Category: Law
My Conversation with the excellent John Arnold
Here is the audio, video, and transcript. Here is part of the episode summary:
Tyler and John discuss his shift from trading to philanthropy and more, including the specific traits that separate great traders from good ones, the tradeoffs of following an “inch wide, mile deep” trading philosophy, why he attended Vanderbilt, the talent culture at Enron, the growth in solar, the problem with Mexico’s energy system, where Canada’s energy exports will go, the hurdles to next-gen nuclear, how to fix America’s tripartite energy grid, how we’ll power new data centers, what’s best about living in Houston, his approach to collecting art, why trading’s easier than philanthropy, how he’d fix tax the US tax code and primary system, and what Arnold Ventures is focusing on next.
Excerpt:
COWEN: Say there’s a major volcanic event, and there’s a lot of ash in the sky for two or three years. Solar needs a backup. In the meantime, before the volcanic event happens — and of course, that’s quite rare — how much do we need to be up and running with the backup energy infrastructure? What do we need for reserve capacity in case the solar goes down?
ARNOLD: Good question. It would be difficult. It’s doable today. I think as solar continues to grow in market share, both in the US and globally, it will have to be met with some type of battery, a significant battery resource. That’s part of the economics of solar now, that it’s not just sticking it right outside of Phoenix, but it is solar plus transmission or solar plus battery. The question of what happens in that type of event — it would be difficult. The existing energy infrastructure is still largely around.
COWEN: But it will dwindle over time, right?
ARNOLD: It will dwindle over time.
COWEN: Is there some market issue? Say the volcanic event is only once every 150 years, but sooner or later, one happens. In the meantime, you need economic incentives for the gas or the nuclear to be ready. Does our government just keep on paying for those for 149 years in a row until the catastrophe comes?
ARNOLD: It’s a great question, and I think this is why nuclear, and particularly next-gen nuclear, is considered the holy grail, right? You’re not constrained by location. You’re not constrained by, is the wind blowing, is the sun shining? And it’s a clean resource. The problem today is just economics. In order to develop the current generation of nuclear, it’s extraordinarily expensive. Next generation — either small modular fission or fusion — both have a number of technological as well as unclear economics in how they compete.
I do think this question of how do you do this transition in a manner that maintains affordability but continues to get cleaner and lower emissions over time is a complex one, and I think it’s one that the environmentalists probably oversold five years ago in saying that this was going to be an easy transition. It’s certainly not. Just the scale and scope of the energy system is enormous, as you’re pointing to in your question. The need for backup, the need for a diversity of fuels, and how they complement each other is real, and you can’t replace that just with the intermittent resources we have today, plus battery.
And:
COWEN: What’s your most optimistic scenario for the US energy future from an environmental point of view, something that could plausibly happen?
ARNOLD: I think next-gen nuclear, if we can overcome the technical hurdles, if we can overcome the economic hurdles.
COWEN: But isn’t NIMBYism the biggest hurdle? The others I could imagine overcoming pretty readily, but I live in Fairfax County, which builds a fair amount. People there just don’t want nuclear. It’s irrational, but I’m not sure they’ll change their minds. It could be called fusion; it’s still nuclear to them.
ARNOLD: Yes, I’ve been surprised. That was my prior five years ago. I’ve been surprised at the number of jurisdictions that are inviting these next-gen nuclear companies to come. Texas, for instance, just passed a bill creating new incentives for nuclear companies to come and build their first plants and pilot projects in Texas. You see jurisdictions that are choosing to take the economic growth associated with it and that have more of a building culture and say, “Come here.”
I think, as things get proven out, then the question is, will the Fairfax counties of the world see what’s going on and become more agreeable to having that? I think it’s very similar to self-driving cars.
There’re some jurisdictions that say, “Come here. We want you to come, test,” and this is what’s happening in Texas. These companies say, “We want you to come pilot your projects here.” And some jurisdictions are saying, “No, prove it out, and then we’ll talk.”
COWEN: My nightmare is that even Texas becomes NIMBY. You see this in Austin already. Houston, Dallas will become more like the rest of America over time, maybe even San Antonio someday, El Paso with more time.
Interesting throughout, recommended. We also talk about art and art collecting…
Do more laws boost economic growth?
