Archive for January 2021

A Few Other Thoughts on Gamestop (GME)

A few thoughts in follow-up to this post on GME and short-selling

  1.  The general celebratory air around the story of Gamestop (GME) is driven, I think, in large part because no one other than a few hedge funds who had naked unhedged short positions in GME.  But recognize we are still only in the middle of this story.    This is like reporting on the Titanic after the first lifeboats were away successfully but before the first drownings.  There is no WAY that Gamestop is going to remain over $300, or even over $100.  Gamestop has almost nothing you would want to own -- bricks and mortar retail locations that sell digital product -- and yet its valuation is higher than even the hottest of retailers.  It is something like 6-8x the valuation on a price-to-revenue basis (so such thing as a PE as it loses a ton of money) of other similarly threatened retailers like Best Buy.  Its valuation is even well above players like Home Depot, which unlike Gamestop a) makes a profit b) sells a bunch of stuff that can't be sold easily online and c) is growing rather than shrinking.  Within 30 days or less GME will be back under $40 is my guess.
  2. This stock windfall is thus essentially a pyramid, no different than other attempts to corner a limited market, and will eventually fall to Earth.  Those in and out early will win -- and those are the folks winning praise and love across the media.  Those out late will lose out.  Had I been in the stock, I would never ever have stayed in the stock past the market close on Friday
  3. Every professional investor and institution that does not have a lockup or some portfolio rule that keeps them in Gamestop is out.  I would fire any professional that did not take the opportunity to unload this bankrupt dog worth $20 or less at a price over $300.  So all that is left are redditors who are keeping the stock afloat by turning over more than the entire stock float every day, thus elevating it by some investor version of Boyles law.
  4. If the folks in the stock now are like the other redditors who got in early, they are very leveraged.  This leverage allowed folks to claim huge gains with small investments, but in turn will leave small investors at the end with huge losses.

My prediction is that 30 days from now, we will look back on this story very differently.  Perhaps I am just a member of the HBS-educated elite and can't see past my traditional views on investing, but I STILL don't think that highly leveraged momentum investments on near-bankrupt stocks in collusion with other investors of whom one knows nothing is a good approach for the typical small investor.

Update:  Aaaaaand it only took 2 days.  Do we still feel like this is a heroically great story for the everyman?  We got to enjoy regular dudes making a fortune on the way up with highly-leveraged investments in a pyramid / pump-and-dump scheme.  Do we get to see stories of people holding leveraged positions at $400?

The Public REALLY Hates (and Misunderstands) Short Sellers

A group of day traders who congregate and coordinate on various online platforms made a name for themselves over the past week running up the stock price of struggling Gamestop (GME), in the process laying some epic losses on a few high-profile short sellers.  As might be expected in the current political age, the entire body of both economic thought and 90 years of stock market regulatory theory have been thrown out in the ensuing brouhaha in favor of an in-group / out-group narrative, ie underdog economic losers against entrenched billionaire elite insiders.  As Glenn Greenwald describes it:

Although it may be more complex than this once all the facts are all known, this is being treated — by those excited by it and those aghast — as a type of populist uprising, a David v. Goliath tale in which ordinary people united to brilliantly beat Wall Street at its own game, thereby transferring plutocratic wealth back to the public. Oligarchs and their media spokespeople spent all day on CNBC and other pro-Wall-Street outlets expressing outrage and demanding government intervention to protect them from what they regard as this grave injustice.

Given this narrative is already fixed firmly in place, it is almost impossible to comment thoughtfully or discuss it with anyone.  On the one hand these traders aren't doing anything that Carl Icahn did not do to Bill Ackman at Herbalife, and I can' see any reason why their communication channels or ability to trade certain stocks should be shut down.  On the other hand, this sort of crazy volatility is not good for confidence in markets.  Remember that driving GME to unrealistic levels produces everyman millionaires of the folks who were first in and driving the train, but there is no way the stock price levels are sustainable and just as surely a lot of other regular folks, just like the last ones into a pyramid scheme, are going to lose a lot of money.  I will say that this whole narrative of the stock market suddenly becoming a path for the downtrodden common man to make a fortune has a very 1928 vibe to it.

