The Capital Letter

Fun and GameStop

Outside a GameStop store in New York City, January 27, 2021 (Nick Zieminski/Reuters)
The week of January 25: GameStop, Larry Fink’s ambitions, Biden’s job-destroying agenda, and much, much more, including the debut of our new podcast series, the Capital Record.

National Review’s Daniel Tenreiro has been doing such good work on GameStop (see links below) that I was going to ignore that particular dumpster fire and concentrate on the latest pronouncements by Larry Fink. Fink is the chairman and CEO of BlackRock, the largest asset manager in the world with $8.7 trillion under management. Fink is also an oligarch’s oligarch, who is working hard to be a key figure in the corporatist America (where corporatism has, in effect, been updated by being redefined as “stakeholder capitalism,” and then supplemented by “socially responsible” investment) that is currently being put together at a quite remarkable pace.

It is hard to bring the World Economic Forum (“Davos”) into the discussion of the corporatist project without sounding more than a bit conspiracist. Nevertheless, the WEF’s “Great Reset” is not a bad place to start. I wrote a bit about it hereand here.

As I noted in a post earlier this week, it is not an unambitious project:

The world must act jointly and swiftly to revamp all aspects of our societies and economies, from education to social contracts and working conditions. Every country, from the United States to China, must participate, and every industry, from oil and gas to tech, must be transformed. In short, we need a “Great Reset” of capitalism.

In that same post, I linked to this article by Justin Haskins in The Hill. In the course of the piece, Haskins quotes from a speech by John Kerry made shortly after Joe Biden’s election:

“And yes, it [the Great Reset] will happen,” Kerry continued. “And I think it will happen with greater speed and with greater intensity than a lot of people might imagine.”

And here’s just a small extract from Fink’s “Letter to CEOs” to be going on with:

It’s important to recognize that net zero demands a transformation of the entire economy. Scientists agree that in order to meet the Paris Agreement goal of containing global warming to “well below 2 degrees above pre-industrial averages” by 2100, human-produced emissions need to decline by 8-10% annually between 2020 and 2050 and achieve “net zero” by mid-century. The economy today remains highly dependent on fossil fuels, as is reflected in the carbon intensity of large indexes like the S&P 500 or the MSCI World, which are currently on trajectories substantially over 3ºC.

That means a successful transition – one that is just, equitable, and protects people’s livelihoods – will require both technological innovation and planning over decades. And it can only be accomplished with leadership, coordination, and support at every level of government, working in partnership with the private sector to maximize prosperity.

If you think that the individual voter will have much say in this, then you will find corporatism something of a disappointment.

So, GameStop. Sadly, this is not a story that can be pushed aside to another day. In a podcast recorded on Friday, an extra episode (“The GameStop Non-Fiasco”) of our new podcast series, the Capital Record, (for details of this series see below) David Bahnsen and I discuss some of the issues that this extraordinary saga has thrown up.

CNBC at 12:21p.m. today (my emphasis added):

U.S. stocks fell sharply on Friday as heightened speculative trading by retail investors continued to unnerve the market.

The Dow Jones Industrial average lost 520 points, or 1.7%. The S&P 500 fell 1.7% as all 11 sectors traded in the red. The Nasdaq Composite slid 1.5%.

Shares of GameStop doubled shortly after the open after Robinhood said it would allow limited buying of the stock and other heavily shorted names after restricting access the day before. Robinhood raised more than $1 billion from its existing investors overnight, in addition to tapping bank credit lines, to ensure it had the capital required to allow some trading again in the volatile stocks. The stock last traded up 85%.

Investors are concerned that if GameStop continues to rise in such a volatile fashion, it may ripple through the financial markets, causing losses at brokers like Robinhood and forcing hedge funds who bet against the stock to sell other securities to raise cash.

There are also fears that the GameStop mania is a sign of a larger bubble in the market and that its unraveling could also cause turbulence and hit retail investors hard. A number of lawmakers also called for an investigation into the chaotic trading. The Securities and Exchange Commission said Friday it will look into regulated body’s actions to uncover if the decisions made disadvantaged investors . . .

“Between Washington calling for hearings and reports Robinhood was forced to not only draw down on its credit lines but also raise $1B from existing investors, the entire situation continues to erode market confidence,” Adam Crisafulli, founder of Vital Knowledge, said in a note Friday.

In last week’s Capital Letter, I wrote that the market was “broken” (essentially thanks to the distortions in the price of money that have been brought about by the Fed). That continues to be my view. I also wrote that the bubble we are seeing across several asset classes was a rational response (for now) to the mispricing of risk that has followed on from the Fed’s actions. I still think that too.

Nevertheless, to quote the economist (and former chairman of the Council of Economic Advisers), Herbert Stein, “If something cannot go on forever, it will stop,” wise words that are not easy to reconcile with the idea that a particular stonk (sic) will “go to the moon.” The revolutionary power of the Internet, long visible in the stock market, can do a great deal, but, in the end, once technical factors — such as a short squeeze — have been exhausted, emotion can ultimately only take a stock so far. It is true that, as Keynes famously (or possibly) observed, that “the market can remain irrational longer than you can remain solvent,” but, in the end, a connection has to be made between the price of a stock and some sort of defensible valuation, even in markets as distorted as these, markets where there is plenty of room for irrational as well as rational exuberance.

Meme stocks will eventually crash back to earth, however close to the moon they get. And when they do, there will be tears, and calls for much tighter regulation. If the relatively recent past is any precedent, that regulation will be heavy-handed, and will result in a market that is far less “democratic” than the Reddit bros would like to see. In the absence of any actionable malpractice, those who have lost out — adults all — will be left to pay the price of their gambling. That experience will be a teaching moment far more compatible with the preservation of free, relatively open markets than anything that our current crop of legislators could dream up. Somehow, I suspect that the opportunity for that teaching moment will be lost, as the rule-setters move in. More clear-eyed investors (large and small) are right to be concerned about what the consequences of that might be.

