Category: Law
How much did land reform help Taiwan?
We study Taiwan’s landmark 1950s land reform, long seen as central to its growth miracle. Phase II of reform—which redistributed formerly Japanese public lands—reduced tenancy, boosted rice yields, and increased the share of labor in agriculture. By contrast, phase III— which reduced tenancy by breaking up larger estates—did not increase agricultural productivity and pushed labor (in particular, female labor) out of agriculture into manufacturing. Phase II likely increased yields by lifting crop choice constraints, while phase III may have created farms too small to be economically viable. However, phase II can still explain at most one-sixth of observed 1950s rice yield growth. These results challenge the longstanding view that land reform was a major factor behind Taiwan’s economic takeoff, and highlight the varying effects of different forms of land redistribution.
Here is the full paper by Oliver Kim and Jen-Kuan Wang. Here is Oliver’s very useful Twitter thread.
Taxing unrealized capital gains is a terrible idea
Sadly, Jason Furman has been endorsing one of the very worst economic ideas of our generation. Here is Jason’s Twitter take, here is his earlier WSJ piece.
Let me start with his quick summary:
I like the Biden-Harris proposal to tax unrealized capital gains. For any given level of capital taxation it’s more efficient & fair to tax unrealized gains, reduces lock in & tax planning.
Read through Jason’s own words in the WSJ — do you really think a system that complicated is going to reduce tax planning? How about figuring out what percentage of liquid vs. illiquid assets to hold? Whether to finance ventures through private equity vs. public markets? Which risky assets to buy and sell before December 31? How much to put into your foundation, so as to adjust your net wealth status? Might there not be other “tricks” to adjust your tax eligibility as well? What about those “live in Puerto Rico” decisions?
When it comes to your assets, how is “tradeable” defined? (Narrator: It isn’t)
How about the “…rules to prevent taxpayers from inappropriately [sic] converting tradeable assets to non-tradeable assets”? Those are going to go down nice and smooth, right? And imagine the legal squabbles over what “tradeable” and “non-tradeable” mean. How about bundling assets and deliberately making them less tradeable? How does that count? Chopping up assets to make them less tradeable? Do we have to measure the intent of the investor? And doesn’t this make it much harder to invest in your own start-up? (As we will see below, Jason and others cite “capital flowing freely” as a supposed benefit of this plan — but their plan harms capital flows a great deal.)
How does this paragraph, with multiple points of tax planning ouch, make you feel?:
Taxpayers with wealth greater than the threshold would be required to report to the Internal Revenue Service (IRS) on an annual basis, separately by asset class, the total basis and total estimated value (as of December 31 of the taxable year) of their assets in each specified asset class, and the total amount of their liabilities. Tradable assets (for example, publicly traded stock) would be valued using end-of-year market prices. Taxpayers would not have to obtain annual, market valuations of non-tradable assets. Instead, non-tradable assets would be valued using the greater of the original or adjusted cost basis, the last valuation event from investment, borrowing, or financial statements, or other methods approved by the Secretary. Valuations of non-tradable assets would not be required annually and would instead increase by a conservative floating annual return (the five-year Treasury rate plus two percentage points) in between valuations. The IRS may offer avenues for taxpayers to appeal valuations, such as through appraisal.
Or if you wish to consider another random complication, and I am quite sure there are many others I have not thought of, how about this one? — what about restricted stock or stock grants that vest over time? Are you only paying taxes on the unrestricted/vested part, or the whole thing? Is this going to be so simple?
I have great respect for Jason, whom I consider to be one of the very smartest policy economists, but I genuinely do not see how he can believe tax planning will become easier and less costly under this proposal. Furthermore, one has to consider the tax complications of the act Congress actually will pass, after lots of political horse-trading, rather than the ideal Jason Furman plan. We all know how previous tax plans have fared when they go through the legislative process.
As for lock in, here is Jason from the WSJ:
…linking taxation to realization encourages people to hold on to assets. These gains escape taxation at death, which turbocharges the incentive not to sell and prevents capital from flowing freely to those who can make the best use of it.