By the way, to understand what is going on, basically these guys attempted and succeeded for a time in cornering the market in GME stock, really no different from any attempt to corner a market in a commodity and drive the price up.  In this case, the wallstreetbets folks are seeking out companies with a very small "float" -- companies that may have a lot of stock outstanding but only a small amount trades actively because of insider and founder shares and shares that have been borrowed and shorted.  Combining a small float with a large short interest can lead to a sharp rise in prices that is accelerated as short-sellers are forced to cover as their losses mount.  As with any such attempt,  whether by the Hunts in silver or these guys in GME, eventually the pyramid can't be sustained and the price collapses again.  When presented this way, it is amazing to me that socialists like Greenwald are cheering on this kind of behavior.  It is a seeming contradiction but I think I know the answer:  short-selling.

I may be overreading this, but a LOT of the support for the WallSteetbets bros seems to be due to the fact that they took down a bunch of prominent short-sellers, who are considered by the public to be barely one step above child molesters on the ethics scale.  Glenn Greenwald, for example, wrote that this is a story about heterodox groups that "unite in opposition to hedge fund short sellers, who contribute nothing of value."  Had these folks united instead to hammer a popular stock like Apple or Tesla down, I am pretty sure the receptions would have been VERY different, even though the basic narrative would be identical.

So is short-selling really a plague that contributes nothing of value?  I have argued many times that it is very valuable.  But let me try again.

Markets don't have a purpose per se beyond the facilitation of individual goals.  Individuals come together in mutually beneficial trades that create value for both parties.  This is ultimately true of capital markets like any other market -- some people want a place where their savings can earn more than in a checking account, and other parties need these funds to support their business operations and growth.  Individual investors shift their money around as the perceive better risk/reward opportunities for their investment.  This is what capital markets were created for, not to serve some higher macro-economic purpose.

But they do serve a higher purpose, and the reason is at the heart of the magic of capitalism.  Because we know that well-functioning markets with clearly understood and consistent rules populated by folks just trying to look after themselves are critical to a productive, growing economy.  At the heart of this magic is the market's role in the efficient allocation of capital to the most productive enterprises.  Again, this all occurs bottom up.   If there are two widget manufacturers making identical products, but one produces them twice as expensively as the other, we are all going to be better off long-term if the more efficient company thrives.  This tends to happen naturally in the capital markets -- more productive companies get more capital, less productive companies do not.

One of the worst things that can happen in an economy is to have scarce capital misallocated, by some market inefficiency, to unproductive or less productive purposes.   And herein lies the societal benefit of short-sellers. I will not say it is their "purpose", because their purpose is to make money (though a lot of short-sellers are driven by righteous ethical indignation about fraud and ironically often have a higher ethical component to their investment choices than do the longs).  But the larger benefit of the actions of short-sellers is to shift capital away from unproductive companies, because every dollar in capital poured into these companies is a dollar that is not invested in something that creates more wealth and benefits for the world.

Something folks may not know but investors are well aware of it -- there is a large raft of "zombie" corporations out there that shamble along unproductively but still consume huge amounts of scarce capital.   Some have government support (eg Boeing).  Others continue to survive for years eating the seed corn of their past reputation, market position, and infrastructure.  Almost all of them are being supported by the Fed's huge money-printing program that tries to keep both the DJIA and the Fortune 500 afloat.

They were once America’s corporate titans. Beloved household names. Case studies in success.

But now, they’re increasingly looking like something else -- zombies. And their numbers are swelling.

From Boeing Co.Carnival Corp. and Delta Air Lines Inc. to Exxon Mobil Corp. and Macy’s Inc., many of the nation’s most iconic companies aren’t earning enough to cover their interest expenses (a key criterion, as most market experts define it, for zombie status).

More than 200 corporations have joined the ranks of so-called zombie firms since the onset of the pandemic, according to a Bloomberg analysis of financial data from 3,000 of the country’s largest publicly-traded companies. In fact, zombies now account for nearly a quarter of those firms. Even more stark, they’ve added almost $1 trillion of debt to their balance sheets in the span, bringing total obligations to $1.98 trillion. That’s more than the roughly $1.58 trillion zombie companies owed at the peak of the financial crisis.

The consequences for America’s economic recovery are profound. The Federal Reserve’s effort to stave off a rash of bankruptcies by purchasing corporate bonds might very well have prevented another depression. But in helping hundreds of ailing companies gain virtually unfettered access to credit markets, policy makers may inadvertently be directing the flow of capital to unproductive firms, depressing employment and growth for years to come, according to economists.