As it is, if they are worried that the current drama is a warning sign of a market that has lost its senses (a madness of crowds amplified by the power of the Internet), there are more than enough canary corpses scattered around the coal mine to set off feelings of . . . unease

This for example, via CNBC:

Dogecoin, a digital coin originally founded as a joke, has soared over 800% after a Reddit board talked about making it the cryptocurrency equivalent of GameStop. Dogecoin was created in 2013 based on the popular “doge” meme at the time which involved a Shiba Inu dog. Doge’s resurgence in the last few days has been due to enthusiasm from a Reddit group called SatoshiStreetBets.

Elon Musk tweeted out a picture of a magazine cover of “Dogue” — a play on popular fashion title “Vogue.” The post showed a picture of a dog, which some Reddit users took as the billionaire supporting the rally.


For Elon Musk, whose hatred for short sellers blazes hot enough to reforge Mjölnir a dozen times over, the millions in losses suffered by shorts after the Tesla CEO changed his Twitter bio to “Bitcoin” it must feel like Christmas and his birthday rolled into one.

That one-word addition caused the price of bitcoin to spike to a 10-day high of $38,020 and sparked $387 million worth of short liquidations on major exchanges including Binance, Bitfinex, BitMEX, ByBit, Deribit, FTX, HuobiDM and OKEx.

The crypto market leader is trading at $37,390 at press time, representing a more than 15% gain from the low of $32,000 seen during the European morning session.

And while we are on the subject of short sellers, they are not (for the most part: Wall Street is Wall Street) the villains of Reddit or legislators’ lore, plotting to bring down decent businesses.

I wrote a defense of short sellers a few months back. Here’s an extract:

Selling a security short has rarely been a way to make friends, whether with investors, companies, regulators, or even governments. If the Fed’s job included (in more disciplined times) taking “away the punch bowl just as the party gets going,” the short seller was and is the person who tells partygoers that the punch they are so enjoying is, in fact, poison. No one wants to hear that.

Bubbles, on the other hand, whether in a stock, sector or market, are popular. And the bigger the bubble, the more popular it becomes: “Everyone” is making money, “everyone” is spending money, and governments take their slice. The boost to revenues that comes from taxing the higher salaries, the higher capital gains and the higher profits that a bubble generates can make a spendthrift government look frugal, and a careless government look wise. To be told that all this is based on a mirage, well . . .

Short selling is one way of speculating on a security’s decline: The vendor sells a (typically) borrowed security in the hope of eventually repaying that debt by later returning an equivalent security bought at a lower price. Short selling can distort the market in a security. That is why there are, for the most part rightly, so many regulations that govern the practice. Some of these rules, however, were introduced as either a panicked response to a plummeting market or as a distraction from a government’s own failings (or both) . . .

Being right is not a ticket to popularity. It is bad enough that short sellers show up at the feast, but it is even worse that they profit when the famine they have predicted duly comes to pass. They are routinely depicted as profiting from the misery of others . . .

Short sellers can make a living partly thanks to the opportunities repeatedly presented by investors’ gullibility and willful disbelief. Hope and greed spring eternal. Just this week, Markus Braun, the former CEO of Wirecard, a heavily shorted, once high-flying payments company headquartered in Germany, was arrested on suspicion of false accounting and manipulative business practices. The share price has collapsed. Over $2 billion in supposed cash balances (the money may never have existed) cannot be found . . .

Short sellers do not always get it right, nor are they philanthropists. They (obviously) aim to make money. But to those who believe that financial markets work best when different investment views are, so to speak, left free to fight it out, short sellers play an invaluable role in helping investors form an accurate picture of what a stock should be worth.

The same, rather too often, cannot be said of either governments or the regulators who do their bidding.

Joe Nocera, writing for Bloomberg:

Old-timers like me have seen, again and again, the positive influence short sellers can bring to the market. First, in making the bear case for various stocks, short sellers offer bullish investors valuable information; good investors will factor bearish reasoning into their own thinking, even if they stay on the long side. Academic research has consistently shown that short selling helps improve price discovery. And, of course, short sellers often do the job the Securities and Exchange Commission is supposed to be doing in rooting out fraud.

Nocera noted:

One of the truly mystifying things about the whole GameStop Corp. stock craziness is the way short sellers have become the enemy. One part of the frenzy appears to be anger with Wall Street elites because they all got off the hook after the 2008 financial crisis. But short sellers had nothing to do with the crisis.

Indeed not, as I related in my defense of those wicked short sellers:

To quote one researcher from the University of Buffalo, part of a team that looked at the effect of a certain type of short selling on Lehman’s collapse (there was none that could be found), “blaming short sellers is always easier than admitting that betting the farm on subprime mortgages was a mistake.”

Nocera’s article was partly triggered by the news that Citron Research (which had recommended GameStop as a short) will no longer publish its short-selling reports after 20 years in the business.

If others follow that lead, observed Nocera:

It will wind up being far more disastrous for the markets than a bunch of day traders losing money because they unwisely believed they could force their “meme stocks” up forever. Like many short sellers, Dan David of Wolfpack Research [not perhaps an ideal name for the business] was struck by the fact that both Senator Ted Cruz and Representative Alexandria Ocasio-Cortez, who agree on nothing, both tweeted their support for the WallStreetBets day traders. Senator Elizabeth Warren has demanded an investigation, and it seems likely that the SEC will get involved.

“I think they’re going to use this as an excuse to say that you can’t publicly talk about your shorts,” said David, who usually issues detailed reports when he does short-selling research . . .

