have to be paid for somehow, thus indirect costs were the way to pay them.

Also some research costs are hard to itemize. Exactly how much should each lab pay for the HVAC that heats and cools their building? Hard to calculate, but the building must be at a livable temperature or no researcher will ever work in it, and any biological experiment will fail as well. Indirect costs were a way to pay for all the building expenses that researchers didn’t want to itemize.

So indirect costs were necessary, but were also abused.

See, unlike what I wrote above, a *university* almost never receives a government grant, a *primary investigator* (called a PI) does instead. The PI gets the direct grant money (the 1 million dollars), but the University gets the indirect costs (the 0.4 to 0.65 million). The PI gets no say over how the University spends the 0.5 million, and many have complained that far from supporting research, the University is using indirect costs to subsidize their own largess, beautifying buildings, building statues, creating ever more useless administrative positions, all without actually using that money how it’s supposed to be used: supporting research.

So it’s clear something had to be done about indirect costs. They were definitely necessary, if there were no indirect costs most researchers would not be able to research as Universities won’t allow you to use their space for free, and direct costs don’t always allow you to rent out lab space. But they were abused in that Universities used them for a whole host of non-research purposes.

There was also what I feel is a moral hazard in indirect costs. More prestigious universities, like Harvard, were able to demand the highest indirect costs, while less prestigious universities were not. Why? It’s not like research costs more just because you have a Harvard name tag. It’s just because Harvard has the power to demand more money, so demand they shall. Of course Harvard would use that extra money they demanded on whatever extravagance they wanted.

The only defense of Harvard’s higher costs is that it’s doing research in a higher cost of living environment. Boston is one of the most expensive cities in America, maybe the world. But Social Security doesn’t pay you more if you live in Boston or in Kalamazoo. Other government programs hand you a set amount of cash and demand you make ends meet with it. So too could Harvard. They could have used their size and prestige to find economies of scale that would give them *less* proportional indirect costs than could a smaller university. But they didn’t, they demanded more.

So indirect costs have been slashed. If this announcement holds (and that’s never certain with this administration, whether they walk it back or are sued to undo it are both equally likely), it will lead to some major changes.

Some universities will demand researcher pay a surcharge for using facilities, and that charge will be paid for by direct costs instead. The end result will be the university still gets money, but we can hope that the money will have a bit more oversight. If a researcher balks at a surcharge, they can always threaten to leave and move their lab.

Researchers as a whole can likely unionize in some states. And researchers, being closer to the university than the government, can more easily demand that this surcharge *actually* support research instead of going to the University’s slush fund.

Or perhaps it will just mean more paperwork for researchers with no benefit.

At the same time some universities might stop offering certain services for research in general, since they can no longer finance that through indirect costs. Again we can hope that direct costs can at least pay for those, so that the services which were useful stay solvent and the services which were useless go away. This could be a net gain. Or perhaps none will stay solvent and this will be a net loss.

And importantly, for now, the NIH budget has not changed. They have a certain amount of money they can spend, and will still spend all of it. If they used to give out grants that were 1.65 million and now give out grants that are 1.15 million, that just means more individual grants, not less money. Or perhaps this is the first step toward slashing the NIH budget. That would be terrible, but no evidence of it yet.

What I want to push back on though, is this idea I’ve seen floating around that this will be the death of research, the end of PhDs, or the end of American tech dominance. Arguments like this are rooted in a fallacy I named in the title: “if the government doesn’t do this, no one will.”

These grants fund PhDs who then work in industry. Some have tried to claim that this change will mean there won’t be bright PhDs to go to industry and work on the future of American tech. But to be honest, this was always privatizing profit and socializing cost. All Americans pay taxes that support these PhDs, but overwelmingly the benefits are gained by the PhD holder and the company they work for, neither of whom had to pay for it.

“Yes but we all benefit from their technology!” We benefit from a lot of things. We benefit from Microsoft’s suite of software and cloud services. We benefit from Amazon’s logistics network. We benefit form Tesla’s EV charging infrastructure. *But should we tax every citizen to directly subsidize Microsoft, Amazon, and Tesla?* Most would say. no. The marginal benefits to society are not worth the direct costs to the taxpayer. So why subsidize the companies hiring PhDs?