This paper analyzes the conditions under which more legislation contributes to economic growth. In the context of US states, we apply natural language processing tools to measure legislative flows for the years 1965–2012. We implement a novel shift-share design for text data, where the instrument for legislation is leave-one-out legal topic flows interacted with pretreatment legal topic shares. We find that at the margin, higher legislative output causes more economic growth. Consistent with more complete laws reducing ex post holdup, we find that the effect is driven by the use of contingent clauses, is largest in sectors with high relationship-specific investments, and is increasing with local economic uncertainty.
That is from a new issue of the JPE, by Elliott Ash, Massimo Morelli, and Matia Vannoni.
They are solving for the (crypto) equilibrium
Twenty-five people, including six minors, were charged in Paris over a spate of kidnappings and attempted abductions in France’s cryptocurrency world, said the city’s public prosecutor office on Saturday, May 31.
“Eighteen people have been placed in pre-trial detention, three have requested a deferred hearing and four have been placed under judicial supervision,” the public prosecutor said, with the suspects between 16 and 23 years old.
Here is the full story.
Mexico has been electing its federal judges
As a result, Mexicans face the paradox that giving more power to the public may undercut their democracy.
Predictions for Morena’s success on Sunday are driven by the unusual nature of the vote.
Just roughly 20 percent of voters are expected to cast ballots, the electoral authorities say, in part because voters hardly know the candidates. Polling shows Morena is overwhelmingly popular and the opposition is frail. The government controlled the selection process for federal candidates, who are elected by voters nationally, and 19 of 32 states will also elect local candidates.
Candidates are largely barred from traditional campaigning, a policy to try to level the playing field among candidates with different campaign funds. And political operatives have been accused of handing out cheat sheets, most of which recommend candidates with known ties to Morena.
Here is more from the NYT. Garett Jones, telephone!
How America Built the World’s Most Successful Market for Generic Drugs
The United States has some of the lowest prices in the world for most drugs. The U.S. generic drug market is competitive and robust—but its success is not accidental. It is the result of a series of deliberate, well-designed policy interventions.
The 1984 Hatch-Waxman Act allowed generic drug manufacturers to bypass costly safety and efficacy trials for previously approved drugs by demonstrating bioequivalence through Abbreviated New Drug Applications (ANDAs). To spur competition, the Act also granted 180 days of market exclusivity to the first generic filer who challenges a brand-name patent—a mini-monopoly as a reward for initiative. Balancing static efficiency (P=MC) with dynamic efficiency (incentives for innovation) is hard, but Hatch-Waxman mostly got it right.
The Generic Drug User Fee Amendments (GDUFA), modeled after the very successful Prescription Drug User Fee Act (PDUFA), require generic manufacturers to pay user fees to the FDA. These funds allow the Office of Generic Drugs to hire more staff and meet stricter approval timelines. GDUFA dramatically reduced ANDA backlogs and accelerated market entry, especially under GDUFA II.
Generic Substitution Laws allow—or in some states even require—pharmacists to substitute a generic for a more expensive brand-name drug unless the prescriber writes “dispense as written.” This gives generics immediate access to the full market without the need for marketing to doctors or patients. The generic drug market has thus become focused on price as the means of competition. Pharmacists also often earn a bit more on generics due to reimbursement spreads, giving them a financial incentive to substitute. And while pharmacy benefit managers (PBMs) are often criticized, they have also been effective promoters of generics by steering patients toward lower-cost options via formulary design.
The FDA’s Division of Policy Development in the Office of Generic Drug Policy also played an underappreciated but vital role in producing recipes for generics, which has opened up the market to smaller firms. Former FDA commissioner Scott Gottlieb writes:
The division’s core responsibility was drafting, reviewing, and approving the policy guidance documents that defined precisely how generic versions of branded medications could be developed and brought to market. For many generic drugmakers, these documents were indispensable — step-by-step recipes detailing how to replicate complex drugs. Without these clear instructions, numerous generic firms could find themselves locked out of the market entirely…the dramatic increase in the quantity and sophistication of guidance documents issued by the FDA during Trump’s first term was instrumental to his administration’s record-setting approvals of generic drugs and the substantial cost savings enjoyed by patients.
Unfortunately, the Trump administration DOGEd this division—an unforced error that should be reversed. The generic drug market is one of the great policy successes in American healthcare. It works. And it should be strengthened, not undermined.