Are there short-selling practices that should be curtailed? There are, starting with what’s called “short-and-distort” schemes, in which short sellers try to spread lies about the companies they’re shorting to push the stock down. You see this mostly on Twitter, though the irony is that most of the people who use that disreputable tactic tend to have more in common with the Reddit day traders than the Wall Street hedge funds the WallStreetBets crowd is trying to punish.

When you come right down to it, throwing your money at certain stocks purely because you’re hoping to harm short sellers is a ridiculous reason to invest. Except that if they succeed, they will have harmed not just the short sellers but the rest of the investing public as well.

Nocera alludes to the “class war” aspect of this Redittors’ crusade. Certainly, some of the language they use on wallstreetbets to explain what they are doing frames it as a form of revenge for the events of 2008–10. And there’s some generational conflict thrown in too. As usual, boomers get a kicking. And I have no doubt that what a number of these Reddit bros perceive as righteous anger — not an ideal investment tool — is playing some sort of role in what is going on. Some have even argued that it is a delayed rerun of Occupy Wall Street, but one that involves using Wall Street’s techniques against it rather than just hanging around Zuccotti Park. Maybe, maybe, but, greed (or “free money”) always feels so much better when it is “good.”

There is a lot, lot more to discuss about this moment (which will be one for the financial history books), from the role of lockdown-induced boredom to the cash reserves that some have been able to build up over this stay-at-home period. And then there’s the little matter of legal boundaries that may or may not have been crossed (time will tell, but whatever else may have gone on, I doubt that we are looking at an updated version of the then-legal stock pools of the 1920s).

But for now, over to Daniel Tenreiro.

From Tuesday’s Capital Note (this week a somewhat intermittent “daily,” dominated by GameStop):

What happens when the line between investment and consumption is blurred? The big financial stories of the past few weeks — skyrocketing prices for Bitcoin and a handful of stocks favored by the denizens of Reddit’s “Wall Street Bets” forum — give a taste. Professional money managers have screamed bloody murder at the astronomical rally of GameStop, a struggling retailer handpicked by an army of Reddit day-traders as the next “YOLO” trade.

You might buy GameStop shares in order to receive its future cash flows, but you might also buy it because your friends on Reddit own it and it seems fun to go all in on a random stock, no less so because of the nostalgia you feel for your childhood trips to buy Halo. You might even screw over some short sellers in the process, and why not?

Many people enjoy patronizing casinos despite the widely known fact that casino gamblers are certain to lose money over a long enough time period. But for most gamblers, especially amateurs, the casino is less an investment product than a consumption good. If you go to Mohegan Sun with a few hundred dollars and waste it away at the blackjack table, you will probably be worse off than if you’d made money, but you will have gotten to have a generally pleasant time spending a few hours drinking free cocktails and sharing stock picks with the dealer.

My half-baked explanation of the crazy retail activity in stocks such as GameStop, Express, AMC, and Blackberry this week is that the rise of online day-trading is turning certain stocks from investments into consumption products. As with casino gambling, the possibility of a financial gain is part of the appeal, but the process of trading in and out of stocks with online friends is about more than making money. It’s an experience; it’s a lifestyle.

Half-baked? Not at all.

Daniel continues:

The difficulty is that the financial system relies on the efficient pricing of stocks to facilitate capital allocation, a process that can be disrupted if enough people decide that they want to consume a stock rather than invest in it. While retail-driven movements are still limited to a handful of names, and should revert to the mean over time, they can upend certain corners of the market . . .

Robinhood (and not only Robinhood) came under fire for the way it refused to accept certain meme stock buy orders.

Conspiracy? Not so much.

In Thursday’s Capital Note, Daniel explained:

On Tuesday, GameStop was the most traded stock on the planet. Of the $32.5 trillion in equities that change hands every day — between multitrillion-dollar asset managers, insurance companies, hedge funds, and banks — the company that commanded the largest volume of trading activity is a brick-and-mortar video-game retailer that lost $275 million last year.

Fueled by the army of day traders that populates Reddit’s “Wall Street Bets” forum, GameStop saw its market capitalization go from $3 billion to $25 billion in a week. In a kind of stock-market flash mob, retail investors put enough money into risky call options to push up share prices and force short sellers out of their positions.

With everyone wanting a piece of the action, some 50 million shares of the company changed hands in the span of an hour on Monday. That hourly volume plummeted today to only 3 million shares. In the intervening period, the adults in the room said enough is enough: Brokerage platforms Robinhood and Interactive Brokers halted trading in GameStop, while other brokerages limited trading of the company’s options.

A wide array of critics chided the move as an attempt to protect institutional investors at the expense of hobbyists. Representative Alexandria Ocasio-Cortez called for a House hearing on the matter, a proposal endorsed by none other than Ted Cruz. Elon Musk, Mark Cuban, Dave Portnoy, and the Winklevoss twins all condemned Robinhood for allegedly fleecing its customers to protect Wall Street.

From Robinhood, a company that claims to be “democratizing finance,” the decision smacks of hypocrisy. But by most indications, Robinhood and its peers halted trading in GameStop out of caution rather than corruption.

Somehow, I suspect that the “wide array of critics” will be determined to find otherwise.


Robinhood makes money by routing trades from its platform to large brokers, who compensate the company for its order flow. The larger the trading volume, the better for Robinhood. But Robinhood also makes money through various forms of lending, primarily margin lending to customers.

Robinhood customers can borrow up to two times the value of the cash they’ve deposited. A $2,000 deposit gets you $4,000 in stock-buying power. Because of the risk posed to Robinhood by margin lending, the company has “margin maintenance requirements” — a minimum amount of equity that customers must hold in each investment (usually 25 percent). If you use your $2,000 to buy $4,000 of stock, and the stock falls by 50 percent, you’ve lost your entire $2,000, but you still hold the shares in your account. In this event, Robinhood would issue a “margin call” requiring you either to sell the stock or deposit enough cash to ensure you don’t end up in the red.

