Category: Current Affairs

The El Salvador tax reform

El Salvador’s Congress approved on Tuesday a reform to remove income taxes previously imposed on money from abroad, in a move to attract more foreign investment.

Money flows from abroad in forms such as remittances and investments in companies will now be exempt from tax, lawmakers said.

Prior to the reform, incomes equal to or greater than $150,000 had to pay a rate of 30% at the time of entry into the country.

There is no extra reason to click on this link.  Here are other pieces.  “Good, if you can keep it,” as they say…

Marc Andreessen and I talk AI at an a16z American Dynamism event

a16z has issued the talks from that event, and we are issuing it too, as a bonus episode of CWT.  But note it is shorter than usual, and not the typical CWT format — this was done for an audience of actual DC human beings!

Excerpt:

COWEN: Why is open-source AI in particular important for national security?

ANDREESSEN: For a whole bunch of reasons. One is, it is really hard to do security without open source. There are actually two schools of thought on information security, computer security broadly, that have played out over the last 50 years. There was one school of security that says you want to basically hide the source code, and you want to hide the source code precisely. This seems intuitive because, presumably, you want to hide the source code so that bad guys can’t find the flaws in it, right? Presumably, that would be the safe way to do things.

Then over the course of the last 30 or 40 years, basically, what’s evolved is the realization in the field (and I think very broadly) that actually, that’s a mistake. In the software field, we call that “security through obscurity,” right? We hide the code. People can’t exploit it. The problem, of course, is: okay, but that means the flaws are still in there, right?

If anybody actually gets to the code, they just basically have a complete index of all the problems. There’s a whole bunch of ways for people to get the code. They hack in. It’s actually very easy to steal software code from a company. You hire the janitorial staff to stick a USB stick into a machine at 3:00 in the morning. Software companies are very easily penetrated. It turned out, security through obscurity was a very bad way to do it. The much more secure way to do it is actually open source.

Basically, put the code in public and then basically build the code in such a way that when it runs, it doesn’t matter whether somebody has access to the code. It’s still fully secure, and then you just have a lot more eyes on the code to discover the problems. In general, open source has turned out to be much more secure. I would start there. If we want secure systems, I think this is what we have to do.

Marc is always in top form.

DEI vs. the Chips Act

The Hill has a good op-ed by Matt Cole and Chris Nicholson on how labor and DEI regulations are strangling the CHIPS act. It’s somewhat over the top, failure is overdetermined, but this is an important op-ed and directionally correct.

The Biden administration recently promised it will finally loosen the purse strings on $39 billion of CHIPS Act grants to encourage semiconductor fabrication in the U.S. But less than a week later, Intel announced that it’s putting the brakes on its Columbus factory. The Taiwan Semiconductor Manufacturing Company (TSMC) has pushed back production at its second Arizona foundry. The remaining major chipmaker, Samsung, just delayed its first Texas fab.

This is not the way companies typically respond to multi-billion-dollar subsidies. So what explains chipmakers’ apparent ingratitude? In large part, frustration with DEI requirements embedded in the CHIPS Act.

…The law contains 19 sections aimed at helping minority groups, including one creating a Chief Diversity Officer at the National Science Foundation, and several prioritizing scientific cooperation with what it calls “minority-serving institutions.” A section called “Opportunity and Inclusion” instructs the Department of Commerce to work with minority-owned businesses and make sure chipmakers “increase the participation of economically disadvantaged individuals in the semiconductor workforce.”

…Handouts abound. There’s plenty for the left—requirements that chipmakers submit detailed plans to educate, employ, and train lots of women and people of color, as well as “justice-involved individuals,” more commonly known as ex-cons. There’s plenty for the right—veterans and members of rural communities find their way into the typical DEI definition of minorities. There’s even plenty for the planet: Arizona Democrats just bragged they’ve won $15 million in CHIPS funding for an ASU project fighting climate change.

…tired of delays at its first fab, [TSMC]flew in 500 employees from Taiwan. This angered local workers, since the implication was that they weren’t skilled enough. With CHIPS grants at risk, TSMC caved in December, agreeing to rely on those workers and invest more in training them. A month later, it postponed its second Arizona fab.