Because people will still do things even if the government doesn’t pay them. Tesla built a nation-wide network of EV chargers, while the American government couldn’t even build 10 of them. Even federal money was not necessary for Tesla to build EV chargers, they built them of their own free will. And before you falsely claim how much Tesla is government subsidized, an EV tax credit benefits the *EV buyer* not the EV seller. And besides, if EV tax credits are such a boon to Tesla, then why not own the fascists by having the Feds and California cut them completely? Take the EV tax credits to 0, that will really show Tesla. But of course no one will because we all really know who the tax credits support, they support the buyers and we want to keep them to make sure people switch from ICE cars to EVs

Diatribe aside, Tesla, Amazon, and Microsoft have all built critical American infrastructure without a dime of government investment. If PhDs are so necessary (and they probably are), then I don’t doubt the market will rise to meet the need. I suspect more companies will be willing to sponsor PhDs and University research. I suspect more professors will become knowledgeable about IP and will attempt to take their research into the market. I suspect more companies will offer scholarships where after achieving a PhD, you promise to work for the company on X project for Y amount of years. Companies won’t just shrug and go out of business if they can’t find workers, they will in fact work to make them.

I do suspect there will be *less* money for PhDs in this case however. As I said before, the PhD pipeline in America has been to privatize profits and subsidize costs. All American taxpayers pay billions towards the Universities and Researchers that produce PhD candidates, but only the candidates and the companies they work for really see the gain. But perhaps this can realign the PhD pipeline with what the market wants and needs. Less PhDs of dubious quality and job prospect, more with necessary and marketable skills.

I just want to push back on the idea that the end of government money is a deathknell for industry. If an industry is profitable, and if it sees an avenue for growth, it will reinvest profits in pursuit of growth. If the government subsidizes the training needed for that industry to grow, then instead it will invest in infrastructure, marketing, IP and everything else. If training is no longer subsidized, then industry will subsidize it themselves. If PhDs are really needed for American tech dominance, then I absolutely assure you that even the complete end of the NIH will not end the PhD pipeline, it will simply shift it towards company-sponsored or (for the rich) self-sponsored research.

Besides, the funding for research provided by the NIH is still absolutely *dwarfed* by what a *single* pharma company can spend, and there are hundreds of pharma companies *and many many other types of health companies* out there doing research. The end of government-funded research is *not* the end of research.

Now just to end on this note: I want to be clear that I do not support the end of the NIH. I want the NIH to continue, I’d be happier if its budget increased. I think indirect costs were a problem but I think this slash-down-to-15% was a mistake. But I think too many people are locked into a “government-only” mindset and cannot see what’s really out there.

If the worst comes to pass, and if you cannot find NIH funding, go to the private sector, go to the non-profits. They already provided less than the NIH in indirect costs but they still funded a lot of research, and will continue to do so for the foreseeable future. Open your mind, expand your horizons, try to find out how you can get non-governmental funding, because if the worst happens that may be your only option.

But don’t lie and whine that if the government doesn’t do something, then nobody will. That wasn’t true with EV chargers, it isn’t true with biomedical research, and it is a lesson we all must learn if the worst does start to happen.

Thomas Friedman’s the-world-is-flatitude

Flatitude is supposed to be a play on attitude

I remember reading about Thomas Friedman’s “The World is Flat” thesis years ago. Put simply: he proposed that globalization meant the USA no longer enjoyed a by-default pre-eminance in the world economy. American companies and workers now had to compete with the entire world, and that inevitably would lead to worldwide wages equalizing and other companies rising up to meet American dominance. Gone are the days when an American can work for the world’s biggest company, headquartered in their hometown, and then go on vacation to places where “everything is so cheap!” The world’s biggest companies will be more likely to be headquartered in China and India than America, and wages worldwide will rise to the point that every country is as expensive to visit as America.

20 years on, none of that has happened.

At times and at places, global wages have risen relative to America. At times and at places, global companies have risen into industries once dominated by America. But in 2005, when Friedman published his book, the top 10 global companies by market cap were 80% American. In 2024, they’re 90% American. And in certain years (like 2016 and 2017), they’ve been 100% American. American companies still rule the global roost, and American wages are still the highest on earth. International workers still prefer to immigrate to America, despite the massive costs and uncertainties, rather than find a job with a global company in their home country.

