Tag Archives: Money

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. 

Would you work more hours if it meant you didn’t have to do housework?

I don’t have a catchier title, but this *is* a question I’ve been pondering. When I was young I thought that having someone else do housework for you was the height of luxury, but these days it doesn’t seem to be that uncommon. I don’t know anyone who paints their own fence, mows their own yard, or cleans their own roof. These jobs used to be seen as just part of owning a house, either you did it or you forced your kid to do it as part of their chores. But it seems nowadays most people hire professionals to do it instead.

Even the most basic housework has been outsourced, with services available to clean your bathroom and kitchen twice a month, or your whole house if you like. And of course think about restaurants and fast food: eating outside your own home has almost doubled in the past 50 years. That’s a lot less meals that people have to cook, a lot less dishes they have to clean, and even less groceries that they have to buy.

So housework is being outsourced, and is it related to how Americans seem to work many more hours than the rest of the developed world?

Shifting gears now, I’ve written before about the Europe vs America economic debates. Inevitably in such debates, the conversation shifts to working hours, workers in Europe work less hours than workers in America.

But Josh Barro on twitter has pushed back against claims about European quality-of-life: they don’t have dryers. Reddit too has a huge thread about the lack of dryers and high-energy appliances in Europe. Can a place without such creature comforts really be comfortable?

I don’t want to dwell on the dryer debate. Yes Europeans can dry their clothes in the sun. Yes, it may be cheaper. But does it require more work? Is an electric dryer not a labor-saving device that lets you cut out the work of hanging up your clothes and taking them down?

And coming back to housework, doesn’t paying someone to do your housework also save you from doing that labor? And if so, how much is your time worth it to you? To restate the question from the title of this post: if working 45 hours a week instead of 40 meant you never had to do housework, would you take it?

Some people like doing housework, I get that. But for most people, it’s a chore. And so I wonder if Americans on the whole have made a choice: they work more at work so they can work less at home, and I wonder if anyone has quantified this. European’s extra housework may not show up in the metrics, but it should still be quantified to know if Americans really do “work more hours.”

Working at work vs working at home is a dichotomy any student of economic history understands. When women first entered the private sector workforce, it didn’t mean that women *started working*, and that they weren’t working before that. Women had been doing work at home without pay since the dawn of time. If you calculate the labor done by homebound women and compare it to the paid labor plus housework done by working women, women’s’ overall working hours went down when they entered the workforce. They could use the money they made at work to pay for other people’s labor or labor-saving devices at home.

Men had also taken this leap from housework to paid work centuries before. During the days of subsistance farming, men, women, everyone had to do a hell of a lot of odd jobs to keep themselves housed, clothed, and fed, even when they weren’t actively “working” on their farm. This is why claims of how few hours medieval farmers worked are so misleading: they had many “holidays,” sure, but besides attending church those days would still be spent doing work around the house even if they wouldn’t be spent in the field.

If you were a medieval peasant, you might have a roof that needs mending, food that needs preserving, you need a new chair to fix the old one, a new patch to cover the hole in your cloak, and you had to do all this yourself or it wouldn’t get done. It didn’t show up in “hours worked” because it’s housework in the home. But it still needed to be done to maintain quality of life.

When men started moving from farms to factories, they traded their labor in for money, and could then use that money to *have their roof fixed, buy their own food, buy a new chair, or have their cloak patched*. They could use money to get someone else to do labor for them. They started working *less hours* when you account for both house work and factory work.

Factories workers worked a *lot*. But subsistence farmers worked far more for far less. But if you only calculate “hours worked” using work *outside* the house, then you’d wrongly conclude that subsistence farmers lived cushy lives and that women’s liberation destroyed women’s free time. Nothing could be further from the truth, instead, people these days work much more outside the house in exchange for working much less in it.

And I wonder how much that feeds in to the America vs Europe debate on working hours. How much labor do Europeans do around their homes that Americans *don’t* do. How much labor do Americans save by using dryers, by hiring landscapers, by hiring homecleaners, and are they happy with the extra hours they work to afford that? Do Americans work more hours to save themselves from housework?

