Fair-weather Hawks
Alas, Stablecoin won't save us
Photo by Alice Pasqual on Unsplash
Hello,
Welcome to Known Unknowns, a newsletter where no investment is risk-free—even if we require everyone to buy stablecoin.
Big Beautiful Bill
I’ve seen some very strong opinions about the Big Beautiful Bill. Everyone suddenly seems to have found debt religion. Welcome to the club! Though I’m wary of these new debt hawk allies—because their objections strike me as more politically convenient than a sudden and sincere concern about the debt. No one is speaking out against anything their political constituency actually favors. I don’t hear Republican debt hawks naming a single tax cut they don’t like. (For the record, I favor extending the TCJA and restoring bonus depreciation—though I’d prefer thoughtful tax reform.) I hate increasing the SALT limit, the tax on tips, and all the other new distortions we’re throwing in that will never go away.
Meanwhile, Democrats are incensed that ANYONE might lose Medicaid coverage—even able-bodied young men—especially if anyone else is getting a tax cut. We’ve expanded Medicaid a lot over the years. Are they arguing every expansion must be irreversible? Just say you see Medicaid as a backdoor way to create a government option that covers most people—even those who are borderline middle class.
I wrote for Bloomberg that both Democrats and Republicans need to get real. Republicans must accept that taxes need to go up; Democrats must accept that we can’t afford a welfare state for the middle class. If they did, we could actually make progress. We could broaden the tax base (get rid of all the deductions), lower rates, and implement a VAT. We could also agree that welfare is for the needy and unlucky, make it work better for the people who need it, and remove all the incentives that make work expensive if you live on benefits. That would not only save us lots of money and fix the debt problem—it would also boost growth.
I’m not optimistic. Eventually, the day of reckoning for serious debt reduction will come—probably when people really feel the pinch of high interest rates. When that day comes, I put low odds on thoughtful, growth-enhancing tax reform or a more efficient welfare state.
We Are Entering a Time of Repression
Before we even attempt either of those, we’ll try financial repression—or the government trying to lower rates by strongly encouraging people to buy more bonds. That’s one way to bring down debt service costs. The President may already be hinting at it. But I think those days are already here.
I could be convinced that the supplementary leverage ratio (how much equity banks must hold relative to assets) needs to be changed because it doesn’t account for the fact that Treasuries have a different risk profile. This may be one reason the bond market has become more fragile and prone to jamming. It does limit how many Treasuries banks can buy—and that’s a problem. But the sudden motivation to change it does seem to neatly coincide with a political push to lower rates. It’s not explicit repression, but it kind of feels like it.
The push to regulate stablecoins may also be a form of repression, since they hedge currency risk with Treasuries too. If stablecoins become a big mainstream asset, they’ll also increase demand for our debt.
Maybe I’m paranoid. But in any case, repression never works. It just increases inflation because it artificially lowers rates—or eventually the market catches up to you. Just ask Japan.
Inflation in Its “Mission Accomplished” Moment
I’ll admit I was skeptical that the Fed could get inflation back down to something in the 2% range. And, well, it’s there. I’m not sure how much credit they deserve, but they should take the win. It may feel like a Mission Accomplished moment because inflation could come back soon. But the pandemic-era inflation seems to have abated.
Future inflation is a different story, and it will be driven by different reasons—some structural, some policy-induced. Taking a small victory lap now bolsters credibility for the next war and gives the Fed room to revisit its target when it revisits its framework this fall.
College Is Not Risk-Free
I’m not done going after American colleges. It seems they’ve failed on another front: guaranteeing higher earnings and employment. The job market for new graduates is not great, and it may be due to structural factors like AI—not just a weak market.
In times of uncertainty, I turn to financial theory, which offers the guidance and answers I need. One thing I know from finance: things go wrong when people assume an asset is risk-free when it’s not. Same goes for college. Everyone thinks education is a sure bet. And yes, it has a positive expected return—but it’s not risk-free. Some people do lose money and years on the endeavor.
To be fair, it used to be risk-free—when technology favored pretty much anyone with college-like thinking skills, and hardly anyone else went to college, let alone grad school. But that’s changed. Now people need to treat higher education as a good, but still risky, investment in their human capital. So be thoughtful: go to the right school, study the right thing, and be open to living somewhere that complements your skills and ambitions. Early jobs are a big part of future earnings risk, too.
In Other News
I went on Mike Pesca’s Not Even Mad podcast to disagree with Matt Yglesias.
Until next time, Pension Geeks!
Allison
"Able bodied unemployed people receiving Medicaid" is not a constituency that actually exists. The intention and effect of the Medicaid cuts is to take away poor people's healthcare to finance (partially) high end tax cuts. Full stop. That's not a political judgment; it's a judgment of what the bill actually does, by people whose job is to analyze the legislation.
Of course you cannot take the politics out of politics.
For the record, I opposed the revenue reductions of 2017 Tax Cuts for the Rich and Deficits Act. [Structurally, reducing taxation of business income was good.]
I’m not aware of any revenue reducing element of the BBB that has a deadweight loss big enough to justify the additional borrowing said reduction will entail.
I really object to using “deductions” rather than partial tax credits to reduce revenue as deductions are more valuable to higher marginal rate taxpayers.
I would not oppose a good-faith work requirement designed to encourage layabouts to get a job. In practice I think this is likely to see working people that cannot negotiate complicated proof of employment systems losing benefits. A good-faith work requirement would just create an in kind EITC and reduce no expenditure.
What is wrong with social insurance for those “unlucky” enough to need consumption more in some life circumstances – sickness, unemployment, old age, rearing children -- even if they are middle class, if the transfer is paid for with a consumption VAT?