Even if only half of that is misallocated, that's a trillion dollars of investment capital that could have been better deployed elsewhere.  It's a dead loss to the economy.  Short-sellers are our gladiators trying to bring down some of these zombies.

So let's consider Gamestop (GME).   GME is mainly a group of bricks and mortar stores selling digital content.  Huh?  Stores that sell freaking refrigerators have been hammered by online sales, do we really think that GME makes any sense any more?  But by driving up the price 20x, these supposedly heroic momentum investors are sending a capital market signal that this is the place, in physical stores selling digital content, that the world should put its scarce capital -- not in new bioscience investments, not in electric vehicles, not in new forms of energy technology -- but right here in physical locations next to a Safeway to allow people to buy stuff they could download less expensively in 5 minutes in their own home.  In this context, the GME shorts were freaking heroic.


  1. To be clear, because I know how these "with us or against us" issues go, just because I am defending the action of short-selling does not mean that I support restrictions on these day traders.  I think Robinhood is making a mistake in restricting trading of its members in GME and I don't like talk of restricting certain Reddit investment forums any more than I support any other proposed restrictions on online speech.  I do think the WallStreetBets folks are being irresponsible to ordinary investors, and high-profile stories of big leveraged wins by some blue collar day traders in momentum strategies is going to result in some huge losses for other small traders getting caught holding the bag at the end of the run.
  2. Essentially, the Tesla run up has just been a slow motion duplicate of the GME runnup, with day-traders who ignore any value metric making gains due to the small float, potentially with added manipulation in the call option market.
  3. GME is currently down almost $100 per share or 28% from yesterday's close, and down $200 from today's intra-day high.  I wonder if Greenwald wants to celebrate all those underdog investors that bought in <4 hours ago at $200 higher.

Update 2: I do want to thank some group of momentum knuckleheads for driving up the price of mall owner Macerich yesterday.  I sold right at the intraday high (which was 2x the price just 2 days before) and got out whole from a crappy loss position when I thought I was going to have to wait that one out for years.

I need some alert service that says the momentum bros are playing games with such and such stock, get out now while the bagholders are buying.

Update 3:  At one point today GME was trading at 5.5x 2019 revenues -- as a bricks and mortar retailer.  Best Buy, for reference, is trading today at 0.68x 2019 revenues.  And for all its problems, if I had to choose, I would rather own Best Buy than Gamestop.

Will the First Amendment Die in the Aftermath of January 6?

I have gone about a week now without even opening Twitter, which makes me both mentally healthier as well as slower to post my thoughts on various issues.  But those who were reading me on Twitter earlier in the month know that I am far more worried about the reaction to the events at the Capitol on January 6 (J6) than I ever was about the events themselves.

We are experiencing a weird moment in history as a great number of people, IMO, are grossly over-reacting to what would have been called a "protest gone wrong", a "riot", or a "building occupation" in almost any other circumstances.  Instead, there seems to be a consensus to call the storming of the capital by a bunch of crazy painted selfie-taking, souvenir-hunting knuckleheads an "insurrection."  Even moderates and free speech defenders (I am thinking of folks like Ken White at Popehat) -- people who should know the dangers of using such inflammatory language to drive an exaggerated reaction -- are using this term.  Folks online tell me that this was "Literally the definition of insurrection."  In turn I would say that this is literally the first time the general public has used this term to describe ... anything since the Civil War.  The Native Americans that took over Alcatraz weren't described as insurrectionists.  The Bundies and the Branch Davidians weren't insurrectionists.  Nixon wasn't an insurrectionist.  The Antifa and anarchist folks declaring independent nations in the center of Seattle weren't insurrectionists.  But by God the dude in the Fred Flintstone water buffalo hat was an insurrectionist.