If I Ruled Britannia: economic reforms

Sir Keir Starmer, the newly elected King of England, 2024 pencil sketch

Last time on Streams of Consciousness, I was talking about the economy of Great Britain and what they needed to change to improve things. They’ve tried raising taxes, they’ve tried cutting spending, but their fiscal deficit is only rising and new loans to cover the deficit are getting ever more expensive. My previous recommendation was spicy and probably unpopular, so I quarantined it in its own post and am putting the rest of my recommendations here.

But first: what should Great Britain *not* do? Well first of all I agree with Tony Blair: they shouldn’t put retaliatory tariffs on America. And this isn’t because I’m biased and don’t want them to hurt America, it’s because *I want what’s best for Britain and don’t want them to hurt themselves*.

It may sting to allow Donald Trump a “win.” He’s jacked up tariffs and demanded that no one else retaliates with their own. If you do what he’s asking, aren’t you letting him win? Well if you think retaliatory tariffs are a smart move, you must think that because you believe they will hurt America with only a modest affect on your own country. But that’s wrong, tariffs are a huge blow to your own country, with only a modest affect on the one you’re tariffing. Doing what Donald Trump wants just means letting him win the foot-shooting competition.

Tariffs are inflation in action: everything gets more expensive for absolutely no reason. Because everything is more expensive, everyone is poorer (since their money doesn’t go as far). And tariffs don’t “protect” domestic industries, they destroy them. They destroy competitiveness because there is no market force pushing companies to improve their products. With tariffs, it’s always more viable to increase your profits by rent seeking (demanding the tariffs rise yet further) rather than by self-improvement. Thus the companies stagnate and rust out. Less goods are produced at a much higher cost, everyone is poorer.

This is true even when your tariffs are “targeted.” It’s just that “targeted” tariffs destroy only a few industries instead of all of them. Donald Trump tariffed you, but if you retaliate with tariffs on on American fuel and aircraft (major American exports), you’ll harm your own airline industry by raising their costs. Needless to say your airlines will have to raise their own costs, harming your tourism/travel industries, and thereby harming your citizens who can no longer afford airfares. America will feel some harm, yes, but not as much as your own people.

“We’ll substitute American goods by buying goods from Europe!” Trump wants to substitute foreign goods with American goods, do you think that will work for him? It won’t work for you either.

Tariffs also destroy industries by raising the cost of all their inputs, since again tariffs are just inflation. The steel company can raise its prices since it’s no longer competing with Chinese steel, and has no incentive to innovate because it plans to ask for more tariffs next year. So if you’re a manufacturing company making anything with steel, all your steel just got very expensive and will only get more expensive from here. Might as well cut wages, it’s the only cost you can control.

Many manufacturers will go bankrupt, they can’t afford the higher prices. A few dozen steel jobs will be “saved” at the cost of thousands of higher-paying manfacturing jobs. Those steel workers will then be laid off because with all the manufacturers going bankrupt, no one needs so much steel. And besides, the cost of iron has gone up with the tariffs on iron (and the iron mine is soon to go bankrupt as they can’t afford the machines needed to keep mining).

Think of it this way: if you think retaliatory tariffs are a good idea, then you think Trump’s tariffs in general are a good idea. You agree with him that the tariffs hurt the target countries more than they hurt the country placing them. You think Trump is doing smart economic policy, and are just mad that he’s doing it to *you*.

So again, don’t complain about giving Trump a *win*, reject the cognitive dissonance on tariffs and accept the one and only truth: tariffs are bad for growth, bad for prices, and bad for workers. Biden knew this in 2019, but I fear the cognitive decline hit him fast since he forgot it by 2021. (example, example, example)

Anyway that’s what Britain *shouldn’t* do, so what *should* it do?

How about reducing the need for occupational licensing? “Licensing” sounds good in theory, the Government is going to step in and demand minimum qualifications for certain professions. But everything sounds good when you ignore the costs and handwave the benefits.

Licensing sounds nice because you immediately think of doctors and nurses. But many many jobs have mandatory licenses that simply do not need them. Does a horse trainer really need a license? A piano tuner? A wig-maker? Adding a license does nothing except make it harder for people to get jobs. It’s part of what’s killed “entry-level” positions, there is no such thing as “entry-level” in an industry where any work at all requires a specific license.