Trump tariffs struck down
The US Court of International Trade just issued a unanimous ruling in the case against Trump’s “liberation day” tariffs filed by Liberty Justice Center and myself on behalf of five US businesses harmed by the tariffs. The ruling also covers the case filed by twelve states led by Oregon; they, too, have prevailed on all counts. All of Trump’s tariffs adopted under the International Emergency Economic Powers Act of 1977 (IEEPA) are invalidated as beyond the scope of executive power, and their implementation blocked by a permanent injunction. In addition to striking down the “Liberation Day” tariffs challenged n our case (what the opinion refers to as the “Worldwide and Retaliatory Tariffs”), the court also ruled against the fentanyl-related tariffs imposed on Canada, Mexico, and China (which were challenged in the Oregon case; the court calls them the “Trafficking Tariffs”). See here for the court’s opinion.
Here is more from Ilya Somin. Here is the NYT coverage: “It was not clear precisely when and how the tariff collections would grind to a halt. The decision gave the executive branch up to 10 days to complete the bureaucratic process of halting them. Shortly after the ruling, the Justice Department told the court that it planned to file an appeal.” David Beckworth has some relevant comments about how the tariffs might reemerge.
Kudos to my colleague Ilya Somin for leading the charge on this!
A report from inside DOGE
The reality was setting in: DOGE was more like having McKinsey volunteers embedded in agencies rather than the revolutionary force I’d imagined. It was Elon (in the White House), Steven Davis (coordinating), and everyone else scattered across agencies.
Meanwhile, the public was seeing news reports of mass firings that seemed cruel and heartless, many assuming DOGE was directly responsible.
In reality, DOGE had no direct authority. The real decisions came from the agency heads appointed by President Trump, who were wise to let DOGE act as the ‘fall guy’ for unpopular decisions.
Here is more from Sahil Lavingia. There is much debate over DOGE, but very few inside accounts and so I pass this one along.
The Ohio Adam Smith mandate
For inspiration they might look to Ohio, where next month, the recently signed Senate Bill 1 (The Advance Ohio Higher Education Act) will take effect, mandating, among other things, that every state institution of higher education require its bachelor’s students to pass a course in “the subject area of American civic literacy.” At a minimum, no student will graduate without demonstrating proficiency in the Constitution, the Declaration of Independence, the Federalist Papers, the Emancipation Proclamation, the Gettysburg Address, Dr. Martin Luther King Jr.’s “Letter from Birmingham Jail,” and (for the sake of understanding the free market) selections from the writings of Adam Smith.
Personnel is policy I say! That is from Solveig Lucia Gold at The Free Press.
Affordable Housing Is Almost Pointless
What is the most important feature of affordable housing? Simple! It’s right there in the name, right? Affordable. But no. When the Illinois Housing Development Authority (IHDA) evaluates housing projects for tax credits it gives out points for desirable projects. Quoting Richard Day:
For the general scoring track, 10% of points are awarded for extra accessibility features, 13% are awarded for additional energy efficiency criteria, 15% are awarded based on the makeup of the development team, and an extra 4% are headed out to non-profit developers. Only 3% of scorecard points are awarded based on project cost.
Thus, when you look at what the affordable housing authority actually does it awards more than four times as many points to energy efficiency than cost which ultimately determines affordability and availability. “Development team” includes some mandatory requirements for experience, which makes sense, but also:
(a) incentivizing Black, Indigenous, or People of Color (“BIPOC”) and minority participation on the development team,
Indeed, a for-profit “certified” BIPOC-led business can earn up to 11 points (and a BIPOC-led non-profit up to 7 points) and you can get a few more points if you go the intersectionality route and have a certified female headed BIPOC team. Cost Containment in Project Design & Construction tops out at only 3 points (plus there are 8 more potential points for targeting to extremely poor residents which presumably also gets you some cost control).
Thus, rather than affordable housing what is actually being incentivized is some combination of:
- Racial equity goals
- Environmental sustainability
- Community development
- Supporting vulnerable populations
- Universal design for accessibility (7 points for going beyond code)
This is what Ezra Klein calls Everything Bagel Liberalism and what I called in one of my favorite posts the Happy Meal Fallacy.