I don’t know how Friedman himself portrayed his thesis in 2005, but in my part of the world (liberal and anti-American-by-default because the sitting president was a Republican), there was a lot of “take that America! You won’t stay on top for long and you’d better get used to it!” I think Friedman had a misread of history, and the readers had an even greater misread of the present.

There is a default mindset that I feel many people fall into when talking about economics. The idea goes: America used to be on top of the world because of unfair, random advantages. Those could be colonialism, those could be early industrialization. But now that the world is more fair (or once we *make it* more fair), America can’t coast on inertia, it will have to compete on a level playing field, and *of course* the rest of the world, which has 95% of the population to America’s 5%, will eventually out-compete it in *many* areas.

I think this belies a misunderstanding of the unfair advantages that America has *right now*. India, Nigeria, and China all have large populations, lots of natural resources, and growing middle classes. But it’s difficult to do business there because of import/export and currency restrictions, and often-times everything can be taken from you by government fiat, so it’s harder to create success and you’re more likely to leave the country if you do manage it. And when you leave the country, you can always go to Europe, but if you want to keep growing your business or your personal finances you go to America where the wages are higher and the business climate friendlier.

Friedman said that globalization, the technology that connects us and the legal/social willingness to offshore jobs and production will inevitably lead to a flattening of global economies and global wages. Why would Microsoft pay $100,000 to a programmer in America, when a programmer just as good in India will cost $10,000? They won’t. And so there will be more demand for Indian programmers and less and less demand for American ones. Law of supply and demand means American wages will fall and Indian wages will rise until the two equalize.

But alternatively, why would Microsoft put its money into India (as it must do in order to have the bank accounts, rental agreements, and so on which allow it to employ Indian workers), when capital controls will restrict its ability to get its money back out again? Companies don’t exist for a country’s good, they exist for their own good, and Microsoft wants to be able to move its money anywhere and everywhere at a moment’s notice. Capital controls, like what the developing world still employs, make it harder to do so, and make companies like Microsoft and others far more leery about investing in those countries.

An employee in America costs 10x as much, but at least your money will never get stuck in America with no way out.

And this is just the one example that leapt off the page at me. There are plenty more reasons why the world is not flat and probably won’t ever be. There are network affects to the USA that may take centuries to undo, such as the preeminence of the US stock markets at the expense of all others. India investors throw their money into the S&P more than the Indian stock markets, so an Indian company looking to grow fast with public money also needs to list on the S&P. That draws it further and further into connecting with the American economy, until it starts making more and more sense to just do its business in America as well. Oh it would never think of uprooting from India (and the government won’t allow it anyway), but it will invest more in American operations and less in Indian operations than it would if it didn’t get drawn to America by all the money that’s there.

Then there’s security. For all the internet memes, America is a safer place with a generally lower death rate than developing nations like India and Nigeria. There’s a whole lot of reasons for this, but it isn’t something that can be fixed quickly and easily with a bit more money. So an Indian worker would still prefer to make their money in America if it means they get to live in America as well, even if they could make the same amount of money in India.

I think there is a general under-estimating of what makes the American economy so strong. A lot of people assume it’s just inertia: America industrialized early, got to coast on colonialism, and then wasn’t destroyed in World War 1 and 2. That meant that it emerged in the 50s as the strongest economy on earth, but without those lucky breaks it has no reason to stay the strongest. So people assume America has just been coasting and the rest of the world will quickly catch up. I don’t think that’s the truth. A lot less attention is paid to just how much America’s laws and economic setup make doing business here easier than anywhere else.

There’s a separate meme about how “lucky” America is that it keeps finding natural resources everywhere. Coal, oil recently Helium, America just seems “lucky.” But while hydrocarbons certainly aren’t found everywhere, America isn’t *really* just lucky. The recent American oil boom is driven by fracking, and Europe could have joined in the boom except that they banned fracking entirely. There is plenty of frack-able (is that a word?) oil underneath Europe, even if there aren’t any Saudi-style oil fields there, but Europe can’t join the oil boom because its laws don’t allow it.