Back to GameStop. Basically everyone, even the Reddit bulls, agrees that the recent rally is based on nothing more than sentiment. GameStop is the same company on January 28 as it was on January 20 — just many billions of dollars more valuable. From Robinhood’s perspective, the GameStop rally is beneficial insofar as it generates revenue from increased trading activity, but it is also extremely risky, because the brokerage platform is lending millions of dollars to retail investors buying a world-historically volatile stock. As more and more buyers have flocked to GameStop, Robinhood has lent out more and more money.

Separately, Robinhood also lends to short sellers. When a hedge fund wants to bet against GameStop, it borrows shares in the company from a broker such as Robinhood and then sells them. If the stock falls, the hedge fund buys back the shares at a lower price, pays the broker back, and pockets the difference. Considering GameStop has long been a Robinhood favorite, it’s reasonable to assume a sizeable chunk of the $5 billion in GameStop short interest was borrowed from Robinhood Securities, which reported $674 million in securities loaned in 2019. It’s unclear how much GameStop stock Robinhood has lent to hedge funds, but whatever the amount, they’ve been lucrative, commanding as much as 80 percent in interest due to the massive amount of money betting against the stock.

Not only did the short squeeze cut off Robinhood’s revenue from lending to short sellers, it may even have wiped out some of the principal. And if it had continued, it would have hit harder.

In the face of all these risks, a broker would typically increase margin requirements — reducing the amount of leverage allowed to its customers. Robinhood had already done so repeatedly, raising the margin requirement on GameStop first to 80 percent, then to 100 percent. Customers who did not meet those required amounts had their accounts locked. But GameStop is so volatile and so obviously overvalued that Robinhood presumably saw the risk of waiting for customers to deposit as unacceptable. And a meaningful increase in margin requirements would likely trigger a fire sale and effect the outcome Robinhood was trying to avoid.

So the decision to halt trading in GameStop is like a margin call on steroids. Robinhood and Interactive Brokers are attempting a controlled demolition of the meme-stock bubble.

This feels wrong, but in a certain sense, it’s the market working. In efficient markets, counterparties are supposed to correct bubbles. In the curious case of GameStop, technical dynamics prevented normal pricing. Robinhood and other brokers, themselves effectively owners of large amounts of GameStop stock, pulled the plug. That doesn’t mean they don’t bear responsibility: Those customers who invested with cash alone were left holding the bag for risks that brokerages let build up. One class-action suit has already been brought against Robinhood, and I’d expect more to come. That Robinhood made a reasonable decision once the bubble became excessively risky does not mean that it upheld its obligations to its customers, but it does put paid to the belief that it’s in the business of protecting “the system.”

In the light of those comments, it is worth noting this story from the New York Times today:

Facing an onslaught of demands on its cash amid a stock market frenzy, Robinhood, the online trading app, said on Thursday that it was raising an infusion of more than $1 billion from its existing investors.

Robinhood, one of the largest online brokerages, has grappled with an extraordinarily high volume of trading this week as individual investors have piled into stocks like GameStop. That activity has put a strain on Robinhood, which has to pay customers who are owed money from trades while posting additional cash to its clearing facility to insulate its trading partners from potential losses . . .

On Monday, Michael Brendan Dougherty looked at what was going on, and could not “stop laughing”:

GameStop is a brick-and-mortar retailer that sells video games, video-game consoles, and junk. These are low-margin items, and the category is dying. Until recently, GameStop’s stock price was $4 and big institutional investors were apparently shorting the stock like crazy.

Maybe too crazily. Now, add in the web app Robinhood, which allows users to open an account and use it for commission-free trading, including more-complex options and calls. Combine that with a growing community of day-trading and hobby investors on Reddit/wallstreetbets and in various Discord chat rooms — and suddenly an army of people armed with $500 in their accounts decided to squeeze the shorts. Some of this was accompanied with somewhat-dummy advice about how GameStop posted a surprise profit in a recent quarter and has new people on their board.

Call it revenge of the day traders. The short-squeezers are openly parodying how they think big institutional investors pump and dump stocks and how they advise investors . . .

A lot of normal investors are horrified by this kind of thing and think that sometime after this there will be rules introduced to stop the pitchfork brigades from squeezing the shorts.

But I think the Reddit short squeeze play is a public service overall. If your institution is shorting a stock so moronically that a few dudes with tiny accounts can make you pay out millions to them in gains, you and your institution are the idiots, not them.  It’s your turn to go onto CNBC on cry, while they go to their YouTube channels and gloat!

In a later post, a somewhat gloomier Michael warned that this was likely to end badly (I agree):

Right now, the [Reddit’s wallstreetbets forum] is roiling not just with David-beats-Goliath strutting, but political manifestos aimed at hedge funders and the Wall Street Establishment. There are vows to take GameStop to $1,000, defeating any incoming short-sellers, or die trying. There are posts trying to get people excited to reload their GameStop positions even if only to make a political point, or simply to wreak havoc on the institutions. There are even some moving posts where users post their screenshots of a major student loan paid off by GameStop stock, which is almost poetic, in its way. Elon Musk tweeted about it, and my guess is that GameStop is going to pop Wednesday to even more absurd heights. This is going to end in misery for a lot of these kids.