Since I tend to criticize people for assuming single-dimension solutions to complex issues, I can think of multiple reasons why reactions to J6 might be exaggerated:

  • Some folks are nearly insane on any topic touching Trump.  I am going to write my retrospective on Trump later, but in short I consider him to be a bully with bad policy instincts who gathered followers by bullying folks on the Left that the Right doesn't like.  He was a disaster for the dignity of the office and public discourse -- though his opposition has some blame too for the latter -- but (consistent with my contention that our system is robust to tyrants) who did remarkably little damage from an actual policy standpoint.  But given that the anti-Trump media has been incredibly harsh on perfectly peaceful Trump gatherings, a riot and occupation of the capital is going to send some folks into orbit.
  • There is a clear asymmetry in how the media covers protests from the Left vs. form the Right.  I believe I can state this as a fact without bias, particularly since I tend to be more sympathetic to the drivers behind 2020 Leftish protests and violence  than to the motives of the J6 rioters.
  • The US Capitol building obviously has special symbolic value, though I think this targeting is more a function of how dumb this J6 group was rather than any special evil on its part.  I think many, many other groups Left and Right might have tried this themselves if they thought it was possible.  But who believed that the Capitol police, which has more officers than some large cities just to cover about 4 buildings, would show all the defensive prowess of an NBA all-star game?
  • I do think that a lot of the overwrought response to this is because it happened inside the beltway.  If this happened in Portland (and a mini version seems to happen there most evenings), it might not make the news.
  • I hate to be cynical, but I do also think there is an element who have focused-grouped the "insurrection" word and inserted it in the narrative in order to prepare the ground for the maximum amount of ex post political retribution and speech restrictions.  These are the folks who are essentially emulating that greatest of all 20th century de-platforming events, the Reichstag Fire Decree.  The lesson from those events and many others in history:  Hang the actions of one mentally ill Dutchman with a lighter on all your tens of millions of political enemies.  Pretend every person of goodwill who disagrees with you is personally responsible for the actions of extremist yahoos.

So in response to all this I was going to write about an article Will Wilkinson wrote at the Niskanen Center the other day (I would describe both Wilkinson and Niskanen as Leftish but at least within sight of the middle of the road but both have had some of the quality of their work reduced over the last 2 years with what I consider an irrational level of Trump hatred).  Given this source from a long-time member of the libertarian community, I found this article he wrote hugely depressing (since I first read it, Wilkinson's byline has been removed, probably for reasons we will get to in a moment).

I am going to leave aside the Trump impeachment stuff, which is a lot of the article.  I will just note the absolutely over-dramatic presentation and suggest there is a deep deep anger here that is simply not compatible with the policy role he wants to play.   I guess if you demanded I take a side, I would say that prosecuting your political enemies that you beat in the last election is a bad precedent.   Even the Republicans in Congress, after the unseemly "lock her up" campaign chants in 2016, managed to mostly avoid the temptation with Clinton and others.   Before I move on, I have to present this bit from the impeachment portion of his piece:

There is too much at stake to further delay mounting a trial, or to draw it out for days or weeks past Biden’s inauguration. There is no need for a lengthy Senate trial because the facts that justify impeachment and removal are not obscure.

It is interesting to see the Niskanen center parroting the words of every law-and-order Conservative demanding some dude get lynched because "we all know he's guilty."  I think it is clear to most folks that Trump was insufficiently diligent in restraining the fringes of his party.  But to convict Trump of  "[sending] his mob to the Capitol to make that threat vivid in the minds of legislators" is a stretch, and does actually need to be proved and not asserted.  I actually am not sure Trump is guilty of an act of commission for J6 -- I see him more as the sorcerer's apprentice, messing with forces he didn't really understand and having it spin out of control.  Which is a good reason to get him out of office, but not necessarily sufficient for Congress to attempt a bill of attainder against Trump under the banner of an impeachment of a dude who is already gone.

But it is the part that followed that really depressed me, leaving me to wonder if there is any intellectual support for the First Amendment any more:

Blame for the insurrectionary riots cannot be laid entirely at Donald Trump’s feet. Many Congress members actively encouraged Americans to believe that the election was tainted by fraud, that Biden may not have been legitimately elected, and that our democracy could be irreparably harmed should he be allowed to take office. They should be held responsible for the dire consequences of propagating these lies. The worst offenders may merit official censure or worse. Most deserve to be abandoned by donors, saddled with strong primary challengers, and punished by voters at the ballot box.

It appears that some Republican members did more than amplify destabilizing falsehoods. Some may have actively planned to bring a mob to the Capitol steps with the intent of influencing the electoral count. If that is the case, they should be removed from Congress and face criminal prosecution.

However, it is essential that any such sanctions imposed on Congress members be grounded in a scrupulous, comprehensive accounting of the factors that contributed to the siege. This disaster was caused by the opportunistic deployment of lies for political gain. If we are to have any hope of restoring stable, functional, constitutional government, the process by which we investigate these events and mete out justice must be a model of careful, proper procedure.