The icing on the cake, by the way, is that Day argues that the IHDA is a better system than the even more convoluted and expensive system for affordable housing promoted by Chicago’s Department of Housing.
Hat tip: Ben Krauss writing at Slow Boring.
Rent Seeking for Four Generations
Amazing story in the Gothamist about a family that has occupied the same rent-controlled apartment for four generations and the last generation is not eager to give up the benefits:
For decades, Vines’ grandmother lived in the rent-stabilized, two-bedroom apartment around the corner from Fort Tryon Park. The unit has housed her family since 1977, Vines said, when her great-grandmother, a Cuban immigrant, moved in. Vines said she started living there part time in August 2021, when she enrolled in college in Westchester.
The building’s owner, Jesse Deutch, told Gothamist in an email that “an apartment is not an inheritance” and that Vines has not submitted the necessary documents to prove she has the right to succeed her grandmother as a tenant.
…Family members — by blood, marriage or emotional and financial dependence — can claim succession rights for a rent-stabilized apartment, but only if they can prove they lived there with the tenant for at least two years immediately before their death or permanent departure. There are exceptions to the two-year requirement, including for people who are full-time students, like Vines was when she says she was living with her grandmother.
Vines doesn’t contest that she lived part of the week in her dorm. But she said she spent long weekends, holidays and spring break with her grandmother and sometimes slept over when she had time in the middle of the week.
Now you might think you understand this story. The landlord wants to kick out the current tenant to raise the rent to the new tenant, right? No. Landlords are no longer allowed to raise the rents to new tenants (!!!). Unless the new tenant is themselves getting rental assistance!
…the owner might also be able to boost his income if a new tenant with a housing subsidy moves in. Property records for the building show the owner is allowed to collect more than the rent-stabilized amount for tenants receiving rental assistance….As of January 2024, the maximum amount the federal Section 8 program and the city’s own aid program would pay is $3,027. That’s more than three times the approximately $900 a month Vines said her grandmother paid.
Did you get that? The city’s rental subsidy programs (like Section 8 and CityFHEPS) will pay more than three times what the current tenant does — creating a surreal incentive where landlords prefer subsidized low-income tenants over potentially middle-class legacy-tenants. Note that whether Vines gets the apartment at the rent-controlled rate has nothing to do with her income. Vines could be middle-class or a multi-millionaire and still be entitled to inherit the apartment at the rent-controlled rate, assuming her claims of having lived in the apartment hold up.
New York has outdone itself with a rent control system so dysfunctional it manages to achieve the worst of all worlds. Not only does it suffer from the usual problems of reducing the supply of housing and dulling incentives for maintenance, but it has transformed over time from a safety net into a hereditary entitlement. Thanks to succession rights, what was meant to help the poor now functions as a kind of family heirloom — a subsidized apartment passed down like grandma’s china set.
Montana Bucks the FDA, Establishes Biotech and Longevity Hub
Longevity: The US state of Montana this week enacted a groundbreaking law that opens the door for clinics and physicians to provide experimental drugs and therapies that have not received approval from the US FDA. The new legislation, known as Senate Bill 535, was signed this week by Governor Greg Gianforte and builds upon the state’s recent expansion of so-called “Right to Try” laws.
Niklas Anzinger, the head of decentralized longevity initiative Infinita City, has long emphasized regulatory zones as a pathway to broader acceleration of therapies, and referred to the new law as a “groundbreaking moment.”
The original SB 422, passed in October 2023, expanded Right to Try access to all patients – not just the terminally ill,” he told us. “That was the first step in enabling a preventative, longevity-focused model of healthcare, rather than reactive sick care. But a major gap remained: there was no clear regulatory pathway. Uncertainty around liability, payments, insurance, and the blurred lines between drug development and clinical care left the field in limbo. SB 535 changes that.”
The new bill establishes a formal licensing framework for healthcare facilities to become experimental treatment centers. These centers can recommend and administer nearly any experimental drug manufactured within Montana, provided it has passed Phase 1 trials.
The law positions Montana as a potential hub for medical tourism and biotech innovation. The bill has been supported by libertarians and the life extension movement. Key backers saw Honduras’s Prospera (previous MR posts on Prospera) as a model. Note, however, that the law passed the Montana legislature with bipartisan backing, reflecting broad appeal for expanding medical access.
Maybe American Federalism isn’t dead yet.