20% of UK jobs need a specific license, which ossifies the labor marker and prevents workers from job-hopping to find better wages. You may have veterinary training, a fondness for horses, and see well-paying jobs opening up in the horse-racing industry. But without a long and arduous licensing process, you’re cut out from that part of the labor market, forced to keep working at Tesco for almost nothing.

You may ask “but without a license, how can we ensure these workers are competent?” You interview them, you look at their CV, you contact prior employers. An incompetent employee can do damage yes, for instance an incompetent Tesco stocker can leave heavy merchandise off-balance to crush unwary shoppers, so do shelf stockers need a license? Be honest, exactly how much is saved by having entry-level jobs be licensed? Quantify all the harms, both physical and monetary, then weigh them up against the costs.

Because licensing *does* have a cost. It lowers social mobility since the lower class can’t afford to spend years getting licensed before getting their first job. It hampers growth by preventing industries from growing to meet demand. And it drastically raises costs for licensed labor, without really raising wages.

How can that be? Aren’t licensed jobs paid more than unlicensed? Yes but look at the cost of getting that license, with its years of training and bureaucracy. Look at the cost of *keeping* that license, with mandatory retraining, continuing education, and the like. Time is money, and all the time it takes getting and keeping a license usually drains any additional pay that the license brings.

And look at how that license locks you into a single career, unable to switch things up to chase a higher wage. I’m sorry, you’re a *horse* trainer, *dog* training is a different license.

And study after study shows that very few licenses improve outcomes. Doctor, nurse, these require years of training and understudy, a license here may be warranted. But this kind of thinking is needlessly applied to far too many jobs, most of which show no difference in quality between licensed professionals (in countries where a license is needed), and unlicensed professionals (in countries where it isn’t). License medical and legal practitioners, let everyone else be.

So that’s occupational licensing. My next suggestion for Keir: end planning permission and build housing on the green belt. I wrote about the Green Belt before, but for those of you who missed it: the Green Belt isn’t green, and Britain should build on it.

“The Green belt” of is a bunch of land surrounding many of Britain’s largest cities. The name conjures to mind beautiful forests and fields, untouched by Man since the days of yore. But it’s actually car parks and monoculture farms, forbidden from being built on so that landowners can prevent their neighbor’s property from being bought up by the urban bourgeoisie. It’s a NIMBY version of feudalism.

And the Green Belt does have houses by the way. NIMBY houses for people who don’t want anyone to live near them, but also don’t want to pay for that privilege. Instead of buying the land surrounding their house (and thus paying tax on it), they simply demand no one *else* be allowed to build anything there.

So build on the Green Belt, put apartments on the car parks. Housing is unaffordable in Britain, build more houses and prices will come down. Build more apartments and rent will come down. And with housing and rent getting cheaper, people can afford to spend more on buying goods and services, pumping more money into the economy and creating more jobs.

Importantly, *the Government does not need to do this building*. Too many people think that if the Government is not actively building things, either with its own taxpayer-funded corporation or through special subsidies, then things just won’t get built. But that is not at all true. A plethora of private companies would love to build and sell houses, but Government laws prevent them. So just repeal the laws and the companies will build, no special subsidies or taxpayer-funded company necessary.

And while we’re at it, do away with local planning permission. People complain about developers “banking” land, holding it without building for years. That’s only done because it takes on average a *decade* to get permission to build anything. If someone wants to build and sell houses, buying the land is step 1, steps 2-90 are all planning permission. Cut out those steps and the houses will be built faster and cheaper.

Local councils hold far too much power to block housing, get rid of that power. Instead of a situation where council have to give “permission,” create a national “by-right” system of planning. Developers submit a proposal to build a dwelling at a location, a national organization makes sure it’s up to code, and once they OK it development starts. No more veto-ocracy by local NIMBYs.

Great Britain is no longer a feudal society, you shouldn’t require the permission of the local landlords to build on your own land. Local landlords don’t want you to build a nice apartment that competes with their crack house? Tough. End local planning permission and kick the landlords to the curb.

And now here’s my final suggestion for Keir Starmer, get rid of bank ring-fencing.

Actually that’s not my suggestion, but it was raised as a possibility by British politicians. And the suggestion isn’t that outlandish, Germany ended its ring-fencing over a decade ago

But wait, what is/was ring-fencing? In 2008, the Financial Crisis/Great Recession happened when banks made risky loans, those loans defaulted, and the banks went bust. This cause a knock-on effect throughout the economy.

