2025-05-09 23:16:49
The Manhattan Project, the top-secret U.S. government initiative to build an atomic bomb before Nazi Germany did, relied on hundreds of brilliant scientists from leading universities. Many of them had fled fascist regimes in Europe and found refuge on American campuses, including Berkeley, Columbia, MIT, Princeton, Purdue, and the University of Minnesota. In the end, Adolf Hitler didn’t come close to developing a bomb. But if the rivers of talent had flowed in the opposite direction, the world would look dramatically different today.
In the eight decades since World War II, collaboration among the federal government, academia, and industry has unleashed unprecedented prosperity and economic growth for America. No other country has been as successful. Consider the list of the 10 most valuable companies in the world. Eight are based in the U.S. Research funded by the federal government has paved the way for a long list of breakthroughs, from the internet to GPS to mRNA vaccines to Apple’s Siri.
Yet rather than building on this foundation, the White House is determined to destroy it. The administration is attacking science and slashing research funding at universities under the false flag of fighting antisemitism. The demands are more thought control than civil rights. An assault on progressive ideology vs. bigotry. The results could be devastating: The river of knowledge may flow in reverse. Loath to get in the way of an adversary making a mistake, global competitors are eagerly shopping at the greatest yard sale of human capital since German scientists bolted for America in World War II.
Soon, China won’t need to engage in theft of U.S. intellectual property. It will become the primary source. After the White House in March moved forward with plans to lay off thousands of researchers from leading U.S. facilities, including the Centers for Disease Control and Prevention, the National Institutes of Health, and the National Oceanic and Atmospheric Administration, Chinese recruiters jumped on social media to tout career opportunities in Shenzhen.
The Boston area is home to Kendall Square, which may be the most innovative square mile on the planet, and boasts universities including Harvard, MIT, and Tufts. In March, a Turkish doctoral student was arrested by masked federal agents, a year after she co-wrote an op-ed criticizing the school’s response to Israel’s war in Gaza. The governor of Massachusetts, Maura Healey, said: “China is on our campuses right now” recruiting scientists and faculty members. “That makes America less safe, less competitive, and has tremendous ripple effects for our economy.”
By many measures, China is already a scientific superpower. In other areas, it’s gaining ground quickly. The number of universities in China and Hong Kong ranked in the top 100 doubled to 12 over the past five years, while the number of American universities slipped to 38 from 40, according to the annual Times Higher Education list of more than 2,000 institutions. A different ranking of the top 500 showed that the number of Chinese universities tripled between 2010 and 2020, amid a slump for U.S. institutions.
Departures of Chinese scientists from the U.S. have also been accelerating, fueled by a 2018 program that sought to curb Chinese espionage. Although the Trump-era “China Initiative” was shut down four years later, reports of high-profile scientists of Chinese origin returning to China in recent months have raised concern. I believe there are likely numerous Chinese nationals who are spies, and … it’s worth it.
Imagine a football team that receives not one, but 31 of the 32 first-round draft picks. Every year. Now imagine the owner harasses the rookie quarterback, cleans out his locker, and threatens to have him and his family arrested and deported, sending a chill through the ranks of promising college players.
That would be … not smart.
This is what the White House is doing. When you hear the term brain drain, you think of America as the primary beneficiary. The country has long been the envy of the world when it comes to attracting talent. But we can no longer take this status for granted. Last week, we wrote about the rivers of financial capital reversing and flowing away from the U.S. But the change in direction of human capital may be even more important. In a March poll by the journal Nature, more than 1,200 American scientists — three-quarters of the respondents — said they were considering leaving America. The journal’s job-search platform saw 32% more applications for positions overseas from January through March 2025 vs. a year prior.
European leaders aren’t wasting any time in exploiting America’s dramatic research cuts, restrictions on academic freedom, and funding freezes. The European Commission’s president, Ursula von der Leyen, earlier this week announced an investment of €500 million to woo international researchers, highlighting the EU’s values of freedom, openness, collaboration, and diversity. Without directly mentioning Trump, she said that undermining science and research is a “gigantic miscalculation.”
French President Emmanuel Macron, who joined von der Leyen at Sorbonne University in Paris, said his country would commit another €100 million to attract scholars and make Europe a “safe haven” for science. Macron said: “No one could have thought that one of the largest democracies in the world would erase, with a stroke of the pen, the ability to grant visas to certain researchers. No one could have thought that this great democracy, whose economic model relies so heavily on free science, on innovation, and on its ability to innovate more than Europeans … would make such a mistake.”
Many other countries see an opening, too. In the U.K., the Financial Times reported that the government is considering a £50 million program to court researchers, while Australia, Canada, the Netherlands, and Norway are progressing with their own plans. Regions within nations are jumping in as well: Catalan President Salvador Illa unveiled a €30 million effort — the “Catalonia Talent Bridge” — to finance posts for more than 70 American researchers facing restrictions to their academic freedom.
At my own institution, NYU Stern School of Business, I’ve seen firsthand the talent the rest of the world is racing to attract. The brightest scholars from the Indian Institutes of Science and other universities pace the halls of Stern. In sum, they dominate: exceptional scholars, teachers, and (American) patriots. To think that the U.S. is shutting off the tap — it isn’t just depressing, it’s fucking stupid.