And American finds of lithium, helium and so on aren’t just luck either. In America, if you own a piece of land you generally own the mineral rights beneath it. That makes it economically viable to just start searching the land for any big piles of lithium/helium and so on, because if you find any its yours by default and you win a lot of money.

But in Australia, many mineral rights are held by the states. So why would I ever go hunting for lithium/helium on my land if I may not be able to get money out of it? If I have to pay the state a portion of my winnings? There’s probably just as much ultra-precious metals in Australia as there are in America, but less of it gets found because there’s less incentive. Not to say *nothing* gets found, Australia does have a mining-intensive economy, but less than if individuals had an incentive to go looking.

I just wanted to post this to say that the world is not flat, and America is not just lucky. Luck may play a role, but writers and commentators often don’t understand how America’s current laws and economic setup give it a *current* competitive advantage relative to all the other countries on earth. It isn’t just coasting on its *past* competitive advantage from the 1950s, and there’s no guarantee that the rest of the world *must* catch up to America unless they loosen their economic laws in turn.

If I were president of Nigeria

You may have read in the news that Nigeria is going through an economic crisis. I feel most news agencies haven’t done a lot of due diligence, they have poured plenty of ink over the human interest stories of people unable to buy petrol, of the mass protests, and of the government’s response. But they haven’t done anything to explain the economic underpinnings of the crisis.

At best they may have given you a few basic facts. The president cut fuel subsidies and currency controls; the price of everything skyrocketed; the president says some pain is necessary. But they aren’t doing anything more than blaming the president’s actions for the crisis while also blandly repeating his assertions of “no pain, no gain.”

WHY did the president do what he did? Why does he think it’s necessary? What has it achieved? What has it *not* achieved? And what could he be doing differently?

Nigerian President Tinubu came into power only last year, amid an already languid economy. He comes from the same party as his predecessor, but was not content to be “Continuity Buhari,” he wanted to shake things up. At his inauguration, he announced the end of the fuel subsidy “with immediate effect.” People of course rushed out to buy the last of the subsidized fuel before prices skyrocketed. Not long after, he began loosening currency controls. The central bank had been artificially inflating the value of the Naira, and so without these controls it’s value came crashing down.

But I don’t think Tinubu did this because he hates poor people and doesn’t want to spend money on them. I think there were dire financial circumstances that demanded these actions, but not only do they demand *more* actions that Tinubu seems unwilling to entertain, but he himself has not been a great spokesman for why he did this.

To start with, the fuel subsidy was costing Nigeria an incredible amount each day. Nigeria maintains a relatively low tax environment thanks to a state monopoly on oil which is the government’s main source of revenue. The fuel subsidy hoovered up between 15 and 25 percent of this government revenue, a huge outflow that badly constrained government finances while also inhibiting a transition to renewable, perhaps even cheaper energy like wind and solar.

Meanwhile, the currency controls also costed Nigeria greatly. There are two ways to maintain an artificially powerful currency: buying currency on the local market and restricting the movement of currency into and out of the country.

The Nigerian central bank spent loads of dollars and euros from its vault buying up naira (Nigeria’s currency) on the global market, to raise the price of naira relative to these other currencies. But this was never enough to keep the value of the naira up, the central bank’s “official” exchange rate was always around 100 to 1000 times more expensive than what the naira was *actually* worth. The black market exchange rate pegged the naira as being worth way way less than what the central bank said.

In normal circumstances, this black market rate would quickly take over, obliterating the value of the naira as people trade naira for dollars at fair market prices, rather than the bank’s artificially set price. So currency controls were implemented to prevent this.

There were (and still somewhat are) huge restrictions on bringing dollars or foreign currency into Nigeria. It’s hard to bring cash on an airplane, and if you send money digitally through a bank, the Nigerian central bank will forcibly convert your dollars into naira at their set price, turning your 100 dollars into say 10,000 naira instead of the 1,000,000 naira they’re actually worth. This loses you a lot of money. And then there are crackdowns on any unofficial money changers, all this means that it’s very restrictive to move money into and out of the country.