The risky loans often came from the “investment” side of the banking business, but when the bank went bust even the the “core” side (which held consumer’s money) was hit. Ring-fencing meant keeping investment banking separate from consumer banking, so any bad investment bets would have no effect on consumer savings.

But banks are banks, and economies of scale mean one bank doing two things is usually more efficient than two separate banks. That’s why some want to get rid of ring-fencing and let banks make more money. Germany already did so, why shouldn’t Great Britain? Let the good times roll again.

I don’t know if ending ring-fencing is good or not because honestly I don’t actually know much about its effect. What efficiency is gained by combining consumer banking and investment banking? What is lost by ring-fencing? But I don’t reflexively hate this idea the way I probably would have hated it 10 years ago, less than a decade after the Financial Crisis. I don’t know, I’ll need to do more reading.

So anyway those are my proposals the economy of Great Britain. Keir, if you’re reading: work on this for me, would you?

Deregulation is a dirty word on the left mostly because it’s a clean word on the right. But this reflexive partisanship isn’t helpful, regulations are not always good. Removing bad ones is necessary for an economy to grow. And if Labour wants growth, if they want to stop having to come out with more taxes and less spending every six months, then they need deregulation.

Post Script: Talking about the banking deregulation, I was reminded of Thatcher’s “Financial Big Bang.” No time to discuss it today, but I hope I remember to do so soon, because it’s a fascinating topic that explains a lot about today’s Great Britain.

“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.”

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.

Surge Pricing and Dirty Deals

I’m sorry I haven’t been posting weekly like I promised to. February has not been kind to me. But I wanted to quickly fire off a post relating to two topics I’ve recently seen in the news.

The first has to do with the infamous Wendy’s “surge pricing” announcement which the company has already walked back on. As I know not all my readers are American, I’ll explain both Wendy’s and surge pricing.

Wendy’s is a fast food burger chain just like any other American chain. Surge pricing meanwhile is what Uber and Lyft do when there is a very high demand all of a sudden, prices shoot up during that time, leaving customers to balk at paying 50$ for a ride home from a baseball game, when getting into downtown may have costed just 30$. Many Wendy’s customers likewise were furious at the price of a burger going up and down during the day, possibly meaning they’d pay for their food than someone who’d walked in just a few minutes earlier.

The story got so much traction that Senator Elizabeth Warren even tweeted about it, trying to play up her corporate greed narrative. Little does Warren know that we’re now living in the era of Corporate Generosity.

Nevertheless I’m always surprised that someone with the credentials of Warren is so economically illiterate. Surge pricing has been going on for decades, perhaps centuries even. The earliest examples I can think of are matinees, theatre productions (or movies) that are shown during the daytime for a cheaper cost than the evening. It costs exactly the same to run the shown at either time, so why is the daytime show cheaper? And if you’ve ever seen a bar with a “happy hour” or a restaurant with an “early bird special,” or Halloween candy sold half-off in November, you’ve also seen surge pricing in action.

What’s going in here is simple supply and demand. The price of a good or service is *not* based on the cost to make it, the price comes from the interplay of supply and demand. The price fluctuates even if the cost does not because sellers are trying to clear the market. Lower demand? Lower price.

But a restaurant also has service and shifts. Any server serving one customer must necessarily be not serving another. Yet at the same time, servers paid for 8 hour shifts, and few people would work a job where they’re only paid minimum wage for 2 hours. The cost of transport alone would eat into your wage. What this means is that if everyone only comes to eat during dinner (let’s say a 2 hour period from 4-6pm), then the servers are sitting around for 6 hours doing nothing, then madly scrambling for 2 hours. During those 2 hours, many customers might come in only to find the line is too long, or they might be able to eat but find the service poor due to overworked servers.

Thus, for decades restaurants have lowered prices during the “slow” parts of the day to entice people to eat at those times instead of during the rush. This is exactly the same mechanism as Wendy’s “surge pricing,” only it’s framed differently. But it’s still the case that they’re charging more at dinnertime even though their costs are the same.

