Capital gains vs. wealth taxes
Standard optimal capital tax theory abstracts from modeling asset prices, making it unsuitable for thinking about capital gains and wealth taxation. We study optimal redistributive taxation in an environment with asset price movements, adopting the modern finance view that asset prices fluctuate not only because of changing cash flows, but also due to other factors (“discount rates”). We show that a combination of realization-based capital gains and cash flow taxes implements the optimal allocation regardless of the source of asset-price fluctuations. Moreover, the capital gains tax avoids distortions in portfolio choice (the socalled lock-in effect) by targeting total net trades rather than gains from selling individual assets. These results stand in contrast to the classic Haig-Simons comprehensive income tax concept as well as recent proposals for wealth or accrual-based capital gains taxes.
Wealth taxes lose the comparison. That is from Econometrica, by Mark Aguiar, Benjamin Moll, and Florian Scheuer.
Emergent Ventures winners, 59th cohort
Tym Syrytczyk, London, autonomous vehicles in the UK.
Shane Regan, Long Island, 16, AI agents.
Maximilian Kornstein, 15, Atlanta area, agents and general career support.
Irene Chen and Jessica Dai, UC Berkeley, data on peptides use.
Evan Warfel, Bay Area, updated meta-analyses through AI.
Daniel Dominguez Gomez, biomedical think tank for Mexico.
Malhaar Agrawal, U Penn., prediction markets and clinical trials.
Andrei Russel Ismael, Harvard, biomedical start-up.
Benedict Springbett, London, conference on the importance of legal issues for UK growth.
Metin Metin, Izmir, Turkey, 15, AI and brain organoid electrophysiology.
Ben Vyshedskiy, Harvard, biology podcast.
Afra Wang, Bay Area, podcast and study of Chinese AI.
Joe Hazell, LSE, AI and macroeconomics.
Anne Arno, Krakow, writing and biography.
Insurance price sentences to ponder
NYU Stern researcher @NateWitkin questions why cyber insurance rates keep falling if AI cyber risk is accelerating:
“Insurance rates for cyber risk declined by about 4% globally in Q2 of this year, and that’s actually the 12th consecutive quarter in which they’ve declined. This is very valuable signal that implies that at a minimum you shouldn’t overindex on the Hugging Face incident.”
“This is a plea for level headedness, but I think it would be helpful for safety folks to engage with these numbers just ’cause this is an avenue of criticism from folks like me and to an extent folks like Tyler.”
“Why are these numbers not moving? Is it because people are underestimating capabilities? Are they not taking the problem even as close to as seriously as they should or is it something else?”
Here is the link with video. File under “Questions that are all too rarely asked.”
I am happy to admit that the answers here are far from obvious, and that I am myself expecting prices to rise somewhat.
I will continue to note that there are a remarkable number of ways, seen among other places on Twitter, to rephrase and to rationalize the statement: “I have the most remarkable and important and true macro risk story in the world to tell you. Unfortunately, it does not correlate with any observed asset market prices.”
Sunday assorted links
1. Vishy now thinks Pragg is number one in the chess world.
2. Do children grow continuously, or grow in fits and starts?
3. It remains my view that Ferrante is the husband and wife team.
5. “US annual interest expense is up to a record 18.5% of federal government revenue. This is officially above the previous record of 18.4% set in 1991. This percentage has more than QUADRUPLED over the last 4 years as interest expenditures on public debt skyrocketed.” Link.
*Why Not Bolivia?*
The author is Calvin Korponai, and the subtitle is From Macchu Picchu into Bolivia in search of the Garden of Eden. Bolivia is a fantastic country to visit, more original than most people are expecting, and this is the book to tell you why. Excerpt:
The landscape itself is like noting else in the Americas. The altiplano is flat in the way that only vast geological formations can be flat, not the flatness of a plain that was once a sea, but the flatness of a plateau that was raised bodily by tectonic forces millions of years ago and then scoured by ten thousand years of wind and ice into the extraordinary emptiness it presents today. The horizon in every direction is uninterrupted. The sky is immense, a dome of blue so saturated at this altitude that photographs rarely convey it accurately, because the camera’s sensor cannot process a blue that contains no haze, no moisture, no atmospheric diffffusion between the sun and the surface.
And:
Arriving at El Alto International Airport (which sits on the altiplano above the city at forty-one hundred meters, making it the highest international airport in the world), you step off the plane into air so thin that the simple act of carrying your luggage to the terminal produces a shortness of breath that is mildly alarming if you have never experienced it and completely normal if you have. The airport itself is unremarkable. What happens next is not. You get into a taxi or bus and the driver takes you to the edge of the antiplano, and then the city appears, not gradually but all at once, a cascade of buildings and lights and terracotta roofs pouring down the walls of a canyon so steep and so deep that the bottom is invisible from the rim. La Paz does not reveal itself slowly. It drops away beneath you like a held breath released.