Even if the White House is sparing artificial intelligence and quantum research from its slash-and-burn strategy, it has requested cutting the $9 billion budget of the National Science Foundation by more than half. The government agency, a major funder of basic science, math, and engineering, especially at universities across the country, terminated more than 1,000 active grants over a two-week period.
Waging war on universities and reducing federal funding for scientific research will weaken America’s economic competitiveness. Economists at American University found that a 25% cut to public R&D spending would cut gross domestic product by 3.8%. That’s comparable to the decline seen during the Great Recession, which ended in 2009. A 50% reduction in funding would lower GDP by almost 7.6%, making Americans much poorer.
The U.S. can’t rely on the private sector to replace the government in funding science. No corporation can match the Defense Advanced Research Projects Agency, or Darpa, which has played a critical role as an engine of American innovation. Early-stage research is risky and requires massive capital — and patience — investments companies focused on quarterly earnings can’t justify. Prosperous nations play the long game. The world’s most valuable firms have one thing in common: They were built on technology financed by American taxpayers via public-private partnerships — government and universities.
They also excel at bringing the government, universities, and companies together. J. Robert Oppenheimer, the Berkeley and Caltech scientist and “father of the atomic bomb” and General Leslie Groves were crucial Manhattan Project players, as everyone knows thanks to the performances of Cillian Murphy and Matt Damon in the Oscar-winning film Oppenheimer. But hundreds of others — and dozens of companies, too — played supporting roles. As physicist Niels Bohr said in 1944, the government wouldn’t have succeeded without “turning the whole country into a factory.”
It was fear of Adolf Hitler getting a bomb that drove Franklin D. Roosevelt to launch the Manhattan Project. But it was hope that spurred the president to write to Vannevar Bush, head of the Office of Scientific Research and Development, in November 1944. Roosevelt asked Bush to come up with a set of policy recommendations to sustain America’s wartime innovation during peacetime.
America’s innovation supremacy wasn’t an accident or birthright — it was earned through deliberate investment and intense collaboration among the world’s most exceptional minds. Now we risk throwing it all away. We’ve spent 80 years building a nearly unassailable lead, only to suddenly decide the race is optional. Our universities still dominate global rankings and our tech firms command unprecedented market power, but we’re actively dismantling the foundation that made it all possible. I believe America is being run by a mob family. That’s bad. What’s worse is that Michael Corleone is running the grift, and Fredo is running the government. America has become the textbook definition of snatching defeat from the jaws of victory. I was in Hamburg last week presenting at the OMR Festival (Online Marketing Rockstars), and the general vibe is bewilderment: How could a superpower be this stupid?
Life is so rich,
P.S. I enjoyed my conversation with Anne Applebaum, a Pulitzer Prize–winning historian and staff writer at the Atlantic, about the rise of kleptocracy in America. Listen here on Apple or here on Spotify, or watch it here on YouTube.
The post Brain Drain appeared first on No Mercy / No Malice.
2025-05-02 23:22:16
“Stay in your lane” is a person’s way of saying they disagree with you, but they’re too lazy to counter your point(s) with any evidence or argument. I get this a lot when I talk about politics. Separating business from politics is akin to believing that fish swim independent of the water’s current. America’s toxic uncertainty is urging capital to look elsewhere.
The world’s biggest yard sale is taking place now that brand America is sick, and the world is on the front lawn hoping to pick up $26t in economic activity on the cheap. Capital flows into EU index funds and institutional interest in investing in the U.S. are at 30-year highs and lows, respectively. As such, I believe Europe and China represent investment opportunities. Since the fourth quarter of 2024, I’ve been reallocating capital out of the U.S.
(Note: This post isn’t investment advice.)
The Amazon River flows eastward across South America for 6,400 kilometers before it empties into the Atlantic. But 65 million years ago — a blink of the eye in geological time — the Amazon flowed in the opposite direction, toward the Pacific. Tidal rivers reverse their flow daily. Others reverse their flow annually as seasons change. Three times this century, the Mississippi reversed its flow during hurricane storm surges. In 1900 civil engineers reversed the flow of the Chicago River, changing its outlet from Lake Michigan to the Mississippi.
Capital flows also shift cyclically and as a result of human intervention. Unlike rivers, shifts in capital flows can be sudden and violent, as capital does not pledge allegiance, but moves aggressively toward safety and opportunity. In the most recent Bank of America fund manager’s survey, the allocation to U.S. equities fell to a net 36% underweight. That represents a 53-percentage-point swing in the U.S. equity weighting since February — the biggest two-month decline on record. In the same survey, 73% of fund managers said they believed U.S. exceptionalism had peaked. What began as a cyclical movement in capital akin to a river’s seasonal change in direction now resembles a transformation on the scale of the Amazon’s ancient rerouting — though this shift was engineered and accelerated by humans, like the redirection of the Chicago River.