Amy Zegart and Herbert Lin of Stanford University have developed a careful proposal for a commission on January 6, based on an extensive assessment of past commissions (including the 9/11 commission). Congress should expeditiously create such a commission and commit across the aisle to follow its findings, wherever they may lead.

Wilkinson can use words like "careful", "thoughtful", and "proper" all he wants but the fact is he is advocating asymmetrical punishment (even if the punishment is just the process) for what is fairly normal political invective.  Had Republicans called for a 9/11 commission to investigate Congressional Democrats who voiced support for riots last year that turned violent, I am positive Mr Wilkinson would have blown a gasket.  Raising questions of election fraud is well within the bounds of acceptable political discourse.  As often happens in politics, the discourse can become overheated, with words slipping from "potential fraud" to "illegitimate."  But this again is fairly normal.  Why, we would have to go all the way back to the distant election of 2016 to see a similar example, where many many prominent Democrats argued Trump's election was tainted by fraud (RUSSIA!) and he was illegitimate.  In fact, there were many protesters in DC on Jan 20, 2017 protesting exactly that and a number of them turned violent.  In fact, we might even cite Wilkinson himself, who has written similar things about Trump many times, including this in Vox:

Trump’s presidency has been dogged with doubts about legitimacy from the beginning. There’s a real possibility that he would have lost but for Russian interference. At this point, however, that in itself is not the biggest stain on Trump’s legitimacy.

This is the problem with all calls for speech limitation or retribution of some sort -- they are always asymmetric.  My protest is entirely justified and important -- yours is trivial and a super-spreader event.  My invective is "passion" while my enemy's nearly identical invective is "violent and threatening."   If nothing else, 2020 has been a giant lesson in the hypocrisy of our elites, both public and private.

Which brings us to the rest of the story, where someone turned the irony dial to 11:

Will Wilkinson is a vice president at the left-leaning Niskanen Center, a contributing writer at The New York Times, and someone who has frequently quarreled with me about so-called cancel culture. (I think it's generally bad when people are fired, expelled, or dragged on social media for saying stupid or poorly phrased things they quickly come to regret; Wilkinson has suggested to me that I've made too much of this problem.)

On Wednesday, Wilkinson tweeted, "If Biden really wanted unity, he'd lynch Mike Pence."

Lynching humor is virtually never a good idea, and this joke was especially badly executed. (Wilkinson said he was making a joke not at the former vice president's expense, but in reference to the Capitol rioters who had expressed a similar sentiment. The joke being that this time it was the far right calling for violence against a Republican official rather than the left.)

Nevertheless, widespread outrage—some of it stoked by conservative news sites like The Federalist and The Daily Caller—ensued on social media. Wilkinson apologized, describing his tweet as a lapse in judgment.

"It was sharp sarcasm, but looked like a call for violence," said Wilkinson. "That's always wrong, even as a joke."

Nevertheless, the Niskanen Center fired Wilkinson and made it clear that they did so explicitly because of the tweet. "The Niskanen Center appreciates and encourages interesting and provocative online discourse," wrote Niskanen President Jerry Taylor in a statement. "However we draw the line at statements that are, or can in any way be interpreted as, condoning or promoting violence."

I guess it would be sort of satisfying to react by saying that I was happy to see him hoist on his own petard, but really I am not.  I am not sure how we are going to do it but everyone has to just chill the hell out and accept speech as speech, and not as violence.   I am subscribed to Glen Greenwald's newsletter because he is one of the few folks on the Left who is willing to call out this ridiculous anti-speech culture that is developing.  He has a good column on Wilkinson's firing here, including:

So a completely ordinary and unassuming liberal commentator is in jeopardy of having his career destroyed because of a tweet that no person in good faith could possibly believe was actually advocating violence and which, at worst, could be said to be irresponsibly worded. And this is happening even though everyone knows it is all based on a totally fictitious understanding of what he said.