Recommended, and yes Cochabamba is an amazing food city.
Short Videos, Big Self-Control Problems
I study how short-form design amplifies self-control problems in digital media. Short units repeatedly renew temptation that lasts longer than each unit, turning local temptation into sustained overconsumption. Using microdata from a U.S. short-drama platform, I exploit a nonlinear top-up menu to infer viewing plans and show that paying users watch 82.1% more than intended. Structural estimates imply an average temptation horizon of 11.2 minutes, short relative to the full drama but long relative to one-minute episodes. Counterfactuals show that larger decision units, default limits, and breaks improve long-run welfare. A short-video calibration highlights the broader welfare relevance.
That is from Renjie Bao of Princeton University. I believe a Princeton job market candidate? Via Quan Le.
Saturday assorted links
1. Joaquin Rodrigo’s Toccata. Rodrigo by the way was blind,
3. “People Keep Sneaking Into New York City Sewers. No One Knows Why.” (NYT)
4. Yiyang Zhuge has postponed her recording session with CWT, in case you will be wondering why the episode does not show up soon.
5. Who was the most consequential emperor in Chinese history?
6. Are science fiction films becoming more optimistic?
7. Ruxandra on clinical trials as the main obstacle (NYT).
8. The trend in U.S. cyberinsurance prices since 2020.
9. Fermat’s Last Theorem, the number of links cannot keep up with the world.
The Kalshi Citizen Debt Forecast (CDF)
Kalshi Research is doing interesting work on the fundamentals of prediction markets and also on how data from prediction markets can be used to improve other forecasts. Economists at the Fed, for example, recently wrote Kalshi and the Rise of Macro Markets finding:
Prediction markets offer a new market-based approach to measuring macroeconomic expectations in real-time. We evaluate the accuracy of prediction market-implied forecasts from Kalshi, the largest federally regulated prediction market overseen by the CFTC. We compare Kalshi with more traditional survey and market-implied forecasts, examine how expectations respond to macroeconomic and financial news, and how policy signals are interpreted by market participants. Our results suggest that Kalshi markets provide a high-frequency, continuously updated, distributionally rich benchmark that is valuable to both researchers and policymakers.
Kalshi gives one example of how this data might be used, the Citizen Debt Forecast (CDF). The CBO forecasts the future debt path but it updates only twice a year and is limited to a legislative baseline even when most observers expect, for example, taxes to increase or spending to be cut. The Kalshi CDF updates continuously and can build in market expectations about future legislative changes.
The Kalshi forecast, as seen below, is slightly more optimistic than the CBO forecast but I don’t read too much into that. The larger issue is how prediction market data can be integrated into a wide variety of forecasts.
Mein Ingeborg Bachmann Studium
Recently I finished read Malina, by Ingeborg Bachmann, an Austrian novel published in 1971. I was pretty stunned by how good it was (it seems less good in English), and I would say I enjoyed it more, and found it deeper, than any of the famous 19th century Victorian novels by women. The initial story line is a woman having relationships with two different men, one she lives with and the other who is married, more charismatic, and lives right up the street.
And so I have been looking into Bachmann more. Her volume of letters with Max Frisch, her lover and the leading Swiss novelist of his time, is the best “letters book” I know. After four hundred pages, with another 180 or so to go, I still am not bored. It is called “Wir haben es nicht gut gemacht.” Der Briefwechsel. (This November coming out in English…and probably the letters work well in English?) Overall, it is remarkable how many ups and downs a relationship can have and persist. It works best to read only a few of the letters at a time, so that the story does not go by too quickly. One sees connections between the letters and the unfolding of Malina.
She also has letters volumes with Paul Celan and Henze, those are in my pile too. (She and Henze were just friends.) And just this year there was a wonderful new biography of Bachmann, namely Dieter Burdorf’s Dieses unruhige Ich: Ingeborg Bachmann. I have started that.
There is a movie of Malina, an opera too, and a biopic about Bachmann and Frisch. I have heard Max Frisch’s Montauk is partly about the Frisch-Bachman relationship as well. And we haven’t even gotten yet to Volker Schlondorff, have we?
Bachmann has poetry in German, and a new edition of her short stories is coming out this fall in English.
It is wonderful to discover something/someone so new and unexpected. And as I get older and know more, it happens less frequently than it used to.
I will continue with this. Amazing (and charming) how many words people can spill about “stuff”!
Is Lichtenstein an actual monarchy?
It seems so:
Internal documents reviewed by the FT show that three days earlier, behind the walls of Vaduz Castle, Europe’s wealthiest ruling dynasty had quietly approved an overhaul that strengthens the authority of a prince who already wields extraordinary power over his 42,000 citizens, while reducing some of the rights and checks exercised by his relatives in the Princely House of Liechtenstein.