I don’t understand the worry here, much less why it is a significant worry. I don’t hear Democratic economists complain about the insufficient liquidity of the wealthy in any other contexts. To put this point in an example, let’s say someone founds a company, and years later that company is worth $200 billion. Under current tax law, Mr. Billionaire arguably will be too late in selling his shares and too late in becoming more liquid, relative to an optimum. Just how big of a distortion is that? Who, on the left side of the politcal spectrum, ever said: “My goodness, I’m worried, Mark Zuckerberg isn’t liquid enough!” And then…we are supposed to help make him more optimally liquid by taking away a decent share of his wealth? In a world with reasonable capital markets, the best way to protect the liquidity of the wealthy is to maintain or boost their net wealth.
Given the ability of private equity to “think about” valuations creatively, the plan offers a huge relative subsidy to that way of doing business. I think that sector is on average more Democratic-friendly than would be public equity holdings? And why introduce this additional distortion? Weren’t we supposed to be worried about the growth of private equity? (What was it they said about Mitt Romney, way back when?)
Alex T., in an email to me, makes a general point very effectively:
What’s really going on is that you are divorcing the entrepreneur from their capital at precisely the moment that the team is likely most productive. Separation of capital from entrepreneur could negatively impact the company’s growth or the entrepreneur’s ability to manage effectively. The entrepreneur could lose control, for example. If you wait until the entrepreneur realizes the gain that’s the time that the entrepreneur wants out and is ready to consume so it’s closer to taxing consumption and better timed in the entrepreneurial growth process.
I agree with Jason (and many others) that revaluing the capital gains step-up basis at death is a bad idea. We all know that is easy enough to fix by other means, as public finance economists have long proposed. And if need be, we could tax the ability of wealthy people to borrow, using their stock as collateral. I don’t favor this, but it would be way better than the proposal under consideration.
Let’s consider another Jason point:
…taxing gains when they are realized is unfair because it allows two people with similar income or wealth to be taxed at different rates for arbitrary reasons. For example, if you hold stocks that appreciate, they will be taxed less than similar stocks that do not appreciate but do pay a dividend.
Keep in mind the Biden-Harris plan is supposed to apply only to the very wealthy (and let us hope it stays that way over time, just like…um…the AMT did). I should be worried about fairness issues because two different individuals with say $300 million in net wealth are paying different tax rates based on their capital gains vs. dividend profiles? I just don’t get it. Is it such a big problem that we don’t end up with “enough dividends”? And this worry of Jason’s comes very early in his piece, with prominence, it is not an aside buried on p.137 of a long proposal. From my point of view, it is simply an idle search for not very relevant distortions.
Here is one very simple way to see the distortions embodied in the new plan. The plan attempts to enforce a minimum tax rate of twenty-five percent. Say you have a start-up, and it becomes valued at $10 billion after a quick growth spurt. But still you aren’t making money yet, but nonetheless your overall portfolio is reasonably liquid because your last company did well and you sold it. So, if I follow Jason and the plan document correctly, in the year after that valuation you have to pay one-fifth of the tax liability on that gain, or say one-fifth of one-fourth of the $10 billion, or $500 million (you don’t have to pay the whole gain, because that would be “too much” a penalty, since the start-up may not in fact pan out. So it is just one-fifth of the 25% rate you pay up front. Obviously you can vary these exact numbers, but the general point remains. Do note that in varying expositions you can see the core rate reported as either 25% or 20%).
That just seems like a bad investment to me! And let’s say the next year the company valuation goes up to $20 billion. You have to pay another $500 million on the new gains, and also (on this point I am not sure I grasp the plan), you have to pay yet another fifth on the gains that have persisted for yet another year, or in other words yet another $500 million (and please do correct me if I am misunderstanding that). Then suppose that, the year after, the start-up crashes and has to be liquidated at a very low value. There isn’t any refund from the tax man. So you have lost not only your investment but also at least $1 billion more, again noting the exact numbers can vary a bit here.
Ex ante, why would you enter into deals like this? But of course a lot of start-up sectors have return structures very much like that, namely some high initial valuations but with reasonably high percentages of a later crash.
Venture capital drives so much of the most productive sectors of our economy, so why are we whacking it like this? When so many promising developments in biotech and green energy seem to be on the way? Why should we want to crush venture capital like this?
By the way, this plan doesn’t seem to be indexing gains for inflation, at least I could not find talk of that in the core document. That introduces a whole new set of distortions — why push more of our taxing capacity into a non-inflation-indexed system? (And please readers, if any advocates of this tax are calling for concomitant inflation indexation, please do leave those links in the comments. I haven’t seen that myself.)
