Ceding defeat

America is actually pretty good at this growth thing

Photo by Eric Prouzet on Unsplash

Hello,

Welcome to Known Unknowns, a newsletter where the only thing riskier than the cold shoulder of capitalism is the warmth of collectivism.

When did China win this argument?

Every time I see a panel that includes a CEO of a major US company, it seems they all argue some variant of, “We can’t compete with China if we don’t adopt more industrial policy, like they have.” There is usually some politician around nodding in vigorous agreement.

OK, sure—maybe for critical minerals or defense tech. But otherwise, when did China win this debate about how to grow an economy? It’s not like the American model has been so shabby. Also, I am not convinced the Chinese model has worked so well. They are very good at doing things quickly, adapting and improving on existing technology. But there are also huge misallocations of capital, and the model is still untested as an advanced economy.

I think it is a seductive idea because if the government carefully manages where capital goes and plans our frontier technology, it seems we can grow and get no downside risk, no recessions, no bubbles, no job loss—or my favorite, more resilience. Though it really does not work that way; less risk means we also will get less growth and innovation.

But it seems we are plowing ahead with this idea anyway. The OpenAI 5% government stake is telling: CEOs really do want this, or feel like they have to want it. And why not, if you are a large incumbent? Giving some of your company to the government ensures cheaper capital and a lighter touch on regulation. Days before, I wrote for Bloomberg about why this whole sovereign wealth fund stake in AI companies is a terrible idea.

First, the government does not need a stake in AI companies. It already has one; it is called future tax revenues. If these companies are successful, the government will get corporate taxes, capital gains taxes, and income taxes from their staff. Also, if they do make the whole economy more productive, it gets tax revenue from every company that uses AI too. I am not sure why it needs to be said, but the US government is already long US GDP.

And because we are a debtor country, this is all done on leverage. So effectively we are taking a big leveraged bet on what we are already exposed to. And it could be argued this major market distortion will make the industry less productive—and therefore less profitable.

The age of ignorance

I am deeply disturbed by the Rent Guidelines Board’s decision to freeze rents in New York City. Hero Arpit Gupta, the sole “no” vote, explains why this is a terrible idea.

It seems like just another bad, but ultimately harmless, policy mistake—we do that a lot and the world doesn’t end. But it is much more significant than that. The board is required to consider the costs landlords face, and it did not, for political reasons. It also shows the DSA is not moderating: they do indeed have power and are serious about implementing their extreme policies, and they have no interest whatsoever in evidence or history.

I was stunned to read this in New York Magazine interview praising the 1970s price controls! With no push back. Is this a rewrite of history, or total ignorance? And these are the people who are so smug about trusting experts?!

It is all very troubling, and not only to economists. For us, price controls are our anti-vax movement—arguments built on ignorance and superstition that cause grave harm. It just never ends well when politicians talk endlessly about affordability, do some things to make the problem worse, and blame other people for their failures.

The student loan bust

Even somewhat innocuous but bad policies can cause harm. It turns out the promise of student loan cancellation induced many borrowers to default or take on more consumer debt. Now that payments have resumed, these borrowers are worse off. Some still believe relief is coming, maybe in 2028. But this policy uncertainty can do lots of damage. This is the danger of a bigger government footprint in the economy: there is less predictability, and the government becomes the single biggest economic shock in your life. Like China.

One study estimates that the zero-Covid policies have had a lasting impact on young Chinese people: they are now much more risk averse than older generations. Similar to Depression babies, young adults in China shy away from risky assets. Youth in America have the opposite problem; they love extremely risky assets, like crypto and betting. Though they do have lots of retirement savings. It turns out the financial trauma you experience as a generation does shape your investing habits.

And all generations have their trauma: Boomers had the economic turmoil of the 70s, Gen Xers drank water from a hose, Millennials graduated during the financial crisis. Gen Z bore the brunt of the pandemic—and the government also became a bigger part of their economic lives. Is this false sense of security why they like extremely risky assets? Perhaps, but if it goes too far, as we see in China, it can swing in the opposite direction.

In other news

I moderated a panel about how we will finance retirement at the Aspen Ideas Festival! It was a great time and I think we solved the problem.

Until next time, Pension Geeks!

Allison