Being a mean-spirited sort, I had to check up on what happened to the GameStop stock on Wednesday. It opened at $351.94, up from $145.96 at the previous day’s close, a “pop” any way you look at it, but then had, by GameStop standards — low bar — a smooth day, closing at $345. The intraday high was a little under $373, the low just over $301. However, even looking at Thursday’s chart (the day trading was restricted in certain meme stocks and their derivatives) had me reaching for my blood-pressure medication. Day high: $469.24. Day low: $132. The stock closed at $197.44.

Back to Michael:

The whole cycle of stories about instant-millionaire day traders reminds me of the dot-com bubble. I was just a teenager, but even at a small family-owned grocery I remember all day hearing the absurd stories about people who risked it all on the Red Hat IPO, and won big.

Even with all this money sloshing around from the Fed, and the way it is propping up Boomer retirement accounts — it really feels like a silly season just before a correction.

As someone who is a little older than Michael (I was working in the markets during the 1987 crash and the dot-com bubble too), I will admit that some of this does feel alarmingly familiar, even if I suspect that — because of the distortions created by the Fed — this may be a peculiarly extreme (and extremely peculiar) bubble within a broader bubble. Can the Reddit-driven bubble pop, leaving most investors unaffected and unconcerned, or will GameStop carnage trigger a broader panic?

GameStop closed at $325 on Friday.

The week was not entirely about GameStop.

We were very pleased to debut our new series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which will appear weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and NRI trustee David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.

In the first episode, David discussed “defining wealth correctly,” the state of the economy, and more with Kevin Hassett, former Chair of the White House Council of Economic Advisers.

Well, we said this would be a weekly series, but in view of the extraordinary events surrounding GameStop and other meme stocks, David and I recorded the extra episode described above.

Now back to our written programming.

Kevin Hassett didn’t like the look of the mission creep contained within President Biden’s relief/stimulus/whole bunch of other stuff package:

You might wonder why yet another relief package is necessary. If so, you share the same sentiment as many of my friends, who shot me mystified emails when President Biden and others in his administration mentioned that I support more relief. While the implication that I support their entire bill is incorrect, the reason to support relief in general is simple. The pandemic is still here, sadly, and likely to get worse before it gets better, perhaps dramatically so, if some of the forecasts about the impact of COVID-19’s more infectious (and possibly more deadly) “British variant” turn out to be correct. CDC research appears to indicate that this variant may become the dominant strain by March. There’s also the South African variant to think about, too.

The disturbingly sharp decline in many economic variables is not yet visible in the government data, but some of the real-time indicators that can be followed online have turned decidedly south . . .

A bill that draws on the lessons of last year would look a good deal different from the package that the president has put forward. While there are elements within Biden’s proposal that genuinely count as relief and should be supported, on other aspects it’s hard to avoid the conclusion that the president followed Rahm Emanuel’s infamous advice of not letting a crisis go to waste. He has taken the real need for relief and used it as a Trojan horse to smuggle in a series of policies that owe more to politics than to the pandemic.

First, his proposal includes a massive bail out for state governments, which is really just a transfer to a few traditionally blue states that had major budget problems pre-pandemic. Second, the drop in economic activity this quarter (absent additional policy) should be much smaller than occurred in the second quarter of last year. The amount of dollars provided under a bill truly focused on helping the country weather the latest stage of the pandemic ought to take that into account. Sadly, the size of this package suggests that a broader agenda is involved. Down the road, all this spending, whether justifiable as relief or otherwise, will lead to a long-term budget reckoning, and the bigger the spending, the bigger the reckoning. Third, it is positively foolish to increase the minimum wage to $15 as the president proposes. Those 29.3 percent of businesses that are still shut down might well just call it quits if their labor costs are set to skyrocket when they are able to open again . . .

Nicholas Phillips spoke up for (intelligently applied) tariffs:

Ideological commitment to free trade turned the U.S. into the “mark” in international trade negotiations, allowing our partners to gain entry to our market without granting equal access to American exports in return. Tariffs aren’t principally about protection; they’re about leverage. Absent the threat of tariffs, competitors feel free to break rules and create asymmetric advantages.

For instance, under Obama, inbound tariffs for Chinese exports carried an average tariff of 3 percent while Chinese duties on our exports averaged 8 percent, to say nothing of non-tariff trade barriers. Such unequal arrangements contributed to America’s record-high trade deficits, with consumption outstripping production by around 2 to 4 percent of GDP for most of the past 20 years, for a combined goods-and-services deficit of $605 billion through November 2020.

Conservatives have long insisted that trade deficits don’t matter. Armchair policy wonks are fond of pointing out that you run a trade deficit with Shake Shack, yet both are better off from this exchange. But as U.S. Trade Representative Robert Lighthizer points out, if you run a trade deficit with everyone, with no net-positive income stream from selling goods or services of your own, you’re just in debt, and your consumption of Shackburgers depends on your credit-card company’s patience.

Some believe that creditor patience is virtually limitless for the United States, because the dollar’s reserve-currency status means that our trading partners will always accept dollar-denominated IOUs in the form of U.S. Treasuries to fund our consumption. But trade deficits necessarily get plugged by sales of assets as well as by debt — meaning we are auctioning off our future productive capacity to consume more in the present.

Nor is debt without drawbacks: When exporters such as China and Germany recycle their profits into Treasuries, it lowers interest rates and stimulates borrowing — and financial bubbles — at the same time their production glut deepens American deindustrialization. As Warren Buffett said, “our country has been behaving like an extraordinarily rich family that possesses an immense farm. In order to consume 4 percent more than we produce — that’s the trade deficit — we have been both selling pieces of the farm and increasing the mortgage on what we still own.” If this can’t go on forever, eventually it will stop . . .

Later in the week, however, Kevin Williamson was less than impressed, with Biden’s buy America first policy:

The Biden administration is going to be a lot more like the Trump administration than you may have been expecting, especially when it comes to “America First” business policies, which are corporate welfare in patriotic drag. To wit: Biden’s executive order expanding on the Trump administration’s buy-American procurement rules.