But what if you’re a tourist, or a business that wants to invest in Nigeria? Then the central bank’s currency scheme is a certain way to fleece you for your dollars. Nigeria (like most countries) demands all transactions be in its local currency, the naira. So if you want to buy Nigerian yams, either because you’re a tourist who wants to eat yams or because you’re an exporter wanting to export them on the global market, you need to change your dollars into naira to do so. This either means losing 90% of your dollar’s value through the official exchange rate, or risking jail time by smuggling dollars into the country and using a black market money changer.

Either way, this makes investment *and* tourism a lot more precarious, and does even more to scare foreign money *out* of the country, at a time when Nigeria desperately needs money coming *in* to save its beleaguered industries.

To get back to Tinubu, he saw that Nigeria’s government finances were not good. The government deficit ran 5% of GDP, and was growing. It was difficult, and VERY expensive for Nigeria to borrow money on the world market because of this, so continuing the deficit-spending path was merely robbing future generations to pay for the present generation.

So he wanted to cut spending and boost investment. He cut the fuel subsidy, since it costed so much of the government’s revenue, and he loosened currency controls so that it’s easier to invest in Nigeria. In this way he hope to grow the economy and raise tax revenue. In the long run, this should provide *more* money to support the people.

Loosening currency controls however, led to triple digit inflation, as the naira’s official value finally caught up to its black market value. And combined with the end of the fuel subsidy this made everyone a lot poorer and made food and basic necessities a lot more expensive.

There’s a glimmer of hope that Tinubu’s plans are working, foreign investment is surging and perhaps after so much pain, Nigeria can come out the other side with a stronger economy that can actually spend more on its people, more on education, safety, and medical welfare instead of just subsidizing petrol. But it may also be far to little to save Tinubu’s presidency, and his successor can just undo it all to appease the populace.

I think the gains would come a lot faster for Tinubu if he were willing to be a truly radical reformer, and not just cut spending on the poor.

In addition to the fuel subsidy and currency restrictions which make investing in Nigeria difficult, the country also has a highly restrictive trade policy which isn’t making things any easier. Nigeria prohibits the import of a wide variety of products, from staple crops like cassava (related to the yam or sweet potato) to cement to eggs and meat. The only justification for this is to “protect domestic industry and farmers,” but let me rebut that:

First of all, people cannot afford food! The end of the fuel subsidy, the floating of the currency, these have put the price of food out of reach of many Nigerians. There are thousands of foreign companies, in West Africa and the rest of the world who can step in to provide more food if import restrictions are lifted. More food means a drop in the cost of food, through the laws of supply and demand, and so this increase in supply would go at least some way towards alleviating the hardships brought on by Tinubu’s other reforms.

And furthermore, importing food would create just as many jobs, if not more, than it “destroyed.” Markets need workers to staff them, trucks need drivers, loaders, unloaders and ports need all the same. Importing eggs so that people can afford to eat might make it harder to a poultry farmer to compete, but it would also create a number of jobs in logistics, supply, and customer-facing roles to get those eggs into people’s hands.

Furthermore, the unemployed farmer need not remain so. The high price of eggs makes it hard not only for customers to afford eggs, but also for any industry that uses eggs to afford them. Ice cream is very popular in Nigeria, but locally made ice cream is more expensive than it should be because the price of eggs remains high. But importing eggs would lower the price of eggs by driving up supply, and would allow ice cream manufacturers to buy more eggs, make more ice cream, and thus they’d need to hire more loaders and unloaders, more line workers, more mechanics for their ice cream machines, and so on. The loss of jobs in the poultry industry would easily be replaced by the gain of jobs in every manufacturing industry which uses eggs as an input.

And new industries could also be created. The thing about the government controlling the economy (as it does when it restricts the import and export of goods) is that the government doesn’t know as well as the market what a country’s competitive advantage is. And by stifling the import of so many goods, the Nigerian government makes it difficult for the economy to *find* those competitive advantages.

The USA eats far more pineapples than it produces, but imported pineapples are often packaged and canned in the USA, and that packaging and canning industry employs far more people than pineapple-growing alone ever could. And it’s not as if the USA *couldn’t* grow pineapples. California, and Florida all grow pineapples, but they have found competitive advantages in other products (like oranges or computer software) and the pineapple-growing jobs are instead pineapple-canning jobs, which are higher paid as well.