Heading into the recent NFL draft, Shedeur Sanders, the University of Colorado quarterback and son of NFL hall of famer Deion Sanders, was considered a likely first round pick. As it turned out, he was the 144th overall pick in the fifth round, costing him an estimated $40 million. I don’t know what Deion told his son afterward, but here’s what I’d tell mine: You’re better than your worst moments, but never as good as your best ones. This regression to the mean is one of the most powerful forces in the world. Also, Deion should tell his son to tell his dad to shut the fuck up.
Over the past decade, U.S. equities have delivered an extraordinary 14.8% annualized return, outpacing global ex-U.S. equities (7.0%) and Eurozone equities (7.8%). After a historic bull run, it’s tempting to believe American exceptionalism is a permanent feature, like gravity. Since 1975, however, the outperformance cycle for U.S. vs. international equities has lasted eight years on average. At the end of 2024, the U.S. was 13.8 years into the most recent one. U.S. equities are regressing to the mean.
Eleven months into the pandemic, Warren Buffett wrote in his annual shareholder letter, “Despite some severe interruptions, our country’s economic progress has been breathtaking. Our unwavering conclusion: Never bet against America.” This statement was based on a set of assumptions that our checks and balances protected the U.S. engines of growth (risk aggressiveness, rule of law, IP, university research, attracting premier human capital). Over the past 100 days it appears we’ve taken these things for granted, and I now believe it makes sense to bet on other regions. Over the long run, I’m bullish on America, as there’s no better platform for unleashing human potential. The question isn’t whether to bet against America, however, but at what valuation? BTW, if a human was engineered to be the polar opposite of Warren Buffett, they’d look strikingly similar to Peter Navarro.
During the Great Recession, I bought Apple and Amazon at around $10 to $12 per share. After 15 years and a historic bull run, I’m up around 19x to 22x. (Note: I also bought Netflix at $12, and sold at $10 — I get it wrong all the time.) The chocolate and peanut butter was the combination of great companies priced at historic discounts. Since then, the natural disruptions that bring valuations down and transfer value from incumbents to entrants have been arrested by massive stimulus (i.e., deficits) at the behest of an older generation, which is spending younger people’s money to prop up their wealth. But that’s another post. The Great Rotation isn’t as much a bet against U.S. equities, but simply the recognition that U.S. equities are overvalued relative to those of Europe and China.
The S&P 500 trades at a multiple of 26x; the STOXX Europe 600 Index trades at a multiple of 14x, and the CSI 300 trades at a multiple of 15x. When stock valuations become inflated, future returns decline. I’ve done well with my Apple and Amazon investments, but with both of them trading at multiples of 34x, I’ve begun taking profits and looking for returns elsewhere.
At the start of the year, investors were bullish on China for a few reasons: strong corporate profits, AI breakthroughs, and the apparent easing of regulatory pressure from Beijing. The trade war and fears of a global recession have dampened China’s growth forecasts. The IMF cut its GDP growth forecast for 2025 from 4.6% to 4%. But as I’ve written before, China is better positioned than the U.S. to weather the fallout from a trade war. I also believe that, over the long run, tariffs will always trend toward zero as consumers opt for cheaper goods over … everything.
Anyways, the stocks I’m looking at:
Alibaba, China’s answer to Amazon, saw its stock hit an all-time high in 2020, and since then it’s off 62%. Its co-founder, Jack Ma, disappeared from public view after criticizing financial regulators. He resurfaced in 2023, but it wasn’t until this February that President Xi blessed his return in a meeting with Chinese entrepreneurs, urging them to “show their talents.” As one China-watcher told CNBC, Xi sent a clear signal that China’s policy priorities are private sector growth and AI. Last quarter, Alibaba posted $38.5 billion in revenue — a 7.6% YoY jump and its fastest rate of increase since 2023. Net profit increased 3x YoY, coming in at $6.7 billion. Alibaba’s growth was driven by its core e-commerce businesses and the progress it’s making on its AI-powered marketing tool. The stock is up 50% YoY.
I believe Alibaba is well-positioned to continue to take advantage of the U.S.-China AI race. Alibaba’s challenge is expanding its consumer business units domestically and accelerating cloud growth (up 13% YoY this quarter). China’s household spending is less than 40% of the country’s annual economic output, 20 percentage points below the global average. Closing that delta offers a massive opportunity, and (again) China’s leaders have signaled support for Alibaba. In his annual report to parliament, Premier Li Qiang prioritized “consumption” over long-standing policies aimed at moving Chinese production up the value chain. While there’s concern that Chinese consumers may reduce spending on nonsubsidized goods, it’s worth thinking about what could go right. China may finally become a consumer economy — a transformation that would benefit Alibaba. Finally, BABA’s cloud revenue will likely register a surge as European firms shift their gaze east (away from the U.S.) for cloud services.
Starting at $8,000, the BYD Seagull has a range comparable to those of other EVs and comes standard with autonomous driving technology, and in the coming years it will receive a battery upgrade with 5-minute charging capabilities. My Pivot co-host, Kara Swisher, really wants one, but they aren’t available in the U.S. — a fact that hasn’t slowed BYD’s growth. Its first-quarter revenue jumped 36% YoY, to $23.5 billion, while its net profit doubled, to $1.26 billion. This year, BYD is on track to sell 5.5 million vehicles, including 800,000 exports and is the fastest growing brand in the UK. Meanwhile, Tesla, which registered a first-quarter sales decline of 13% YoY, trades at a multiple of 130x, vs. 20x for BYD. The Chinese company’s mission is to cool the Earth by 1 degree Celsius, and it just launched its first cargo ship.