The rules developed under the Trump administration have not exactly been sitting there for years, growing outdated — the rules were finalized on the day before Donald Trump left office. The new rules developed under the Trump administration raised the “domestic content” requirement for most products from 50 percent to 55 percent — and raised them to 95 percent for goods made mainly of steel or iron; ended an exception for commercially available off-the-shelf iron or steel products while continuing an exception for fasteners such as nails and screws; and, most significant, they jacked up the “price preferences” for domestic goods.

The last of these, the “price preferences,” are what really matter most. Washington doesn’t just order federal agencies to source products from U.S.-based providers — instead, there is a complex system of procurement rules that favor domestic producers unless the imports are a great deal less expensive. Price preferences specify how much more government will pay for the same goods provided by a U.S.-based company when they could be had at a lower price from a non-U.S. firm. Under the Trump-era rules, which are now the Biden rules, the U.S. government will pay as much as 20 percent more for goods procured from large firms and as much as 30 percent more for goods procured from small businesses.

That’s how you jack up procurement expenses in one easy step. You don’t just go local — you pay more. Sometimes, you pay a lot more.

Biden is, to no great surprise, receiving some encouragement in this from members of Congress whose districts are home to firms that would benefit from being able to charge higher prices. For example, Senator Sherrod Brown (D., Procter & Gamble) and Representative Kathy Manning (D., Honeywell) are pushing the Biden administration to ramp up personal protective equipment (PPE) purchases, contracting for big purchases directly from favored domestic manufacturers. This is the denouement of one of the year’s most predictable business stories: When the coronavirus emergency first hit, the economy was shut down and PPE purchases skyrocketed — you couldn’t get your hands on an N95 facemask there for a while. And, so, everybody and his uncle got into the PPE business, and, now that the panic-buying has subsided, there is a glut in the market. “Regrettably, we have too many manufacturers in our states and across the nation that have capacity but no orders,” the Democrats said in a letter to Biden.

If only there were some ingenious mechanism by which supply and demand could be coordinated in a decentralized and non-politicized fashion!

Michael Strain weighed into the debate over the minimum wage:

One of the most striking features of the academic debate on minimum wages is that the scope of disagreement extends to characterizations of the literature itself.

Normally, in an active literature, one economist would believe the right answer to a question is X, and another would believe it is Y, but the two would agree on what the body of evidence as a whole has to say on the subject.

Not so with the minimum wage. Some economists believe that the totality of the evidence suggests it reduces employment, while others believe the opposite.

To the rescue ride economists David Neumark and Peter Shirley. From the abstract of their new paper, released Monday . . .

Robert VerBruggen also began his look at this question in similar territory:

A major downside to raising the minimum wage is that it could decrease employment. If employers have to spend more for each person they hire and each hour they assign, they might do less hiring and cut back on hours. But don’t worry, say the policy’s defenders: While older research did tend to find negative employment impacts, newer, better research does not.

That line has taken hold in the public debate, but it’s not quite true. And with Joe Biden’s advocacy of a $15 nationwide minimum wage, it’s prompted some strong pushback from within the economics profession — including allegations that politics have played too much of a role in deciding what gets published and what gets discussed.

“Anyone who thinks there’s a consensus in economics on the effects of changing the minimum wage should talk to someone who’s recently tried to publish a paper on the topic,” tweeted Jennifer Doleac, an economics professor at Texas A&M University, earlier this month. “I study lots of controversial topics but would never go near that one, thanks. So political. A nightmare.” She added that “the stories are enough to make me discount the past 10 years of published research in this area.”

Tyler Cowen, the George Mason University economist and popular blogger, was even harsher in a recent post: “I am sorry to speak in such terms, but the reality is that an allied cabal of activists and left-wing economists have combined on social media to insist on a particular approach to minimum wage economics and to bully those who disagree.”

And this week, David Neumark and Peter Shirley released a paper reviewing the academic literature. On balance, they find, this literature still suggests that higher minimum wages damage employment . . .

Robert returned to the topic of the minimum wage the next day:

Yesterday I had a piece about the debate over whether minimum-wage hikes decrease employment. Toward the end, I pointed out that this isn’t the only important question here. For example, we also should want to know who pays for a higher minimum wage — business owners or customers? — and how much of a minimum-wage hike the government will take back by cutting benefits for, and collecting additional taxes from, the folks who get raises.

There’s an interesting new study that touches on some of these concepts. It looks at how McDonald’s restaurants throughout the U.S. have responded to minimum-wage hikes in recent years.

Some of the results are good for minimum-wage advocates. For example, the hikes don’t seem to drive McDonald’s establishments out of business. And while the chain has been ramping up its use of touch-screen ordering kiosks in recent years — a fifth of the restaurants had them in 2017, rising to almost three-quarters two years later — this rollout doesn’t seem to be correlated with minimum-wage hikes.

But there’s a hitch, too: Consistent with previous research on the restaurant industry, the authors report “near-full price pass-through of minimum wages.” This means a minimum-wage hike doesn’t just come out of the pockets of those evil exploitative capitalists who own McDonald’s restaurants; instead, it overwhelmingly comes from McDonald’s customers. It’s basically a fast-food tax, which is regressive, because the poor spend a bigger share of their income on fast food than the rich . . .

Douglas Carr wondered what the Fed was up to with its disproportionate purchase of TIPS (Treasury Inflation-Protected Securities):

Unlike with the much larger, more liquid Treasury and mortgage-backed securities, the Fed has neither disclosed its TIPS buying plans nor discussed the market impact. One could make a case from the first chart that the Fed is seeking TIPS portfolio holdings proportionate to Treasury issuance, but that would be grossly disproportionate to the liquidity of the two markets, thereby having an outsize effect upon yields.