Greenwald does not say it, but it has become a habit of Trump critics to take his every statement and read it, no matter what the obvious meaning of the words, in the worst possible light.  While this is something folks have been doing in the editorial business since time immemorial, the migration of this pattern in the Trump era to the news division has been toxic.  It started way back at with the treatment of Trump's Charlottesville comments -- these actually surprised me as I for years had accepted that Trump had defended neo-Nazis as was portrayed on every news feed until I actually read his actual comments.  Trump wasn't supporting nazis and Wilkinson wasn't threatening the VP.  Any reasonable person reading either set of comments in context would agree, but we are living in a word dominated by post-modernist narrative.   Greenwald ends with this warning to both sides:

Unleash this monster and one day it will come for you. And you’ll have no principle to credibly invoke in protest when it does. You’ll be left with nothing more than lame and craven pleading that your friends do not deserve the same treatment as your enemies. Force, not principle, will be the sole factor deciding the outcome.

I will end with a few tweets from the same source, because I think he was been spot-on during the past few weeks:




Repost for the New Administration: Trans-partisan Plan #1: Addressing Man-Made Global Warming With A Plan That Could Be Supported By Both Democrats and Republicans

By the way, drafts of Biden's plans released so far has him doing almost the polar opposite of every step I suggest.  The cancellation of individual pipeline projects is just stupid political micro-managing to absolutely no benefit.  (First published September, 2018)

While I am not deeply worried about man-made climate change, I am appalled at all the absolutely stupid, counter-productive things the government has implemented in the name of climate change, all of which have costly distorting effects on the economy while doing extremely little to affect man-made greenhouse gas production.  For example:

Even when government programs do likely have an impact of CO2, they are seldom managed intelligently.  For example, the government subsidizes solar panel installations, presumably to reduce their cost to consumers, but then imposes duties on imported panels to raise their price (indicating that the program has become more of a crony subsidy for US solar panel makers, which is typical of these types of government interventions).  Obama's coal power plan, also known as his war on coal, will certainly reduce some CO2 from electricity generation but at a very high cost to consumers and industries.  Steps like this are taken without any idea of whether this is the lowest cost approach to reducing CO2 production -- likely it is not given the arbitrary aspects of the program.

These policy mess is also an opportunity -- it affords us the ability to substantially reduce CO2 production at almost no cost.

The Plan

Point 1: Impose a Federal carbon tax on fuel.

I am open to a range of actual tax amounts, as long as point #2 below is also part of the plan.  Something that prices CO2 between $25 and $45 a ton seems to match the mainstream estimates of the social costs of CO2.  I think methane's greenhouse effects are exaggerated, but one could make an adjustment to the natural gas tax numbers to take into account methane leakage in the production chain.   I am even open to making the tax=0 on biofuels given these fuels are recycling carbon from the atmosphere.

So what is the best way to reduce CO2 -- by substituting gas for coal?   By more conservation?  By solar, or wind?  With biofuels?  With a carbon tax, we don't have to figure it out or have politicians picking winners.  This is why a Pigovian tax on carbon in fuels is going to be the most efficient possible way to reduce CO2 production.   Different approaches will be tested in the marketplace.  Cap and trade could theoretically do the same thing, but while this worked well in some niche markets (like SO2 emissions), it has not worked at all in European markets for CO2.   There has just been too many opportunities for cronyism, too much weird accounting for things like offsets that is hard to do well, and too much temptation to pick winners and losers.

When I first crafted early drafts of this plan several years ago, I had assumed that Progressives championed a carbon tax for the reasons I listed above, ie that it is the most efficient means to allow markets to reduce emissions.  However, the referendum a couple of years ago in Washington State demonstrated that many Progressives may not understand this at all.  You can read a lot more about this debate here.  I fail the ideological Turing test on this one, because I don't know if the Progressives who were strongly for CO2 reduction but opposed the Washington State carbon tax did so because they did not understand economics or because they cared less about global warming than funding other Progressive causes.

Point 2:  Offset 100% of carbon tax proceeds against the payroll tax

Yes, there are likely many politicians, given their incentives, that would love a big new pool of money they could use to send largess, from more health care spending to more aircraft carriers, to their favored constituent groups.  But we simply are not going to get Conservatives (and libertarians) on board for a net tax increase, particularly one to address an issue folks on the Right may not agree is an issue at all.  So our plan will use carbon tax revenues to reduce other Federal taxes.

I think the best choice would be to reduce the payroll tax.  Why?  Because, the carbon tax will necessarily be regressive (as are most consumption taxes) and the most regressive other major Federal tax we have are payroll taxes.  Offsetting income taxes would likely be a non-starter on the Left, as no matter how one structures the tax reduction the rich would get most of it since they pay most of the income taxes.