Now TSMC has revealed plans to build a second fab in Japan. Its first, which broke ground in 2021, is about to begin production. TSMC has learned that when the Japanese promise money, they actually give it, and they allow it to use competent workers. TSMC is also sampling Germany’s chip subsidies, as is Intel.

Intel is also building fabs in Poland and Israel, which means it would rather risk Russian aggression and Hamas rockets over dealing with America’s DEI regime. Samsung is pivoting toward making its South Korean homeland the semiconductor superpower after Taiwan falls.

…The CHIPS Act’s current identity as a jobs program for favored minorities means companies are forced to recruit heavily from every population except white and Asian men already trained in the field.

Remember that there is an Extreme Shortage of High-IQ Workers. The United States is big and rich and can afford to handicap itself in many ways but less so when it comes to high-end semiconductor manufacturing, the most difficult and complicated manufacturing process ever attempted by human beings. For that we want the Dream Team, the very best, chosen on merit alone.

Addendum: Scott Lincicome has a good overview of the problem.

The new UAPs report

You will find it here, 45 pp. of text plus lots of footnotes.  Overall it is a nothing burger.  You’ll find plenty of (justifiable) claims that there are no dead bodies, no alien spacecraft have been recovered, no technology is being reverse engineered, there is nothing to Roswell, and so on.  Here is from the executive summary:

AARO found no evidence that any USG investigation, academic-sponsored research, or official review panel has confirmed that any sighting of a UAP represented extraterrestrial technology.

That is certainly true.  What you won’t find in this report is any mention of Nimitz, Gimbal, or any of the other more puzzling cases about observed objects — on multiple sensors with independent verifications — that defy current explanation.  No real discussion of the more serious pilot eyewitness reports (and no, these pilots are not saying they saw aliens, they are reporting they cannot explain what they saw).  On p.26 you will find the concession: “A small percentage of cases have potentially anomalous characteristics or concerning characteristics.  AARO has kept Congress fully and currently informed of its findings.  AARO’s research continues on these cases.

So overall there is no reason to revise whatever your current views might be, at least provided those views were not the crazy ones in the first place.  If anything, perhaps you should do a slight Bayesian update toward believing in a real puzzle, given that in a 45 pp. report the government is not willing to directly explain or even confront the most anomalous cases.

Small countries, big firms

That is the topic of my latest Bloomberg column, here is one excerpt:

From both a biomedical and economic point of view, the success of the new class of weight-loss drugs is something to behold. Not only are they a remarkable scientific achievement, but — in the case of Ozempic and Wegovy, both made by Novo Nordisk — they are a huge boon to the Danish economy. The Danish pharmaceutical industry kept Denmark from falling into a recession last year.

The dependence of some mid-sized economies on a single commodity, often related to oil or natural gas, is a familiar story. The new twist, which may become increasingly common, is a national economy dependent on a single company — not a natural resource. This will lead to some fundamentally new economic and political dynamics.

And:

Government attempts to manage a biomedical company, or a major AI company for that matter, would probably not work. Private-sector management thus becomes ever more important for the economic growth of these small to mid-sized countries.

And while it is better for a country to have one big, successful company than not, such a company — such as Nokia in Finland — does put the domestic economy in a somewhat precarious position. Politically as well, that company will have a fair amount of leverage over domestic decisions. It is noteworthy that Novo Nordisk has a very large philanthropic fund, worth more than $100 billion by one estimate. The mere option of spending some of that money in Denmark gives the company further influence over politics and public opinion.

The net result might be more “crony capitalism” — which, to be clear, is preferable to socialism — in mid-sized countries.

Abroad, as the demand for these weight-loss drugs continues to grow, people may start identifying Denmark with pharmaceuticals — just as many people identify France with wine or cheese. The longer-run image of Denmark may shift at home as well, perhaps in a manner that encourages further successes in the biomedical sector.

Worth a ponder, there is more at the link.

We need YIMBY for the U.S. power grid

The amount of new transmission line installed in the United States has dropped sharply since 2013, when 4,000 miles were added. Now, the nation struggles to bring online even 1,000 new miles a year. The slowdown has real consequences not just for companies but for the climate. A group of scientists led by Princeton University professor Jesse Jenkins warned in a report that by 2030 the United States risks losing out on 80 percent of the potential emission reductions from President Biden’s signature climate law, the Inflation Reduction Act, if the pace of transmission construction does not pick up dramatically now.