Surge pricing like this is actually a very good thing. It evens out demand in service industries, allowing more people to be served during a day while still letting the wait staff work full 8-hour jobs. And certain customers can take advantage of this, getting a lower price at the cost of not eating during a “normal” time. Warren (and other outraged twitterati) are simply jumping on a poorly framed policy to score very stupid political points. In fact, Burger King decided to dunk on Wendy’s poorly framed surge pricing policy by highlighting their own better-framed surge pricing policy. Every restaurant is like this, and it’s actually A Good Thing.

Speaking of restaurants but not about Good Things, Gavin Newsom is quite nakedly corrupt. I had only heard mild criticisms of Gavin before, but there were some Democrats I know claiming he was basically the candidate-in-waiting should Biden not run. He is Governor of America’s largest and wealthiest state, and would surely win election because the only thing Republicans could ever say against him were tired tropes about “Commiefornia.” But actually it turns out here’s corrupt.

I know this because he handed a political kickback to his buddy who owns at least two dozen Panera Bread restaurants. California is set to raise the minimum wage to 20$/hr, except at restaurants that serve freshly bread baked. No, bagels and pastries do not count as “bread.” Panera is one of the very few restaurants that does this, and so they will still be allowed to pay their employees just 16$/hr.

You might think this would cause many restaurants to start opening up bakeries, but it gets even more corrupt: the restaurant must have been serving freshly baked bread in September 2023 to qualify. So only Panera is grandfathered in. Essentially, Gavin Newsom decided to directly use a government law to enrich his friend and confidant, and no one seems to really care.

Now of course he wasn’t handing his friend state money. But he was writing legislation that imposes costs on every single one of his friend’s rival businesses, while shielding his friend. That will allow his friend (whose name I just looked up is “Greg Flynn”) to profit much more than anyone else from fast food, since he can keep the same prices while paying his staff 80% less than the competition.

Some of the twitterati have tried to defend Gavin indirectly, saying that it’s obviously corrupt but that this carve-out won’t actually do anything. They say that since every other restaurant will have to abide by the 20$/hr minimum wage, it means no one will ever work for Panera for less than 20$/hr either. But that ignores that people take jobs based on more than just the wage. Maybe the Panera is closer to you than the Taco Bell, maybe you hate the smell of fried foods and are loathe to work at McDonald’s, maybe you don’t own a car and the Panera is the only restaurant in walking distance. Or maybe you have classes and Panera can offer you hours that better fit your schedule.

And Greg Flynn knows this. He knows that he will likely be able to find at least some workers willing to work for just 16$/hr, that’s why he asked Gavin to put that in the bill. But corruption and friend-dealing has never been punished too strongly in America, no matter how much partisans rage about how “the other side” is corrupt. Still, the naked corruption on display may have hurt Gavin in a national election, so Democrats are probably happier he didn’t decide to challenge Biden.

Is it culture? Or is it incentives?

The Internet in general is US-centric. So even on the European parts of the Internet it’s common for countries (or the entire continent) to compare themselves to America. There are thousands of things you could compare, but the most contentious is probably the economic comparisons. America has recently grown much more strongly than Europe, and it doesn’t take an economist to realize that nearly all of the world’s top companies and startups are located in America. San Fransisco alone has more billion-dollar startups than entire countries, and before you say “that’s just silicon valley,” New York and Boston aren’t far behind.

There are a million ways to explain this discrepancy and plenty of reasons why Europeans may even think it’s good. We could talk all day about whether worker’s rights are fundamentally incompatible with cut-throat capitalism, and if Europe has therefore chosen the better path. But the most flawed reason I see bandied about is that Europe just has the wrong culture for this kind of stuff.

Europe is more laid back, less aggressive. Their investors prefer same, consistent gains. The European mindset isn’t focused on innovation, and culturally Europeans aren’t focused on business the way Americans are.

I think these explanations are wrong and dumb, and I’d use more expletive words if I hadn’t made a New Year’s Resolution not to do so in my writing. I don’t think Europeans are culturally less attuned to startups and Big Business, I think the legal framework prevents it.

Not long ago, Europe was seen as the beating heart of innovation and technology. Industrial progress, scientific progress, just go to any chemistry or physics class and see how many formulas are named for Germans. But now America dominates the industries, and I think it’s because of government, not culture.