As a result of the policy, doesn’t more asset ownership end up in the hands of foreigners? Once the policy is on the way, American capital owners will be selling at discounts. That is another distortion, and the resulting capital inflow likely would not help U.S. exports (it is a bit complicated because not all ceteris are paribus). Foreigners will end up “owning more of America,” and yes that includes Chinese. That alone seems like reason to reject this plan, yet you won’t find these issues discussed.
If this is supposed to be a major revenue source for our government, why make the budget so dependent on capital gains, realized or otherwise? How has that dependence worked out for the state of California? What happens to the broader budget during recessions and asset price crashes?
Or just try the very simplest of “small c conservative” questions — how many countries have ever made a system like this work? None, and yes I do know about the much smaller, more limited, and also abandoned French wealth tax.
Overall, this is a terrible policy, and we need the real Jason Furman back!
Addendum: Here is a Jason Furman Twitter response, and my response back to him at the end of that.
Taxing Unrealized Capital Gains and Interest Rate Policy
First read Tyler on the practical difficulties implementing a tax on unrealized capital gains!
I have a different argument that I rarely see discussed. A significant fraction of what we call capital gains is due to variation in the discount rate rather than variation in income. Take the simplest Gordon model of stocks P=D/r where D is the annual dividend and r is the discount rate. If D=100 and r=.1, for example, then the stock is worth 100/.1=$1000. Now suppose people become more patient and the discount rate falls to .05 then P=$100/.05=$2000. The stock price doubles, a massive capital gain. But notice that income hasn’t gone up at all. It’s still D per year. Income hasn’t gone up and lifetime consumption possibilities haven’t gone up for someone who doesn’t sell (but recall this is a tax on unrealized gains. If there is a sale then tax the realized gain.) Ultimately, we want to tax consumption so we should not be taxing “capital gains” which reflect changes in discount rates rather than changes in income or consumption possibilities.
Taxing unrealized capital gains also connects interest rate policy even more tightly with fiscal policy. Need a tax boost? Lower interest rates! Fed policy already influences taxes but this adds another lever for political business cycles. More generally, interest rate volatility now adds to fiscal volatility. When we exited zero interest rate policy, for example, banks had huge capital losses. As rates fall, capital gains increase. Do we really want to add the tax system to this?
If we generalize the Gordon model to P=D/(r-g) where g is the growth rate of dividends then we can see that another cause of increased capital gains, an increase in g. It’s not obvious that we should tax unrealized changes in asset values due to increases in the growth rate of dividends. On the one hand, this is more income-like but it’s expectational. It’s taxing the chickens before the eggs have hatched.
The one clear increase in income which should be taxed is increases in D. An unrealized capital gains tax would do that but at the expense of also taxing changes in asset values due to changes in r and g which should not be taxed.
Now add the point I mentioned to Tyler, which is that taxing unrealized gains divorces the entrepreneur from the firm at a time when the “marriage” is likely at its most productive. Not good. Taxing unrealized gains might not even be a good idea from the point of view of the tax collector. Does the IRS want to tax X now or a much larger figure later? If the IRS taxes entrepreneurship too early it can reduce total discounted tax revenues.
Bottom line: I don’t see how taxing unrealized capital gains is a well thought out policy. Eliminate the stepped up basis, declare victory and go home.
Addendum: Aguiar, Moll, and Scheuer make some similar points but embedded in a fully GE framework. Ben Moll also points me to earlier pieces by Frank Paish 1940, Nicholas Kaldor 1955 and John Whalley 1979.
Mpox Vaccines Stuck in Limbo: WHO is at Fault
In 2022, Mpox, a viral disease endemic to parts of Africa and primarily transmitted through close contact—especially sexual contact between men—spread to developed countries, including the United States. The U.S. saw over 30,000 cases and approximately 58 deaths. Despite two available vaccines there was not nearly enough supply to vaccinate even the high-risk populations. Fortunately, health authorities adopted vaccination strategies my colleagues and I had recommended for COVID such as first doses first and fractional dosing. For example, several small studies (e.g. here and here) suggested that 1/5 doses delivered intradermally could be effective and the FDA, EMA, and the UK all recommended this fractional dosing strategy. As result, the US was able to vaccinate around 800,000 people and the epidemic ended (natural immunity and other preventive measures also played a role).