I had not know this:

To answer the call, some states have passed laws to protect crypto mining’s access to huge amounts of power.

Or that this had come so far:

Northern Virginia needs the equivalent of several large nuclear power plants to serve all the new data centers planned and under construction. Texas, where electricity shortages are already routine on hot summer days, faces the same dilemma.

Here is the full WaPo article by Evan Halper.

My excellent Conversation with Marc Rowan

Here is the video, audio, and transcript, taped in his Apollo office in NYC.  Here is the episode summary:

Marc Rowan, co-founder and CEO of Apollo Global Management, joined Tyler to discuss why rising interest rates won’t hurt Apollo’s profitability, why liabilities have traditionally been the weak spot in insurance, why the concept of liquidity needs a rethink, the meaninglessness of the term “private credit”, what role crypto will play in American finance, why Marc bought a brutalist apartment, which country has beautiful new neighborhoods, what motivated Apollo’s office redesign, what he looks for in young hires, the different kind of decision-making required in debt versus private equity, the biggest obstacle to doing business in India, how university governance can be improved, what he’s learned from running restaurants, the next thing he’ll learn, and more.

And an excerpt:

COWEN: Now, how stable is all this as a political equilibrium? If you think about the four major banks, as you well know, there are very serious stress tests applied to them, capital requirements. The Fed is a major regulator. At least for insurance, it tends to be at the state level. One can reinsure through Bermuda. Capital requirements are very different. Competence of the state regulators arguably is lower than that of the Fed. Whether or not one wants more regulation — and generally, I don’t — but is this a stable situation? How’s it going to evolve?

ROWAN: First, I would have to correct almost everything you’ve said along the way to set the table for what I’m going to talk about. First, the difference between not so much the banking system and insurance, but the banking system and the investment marketplace. Let’s start with this — there are plenty of ways for investors to lose money. Investors can buy speculative stocks. They could buy the S&P. They can speculate in almost anything.

The making or losing of money is not, in and of itself, a systemically risky activity because, for good reason, we allow speculative investing every single day. Things go up, things go down. You can lose money in credit as well as in equity.

Now we come to mutual funds. If a mutual fund, which is daily liquid, owns credit, and investors want to get their money back, you’re right, price just adjusts. Mutual funds are not price guarantors. Are they regulated? Mutual funds are regulated. Are they disclosed and transparent? Yes, they’re disclosed and transparent. The holdings of a mutual fund are completely visible and they’re de-levered. Is that a risky activity because it moved out of the banking system and into a mutual fund? I don’t think so; I actually think it has de-risked. It’s made our economy and our financial system more resilient.

Now I’ll come to your question on political equilibrium. Insurance — if you just focus on insurance — has no federal guarantee, does not borrow short and lend long, has no access to the Fed, and does not do liquidity transformation or maturity mismatch, and they are forced to hold amounts of capital.

If you look — and I’ll give you a comparison just for us, not for the whole industry — who holds more capital, Athene our insurer as a percentage of assets or the typical bank? You would think the typical bank, but you would be wrong. We hold more capital per dollar of assets than anyone else. Who holds more investment-grade assets? Ninety percent of our book is investment-grade, the typical bank is two-thirds investment-grade.

COWEN: Sure, but that’s all time-sliced—

ROWAN: Let’s keep going.

COWEN: Money market funds have been a source of systemic risk, AIG has been —

ROWAN: I can’t tell you there’s not risks in the economy. We have a choice. We can have risk dispersed among lots of institutions, or we can have it concentrated in the government-backed, borrow-short, lend-long, government-guaranteed banking system.

Every time we disperse that risk, we make the system more resilient. If you want to focus on insurance, which is your question on political equilibrium, there’s more capital, there’s no ALM mismatch, there’s more investment-grade, and there is appropriate state-based regulation for institutions that do not have government guarantees or borrow from the Fed or do anything else.

Insurance is very slow-moving. We’re talking about, on average, 10-year assets. This is a very slow-moving process. Again, most of the issues that have happened in the insurance industry have not been asset issues. They’ve been liability issues, exactly the kind of thing that insurance-specialist regulation is designed to detect.