Even before “Liberation Day,” capital inflows to European equities were at a decade-long high, suggesting the Great Rotation was already underway. The trade war has accelerated inflows, but it’s also contributing to a growing sense of European patriotism. In the first two weeks of April, U.S.-focused funds managed by Amundi, State Street, and UBS saw a combined outflow of $4.5 billion. As I previously wrote, America’s retreat from the post-war order it created could be a catalyst for the EU to harness its economic strength and finally become a true union. After Germany’s recent decision to lift its constitutional debt restrictions to boost defense spending above 2% of GDP, the bloc began discussions to encourage other member states to make similar fiscal reforms. A defense boom across the continent keeps Ukraine in the fight, but it’s also an economic stimulus for the EU.
I try to avoid helicopters. They’re noisy and smell of fuel. To me, helicopters feel flimsy and crude, like a fan stuck on a soda can with duct tape. I spend most of the journey adding up the staggering number of points of failure. Statistically, helicopters are 26x more likely to crash than commercial airplanes, and helicopter crashes are 230x more likely to result in a fatality. The upside? Helicopters are one of the few last-mile solutions at the premier choke point in travel.
I recently participated in a $50 million PIPE in a British company called Vertical Aerospace (NYSE: EVTL) that’s developing an electric flying taxi. Electric vertical takeoff and landing (eVTOL) aircraft are quieter than helicopters and emissions-free, and they have lower projected operational and maintenance costs. They may also turn out to be safer, as eVTOL aircraft use distributed propulsion systems with redundant motors and battery packs. Built for short hops with small payloads, eVTOL aircraft aren’t meant to replace helicopters, but rather create a new last-mile solution capable of delivering people, packages, and meals without having to navigate through traffic jams on the ground.
The eVTOL sector is in the process of testing and regulatory certification. The FAA is adopting new regulations, while U.K. regulators are using an existing framework for aircraft under 5,700 kg for interim operations and tailoring as they go. Also, the EU has realized that its rich uncle (Sam) has gone bat-shit crazy and can no longer be counted on for support. If the EU, per its claims, increases defense spending from 1.9% of GDP to 3%, an incremental $200 billion more will be spent on defense per annum. This, in my view, could be a turning point for EU stocks and tech firms. This wager is much riskier than betting on BABA or BYD, as the bankruptcy risk is real. The stock is off 97% from its high, and American competitors Joby and Archer trade at 10x that valuation. I see this one as rocket fuel: It’s got enormous thrust (upside), but it’s dangerous (downside).
I went to a pop-up bar last night run by the doorwomen from the recently burned down Chiltern Firehouse (#enormousfuckingbummer). I believe the universe was not comfortable with me having access (they liked me for some reason) to the best room in Europe. The natural order has been restored, and now I’m back at members’ clubs with other middle-aged men trying to fill the void in their chest with alcohol and clinging to the myth that David Beckham and Guy Ritchie also “hang out here.” Too much?
Anyway, it wasn’t about the venue, but the people in the room. And it’s the same here with VERT. I co-invested with my friend Jason Mudrick (Mudrick Capital). The previous investments he stitched me into returned 4x and 30x. So he had me at hello.
As Brand America shifts from prosperity and rights to oligarchy and corruption, I distract myself with a great American pastime: wondering how I make money here. The greatest own-goal since Brexit/Iraq/Vietnam is underway, and, as in any disruption, there is an explosion in Alpha. It’s fun and (again) helps distract me from watching the pillars that provided me with a life my immigrant parents couldn’t imagine crumble. It helps. Sort of.
Life is so rich,
This week on my Conversations pod I spoke with New York Times columnist David Brooks about the decline of true conservatism and the crisis facing men and boys. Listen on Apple or Spotify or watch on YouTube.
The post The Great Rotation appeared first on No Mercy / No Malice.
2025-04-25 22:50:32
At different points, I’ve worked with 30 Fortune 100 CEOs. I believe 90% of them wake up in the morning, look in the mirror, and think, “Hello, Mr. President.” These are talented, confident, tall (we’re a highly looksist nation) people, who surround themselves with supporters who are damn impressed with their genius.
But the key attribute of leadership is doing the right thing when it’s hard. Really hard. It’s difficult for CEOs to speak out as the U.S. president demonstrates a willingness to declare war on everyone, all at once. Best just to keep calm (i.e., quiet) and carry on. There’s a powerful quote attributed to a German theologian: “Silence in the face of evil is itself evil. Not to speak is to speak. Not to act is to act.” In this case, business leaders are saying their fear and idolatry of the dollar trumps all.
Their silence is cowardice.
Similar to a mob boss, the president has created an incentive system to keep everyone in line. Donating $1 million to his inauguration fund, nodding politely, publishing a (bullshit) press release about a “massive” investment in domestic manufacturing, and staying quiet is the way to go … if you know what’s best for you and your economic interests. I’ve heard firsthand that CEOs at the biggest companies agree — in private — that Trump’s policies are dangerous and stupid. In public, they cower. They keep their heads down and their knees bent, fearing retribution or hoping to profit.