Unfortunately, a new Mpox variant is now spreading in the Democratic Republic of the Congo and nearby countries. Here’s the crazy part: despite declaring Mpox a public health emergency on August 14, the WHO has not approved any Mpox vaccines. You might think, “Who cares what the WHO authorizes?” After all, the FDA, EMA, and the UK have all granted emergency approval. But here’s the catch: the WHO’s approval is crucial for GAVI, the vaccine alliance that donates vaccines to developing countries. Without WHO approval, GAVI is reluctant to provide vaccines to the Congo. To add insult to injury, the Congo itself has approved the Jynneos and LC16 vaccines. Yet, the WHO refuses to authorize and GAVI to donate these vaccines, citing vague concerns about safety and efficacy.
Stephanie Nolen at the NYTimes has a very good piece on this mess:
Three years after the last worldwide mpox outbreak, the W.H.O. still has neither officially approved the vaccines — although the United States and Europe have — nor has it issued an emergency use license that would speed access.
One of these two approvals is necessary for UNICEF and Gavi, the organization that helps facilitate immunizations in developing nations, to buy and distribute mpox vaccines in low-income countries like Congo.
While high-income nations rely on their own drug regulators, such as the Food and Drug Administration in the United States, many low- and middle-income countries depend on the W.H.O. to judge what vaccines and treatments are safe and effective, a process called prequalification.
But the organization is painfully risk-averse, concerned with a need to protect its trustworthiness and ill-prepared to act swiftly in emergencies, said Blair Hanewall…
In addition, no one has followed the other practice my colleagues and I recommended for COVID (which Operation Warp Speed did), namely advance market commitments. So the vaccine manufacturers have basically been twiddling their thumbs and not gearing up for greater production. (The Congo can also be faulted for not buying more on their own account.)
All of this means that when the WHO does authorize and the vaccines begin to flow, we will still desperately need strategies like fractional dosing.
Hat tip: Ben H. and special thanks to Witold Wiecek.
From the comments (on regulation)
Prescriptive versus Performance Codes
A great piece in the NYTimes on the history and future of factory produced buildings:
But the most remarkable difference between the United States and Sweden is regulatory. Building codes in the U.S. try to make buildings safe by prescribing exactly what materials must be used and how (a prescriptive code). In Sweden, the government does this by setting goals and letting builders come up with a way to achieve them (a performance code).
So, for instance, U.S. building codes dictate the thickness of drywall that must be used for fire resistance, how many layers are needed and how many nails are required to attach it. In Sweden, the code requires that a wall must resist burning for two hours, say, and lets engineers and manufacturers figure out how to accomplish that. The regulator’s job is to check the engineer’s work.
The result of both is fire resistance and structural safety, but in the United States, each residential building needs to be granted a permit. During construction, work often halts for inspectors to make periodic visual inspections. That contributes to a stop-and-go pace that frustrates pretty much everybody except lenders, who get interest on financing. Sweden’s codes require more work on the front end when builders have to demonstrate that their methods are up to snuff, but factory processes that comply with the performance code can be certified. This encourages innovative solutions and results in less waste.
As an example of how a performance code leads to innovation:
..Before Sweden adopted its performance-based code in 1995, wood buildings had been limited to two stories; almost overnight, wooden buildings could be as tall as engineers could prove safe.
Addendum: See the comments for useful argument that the US code is more performance based than the NYTimes article suggests. What would be very useful is to hear from someone with experience in both systems.
Why massive deregulation is very difficult
That is the topic of my latest Bloomberg column, just to clarify context for the newbies I think more than half of all current regulations are a net negative. Anywhere, here are some of the problems:
Consider the relatively straightforward idea, popular in some Republican circles, of firing large numbers of federal bureaucrats. There would be immediate objections, not only from the employees themselves but also from US businesses.
Businesses need to make plans, and they frequently consult with regulatory agencies as to what might be permissible. The Food and Drug Administration needs to approve new drug offerings. The Federal Aviation Administration needs to approve new airline routes. The Federal Communications Commission needs to approve new versions of mobile phones. The Federal Trade Commission and Department of Justice need to give green lights for significant mergers. The Federal Deposit Insurance Corp. needs to approve plans for winding down failed banks. And so on.
If those and other agencies were stripped of their staffs, a lot of US businesses would be paralyzed. You might argue that this fact is itself proof that there is too much regulation, but the fact remains. Shutting down a large chunk of the federal regulatory apparatus would make it harder, not easier, for the private sector. Furthermore, regulation would give way to litigation, and the judiciary is not obviously more efficient than the bureaucracy.