It’s hard not to think that the scale of the Fed’s TIPS purchases is a reflection of the special importance that the Fed attaches to financial-market inflation expectations. Put another way, is the Fed trying to push inflation expectations up? In developing the Fed’s inflation averaging strategy, which “makes up” for inflation undershoots of its 2 percent target, researchers concluded:

Makeup strategies do not require that the public completely understand them in order to provide most of their benefits. In [the Fed model], it is only necessary for financial market participants to understand policymakers’ commitment to a makeup strategy.

The Fed’s emphasis on market inflation expectations, coupled with its persistence in driving up breakeven rates, raise questions about its motives. These must be publicly disclosed along with its purchasing strategies and effects.

Oh, there’s this:

Every increase in unemployment is preceded by rising inflation. Every period of declining inflation is followed by lower unemployment. There is no economic benefit to higher rates of inflation. Never in its 107 years of history has the Fed shown the ability to move inflation up and down in a carefully gradated way as it proposes to do with its “make-up” strategy.

The goal of effective monetary policy is stability, not higher inflation. One of the greatest obstacles for the disadvantaged is the “last hired, first fired” syndrome, and boom-bust policy is the enemy of their full participation in our economy . . .

I noted the contrast between McKinsey’s vociferous support for corporate social responsibility and stakeholder capitalism and the curious attitude of its Moscow office toward the demonstrations in Russia that followed the arrest of opposition leader Alexei Navalny:

History doesn’t repeat itself, but it often rhymes (as Mark Twain may or may not have said). Stakeholder capitalism is neither a replay of the benign corporatism of, for example, post-war West Germany, and, nor, despite the way it is increasingly being used to bypass democracy, is it a rerun of corporatism’s fascist incarnation. Nevertheless, let’s just say that to compare McKinsey’s talk with its deeds, at least outside the West (and McKinsey is by no means alone in this) triggers some unsettling comparisons.

And those who think that such games will only ever be played outside the perimeter of our safe, Western democracies have not being paying attention.

Speaking of which, on Monday the World Economic Forum (“Davos”; you can find the, uh, McKinsey guide to what’s going on there here) played virtual host to China’s leader, Xi, who was apparently able to take a break from organizing the genocide of the Uyghurs to use the WEF’s platform to give a moral lecture to the rest of us. On Wednesday, incidentally, the WEF is set to be addressed by none other than Vladimir Putin.

Perhaps it’s unfair to mention that Klaus Schwab, WEF’s founder and executive chairman, has been beating the drum for stakeholder capitalism for decades.

Then again, perhaps it’s not.

Marc Joffe argued for a more critical approach to be taken towards Biden’s proposals to increase state and local aid:

Though popular in Congress right now, a large aid package to state and local governments is not without risks. It could mean that taxpayers in states that have been fiscally responsible will be effectively bailing out taxpayers in states that haven’t managed their money well. And states that have been making poor spending decisions are likely to do the same with new federal aid. There will be a lot of good money going after bad.

Previous House aid packages for state and local governments were influenced by studies from Moody’s Analytics and others that try to project revenue losses over multiple fiscal years. This is a tall order not only because it requires forecasting numerous variables, but because it also uses an essentially immeasurable baseline: the amount of revenue that state and local governments would have collected had the pandemic not reached U.S. shores.

In September, Moody’s Analytics predicted that state and local governments would lose between $450 billion and $650 billion of revenue through 2022. In December, the firm estimated a lower range of revenue losses: $331.5 billion to $468.2 billion . . .

An alternative is to base state and local relief payments on actual revenue losses. For example, calendar year 2019 could be used as a revenue baseline, and aid awards could be based on shortfalls in 2020 and subsequent years. An advantage of this approach is that it requires no forecasting at all. Governments seeking grants could simply report their 2019 and 2020 revenue collections to a federal agency, which would provide an award based on the difference. Another set of grants could be computed and issued once actual 2021 revenue receipts are known.

Veronique de Rugy’s “LOL story of the day” came to her from The Hill. De Rugy explained that:

This piece by Stephanie Taylor of the Progressive Change Campaign Committee makes the case that if Democrats want to win again in 2022 and in 2024, the Biden administration should spend significant energy informing the American people of the wonders that the government has delivered to them. The author suggests that, to achieve this goal, the administration “should even consider creating a new position based in the Executive Office.”

The part of Taylor’s article that de Rugy most enjoyed concerned the Export-Import Bank, specifically this:

“EXIM could become a critical tool in the building of a green economy, supporting loans towards American companies working in green technologies — major down payments on Biden’s Build Back Better promises.”

That’s a great story to tell to gullible people who have no clue that a quarter of Ex-Im’s portfolio is — wait for it — oil and gas! In fact, extending financial products to U.S. companies to ship oil and gas equipment around the world is Ex-Im Bank’s second largest sector concentration, after the aircraft sector.

But it gets better still. Ex-Im’s favorite foreign customer is the Mexican state-owned oil firm, Petróleos Mexicanos (Pemex). Before 2017 and going back at least 15 years, the Ex-Im Bank had more loans outstanding to Pemex than to any other borrower. In 2015, these loans totaled nearly $7 billion. Shortly before last November’s election, the Ex-Im Bank’s Board of Directors pushed through an additional $400 million in financing to Pemex. And you know what? Kimberley Reed, who was then chairman of the bank, bragged about all the jobs she was creating in the U.S. by extending cheap loans to the super corrupt state-owned Mexican oil and gas firm.