The fastest-growing, and possibly most dangerous, class in America is what I’d label the Transnational Oligarchs (“Togarchs”). The Togarch has no use for the government once Uncle Sam’s check has been cashed. The charging stations are built, and the government-sponsored technology is already stitched into their offering. The rule of law, regulation, tax system, and public infrastructure that paved the way for their billions is now a liability for their “genius” — an obstacle to paying no taxes or worrying about the damage their product(s) levy on others. They have little vested interest in the things the government does or why it requires their tax dollars. Their wealth, comparable to that of a nation state, yields its own sub-infrastructure: private schools, health care, security, and rights. Overturning Roe v. Wade or rounding people up poses no threat to them. If shit gets real, and someone in their life becomes pregnant or people show up with pitchforks, no bother. The Togarch will always have access to mifepristone or residency in Dubai, London, or Milan. In sum, they’re no longer Americans. The Togarch class is growing and slowly co-opting Fortune 500 CEOs to join their ranks.
These corporate titans are not only doing the wrong thing but bypassing an economic opportunity. The first CEO who forcefully and publicly resists Trump could reap significant benefits, both reputationally and commercially. Leadership springs from unexpected places, but from a pure brand perspective, the biggest commercial opportunity rests with the CEO of an iconic American brand (e.g., Apple, Nike, P&G, Walmart). You can make a case for Walmart, which gets about 60% of its imports from China (down from 80% pre-Covid). But Nike is even better positioned to push back. Tariffs are threatening to hobble Nike’s effort to revitalize its brand and reverse a decline in sales, with the company making a large share of its footwear in China and Vietnam. Nike, famous for innovation, high-profile endorsements, and breaking barriers, is suddenly uncool. Its market value has tumbled more than 60% from a 2021 high.
Nike is especially well positioned as … it has less to lose. This is not a time for the swoosh to be timid and stay the course. Being bold is in Nike’s DNA. Exhibit A: Colin Kaepernick, the former San Francisco 49er who refused to stand during the national anthem to raise awareness about police brutality against Black Americans and racial injustice more broadly. Conscious of the potential brand damage, Nike reportedly almost dropped him. Instead, the company in 2018 chose the outcast quarterback as its spokesperson for the 30th anniversary of the “Just Do It” campaign, thrusting it into the national spotlight, sparking an outcry, and driving some sports fans to set fire to their sneakers in protest. It was a disaster … for Nike’s critics. The company’s sales surged by more than 30%. This wasn’t reckless. It was genius.
Nike did the math. They knew they’d piss off right-wing conservatives. But they also knew they didn’t matter. Nonwhites made up a greater share of Nike’s customer base than of the population at large. Most of the company’s consumers were younger than 35 and lived outside the U.S. Few of these people thought America had race relations right. Nike shrewdly concluded that gains to its brand would dwarf any downside. The people who burned Nikes likely had to go out and buy their first pair.
Nike’s CEO shouldn’t bring a knife to a gun fight. He should weaponize one of the great creative teams in consumer history and fire up the company’s storytelling machine — outstanding marketers supported by world-class creative firms including Wieden+Kennedy. What could be more effective than a message of resistance showcasing American values through the lens of sport — the role of immigrants, teammates, fair play, and international competition?
The first large American company to go out on a limb and do this successfully will attract huge amounts of goodwill from consumers, manufacturers, and partners at home and abroad. This is Nike, Walmart or Apple’s prize to lose. But it could be captured by other leaders, including Satya Nadella at Microsoft or Marc Benioff at Salesforce — their iconic brands are built on American values. They shouldn’t wait. The advantage will erode sharply for the second and third CEOs who follow. The risk has been overstated. The Trump army is divided, and it’s got more bark than bite, snapping at every dog in the park. Does anybody take him or his threats seriously any more?
Given the rising stress levels in corner offices across America, we may be nearing a turning point. Citadel CEO Ken Griffin noted on April 23 that no brand in the world could compare with U.S. Treasuries, given the strength of the dollar and the nation’s creditworthiness, but that Trump’s tactics had eroded America’s reputation (a point I’ve been making for weeks). And Jamie Dimon, one of Wall Street’s most influential figures, has raised concerns about tariffs, warning about long-term damage to America’s credibility. But dancing around the issue and feebly highlighting the “considerable turbulence” facing the economy, Dimon looks like he’s auditioning to become the next Treasury secretary rather than filling the leadership vacuum.
For now, the most meaningful conversations are happening behind closed doors. On the public stage, CEOs are shrinking from the fight. Disney’s settlement in December in Trump’s defamation case against ABC News — approved by CEO Bob Iger — had a chilling effect. The company agreed to donate $15 million to Trump’s future presidential foundation and museum and an additional $1 million for his legal fees instead of fighting a case they would have won. They were afraid of Trump, not the law.
Goldman Sachs CEO David Solomon, meanwhile, referred to “landscape changes,” and “uncertainty about how certain things that are close will proceed forward,” among other euphemisms, in discussing the bank’s financial results and outlook earlier this month, as the New York Times reported. Executives steered clear of mentioning Trump directly or using the word “tariff.”