And this:
The basic paradox is this: Government regulations are embedded in a large, unwieldy and complex set of institutions. Dismantling it, or paring it back significantly, would require a lot of state capacity — that is, state competence. Yet deregulators are suspicious of greater state capacity, as it carries the potential for more state regulatory action. Think of it this way: If someone told a libertarian-leaning government efficiency expert that, in order to pare back the state, it first must be granted more power, he would probably run away screaming.
Recommended, the piece has numerous good points of interest.
Obama’s space legacy?
Bucking his central planning instincts, Obama embraced a surprisingly laissez-faire approach to space flight that angered political allies and opponents alike.
In doing so, however, he tapped a reservoir of ingenuity and innovation that has ushered in a new age of space flight and exploration…
In her forthcoming book Bureaucrats and Billionaires, former NASA deputy administrator Lori Garver and reporter Michael Sheetz trace the origins of NASA’s commercial crew program, a revolutionary human spaceflight program that joins private aerospace manufacturers such SpaceX and Boeing with NASA’s astronauts.
Garver writes that this hybrid allows space flight “at a fraction of the cost of previous government owned and operated systems.” A decade ago, however, the program faced opposition seemingly from every side.
The saga began early in 2010 when President Obama announced his intention to abort NASA’s Constellation program—NASA’s crew spaceflight program—correctly pointing out it was “over budget, behind schedule, and lacking in innovation.”
The decision angered almost everyone. As Garver and Sheetz write, the program was “extremely popular with Congress, and the contractors who were benefiting from the tax dollars coming their way.” An impressive array of stakeholders from aerospace companies, trade associations, and astronauts to lobbyists, Congressional delegations, and NASA pushed back.
The resistance was immense.
NASA chief Charles Bolden, while choking back tears, compared the decision to “a death in the family.” Pulitzer Prize winning columnist Charles Krauthammer ominously noted the move would give the Russians “a monopoly on rides into space.” Congressman Pete Olson (R-Texas) called the decision “a crippling blow to America’s human spaceflight program.”
Few commentators seemed to even notice the $6 billion in spending over five years to support commercially built spacecraft to launch NASA’s astronauts into outer space…
By pulling the plug on Constellation, Obama had unleashed the power of markets and competition. While many associate competition with dog-eat-dog and survival of the fittest tropes, competition is a healthy and productive force.
Here is the full story, by John Miltimore at FEE (!). Via Matt Yglesias.
Jim Crow and Black Economic Progress After Slavery
This paper studies the long-run effects of slavery and restrictive Jim Crow institutions on Black Americans’ economic outcomes. We track individual-level census records of each Black family from 1850 to 1940, and extend our analysis to neighborhood-level outcomes in 2000 and surname-based outcomes in 2023. We show that Black families whose ancestors were enslaved until the Civil War have considerably lower education, income, and wealth than Black families whose ancestors were free before the Civil War. The disparities between the two groups have persisted substantially because most families enslaved until the Civil War lived in states with strict Jim Crow regimes after slavery ended. In a regression discontinuity design based on ancestors’ enslavement locations, we show that Jim Crow institutions sharply reduced Black families’ economic progress in the long run.
That paper, by Lukas Althoff and Hugh Reichardt, will be coming out in the QJE, was it Florian Ederer who mentioned this on Twitter?
The Intellectual Roots of YIMBYism
At the Democratic National Convention former President Obama came out strongly in favor of housing deregulation saying “we need to build more homes and clear away some of the outdated laws and regulations that make it harder to build homes”. Robert Kwasny asks on X, “What are the intellectual roots of present-day YIMBYism?”
Looking at MR I think the first truly YIMBY post was a 2005 guest post by Tim Harford, Red tape and housing prices, pointing to a Slate article by Steven Landsburg. Here’s Landsburg:
Instead of the traditional formula “housing price equals land price + construction costs + reasonable profit,” we seem to be seeing something more like “housing price equals land price + constructions costs + reasonable profit + mystery component.” And, most interestingly, the mystery component varies a lot from city to city.
Even in cities like San Francisco, where there’s little room to build and land is consequently dear (on the order of $85,000 per quarter acre, compared with $2,200 for Dallas), you can’t use land prices to explain away housing prices. The mystery component in San Francisco housing—that is, the amount left over when you subtract land prices and construction costs from house prices—is the highest in the country.