Even before the changes, Prince Alois could veto legislation, dismiss the government, dissolve parliament, appoint judges and reject laws approved by referendum. In June, the Catholic prince said he would veto a citizens’ initiative to legalise abortion during the first 12 weeks of pregnancy, even if voters backed it…
The latest changes to the House Law go far beyond succession. According to internal documents, the prince gains greater discretion over who belongs to the dynasty and explicit authority to set rules on family names, titles and coats of arms. The Family Council, a body of relatives that oversees dynastic affairs, will expand from three to five members but loses an important check: the prince will no longer need its consent for pardons, only to consult it…
The reforms were approved not by parliament or the public, but by members of the dynasty itself.
How are the market valuations for the U.S: insurers doing?
U.S. insurance stocks have been doing quite well since the beginning of May 2026, and they have materially outperformed the overall market. I’m using the May 1 close through the September 3 close so that we compare complete trading days; these are price changes, excluding dividends.
The cleanest broad measure is the iShares U.S. Insurance ETF (IAK), which covers U.S. life, property and casualty insurers. It rose from $132.01 on May 1 to $147.87 on September 3: +12.0%. An alternative, more equal-weighted measure, the SPDR S&P Insurance ETF (KIE), rose from $56.79 to $64.80: +14.1%.
For comparison, the S&P 500 ETF (SPY) went from $720.65 to $773.17 over the same period, +7.3%. So insurers have beaten the market by roughly 5–7 percentage points in four months.
That is from GPT Pro. Here is my earlier post on numbers and market valuations. Do any market prices reflect a realistic chance of very bad outcomes from advanced AI?
Here is advice on how to short those shares.
Friday assorted links
1. “After work, we’ll have each other.”
2. Gloria Steinem, RIP (NYT).
3. Henry Oliver on Finding Emily.
4. Solve for the Russian family squabble equilibrium (short video).
5. New Fuchsia Dunlop book due out October 20.
6. The O-Ring model, restated for AI.
8. The pig kidney worked (NYT).
Real GDP Per Capita and the Standard of Living
We are freshening up some of our videos with updated data so now is a good time to remind everyone that Modern Principles of Economics is best principles of economics textbook; great videos, clear writing and excellent applications and examples!
Shout it from the rooftops (of the data centers)
Data-center investment has become one of the largest capital-expenditure cycles in financial markets, with U.S. hyperscalers expected to deploy roughly $700 billion in 2026. This investment boom has raised concerns that large computing loads impose external costs on households through higher electricity prices. Using a 50-state panel for 2021-2024, we find no statistically significant evidence that data-center presence, installed capacity, or capacity expansion predicts residential electricity-price inflation across extensive-margin, intensive-margin, fixed-effects, and timing specifications. We propose an energyinternalization mechanism: hyperscalers can partially internalize incremental electricity demand through contracted or dedicated generation, including solar and wind energy. Consequently, gross datacenter electricity consumption need not translate one-for-one into net pressure on residential electricity supply. The findings suggest that the extraordinary AI capital-investment cycle has not, thus far, produced a detectable residential electricity-price externality.
Here is the article by Yosef Bonaparte, via the excellent Kevin Lewis.
Share price numbers for the Hugging Face incident
…major publicly traded cybersecurity firms lost roughly $65–80 billion, or about 8–10% of their combined value, in the days following disclosure of the Hugging Face/OpenAI incident; by early September they had recovered roughly $58 billion, representing about 70–90% of that drawdown, depending on whether July 15 or July 20 is used as the pre-event baseline.
That is from GPT Pro, there is more at the link. As a very rough approximation, say you dismiss the price bounceback altogether as either random or due to good earnings reports. You have “the value of previous cybersecurity efforts” falling by eight to ten percent. I take that to be very broadly consistent with some of the estimates discussed in my previous post on the numbers.
In any case that is a significant sum. But do note that if the AI models were on the verge of doing truly terrible things to us, the market might estimate the value of our cyberprotection of falling more than eight to ten percent?
More generally, perhaps these numbers could be used to discipline the discussion a bit? Or will I read long lists of reasons why they show us nothing, in that case try coming up with some other market price-based indicators of AI risk? Vix will not do it for you, not these days. I see many metaphors and insinuations and random anecdotes of AI terror, not numbers. Maybe you think your ideas about AI risk are so important that no market prices can reflect them? (If you really believe that, does it mean you would not be worried, and would not cite the numbers, if the value of those companies fell by ninety percent?)
I am sure others can improve on what I am putting forward, and furthermore we should track the continuing progress of these share values over time, especially if other AI hack attacks surface.
Overall I am extremely skeptical of arguments that essentially take the form of “what I am concerned about is too big and too important to show up in any market prices.” Pick your market prices!