This marks the end of an era that never was: the era of “stakeholder capitalism.” The notion that businesses have a responsibility that extends beyond their shareholders to society at large. I’ve served on seven public, and dozens of private, company boards. Spoiler alert: This is, and always was, bullshit. The CEO/board has only one group of stakeholders in mind: shareholders.
If Nike or any other corporation needs inspiration, they should look at Harvard, which ought to win the award for best brand decision of the year after becoming the first American university to officially resist Trump’s vow to “reclaim” elite schools.
Harvard sued the Trump administration earlier this week, fighting back against its threats to cut billions of dollars in research funding after the institution said it would defy the White House’s demands to limit activism on campus. Alan Garber, its president, wrote in a public letter that “no government — regardless of which party is in power — should dictate what private universities can teach, whom they can admit and hire, and which areas of study and inquiry they can pursue.”
The only testicles in sight in the government appear to be possessed by women (you know what I mean). Senator Lisa Murkowski, the Alaska Republican who hasn’t been shy about challenging Trump, showed how it’s done last week at an event in Anchorage. “We are all afraid,” she said. “I’m oftentimes very anxious myself about using my voice, because retaliation is real. And that’s not right.” But, she added, “that’s what you’ve asked me to do. I’m going to use my voice to the best of my ability.”
Janet Mills, the governor of Maine, who has consistently clashed with Trump over a state anti-discrimination law that allows transgender athletes to participate in girls’ and women’s sports, has also refused to give in. When Trump threatened to pull funding from her state earlier this year, Mills responded: “See you in court.”
The markets are in turmoil, and we’ve turned on our allies for no discernible benefit … but thank God a 14-year-old transgender girl isn’t playing volleyball in rural America. When did America get this fucking stupid and cruel?
The pursuit of money at the expense of freedom is a common thread that runs through some of the darkest periods of history. The first year of Adolf Hitler’s reign was a crucial period in which German businesses could have resisted his regime. Instead, as scholars have documented, some provided key financial support for the Nazi party. Others became complicit in Hitler’s crimes, driven by fear, greed, or antisemitism.
Few leaders took Hitler seriously, and those who worried about antisemitism believed it wouldn’t affect “the kind of people I know,” as Northwestern professor Peter Hayes told Fast Company last month. Hayes is skeptical American businesses will behave any differently today in response to Trump. Based on the lack of courage we’ve seen so far from corporate America, it’s difficult to rebut that point.
Leadership is doing the right thing even when it’s hard. Not becoming another brick in the fascist wall. Standing up to the administration’s policies may be painful in the short term, drawing rage from the president and his team of clowns and enablers, but it presents an enormous opportunity over the longer term for Nike, Walmart, Microsoft, Apple, or some other household American brand. It’s never the wrong time to do the right thing.
When do we stop being so stupid and afraid? When do we show some courage, even if it involves risks to shareholder value? When do we nod to the sacrifice others before us have made? When do the Americans show up?
Life is so rich,
P.S. If you missed my conversation with Canadian Prime Minister Mark Carney, you can listen on Apple or Spotify or watch it here on YouTube.
The post Breaking the Silence appeared first on No Mercy / No Malice.
2025-04-18 23:04:22
“I would like to come back as the bond market. You can intimidate everybody.”
— James Carville
America is blinking. The day after April Fool’s Day, President Trump “liberated” the United States from an eight-decade run as the world’s economic superpower, raising the cost of capital for the federal government, American companies, and consumers. If this sounds like stupidity, i.e., hurting others while also hurting yourself, trust your instincts. But don’t trust America. A blackout drunk is behind the wheel of the U.S. economy. All around us, horns (bear markets; consumer confidence plummeting to historic lows) are blaring. In the backseat is a cultist (GOP) who thinks the red lights Trump has blown through, and the accidents in his wake, are baller moves. Also in the backseat: a sulking teen (Democrats) who’s visibly upset but can’t articulate what they want or suggest a better route. Riding shotgun, though, is an adult the driver can’t ignore, the bond market.
First-year economics students are taught that money evolved to make early barter systems practical. In his book Debt: The First 5,000 Years, anthropologist David Graeber argues that the barter story was likely a fiction created by Adam Smith; Graeber believes the earliest coins were actually tokens used to keep track of debt. “The moment one starts framing things in terms of debt, people will inevitably start asking who really owes what to whom?”
Debt is both a financial instrument and a social construct that binds people, firms, and nations to one another and links together the past, present, and future. As many anthropologists have pointed out, debt has moral implications around fairness, responsibility, and obligation, as it’s a tool through which we impose order. Historically, Judaism, Christianity, and Islam outlawed interest under most circumstances, counseled their followers against taking on debt, and advised debtors to repay loans promptly. When someone saves another person’s life, the person they rescued is said to be in their debt. When a criminal has served their sentence, they’re said to have repaid their debt to society. In a debt crisis, the real risk is not default, but a breakdown of the economic, social, and political orders.