There is another benefit of reducing the payroll tax -- it would mean that we are replacing a consumption tax on labor with a consumption tax on fuel. It is always dangerous to make gut-feel assessments of complex systems like the economy, but my sense is that this swap might even have net benefits for the economy -- so much so that we might want to do it even if there was no such thing as greenhouse gas warming.  In theory, labor and fuel are economically equivalent in that they are both production raw materials. But in practice, they are treated entirely differently by the public.   Few people care about the full productive employment of our underground fuel reserves, but nearly everybody cares about the full productive employment of our labor force.   After all, for most people, the primary single metric of economic health is the unemployment rate.  So replacing a disincentive to hire with a disincentive to use fuel could well be popular.

Point 3:  Eliminate all the stupid stuff

Oddly enough, this might be the hardest part politically because every subsidy, no matter how idiotic, has a hard core of beneficiaries who will defend it to the death -- this the the concentrated benefits, dispersed cost phenomena that makes it hard to change many government programs.  But never-the-less I propose that we eliminate all the current Federal subsidies, mandates, and prohibitions that have been justified by climate change. Ethanol rules and mandates, solar subsidies, wind subsidies, EV subsidies, targeted technology investments, coal plant bans, pipeline bans, drilling bans -- it all should go.  The carbon tax does the work.

States can continue to do whatever they want -- we don't need the Feds to step on states any more than they do already, and I continue to like the 50 state laboratory concept.  If California wants to continue to subsidize wind generators, let them do it.  That is between the state and its taxpayers (and for those who think the California legislature is crazy or that the Texas legislature is in thrall to oil companies, that is what U-Haul is for).

Point 4:  Revamp our nuclear regulatory regime

As much as alternative energy enthusiasts would like to deny it, the world needs reliable, 24-hour baseload power -- and wind and solar are not going to do it (without a change in storage technology of at least 2 orders of magnitude in cost).  The only carbon-free baseload power technology that is currently viable is nuclear.

I will observe that nuclear power suffers under some of the same problems as commercial space flight -- the government helped force the technology faster than it might have grown organically on its own, which paradoxically has slowed its long-term development.  Early nuclear power probably was not ready for prime time, and the hangover from problems and perceptions of this era have made it hard to proceed even when better technologies now exist.   We are at least 2 generations of technology past what is in most US nuclear plants.  Small air-cooled thorium reactors and other technologies exist that could provide reliable safe power for over 100 years.  I am not an expert on nuclear regulation, but it strikes me that a regime similar to aircraft safety, where a few designs are approved and used over and over makes sense.  France, which has the strongest nuclear base in the world, followed this strategy.  Using thorium could also have the advantage of making the technology more exportable, since its utility in weapons production would be limited.

Point 5: Help clean up Chinese, and Asian, coal production

One of the hard parts about fighting CO2 emissions, vs. all the other emissions we have tackled in the past (NOx, SOx, soot/particulates, unburned hydrocarbons, etc), is that we simply don't know how to combust fossil fuels without creating CO2 -- CO2 is inherent to the base chemical reaction of the combustion.  But we do know how to burn coal without tons of particulates and smog and acid rain -- and we know how to do it economically enough to support a growing, prosperous modern economy.

In my mind it is utterly pointless to ask China to limit their CO2 growth.  China has seen the miracle over the last 30 years of having almost a billion people exit poverty.  This is an event unprecedented in human history, and they have achieved it in part by burning every molecule of fossil fuels they can get their hands on, and they are unlikely to accept limitations on fossil fuel consumption that will derail this economic progress.  But I think it is reasonable to help China stop making their air unbreathable, a goal that is entirely compatible with continued economic growth.  In 20 years, when we have figured out and started to build some modern nuclear designs, I am sure the Chinese will be happy to copy these and start working on their CO2 output, but for now their Maslov hierarchy of needs should point more towards breathable air.

As a bonus, this would pay one immediate climate change benefit that likely would dwarf the near-term effect of CO2 reduction.  Right now, much of this soot from Asian coal plants lands on the ice in the Arctic and Greenland.  This black carbon changes the albedo of the ice, causing it to reflect less sunlight and absorb more heat.  The net effect is more melting ice and higher Arctic temperatures.  A lot of folks, including myself, think that the recent melting of Arctic sea ice and rising Arctic temperatures is more attributable to Asian black carbon pollution than to CO2 and greenhouse gas warming (particularly since similar warming and sea ice melting is not seen in the Antarctic, where there is not a problem with soot pollution).