The new FTC commissioner Mark Meador
Frankly, he is just flat out terrible. You can read his recent document here. Early on he tells us:
Conservatives must reaffirm that concentrated economic power is just as dangerous as concentrated political power…
I suppose if you hold political power you might think that. Or try this bit from the conclusion:
But we can make it {antitrust law] more just by ensuring that we do not allow a preoccupation with economic speculation to water down robust enforcement, preferring to err on the side of cautious deconcentration rather than hopeful deference to the interests of concentrated economic powers. Powers, I will note, that apart from their putative lines of business increasingly declare open war on the moral values that undergird the foundation of our constitutional republic.
That last line segues into my next point, namely that perhaps he is hostile to economic analysis ecause it does not judge the morality of the companies under consideration. (By the way, if the company is truly evil, you might want market power and higher prices!) On p.32, he calls for explicitly limiting the influence of economists, for instance:
statutorily cabining the use of economic evidence…
You can debate what exactly he might mean by that, but he does not seem intent on raising the status of economists in governmental processes. Is moving further in that direction really the right way to go these days? He notes also that:
…antitrust law today has strayed into exactly the kind of “economic extravaganza” that Bork warned against.
Is he referring to Lina Khan?
Nor can he keep up a basic level of professionalism. Like so many on the current political right, he saves his greatest scorn for libertarians, who arguably are those most likely to see through the power charade. Here is one example:
Conservatives must reject the lies they have been told by libertarianism…
As a political motive, perhaps projection is sometimes underrated.
The link and pointer are via Larry.
Claims about police shootings
There is a new book by Tom S. Clark, Adam N. Glynn, and Michael Leo Owens, called Deadly Force: Police Shootings in Urban America. Here are a few of the conclusions:
…we were more likely to obtain records [on police shootings] from cities with women mayors and more women on municipal legislatures.
And, most interesting to me:
…we also found that fewer police shootings occurred in cities with more police, all else equal.
And:
…Black and Hispanic officers are disproportionately the ones involved in police shootings. That is particularly true when a Black civilian is the subject of the shooting.
I do not follow this area closely, but the book seems of interest.
Why (and How) Young People Should Go Into Debt to Buy Stocks
In 2022, I highlighted Ian Ayres and Barry Nalebuff’s proposal that young people should borrow to invest in the stock market. Why? Most people invest gradually, which leads to a concentration of stock holdings late in life. By borrowing early, young investors can spread market risk more evenly across their lifetime, much like diversifying across assets. Put differently, a young person’s biggest asset is their future labor income. Borrowing to invest reduces overexposure to that single asset, effectively diversifying their portfolio away from specific human capital and toward financial capital.
I supported the idea writing that “I agree with Ayres and Nalebuff that young people should be [at least] 100% in equities” but I didn’t expect people to go beyond this until the idea became standardized in a similar way to home mortgages. I wrote, “It could be standardized, however, with retirement planning products.”
Well, we now have our first product in this category, Basic Capital. Basic Capital is a mortgage for investing in stocks and bonds. You put in $1 and you get $5 of investment. Moreover, you cannot lose more than you put in. How is that possible? The investments are constrained–85% of it goes to bonds and 15% to equity but remember that 15% is on $5 rather than $1 so instead of investing $1 in stocks you are investing $.75 in stocks and $4.25 in bonds. The net result is broader exposure at lower individual risk. Whether it’s a compelling product depends on fees and execution, which seem high, but the underlying idea is innovative, and I’m excited to see how products in this new category evolve.
Addendum: Matt Levine offers further commentary. On the general topic of innovative financial products, see also my previous post on Shiller’s Macro Markets.
Hat tip: Naveen.
My thoughts on pharma pricing for The Free Press
Here is an excerpt:
Begin with a basic fact. Generics account for about 90 percent of all prescriptions, and for those drugs Americans pay less than the OECD (Organization for Economic Cooperation and Development) average. So while Americans do pay much higher prices for many new drugs, most of the time, for drugs like metformin, atorvastatin, and amoxicillin, they are getting a bargain.
Furthermore, high American healthcare expenditures are in line with our penchant for higher consumption spending in other sectors of the economy as well. Compared to Europeans, we also spend more on leisure and just about everything else.
Here is the full piece — don’t be a Supervillain!