How bad is this debt crisis? It’s too early to tell. But as former Treasury secretary Lawrence Summers explained, what has people most scared is the real-time erosion of the American-led economic order. Our reputation as a bastion of strength and stability, with our dollar and Treasuries representing safety, is in jeopardy. Increasingly, we resemble an emerging economy, where a crisis in confidence sends stocks, bonds, and currencies down and spikes interest rates. “If the United States isn’t credible, that makes the whole financial system less stable,” Summers said, adding, “we are more vulnerable to bad surprises from here than to good surprises.” One potential bad outcome? A stagflation cocktail of high interest rates, low growth, and high unemployment. This week, Fed Chair Jerome Powell warned that Trump’s trade policy and the resulting uncertainty may put us in a “challenging scenario” in which the Fed’s dual-mandate goals of maximum employment and stable prices are “in tension.” That’s Fed-speak for: This could be a clusterfuck.
Since World War II, the U.S. dollar and U.S. Treasuries have been the backbone of the global economy. Charles de Gaulle called this “exorbitant privilege,” as it creates an asymmetrical financial system where foreign governments effectively subsidize American living standards and firms. Just how exorbitant is difficult to quantify, but, as economist Barry Eichengreen argued, the privilege isn’t what it was in the 1960s when de Gaulle complained that America was far too powerful. Still, our exorbitant privilege is a benefit, not a liability, as reliance on U.S. currency and debt lowers our cost of capital and increases the punching power of our economic sanctions. But in the wake of “Liberation Day,” analysts at Société Générale, Deutsche Bank, and Goldman Sachs expressed concern that America’s privilege is eroding.
A financial adage frequently attributed to John Maynard Keynes, John Paul Getty, and others: “If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” This is the paradox of debt. The bigger the outstanding balance, the more the risk shifts from debtor to creditor … for a time, anyway. Trump, who bragged that he was “the king of debt” during the 2016 campaign, has leveraged this paradox his entire career, filing for bankruptcy six times. But compared to the federal government, Trump is a lightweight.
Despite decades of warnings from economists and business leaders, increasing the debt is one of the longest-running bipartisan traditions in Congress. Conservatives (teetotalers) campaign as deficit hawks, then vote to increase the debt for unfunded tax cuts. Liberals (social drinkers) deprioritize debt by pairing big spending initiatives with modest proposals to increase revenue, i.e. taxes. And progressives (full-blown alcoholics) champion Modern Monetary Theory, which holds that governments with control over their own currency can finance spending without worrying about deficits or debt, as long as they manage inflation. How’s that working out?
America is drunk on debt. We continue to drink at the bar long after last call. Spiking bond yields and the declining dollar are interventions. It’s not too late to get sober, however. I believe we should do it for our kids, as debt is a tax on future generations. But as I argued in my Ted Talk, despite saying we love our children, we’re waging war on them. There’s another reason to sober up: self-preservation. Sovereign debt crises have been the green mile of empires, from ancient Rome to the French monarchy to the Ottoman and British empires to the Soviet Union. America is exceptional in many ways, but we’re not exempt from history. Countries typically are not conquered, but go broke.
In budgetary terms, some people call the U.S. an insurance company with an army. This is correct insofar as our largest deliverables are the greatest military in history and a social safety net that lags behind those of other industrialized nations. But our fastest-growing spending priority is the interest on our debt. If current laws remain the same, net interest payments will total $13.8 trillion over the next decade, rising from an annual cost of $1.0 trillion in 2026 to $1.8 trillion in 2035, according to CBO projections. Rising interest rates increase the vig, crowding out mandatory and discretionary spending, as well as our capacity to respond to future crises.
General Omar Bradley once said, “Amateurs talk strategy, professionals talk logistics.” His point was that war plans, even when the defense secretary doesn’t drunkenly share them with the Atlantic’s editor-in-chief on Signal, don’t count for much. It’s the unsexy stuff — supply lines, resources, and infrastructure — that wins wars. The world’s least-sexy financial instruments are U.S. Treasuries. They have historically been viewed as the safest bet in uncertain times. U.S. debt is both a shield that protects us from higher borrowing costs and a sword that, when used in conjunction with the dollar as the global reserve currency, guarantees American economic hegemony. But as with any weapon, if we lose control of it, our debt can be used against us.
The U.S. debt is roughly $36 trillion. Nearly three-quarters of that debt is held by U.S. investors, the Fed, and various federal agencies, including the Social Security Administration; the rest is held by foreign investors. China is currently the second-largest foreign holder of Treasuries, behind Japan. After last week’s shit show, some analysts asked, without hard evidence, whether China was to blame for bond market volatility. That question misses the point. It’s not what China did or didn’t do, but rather what it’s capable of doing now that the Blinker-in-Chief has put a spotlight on our Achilles’ heel.
Dumping Treasuries raises U.S. borrowing costs, and, more important, undermines global trust in American leadership. It also hurts China, as a fire sale means they’ll take losses too, and a possible recession hurts everyone. Beijing’s fear of that economic pain has been a strong deterrent … until now. A trade war makes the pain real, meaning China has a lot less to lose (and potentially something to gain) by using our debt against us. And China has a pain-multiplier here: An increase of 50 basis points on a $36 trillion debt adds about $180 billion per year in additional interest — the equivalent of 13 aircraft carriers (we currently have 11), or $30 billion more than DOGE claims it’ll save taxpayers this year.