Final Thoughts

At its core, this is a very low cost, even negative cost, climate insurance policy.  I am convinced this policy, taken as a whole, would still make sense even if CO2 turns out to be as harmless as nitrogen.  The carbon tax combined with a market economy does the work of identifying the most efficient ways to reduce CO2 production.   The economy benefits from the removal of a myriad of distortions and crony give-aways, while also potentially benefiting from the replacement of a consumption tax on labor with a consumption tax on fuel.  The near-term effect on CO2 is small (since the US is only a small part of the global emissions picture), but actually larger than the near-term effect of all the haphazard current programs, and almost certainly cheaper to obtain.  As an added benefit, if you can help China with its soot problem, we could see immediate improvements in probably the most visible front of man-made climate change:  in the Arctic.


Perhaps the hardest thing to overcome in reaching a compromise here is the tribalism of modern politics.  I believe this is  a perfectly sensible plan that even those folks who believe man-made global warming is  a total myth ( a group to which I do not belong) could sign up for.  The barrier, though, is tribal.  I consider myself to be pretty free of team politics but my first reaction when thinking about this kind of plan was, "What? We can't let those guys win.  They are totally full of sh*t.  In the past they have even threatened to throw me in jail for my opinions."  Since I first published this plan I have had very prominent skeptics contact me to criticize me for "giving in to the warmists."


The Other Problem With A National Minimum Wage -- The National Part

So a $15 national minimum wage will almost certainly be on the table in Congress this year, and if past such legislative efforts are any guide the Republicans will probably eventually go along in exchange for reducing the $15 to a lower number and slowing the rollout.

I have talked a lot about the negative effects of higher minimum wages on low-skill workers.  Two good example background posts are here and here.  I covered how a broad range of labor regulation hurts unskilled workers in a cover story for Regulation magazine a few years back.  Unfortunately, in a country where the average American buys about $1000 in lottery tickets each year, the willingness to believe we can get something for nothing is strong.

But I want to talk specifically about a Federal minimum wage increase, where one other problem emerges.  The best way to state this is -- how can one possibly set the same minimum wage for San Francisco at the same rate as one does for rural Mississippi?  Here is one source for comparative state cost of living.  Doing this by county would make the curve even wider.

Cost of living in Hawaii is more than 2x that of Mississippi.  CA and NY are not far behind.  A minimum wage that might comfortably be accommodated in San Francisco (and note even there the rise to $15 was ending service jobs in that city long before COVID), would be an economic disaster for rural Alabama.  I don't tend to think primarily along racial lines as seems to be the case on the Left today, but basically this is a policy driven by rich white tech guys in San Francisco that is going to devastate the employment prospects of rural blacks.

Whatever one's misgivings about minimum wages, it is certainly true that allowing states to take the lead on setting minimum wages (counties would make even more sense) makes a lot more sense that trying to take action at the national level.  Even with state action there are disparities.  Look at this unemployment map of the rural counties in CA vs. the tech. enclaves in the Bay Area (the chart below is January 2020, I wanted to dial back pre-COVID).  Those rural counties are being slaughtered by the $15 minimum wage.  Just think about rural areas in states less costly than CA.

So a state by state approach is WAY better. There are three reasons, in increasing order of cynicism, why Democrats in Congress will still insist on a higher national minimum wage.

  1. Democrats in Congress believe they are carrying salvation to the powerless masses in Alabama who are held in slavery by state Republicans.  Democracy and the "will of the people as expressed at the ballot box" are only sacred when it's our team in charge.
  2. Folks in Congress did not spend a career fighting to win a seat in that body only to find that there is something that would be best done by state legislators.  They didn't work to get promoted to have LESS power (though that is exactly how the country was originally designed).  This is the enemy of all Federalist notions
  3. The fact that a $15 minimum wage will devastate many rural areas, mostly Republican bastions, may be a feature and not a bug for some.  Think of the $15 minimum wage as Democratic revenge at the heart of red states for the Trump reductions of SALT deductions in the tax code (which were a dagger at the blue state model).