The American business framework provides significant bankruptcy protection. People mocked Trump for his many bankruptcies, but most investors know that 90% of good ideas fail and the last 10% have to cover those loses. Bankruptcy is a way for investors to mitigate their downside, and thus allows for bigger risks to be taken.

The American financial system also gives significant benefits to investors, giving them greater flexibility in buying and selling their company to whomever they wish. Until Biden and Trump brought protectionism back to the fore, it was not uncommon to see American companies sold to foreign investors with little fanfare. Nativists and racists may complain about *gasp* Chinese people owning an American company, but from the investor’s perspective selling the company is a good way to cash out his winnings from the investment. Foreign buyers compete with American buyers, and this increase in demand means prices go up. This means the sale price of companies goes up, and that increases the returns on an investor’s investment.

But long before Trump, Europe was made famous in the tech world for blocking foreign buyers from its companies. Again, nativists wrongly think that this strengthens the European tech industry by “keeping it in European hands.” But when an investor sells out, they get cash in return. What do you think they do with that cash? They don’t hoard it like Smaug the Dragon, they reinvest it. Because they’re investors. By blocking foreign buyers, you reduce buying pressure, you reduce how much money investors can get out of their investment, and you therefore reduce their upside potential. Is it any wonder then they’d prefer a safer investment, when Europe is happy to cap the gains on any risky tech investment they make?

And Europe prides itself on fining big tech companies for any reason whatsoever. But surely it’s obvious that a government hostile to profitable tech companies would scare off anyone wanting to make a profitable tech company near them. Better to start in America or get out of Europe ASAP. Microsoft and Apple can afford billion dollar fines, but such sanctions could be lethal to a smaller European tech company. So again investors are scared off, entrepreneurs are scared off, and Europe wonders why it doesn’t have a tech sector.

“But what about ASML and Spotify!” And what about them? For every single, solitary European company that manages to rise above the hostile governing environment, there are 10 American companies that rose under easier circumstances. Spotify started in 2006, and since then Massachusetts alone has started Draft Kings, Moderna and Intellia Therapeutics, all of comparable value to Spotify. And Massachusetts has half the population of Sweden.

People respond to incentives, and the incentives for risky tech investment are very poor in Europe. Bankruptcy is easier in America, returns are (or were before Biden and Trump) less likely to be capped by protectionist policies, and (before Biden) the government generally has taken a more lax approach to dealing with corporations. You can debate if these things are good or bad, but I find them far more likely reasons for America’s tech dominance than “culture” or “attitude.”

“The Crime of ’73”

Boy, these posts aren’t quite coming out weekly now are they?

I might have posted on this topic before, but I wanted to write something down and this was on my mind. It’s interesting how the controversies of yesteryear always fade away, even though in their day they dominated the news and the mind-space of politically conscious voters.

Take the Silver vs Gold movement. When America was founded, it had a bi-metallic standard, meaning that both silver and gold were legal tender. Congress set down in writing how much weight of silver made a dollar and how much gold made a dollar, and so both could be used to buy and sell. But of course, as commodities the price of silver and gold in the market would fluctuate, but congress didn’t understand or act quickly enough to fix things.

For example, silver mines in Mexico continued to run and depressed the price of silver relative to gold. This created an arbitrage opportunity because the price of gold was higher than that of silver:

  • Take 10 silver dollars and exchange them for 10 gold dollars, as they are equivalent
  • Take the gold dollars to Mexico and melt them down.
  • Take that gold and exchange it for raw silver
  • Bring that silver back to the Mint in America and demand to have it struck into silver dollars. Because of the price difference between silver and gold, the silver you brought back will make more than 10 dollars worth, so you can pocket the extra as your profit.
  • Start back from the beginning, trading 10 silver dollars for 10 gold dollars

This happened because congress set a fixed value for a commodity who’s value changed on the market, and as that value changed there was arbitrage created. Gold flowed out of the country and was replaced with silver. When the California gold rush happened, the price of gold suddenly decreased and the whole process reversed. Congress didn’t understand what was happening, and so simply decided to remove the bimetallic standard to stop this from happening.

But now we get to “The Crime of 1873.” When congress removed the silver standard in 1873, silver miners could no longer have their pure silver struck into coins that could be used as tender. The mint was by far the largest purchaser of silver and so removing silver from the standard removed most of the demand and so killed the price. Congress therefore upended the livelihoods of thousands of miners and mining towns by changing the laws on coinage. And those people never forgave them.