Edward Glaeser of Harvard and Joe Gyourko of the University of Pennsylvania have computed these mystery components for about two dozen American cities. They speculate that the mystery component is essentially a “zoning tax.” That is, zoning and other restrictions put a brake on competitive forces and keep housing prices up. (Read one of their papers here.)
Zoning’s Steep Price, the Glaeser and Gyourko paper is actually from 2002 (a popular version of their NBER piece presented that same year at the NYFed) so you can see back in the old days it took years for ideas to circulate even among the bloggers! Nevertheless, 22 years from NBER paper to Presidential campaign is a great accomplishment. I see Glaeser and Gyourko as the YIMBY fountainhead. All hail Glaeser and Gyourko!
MR continued to promote housing deregulation on and off for years but I think it picked up around 2017 which is when the first YIMBY reference I can find on MR appeared in an assorted link. Here’s Tyler in 2017 pointing to a job market paper on how regulation increases housing prices and here is me in early 2018 on Why Housing in California is Unaffordable. The increase in research on this topic gave us something to talk about which is an interesting model of how ideas are transmitted.
Kwasny also wonders why Democrats seem to have picked up YIMBY more than Republicans, especially given that deregulation, anti-zoning, pro-growth, pro-developers would seem more compatible with Republican rhetoric and political support. Indeed, Zoning’s Steep Price was published in Cato’s Regulation and the assorted link which introduced YIMBY to MR was to an article blaming YIMBY on libertarians, Peter Theil and tech bros! (Congratulations Jeremy Stoppelman for an extremely effective EA donation!)
While it might have started out as being coded libertarian, Ezra Klein and Matt Yglesias are to be credited with pushing YIMBY and housing growth among Democratic elites. (Jon Favreau, an Obama speech writer, says Obama sounds like Ezra Klein!) But it’s not too late for Republicans to come home. Can’t we all agree on building more? Read Bryan Caplan in the NYTimes and buy his book!
Addendum: Tyler traces the intellectual roots of YIMBY back much further to Nicolas Barbon’s An Apology for the Builder which is also recommended by Marc Andreessen. For Britain, Sam Bowman points Mark Pennington’s excellent 2002 monograph Liberating the Land: The Case for Private Land-Use Planning (pdf).
Sweden fact of the day
…the country’s migration minister is celebrating the fact Sweden has “negative net immigration”, with more people thought to be leaving the country than entering for the first time in more than half a century.
“The number of asylum applications is heading towards a historically low level, asylum-related residence permits continue to decrease and for the first time in 50 years Sweden has net emigration,” Maria Malmer Stenergard announced earlier this month.
Sweden’s Moderate-led government, which is supported by the far-right Sweden Democrats, has pursued increasingly restrictive asylum policies, including plans for a “snitch law” that would legally require public sector workers to report undocumented people.
…the UN high commissioner for refugees confirmed the trend. It was surprising, the UNHCR said, that while global displacement was at an all-time high, the number of people seeking asylum in Sweden was at an all-time low.
“The statistics show Sweden having a net outflow of immigrants for the first time in decades,” Annika Sandlund, the UNHCR representative to the Nordic and Baltic countries, told the Guardian.
Here is the full Guardian piece. I think this is all going to work out reasonably well.
Why Top CEOs Earn Big Paychecks
CEO compensation at large firms is high, especially in comparison to average worker wages, sparking debates over income inequality. Critics argue that such pay packages are unfair and disproportionate to actual company performance. Proponents contend that high pay reflects productivity and is necessary to attract scarce top talent to large firms. Let’s go to the ticker tape.
On August 12 shares of Starbucks were selling for about $77, a level they had been stable at for some time. On August 13, shares were selling for $94. What changed? On August 13, Starbucks announced that they were hiring a new CEO, Brian Niccol, who had held the top position at Chipotle.
There are some 1,132,800,000 Starbucks share outstanding so hiring Niccol instantly increased the value of Starbucks by just over $19 billion. In comparison, Niccol will be paid $1.6 million in salary, a bonus payment of $10 million and potential equity incentives that could be worth on the order 
of $100 million or more if the stock continues to do well.
No question, Niccol is paid handsomely but it’s only a small percentage of the billions the market estimates he will create for other people, both consumers and investors.
Niccol has had a phenomenal streak as CEO of Chipotle raising the stock price from about $6 to $56. Thus, it wasn’t surprising that on the announcement of his move, Chipotle stock plunged from $56 to $46 (later recovering to around $52).
