Good and hard

On Socialism, sex work, and credit spreads

Photo by Jon Tyson on Unsplash

Hello,

Welcome to Known Unknowns, a newsletter that’s about to get the government its neighbors deserve.

Election week
Tomorrow is Election Day, and New Yorkers will elect a new mayor. Sigh.

To outsiders, it may seem strange that the center of capitalism is about to elect a proud, self-described Democratic Socialist. I’m sorry, I just can’t get over the Mamdani plan to apply a flat 2% extra tax to anyone who makes more than $1 million. Not a marginal tax — a flat tax. I know this may seem small compared with everything else at stake in economic policy, including a four-year rent freeze on private property. But the fact that if you earn $1 more than $999,999 you’d owe $20,000 is just amateurish tax design — like something an eighth grader would come up with. It points to outright economic illiteracy — or that no one with even a passing familiarity with tax policy reviewed it.

And it’s not a small thing — this is how he expects to pay for free bus rides, childcare, food, and whatever else. It suggests a lot hasn’t been thought through. The fact that people are relying on Kathy Hochul to be the adult in the room is some level of cope.

Anyhow, maybe we shouldn’t be surprised. The economy has been changing, especially in New York. The number of people who work in finance has been declining, while the number who work in media, local government, arts, nonprofits, and care has increased.

These jobs don’t pay as well, but New York is still an expensive city. That explains the dissatisfaction — and a bigger population that wants and expects government to play a bigger role in their lives.

Who is the shutdown for?

These New York labor-market trends are national trends — just like everything in New York, but more intense. And we can expect more of it. I expect new jobs will be created even as others are lost to technology. I have no idea what those jobs will be — no one does. But there’s a good chance more will be in care, because those skills become more scarce, while the number of business and numerical jobs that once paid well may shrink. Jobs in health care and education have been major sources of growth for the last twenty years. That has big economic and political implications.

More people working in government and care increases demand for bigger government and more benefits. In recent decades there has been a push (not just from Democrats!) to enlarge the welfare state and provide more benefits to the middle class. Does that mean poverty has been solved and we can now subsidize those who can afford it? No one wants to say that — so instead we just expand middle-class benefits while still talking about poverty.

Take the government shutdown. The problem that gets lost is: we can’t afford a big welfare state for higher earners. That’s the fiscal reality — and the discussion we should be having around continuing the enhanced ACA exchange subsidies. They were added as part of the Covid emergency, and now we’re told they are essential to economic well-being. Maybe that’s true — I’m all for cheaper health care if we lived in a world of free stuff. But have you seen the debt — and rising rates? The days of expanding the welfare state to cover the not-so-needy should be over. We should focus on alleviating poverty — and do that well.

Instead, we shut down government and may deprive the needy of benefits just so we can give more money to higher earners.

But with the changing structure of our economy, I’m not optimistic we’ll ever face that hard truth. Odds are we will have a growing population of bureaucrats who want a government we can’t pay for.

Credit spreads
On to happier news: is the stock market in a bubble? I don’t know — though asset prices are a bit expensive. I try not to worry about it, even if my portfolio is exposed. From an economic perspective, a stock correction is never good — but it’s not a disaster either. People lose money, and at worst you get a mild recession.

A mispricing of credit — that’s another story. When bond prices fall a lot, or worse, when you get defaults — collateral becomes worthless, firms go bankrupt, and the damage spreads across the economy. It’s nasty.

So maybe we should be more worried that credit spreads are awfully tight. That suggests low perceived risk — or an environment where heavily leveraged firms aren’t adjusting to higher rates. I’m told that’s because there’s huge demand for debt, including from the enormous growth in private credit. There are valid concerns that private credit has serious vulnerabilities — and the lack of transparency means we don’t even know how bad they are. But the demand drives down spreads in public markets too.

Maybe that will be okay. Where else will all that capital go? But I worry something spooks markets, investors pull back, and then things get ugly fast.

Sex work as work
The biggest thing that worries me about a Mamdani administration is crime — because that’s where he has the most control and where the stakes are highest. One of his pet issues is decriminalizing sex work. I wrote for Bloomberg about why it’s a bad idea.

It’s wild: we live in an over-regulated economy when it comes to everything except vice — which we fanatically under-regulate. That’s why both drugs and gambling are out of control: there seem to be only two speeds — outright prohibition or a free-for-all. The new frontier is sex work. The idea is to let providers operate without criminal penalties. It will go about as well as drugs and gambling have.

The motivation stems from the perception that sex transactions always involve vulnerable young women coerced or trafficked — and sometimes that’s true. But not always. Some customers are sympathetic — like disabled people who pay sex workers. Some providers are not vulnerable at all. It’s a complicated market. Once you make it effectively legal, you get a lot more of it — the good and the bad. The problem with decriminalization, versus legal and well-regulated frameworks, is that it becomes impossible to address the bad — exploitation, trafficking, and quality-of-life issues.

Again, we aren’t dealing with serious policy thinking here — even if these are the people in charge.

Aspen Ideas
I was a moderator for two Aspen Ideas: Economy panels — both interesting. I did one on Gen Z economics with Kyle Scanlon and Ed Elson — two people who give me hope for the future.

Until next time, Pension Geeks!
Allison

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