Recommended, and of course we talk about Marc’s higher ed campaign as well.

Public Choice Outreach 2024!

Please apply and send your students to the 2024 Public Choice Outreach Conference! The conference is a crash course in public choice. It’s entirely free. Indeed scholarships are available! More details in the poster. Please pass around. Applications are here!

Here is a pdf of the poster, please circulate. Outreach Conference Flyer 2024 – 2

Tide turning in Washington State?

From an MR reader:

Good story here about one man in Washington state fighting the battle against the progressive tide. He single handedly got six initiatives on the ballot to repeal progressive reforms over the past few years. These include a police pursuit law that prevents police from chasing criminals in most cases, and a capital gains tax despite the Washington State constitution specifically banning income tax.

One man takes on state government and wins after passage of 3 voter initiatives (fox13seattle.com)

Big recent news is that 3 of the 6 initiatives have already passed in the State legislature, and the rest will be sent to the voters as ballot questions.

We also have a new moderate city council in Seattle that is pressing charges against protestors who disrupt city meetings, making hard drugs illegal again, and trying to re-fund the police department. Also it looks like 12 (out of hundreds) of protestors that recently shut down I-5 in the heart of the city will be prosecuted.  This all would have seemed impossible under the former mayor and city council.  Definitely a feeling in the air that the tide has turned to some degree.

I await further reports.

A pessimistic account of the Milei reforms

Eduardo Costantini, a billionaire property developer, supports Milei’s plans but describes his handling of Congress as an “unforced error”. “The legislative strategy he had clearly didn’t work,” he says. “He came away from this first round practically empty-handed.”

Nicolás Pino, head of agribusiness lobby La Sociedad Rural Argentina, says cutting spending without also delivering deep reforms of Argentina’s state in the legislature is “no solution”. He urges the president to “lower tensions” with Congress and try again. “He will find many people ready to help him.”

But Milei appears to think otherwise. People who deal with the government say the president is now more dependent than ever on a small inner circle of true believers and his army of social media followers, to whom he devotes more than two hours a day online. His closest advisers include his sister Karina, who used to sell specially decorated cakes on Instagram and is now the presidential chief of staff, and Santiago Caputo, a 38-year-old political consultant and social media guru whose father is a cousin of Luis Caputo, the former Wall Street trader now serving as finance minister…

Some question Milei’s economic results too. Eduardo Levy Yeyati, an economist and professor at Torcuato di Tella university in Buenos Aires, believes the much-vaunted fiscal surplus in January benefited from accounting tricks such as shuffling government payments around. “The surplus is unsustainable,” he says. “It can only be sustained if the government passes tax measures.”

I am not saying this is true, as I genuinely do not know the latest.  But it is the pessimistic account, if you are looking to catch a dose of that.  Here is more from Michael Stott and Ciara Nugent at the FT.  You will note that the (black market) peso is up, but only modestly.

The Ability to Concentrate is Increasing?!

Distraction is everywhere. As I write this post, I pause to check twitter. Phones are omnipresent and demand our attention. Dopamine hits rule. Yet, despite the potential for greater distraction, a large study finds that on a standardized test, the ability to concentrate is up (modestly) for adults.

In the present cross-temporal meta-analysis, we investigate potential test score changes for attention as assessed by the d2 Test of attention. Based on data from 287 independent samples (N = 21,291) from 32 countries over a timespan of 31 years (1990–2021) we found evidence for moderate generational test score gains in concentration performance in adults, but not [statistically significantly, AT] children.

And while I wouldn’t put much weight on these results, since they are correlational and by country only, do note:

Internet use predicted concentration performance positively, yielding small effects for children but no meaningful effects for adults. This seems to be in contrast with findings that indicate adverse effects of digitalization in general, and video games, media multitasking, as well as overall increased screen time on attention capabilities in particular….

Of course, this is measuring attention on a test where presumably the phones have been taken away! In other words, the environment may have made deep work more difficult but we still retain the ability to concentrate in a distraction-free environment. Or, perhaps in the past, people just daydreamed more instead of checking their phones.

Is Bidenomics working?