Using the latter number, the value of Chipotle fell by about $5.5 billion on the day of the Niccol announcement. That’s a remarkable fall given that the number two at Chipotle is probably no slouch. But heh, Kevin Durant doesn’t make quite as much as Steph Curry. (See yesterday’s post on the benefits of inequality!) Last year, Chipotle paid Niccol a total compensation package worth about $22.5 million. Again, a nice pay package but is there any question that Chipotle investors are sorry to see Niccol go?
Note also that the market expects Niccol to raise the value of Starbucks going forward more than he would have raised the value of Chipotle going forward so this move was a net gain for society. It’s important to remember that CEO pay is not just about incentives it’s about allocation.
Bottom line is that in the estimation of people who put their money where there mouth is, Niccol is worth the pay.
Addendum: Don’t forget my previous post in this series from 2013, The Value of a CEO looking at what happened when Ballmer exited Microsoft. Same basic lesson but in reverse! N.B. look at what has happened to Microsoft stock since!
All of this should also be put in the context of the Extreme Shortage of High-IQ Workers which one can also understand as the shortage of talent.
Go for the Gold!
Bob Lawson and I have an op-ed in Barrons with a new perspective on inequality. Kamala Harris has said inequality is “the defining economic challenge of our time.” Indeed, the Gini coefficient for the United States is 0.4, one of the highest among developed nations, and Senator Bernie Sanders says US inequality is “obscene.” But consider another economy:
In this economy, the Gini coefficient is a whopping 0.60—much higher than in the United States or just about any country in the world. Living in this economy must be miserable, right? Well, what if we told you that the average wage in this economy was around $3 million, the median wage close to $1 million, and the poorest 1% earned nearly $800,000 a year?
The economy we are talking about is the NFL. Is comparing inequality within countries to inequality within a sports league an unfair or irrelevant comparison? We don’t think so. NFL inequality can teach us a lot about what inequality statistics mean.
First, inequality does not mean poverty. The average income in the NFL is well above the U.S. average income. Even the poorest 1% do well. Is that a special case? Not at all. The average income in the United States is well above the world average income. And while our poorest 1% don’t have it easy, their situation looks far better when compared to most people in the developing world.
Second, unequal does not mean unjust. Salaries in the NFL are set by competitive market forces. Jared Goff (Detroit Lions) at the top of the NFL roster earns a lot more than Cameron Sutton (Pittsburgh Steelers), who earns the veteran minimum. But Goff didn’t steal his position from Sutton. Nor do Goff’s riches come from Sutton’s penury. Goff doesn’t earn more because Sutton earns less. Goff earns more because he produces more.
[Some people warn that inequality leads to envy, resentment, societal dysfunction and even collapse. But] Steph Curry’s salary dwarfs those of most of his teammates on the Golden State Warriors. Yet, do we see resentment manifesting on the court? Do Steph Curry’s lesser-paid colleagues refuse to pass him the ball or secretly hope for his downfall? On the contrary, Curry’s teammates rally around him. They recognize that his success elevates their chances of winning championships, enhances their visibility, and potentially increases their own market value.
The dynamics throughout our entire society are certainly more complex, but the sports analogy illustrates a crucial point: When inequality is perceived as a result of merit, effort, and value creation—rather than exploitation or unfair advantage—it fosters collaboration instead of resentment.
In such an environment, people see high earners as role models and partners in success, not adversaries. In the same way, if inequality in the United States is seen as a result of merit, effort and value creation it can help the U.S. team cooperate against rivals in the rest of the world. Go Curry! Go Team USA!
[Sports inequality helps us to understand inequality more generally.] The goal shouldn’t be to eliminate inequality, but to ensure it reflects real value creation in a system with ample opportunity and dignity for all. That is best achieved through competitive markets. Do that, and inequality transforms from a divisive force into a driver of progress.
In short: Don’t fear inequality. Fear unfairness. Build a just system, and let the scoreboard reflect the game.
India’s Cities
The Economist has a good piece on India’s cities. Mumbai has done a great job in recent years at building more infrastructure but infrastructure alone is not enough:
…An overly prescriptive, 2,200-page National Building Code and a surfeit of local rules prevent developers from making optimal use of pricey urban land. Mumbai has some of the most restrictive land-use regulations of any global megacity. In most well-functioning cities about 90% of land is given over to streets, public spaces and buildings. In Mumbai and other Indian cities, those uses take up less than half of the land area, according to analysis by Bimal Patel, an urban planner. The rest is wasted on “private open spaces”—mostly building compounds that are walled off and put to no good use.