So if Nigeria ended its import restrictions, not only would individuals be able to afford groceries, but industries would be created and expanded, growing the economy. Nigeria would be able to find its competitive advantages, the things it does better than every country on earth, and would better exploit those advantages for growth and profit.

I will throw a bone to the populists who say that the fuel subsidies and currency controls may have been lifted *too fast*. I haven’t looked into it, but perhaps the pain would have been minimized, and the disruptions smoothed out, if these reforms were phased in such a way that the economy could better adjust. But if I were advising president Tinubu, my primary advice would be that he isn’t going far enough. End the trade restrictions, help the people afford basic goods, and help the industries grow through competitive advantage. The end result will be a much better economy than when you cut all the subsidies but still try to “protect” entrenched industries.

Why is State Farm leaving California?

note: I had intended to publish this months ago. But I never finished it, and now I’m struggling to get a post out in time, so I’ve tried to make this one acceptable.

There was recently news that State Farm insurance is leaving California, and will no longer accept new customers. Perhaps they may even kick old customers off their plans and refuse to do any business in California at all. This caused a wave of reactions, from consternation that a company could be so mean to California, to demands that State Farm “reimburse” customers who have paid for years with no claims, to calls to nationalize the insurance companies because “clearly” they’re just stealing from the little guy.

All these reactions will be addressed in turn, but first, let’s talk about how insurance works. If you recall my post from way back about Ric Flair and his gym, insurance is just a way to reduce your downside risk in exchange for a small lose of your upside gain. You pay a little every month and in exchange if your house or business is destroyed, you get some money back.

What’s important is that insurance is structured like a bet: the insurance company is betting that nothing bad will happen to your property during the period of your insurance, if they win the bet they keep your money and you get nothing in return (except maybe peace of mind). While they only pay out if they lose the bet and your property *is* damaged. Because of this, many people see insurance as a scam. Why would I ever pay if I don’t expect my property to be damaged? Well you’re mitigating risk, maybe there’s only a 1% chance your home is destroyed, but that’s a 1% chance that you lose *everything* and are left utterly homeless unless you have insurance to cover the cost of rebuilding your home. Isn’t it worth it to pay a little to ensure you aren’t homeless from an act of God?

Now first, I want to quickly call out a very dumb line of reasoning I’ve seen floating around regarding insurance. I’m not quoting any one tweet or post, but synthesizing what I’ve seen in many places at many times:

Why isn’t there a refund check for insurance like taxes? I’ve paid so much without using the policy, and even if I make a claim, they find ways to avoid paying. Total scam!

This sentiment belies a complete failure to understand insurance on even the most *basic* level. To start with, if you want a refund because you’ve paid in without using the policy, should the insurance company be able to demand more money if you paid in and then *did* use the policy? Of course not, you’d call them insane and selfish. But realize that it’s the identical situation, in reverse.

An insurance policy is simple: you pay regularly and they pay if certain conditions are met. Of course “certain conditions” can be interpreted differently by different people. And insurance companies are profit-maximizing (like all companies) they’ll try to avoid paying when they can. But this is a necessary evil, better the company try to limit payouts than it go bankrupt overpaying it’s customers. Because then every *other* customer would suddenly lose their insurance.

So finally, why is State Farm leaving California? Because they can’t make a profit. Most states regulate insurance incredibly heavily, to the extent that they put price caps on insurance premiums. That way the company cannot raise prices without the state’s say so. And if the state won’t let a company raise prices to cover rising costs (and costs ARE rising because of inflation and climate change), then the insurance company is not obligated to subsidize a state with coverage cheaper than costs.

As is so common, people blame the free market for a government-run system.

Vibes and the economy

I don’t want to get too political, but it’s an election year (in several countries) and The Discourse is inevitable. But I want to quickly push back on something I’ve seen all too often on social media recently.

In America, the numbers for the economy look “good.” Unemployment is low, *really* low. Inflation is high, but wage growth is higher. And the stock market is up. So why are Americans’ perceptions of the economy so poor? Why is consumer confidence lower than it *should* be?

Some partisans and twitterati have decided that Trump Was Right and the problem is fake news. Legacy media and social media are both driving relentlessly negative press and this is brainwashing people into believing that the “good” economy is “bad.”