I wrote last September about the Ex-Im Bank’s long and deep relationship with Pemex when the Ex-Im Bank was approving this most recent loan. So honestly, if the Ex-Im is ever going to “become a critical tool in the building of a green economy,” the Biden administration better change its business model. Pandering to the American people won’t do the trick.

I looked at the effect that the Biden administration’s green vision (an appropriate word to describe something that owes more to delusion than to reality) is going to have on jobs (spoiler: nothing good):

Given Biden’s climate crusade, there will be many more job losses to come. The green new dole will be what it will be.

From the Wall Street Journal:

“Any doubt that the Biden Administration plans to slowly regulate fossil fuels out of existence vanished this week. First came the Keystone XL pipeline kill, but perhaps more significant is the 60-day freeze on new leases on federal lands and bureaucratic permitting. The pause could soon become a long-term ban.

Federal lands account for about 22% of U.S. oil production, 12% of natural gas and 40% of coal. When the Obama Administration slowed oil and gas permitting on federal land, drilling and exploration shifted to private land. The Biden Administration may shut that down too.

Start with the 60-day suspension on new leases on federal land. Producers in older oil and gas fields won’t be significantly affected, and many have already scaled back investment in places like California and Louisiana while pouring more into shale. But shale fracking occurs in large part on federal land in western states, and it continually requires new leases and investment.

Federal land accounts for 51.9% of New Mexico’s oil production and 66.8% of its natural gas, as well as a sizable share of gas extraction in Colorado (41.6%), Utah (63.2%) and Wyoming (92.1%). A federal leasing ban would cost some 18,000 jobs in Colorado, 33,000 in Wyoming and 62,000 in New Mexico by 2022, according to the American Petroleum Institute.

States would also lose hundreds of millions of dollars of mineral royalties that are shared by the feds. Oil and gas revenue accounts for 20% of New Mexico’s budget. Downstream suppliers like fracking sand mines in Wisconsin and steel manufacturers in Pennsylvania would also be hit . . .

For more on the difficulties that are, specifically, likely heading New Mexico’s way, take a look at Paul Gessing’s article for Capital Matters last month.

Those splendid new green jobs are going to have to materialize very quickly, and, some states must hope, in the right places.

Count me skeptical.

A notorious phrase about omelets and broken eggs comes to mind.

And so does one famous reply: “Where’s the omelet?”

Robert VerBruggen anticipated a brawl between states over which of them get to tax remote workers:

Let’s say you work from home, and your employer is located in another state. Which state has the authority to tax your income?

The legal status quo may surprise you: possibly both of them.

Several states, most famously New York, tax people who hardly ever set foot there — so long as they are working elsewhere for their own convenience, and not because their in-state employers assigned them to another location — and these states have gotten away with it for years. More recently, in response to the COVID-19 pandemic, Massachusetts enacted a similar rule as an emergency measure: It shut down many businesses and encouraged people to work from home, but demanded everyone keep paying their Massachusetts taxes, even if they had begun working in another state.

This is a shocking overreach, especially in the states that do it as a matter of routine, and it’s one that’s becoming more salient as remote work grows in popularity. States have no right to tax people as they work elsewhere, live elsewhere, and use government benefits and services elsewhere. And in a new case, the Supreme Court has a chance to do something about it.

Steve Hanke and John Strezewski asked some hard questions about hard lockdowns:

The most recent, rigorous studies on the efficacy of lockdowns raise questions as to just how effective they are. Take, for example, a newly published paper by Stanford University professors Eran Bendavid, John Ioannidis, Christopher Oh, and Jay Bhattacharya. The authors estimate the impacts of strict lockdown policies on COVID-19 case growth in eight high-income countries in the earlier months of the pandemic (England, France, Germany, Iran, Italy, the Netherlands, Spain, and the United States). Additionally, they estimate the effects of Sweden’s light-touch approach.

After comparing infection trajectories in the strict-lockdown nations with Sweden’s, Bendavid et al. find that instituting strict lockdown policies reduced COVID-19 case growth by roughly 20 percent on average. However, Bendavid et al. also find that Sweden’s lighter restrictions reduced case growth to a similar extent (roughly 25 percent). Their results indicate that Sweden — a nation whose government imposed very few mandatory intervention policies in the spring of 2020 — displayed lower case growth than five out of the eight countries that implemented strict lockdowns. Armed with this evidence, Bendavid et al. suggest that lockdowns are an unnecessarily harsh response measure and that “similar reductions in case growth may be achievable with less restrictive interventions.”

An article in Nature by Serina Chang et al. confirms the conjecture of Bendavid et al. Using cell-phone GPS data gathered in the early months of the epidemic to model hourly movements in the U.S.’s ten largest cities, researchers discovered that reducing capacity in gyms, grocery stores, restaurants, and hotels to 20 percent could prevent over 80 percent of new COVID-19 infections. Businesses could therefore remain operational to some degree while nonetheless preventing the vast majority of infections. This approach is clearly preferable to a total lockdown, which can destroy businesses for, at best, only marginal health benefits, and the malign consequences do not end there.

Not surprisingly, the strategy proposed by Chang et al. mirrors the light-touch approach currently embraced by Sweden. Indeed, contrary to the barrage of criticism that has been leveled at the Swedes in the mainstream media, their light-touch approach appears to be the one most consistent with science. And its benefits have allowed Sweden to avoid many of the costs associated with hard lockdowns. By doing its best to leave schools open, Sweden has at least partially preserved the educational integrity of its youth. By avoiding mandatory stay-at-home orders, it has safeguarded its citizens’ mental health. By keeping businesses open, Sweden has suffered fewer economic losses than most of its European peers.

Thanks to its constitution, Sweden has experienced COVID-19 caseloads comparable to those that would have occurred under hard lockdowns but has avoided much of the economic and associated collateral damage that comes with hard lockdowns . . .

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