The result is that Indian cities are sparsely built-up yet feel densely crowded, note Sanjeev Sanyal and Aakanksha Arora of the prime minister’s Economic Advisory Council. Cities sprawl outwards, driving up the cost of providing infrastructure.
The Economist misses, however, that to truly solve the problem what is needed is better institutions including private cities. Here’s Shruti Rajagopalan and myself writing in the NYTimes:
If China shows the costs of too much top-down planning, India shows the costs of too little. Indian urban development has suffered under an imposing edifice of overlapping bureaucracies and a philosophy of economics that prioritizes village life over urbanization. Together, Nehruvian bureaucracy and Gandhian economics, romanticizing rural agrarian life, have made it extremely costly to convert rural land for urban use. Indian urban development has lagged that of China, and the pressures for urbanization have resulted in the unofficial building of slums and illegal and chaotic development in large cities.
Gurgaon, a city southwest of New Delhi, is an exception. Gurgaon was a small town 25 years ago, but today it’s a city of some two million people filled with skyscrapers, luxury apartment towers, golf courses, five-star hotels and shopping malls. Often called “the Singapore of India,” Gurgaon is home to offices for nearly half the Fortune 500 firms.
Gurgaon, however, grew not by plan but in a fit of absence of mind. After the state of Haryana streamlined the licensing process, it left developers in Gurgaon to their own devices with little intervention from any national, state or local government. As a result, almost everything that works in Gurgaon today is private. Security, for example, is privately provided for almost all housing, shopping and technology complexes. Over all, about 35,000 private security guards protect Gurgaon, compared with just 4,000 public officers. Gurgaon also has India’s only private fire department, filling an important gap, because it must be capable of reaching Gurgaon’s tallest skyscrapers.
But not all is well. No developer in Gurgaon was large enough to plan for citywide services for sewage, water or electricity. For a price, private companies provide these, but in inefficient ways. Sewage doesn’t flow to a central treatment plant but is often collected in trucks and then dumped on public land. Tap water is often delivered by private trucks or from illegally pumped groundwater. Reliable electricity is available 24 hours a day, but often using highly polluting diesel generators.
Compared with the rest of India, Gurgaon fares well but its functioning is far from ideal. Is there a middle ground between China’s ghost cities and the anarchy of Gurgaon? Surprisingly, privately planned cities may be an answer. And one of the oldest is in India.
Jamshedpur was founded by Tata Steel, as a company town, in 1908. It has landscaped parks, paved roads and even a lake, but it’s no playground for the rich. It’s a working town. Nevertheless, it is the only city in the state of Jharkhand with a sewage treatment plant, and it’s one of the few cities in all of India where residents enjoy reasonably priced, reliable electricity and safe tap water. In a survey by the marketing research company Nielsen, residents ranked the city among the best in India for its cheap and reliable provision of sewage, water, electricity, public sanitation and roads.
Jamshedpur works because Tata owned enough land so that it had the right incentives to plan and invest in citywide infrastructure. Tata has also had to maintain good services in order to attract workers. In Gurgaon, private developers built lots of infrastructure, but only up to the property line. By extending the property line to city-scale, the incentives to build large-scale infrastructure like sewage, water and electricity plants are also extended.
See also Lessons from Gurgaon: India’s Private City and my MRU video Skyscrapers and Slums: What’s Driving Mumbai’s Housing Crisis?
Hat tip: Salim Furth.
Why doesn’t Switzerland have more air conditioners?
Installing air conditioning in Switzerland is often subject to rules set at the cantonal level. Geneva is the strictest canton. To qualify, a home owner must prove they have a legitimate need, for example, by producing a medical certificate, and install systems that capture some of the heat emissions and condensation produced.
Other cantons require air conditioners to be powered by solar panels. This increases the upfront cost for anyone without solar panels, putting them out of reach of many home owners.
Here is the full story, via Nicholas. And, via Steve Rossi, here is a Guardian article with the header “Neighbours turn on each other in Portofino air-con crackdown. Some residents of wealthy Italian village reportedly passing on photos to police who are hunting illegal units.”
That is from Mike in VA.