It is too soon to say, as I express in my 2x the usual length Bloomberg column.  It is amazing how many people are swallowing this one whole.  Here is the simplest point:

The biggest problem is that it’s not yet clear these investments are going to pay off. They are being paid for with borrowed money, not higher taxes or lower spending elsewhere. It is always possible to boost wages and employment in the short run by funding new investments with borrowed money. The critical question is whether those investments will succeed in the long run.

And:

If they do not, today’s boom will eventually turn into a bust. Sooner or later, the federal government will have to pay for all this borrowing and spending, and that will mean some mix of (additional) tax hikes and spending cuts. That contractionary fiscal policy will hurt the economy, giving back some or all of the gains it is reaping today. The net effect of this reversal of fiscal policy could even be negative.

And is it working?

One defense of the limited global scope of Bidenomics is that the most the US can hope to do is to “take care of our own.” That may be true, but it does not alter the underlying reality. If the new investments do not bring about a significantly greener world, they will have failed. In a matter this serious, it really is about results.

Another possible outcome is more optimistic: Namely, the rest of the world will move to cheap green energy without needing support from Bidenomics. If that’s the case, however, then Bidenomics’ green-energy investments are still hard to justify. Why couldn’t the US simply borrow cheaper technologies from the rest of the world?

The most favorable scenario for Bidenomics is that US investments lead, through faster innovation and shallower learning curves, to cheaper green energy sources that otherwise would not have come about. Again, that is certainly possible. And again, it is hardly obvious that it is the most likely outcome.

We shall see.  The “everything-bagel” gets discussed as well.

Kind of like the NBA All-Star game

In the NBA All-Star game, no one is playing defense any more, and so the score was a ridiculous 211-186, something which would never happen in a regular season game.  (Note that some of the league’s finer defenders were on the floor, though Joel Embiid, the reigning MVP and an intimidating defender, was sidelined due to injury.)  Some part of the ethic of (defensive) service has disappeared, though the players are still happy to shoot and score.  And they certainly will play defense hard when the playoffs roll around.

I’ve never seen papers on the labor supply of royal families (Cowen’s Second Law?), but I do wonder what it varies with.  It is hard to use one’s royal position to influence politics, at least in the UK.  And certainly you are not paid more if you work harder.  The King or Queen nominally owns a lot of land and art, but in practice one cannot pull income streams from those assets.  You can have a Michelangelo drawing hung in your bedroom, but that if anything is a reason not to go out in public.

You can use a royal family position to meet with lots of important people, but toward what end?  Raising money for your next start-up?  Alternatively, you can work harder to raise your stature and influence with the other royal family members (now we’re getting somewhere).  But what if that equilibrium falls apart, if only because of one or two initial defections, or in the case of the King an illness?  What external force would keep the whole struggle for royal family influence going?  Is this a case of multiple competitive equilibria, and now we (they?) are stuck in the low effort corner?  Can Lina Khan work on this?

What if they are all just pissed off with the lot of us?  In that case, what is our next move in this von Stackelberg game?  Should America reapply to the Empire with some trembling hand probability?  Would it suffice to give them Newfoundland back?  Take Northern Ireland off their hands?  Do they want us to send more or fewer tourists to London?  Should one of them marry Taylor Swift, or at least date her, to remain in the public eye?

If the NBA All-Star game is to improve, perhaps viewer censure (or mockery) for the non-cooperators is the primary way forward?

Solve for the equilibrium?

At $US15,000, BYD’s new Qin EV is already being touted as a “Corolla killer”, as the world’s second largest EV maker continues to disrupt the global auto market.

Launched earlier this week in China, the all-electric Qin Plus has five variants priced between 109,800 RMB to ($A23,300) to 139,800 RMB ($A29,700).

The Qin Plus comes with a 100 kW motor and the option of either a 48 kWh battery providing 420 km CLTC range or a 57.6 kW hour battery with 510 km range.

Mobility consultant James Carter wrote on LinkedIn  the new offering is the $15,000 car that incumbent OEMs (car makers) hoped would never come.

“The new BYD Qin Plus EV Honor Edition is the car that makes EVs way cheaper than ICE vehicles and blows open the mainstream market,” he wrote.

Here is the full article.  So will U.S. and EU car prices fall?  Or will protectionism result?  Aren’t they planning to make a bunch of these cars in northern Mexico? Will America invent some new kind of trade restriction?