For years this “Crime” was the hottest topic in certain political sections. It was the litmus test for candidates and parties. And it was the entire foundation of the presidential candidacy of William Jennings Bryan. For years, certain voters would never vote for a candidate or party who had supported the “Crime,” and they may not have even kept polite company with voters who supported those candidates. In its time, the “Crime” was seen as the greatest betrayal possible, and plenty of people pointed to it as the reason for national or local economic problems. They blamed the “Crime” and hoped that overturning it would fix things.

Of course, America never regained the silver standard. For a time, the Federal government compromised and declared it would still buy silver from the miners directly, but in time even this subsidy was removed. The people affected by the “Crime” probably never forgave the Republicans (who passed the bill) for what they did. Indeed the “Crime’s” authors had a hard time defending their actions in the face of angry voters. Some authors claimed that the bill didn’t do what critics claimed, and that the US had technically been non-silver since 1853. Others claimed that ending the silver standard was an unintended biproduct. But this had the perverse effect of amplifying conspiracy theorists who believed the bill was passed with malicious intend, and giving ammo to those who wanted to overturn it.

In the 1880s and 1890s, the “Crime of 73” was as much a controversial topic as any political topic today. Friendships could be ended by it. But it too did pass. I think most of the controversies of our day shall also pass, these days even American History students will barely remember the “Crime.”

Have IPOs become more speculative?

This post is very late because I didn’t feel good about my conclusions, but here it is.

I’ve been wondering if IPOs have become more speculative of late. Rumors abound that OpenAI (makers of ChatGPT) may IPO soon and they’ve been quoted as having a billion dollars in revenue and a valuation of 80 billion. 80 times profit is already a pricey valuation, 80 times revenue is even moreso. And other even more speculative IPOs have happened in recent memory. Companies like CRISPR Therapeutics and Beam Therapeutics IPO’d when they have essentially no revenue, just patents.

It was once said to me that IPOs are “supposed” to be for a company that is profitable. The company shows the world that it is profitable and can thus afford to pay a dividend. The investors of the world will then pay for stock in the company in order to grow their money. So the company gets a big pile of cash by selling shares, and the investors get shares which pay a dividend and may grow in value also.

The above is a very 20th century view of investing, these days dividends aren’t all that popular to begin with. So too does it seem that many companies will IPO long before they can afford a dividend, and long before they are profitable at all, so why are investors investing and buying these stocks?

It isn’t necessarily a bad move for investors to buy stock in OpenAI if it does IPO. The investors are speculating that while it’s not profitable now, it will be in 10 or 20 years. In essence, an IPO like this lets investors play the role that venture capitalist play. Venture capitalists invest in many startups long before they see revenue or profit, and they bank on the fact that while 10 startups may fail, the 1 that succeeds will let them see more than 10x gains. With companies IPOing early, normal investors can now also play this game. Beam Therepeutics, CRIPSR Therapeutics, and OpenAI may all fail, but if you invest in them and 10 other speculative companies, then maybe 1 will succeed which will give you gains that wipe away all your loses.

So I can’t say that companies IPOing earlier and earlier is a bad thing. As long as they don’t lie on any of their forms, then investors know exactly what they’re getting into. Investors know that they’re buying into a very speculative, pre-profit, maybe even pre-revenue company. But if it works out, they can make big gains. And remember that “investors” here isn’t just faceless, deep pocketed billionaires. Investors is also every person with a 401k or IRA. They too can buy into these companies using their own money and play at being venture capitalists. And if its so profitable for venture capitalists to do this, then why shouldn’t the rest of us do the same?

But while I cannot say this is a bad thing, I also cannot say if this trend is even happening. Remember I started this story by asking if IPOs are happening earlier and earlier. Is it true that in the 20th century, most IPOs were of profitable companies, and in the 21st century most IPOs are of unprofitable ones? Or is that simply recency bias at work? I tried and tried but couldn’t find hard numbers on this kind of thing, which is why it took me so long to write this post.

Either way, if OpenAI does IPO I might toss a few dollars their way. Intellectually I know I probably can’t beat the market, but emotionally it’s fun to pretend I can. And where’s the harm in that?