These inefficiencies won't stand

And yet we impose them anyway

Photo by Rajiv Perera on Unsplash

Hello,
Welcome to Known Unknowns, a newsletter where no party has a monopoly on bad ideas.

Bad policies
The economics profession has been around for a long time. And to be fair, we’ve made some mistakes, advocated for some bad policies, and most often can’t even agree on what a good economic policy is. I’d say a good economic policy enhances prosperity not only today, but in the future too. There are also distributional concerns; my personal values rank them as second order, but that’s me—reasonable people can disagree on that one. But growth and enhancing prosperity are important.

We have learned some things that most economists can agree on when it comes to furthering those goals. For one, price controls are bad. The market is a miracle: all these people come together with different preferences, and a price is determined that clears the market. With few exceptions, you don’t want to mess with it. And yet, for now, price controls are all the rage. We have this sudden love of rent control, especially in New York City—though apparently driving landlords out of business may be the plan. The president also wants to cap interest rates on credit cards. We also have politicians advocating for price controls on energy.

I kind of get it. Affordability is the hot political issue. Lower prices by fiat appear to fix the problem if you don’t think about it very carefully. Though if there is one thing we know, it’s that this actually makes the problem much worse.

Then there is the really bad tax policy. I hate all taxes. I don’t like paying them, and I think they make the economy less efficient. But they are also a necessary fact of life. The government does need revenue, and again there are some distributional concerns. But there are good taxes and bad taxes. Good taxes don’t mess with people’s behavior so much. I think where many economists break with everyone else is that we take it for granted most people make the best decisions for themselves. They know their preferences; they have more information. It is not our job to make people deviate from their normal behavior, or bad things happen—or you just grow less. A good tax is less distortionary and can also be collected. Feasibility is important too.

And by these standards, the best kinds of taxes are consumption taxes, followed by income taxes, followed by wealth taxes. And yet we have the worst kinds of taxes. Even if this crazy California law doesn’t come to pass (and it is already having an impact on behavior), wealth taxes seem like our future. There are also the tariffs, which I suppose are a consumption tax (good), but in a distortionary way (bad). Oh, and then we have the Mamdani plan to impose a flat higher tax rate on people who make more than $1 million. So if you make $999,999, you owe nothing—but you owe $20,000 if you make a dollar more. Seriously.

So much knowledge in the world, and we choose to ignore it all. All of this reduces prosperity, and even if you put a bigger weight on redistribution, it’s bad because there’s less to redistribute.

Not a terrible policy idea
You know, I don’t hate the Trump plan to let people use their 401(k)s toward a house down payment. Maybe because I did this myself during the pandemic, when they waived the penalty on withdrawals. I think it was a good financial decision for me (assuming NYC real estate prices don’t crash) for two reasons.

1. Mortgage rates were freakishly low at the time

2. More than 80% of my assets were in retirement accounts, which is probably too high

In normal circumstances, emptying out your 401(k) to take a big leveraged bet on a single asset is not advisable. But it can be right for some people. The bigger problem is many retirees already have too much wealth tied up in housing relative to their financial assets.

If the plan includes ways to better tap that when you retire, it may not be a terrible idea.

Like many things, it depends on the details.

2026 is the year of the IPO
After years of decline and a cyclical post-pandemic drop, 2026 is set to be the year of the IPO comeback! Markets are settling into the new rate regime, and there is hopefully less economic uncertainty around tariffs and stuff (HA!). Also, lots of funds need the money; their LPs are getting itchy.

This could get interesting. Lots of pension funds and endowments have been promised high returns for years. This is the year they find out how much they actually get. I am all for public markets, and IPOs are great, but this could also be the year we right-size private markets too. Either that, or they demonstrate their worth. It should be interesting.

Congressional testimony on the Fed
It was a big week in monetary policy last week—or the politics around it. I was already scheduled to testify on the Fed’s balance sheet (“Striking the Right Balance Sheet”!) for the House Financial Services Committee. Sort of a dry topic, but with the news it was quite spicy! The other witnesses ran QE at the Fed for years and had lots of interesting things to say too.

My takeaway is Fed independence has never been more secure! Sometimes testing institutions is what makes them stronger. I never thought I’d sit through 90 minutes of congressmen making impassioned speeches about Fed independence being critical to our future prosperity. I mean, yeah, sure—that’s true. But where have you been the last several years?

Let’s file this one away for future viewing when we have a debt crisis.

Until next time, Pension Geeks!

Allison