But instead I’d like to take take a step back and see if polls are telling us something that “the numbers” just aren’t. And I think I have good evidence that they are.

First, here’s a graph from the Federal Reserve Bank of Dallas. It shows that housing affordability is lower than at any time since the 80, lower even than during the housing bubble that precipitated the Great Recession. If you’re a millennial or a zoomer, *never in your life has housing been less affordable than it is today*.

And housing isn’t just a “nice-to-have,” it sits at the bottom of Mazlo’s Hierarchy of Needs for a reason. A stable housing situation is (for most people) a necessary ingredient before they feel confident starting a family, putting down roots, or just feeling like they “belong” to where they live.

Now, you *can* have a stable housing situation in an apartment, but it’s much harder. Rent increases can drive you out, and rent-controlled apartments are hard to come by. Apartments also aren’t always conducive to the types of living that people want in their life.

So the price of housing is driving a *real crisis* in millennial and zoomer living, as people with otherwise high earnings are unable to obtain what lower-earnings folks could get in the past, namely a house to live in.

Then there’s the fact that datapoints about “all” millennials are missing key differences *between* millennials. See the next graph

The *median* millennial is doing worse than the median boomer was at this point in their life, in terms of net wealth, net assets, and housing. But the top 10% of millennials are doing way better than the boomers ever could, so taken together it seems like millennials are doing well overall. It’s like looking at a city where 1 person is a billionaire and 99 are destitute and saying that overall the city is very wealthy.

These kinds of mean/median differences are well-known to people in liberal circles, because they signal high inequality. But because a liberal is currently president, these differences are ignored by much of the twitterati.

I could say more about this topic, and I wish I had the energy to, but I’ve been so tired lately with my new medicine. Nevertheless, next time you see someone like Will Stancil screech that the kids are all morons and that everyone is rich, note that he is a member of that top 10%, not the median.

When people’s answers in polling are different than what “the fundamentals” suggest, it may be that the people are just stupid. But it’s far more likely that polling is capturing something that your data is ignoring. And right now that’s housing costs and growing inequality.

Are analysts’ opinions anti-correlated with the market?

This time 2 years ago, we were still riding high on the post-pandemic surge, and analysts were expecting the S&P could break 5,000. This time last year, we were still in what felt like the 2022 doldrums and analysts were predicting a recession. This time 3 months ago, people were declaring inflation was whipped. And then a few days ago, CPI and PPI came in hot.

I’ve written before about how the Efficient Market Hypothesis may imply that there is *no* correlation between analyst opinion and the stock market. Analysts are just as likely to be wrong as right, but people only remember the examples which agree with their biases. On the other hand, I read an article recently (I’m sorry I cannot find it to link) arguing that analyst opinion is in fact *anti*-correlated. That is, the Short Cramer ETF is correct, and analysts are so stupid you should do the opposite of what they say.

Speaking of, the Short Cramer ETF “SJIM” is down about 20% from when it began. But no matter, should you do the opposite of what analysts say or is that as irrational as following their advice?

One argument is that analysts are inherently *backward-looking*, they generally assume trends will continue forever. Some are perma-bulls or perma-bears, but on average when the market is down analysts predict a down year, and when it’s up they predict an up year. In this case, if the market is a random walk then it’s very unlikely to simply continue it’s current trend, thus an analyst is more likely to be wrong than right.

On the other hand, shouldn’t wisdom of the crowds have an affect? On the aggregate, many gamblers who bet on real world events (either sports of politics) are betting on what they *want* to happen, and many have no real knowledge whatsoever. Yet Nate Silver and others have argued that betting markets are often more accurate than not, whether it’s politics, sports or what have you. Some how, a million idiots adds up to something better than our smartest mind.

If that’s the case why don’t all the analysts of the market add up to something smart?

It just reminds me to be humble, because all too often I’ve seen people caught out badly by a trend. The late 2023 “inflation is beaten, start thanking Joe Biden” narrative won’t seem as smart if inflation stays persistently hot, any more than the “recession around the corner” narrative of 2023. Overconfidence when you really know nothing is the hallmark of an analyst, and maybe that’s why they’re so often wrong.