Our debt isn’t our only vulnerability. China holds $3.2 trillion U.S. dollars, more than any other foreign nation. Devaluing the U.S. dollar in the face of rising inflation would hurt Americans, as they’d pay even more for less. China’s mortgage-backed securities position is less clear, but as one of the top three foreign MBS holders it has the power to spook an already troubled housing market. China’s leading export partners are ASEAN (a 10-nation trading bloc in Southeast Asia) and the EU, followed by the U.S. Decoupling hurts both countries, but it hurts us more, as our exposure is greater and our pain tolerance lower. Remember, Americans freaked out about toilet paper and masks during Covid; China did actual lockdowns. We lost 36,000 service members fighting in Korea; before tapping out, China suffered 10x the casualties. We don’t have the tolerance for pain to exchange fire in an economic war with China. Ask Bowen Yang who’s more willing to endure hardship for the glory of their nation.
In the same week that U.S. Treasuries surged 50 basis points, yields on German bunds were largely unchanged. According to Bloomberg, that’s the biggest underperformance since 1989. In nonfinancial terms: As investors lost trust in the U.S., they found safety in Germany. One fixed income portfolio manager put it this way: “Bunds have been one of the only rate markets that has acted as a risk-off asset during recent volatility.” Are bunds the new T-bill? Too soon to tell. But if last week kicked off a debt crisis that unravels the world order, Germany — even allowing for a recent increase in defense spending — looks like a paragon of fiscal responsibility compared to other industrialized nations.
Ostensibly, HBO’s Game of Thrones was a show about knights, dragons, arctic zombies, and hot people. But underneath the veneer of sex and violence, the show was an epic story about the relationship between debt and power. As three economists who analyzed the political economy of Westeros wrote, “those who control the purse strings of the realm thereby acquire political power … [and] although it is a foreign institution, the Iron Bank becomes a key political player in Westeros.”
“Full faith and credit” is American for “a Lannister always pays his debts.” Instead of a mad king sitting on the Iron Throne, we have a very unstable genius (minus the genius) sitting behind the Resolute desk. His small council of sycophants know better, but, drunk on a cocktail of fear and greed, they cheer him on, claiming “He’s playing 4D chess.” This is the bullshit we hear from the Sparrows who can’t offer a counterargument to what is depressingly clear: The president’s actions are nuclear-grade stupidity.
Chess? At this point, the Western world is expecting him to eat the pieces. Trump’s game isn’t chess or checkers, but Russian roulette with bullets in five of the six chambers. The interpretive dancing and intellectual pretzeling of the remaining cultists doesn’t fool the Iron Bank, aka America’s creditors. In Season 1 of True Detective (#awesome), Matthew McConaughey needs something from his former partner, Woody Harrelson. McConaughey convinces him with a simple statement: “You have a debt,” calling on his sense of equity and a bond they share to reciprocate. Europe, China, the Middle East, and America all, at one time, imprisoned people who couldn’t pay their debts.
With 4% of the world’s population and 25% of global GDP, we have a debt to our allies, who’ve engaged in relationships that provide roughly 6x the prosperity relative to the rest of the world. However, that hasn’t been enough, and we’ve accrued unsustainable debt. From George Washington through George W. Bush, we borrowed $10t. During the first Trump administration, we borrowed $8t (Biden was $4t). We find ourselves ignorant of our debts and in a prison of our own making — a giant with feet of clay, ignorant to our vulnerabilities. In sum, we (America) are acting like assholes.
Life is so rich,
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2025-04-11 23:36:28
Countries have long used tariffs to protect strategic industries or counter unfair trade practices. In some cases, targeted tariffs are justified. In his first term, Donald Trump imposed levies on hundreds of billions of dollars of Chinese goods — tariffs that Joe Biden largely retained. But blanket tariffs of the scale we’re now seeing are what leeches are to medicine, an outdated strategy that doesn’t work.
With his “Liberation Day” tariffs, Trump has threatened to blow up the global economic order and spread pain around the world, from China to the Pacific island nation of Nauru. But when the shitstorm subsides, America will emerge from the wreckage with the most serious wounds. Erecting a protectionist trade wall around the U.S. is a brilliant idea … if your goal is to elegantly reduce American prosperity.
The markets ripped higher Wednesday when Trump postponed tariffs on dozens of nations (except China) — pulling the knife halfway out of the back of the U.S. economy — then tumbled again the next day. Treasury Secretary Scott Bessent told reporters: “I don’t see anything unusual.” Investors disagree. They realize these injuries will take years to heal. Brand America now stands for toxic uncertainty.
Extreme tariffs, if sustained, will immolate decades of economic integration, bringing an end to an era of globalization that’s created unprecedented wealth for the U.S. They’ll raise prices and decrease demand for American products abroad, curbing economic growth and destroying shareholder value. The revenue raised will be dwarfed by the losses. Like Britain’s vote to leave the European Union in 2016 — dubbed “Independence Day” by Nigel Farage and the other Brexit dullards — Trump’s tariffs will go down as one of the biggest own goals in history. But this is Farage on steroids, and the fallout will be much wider.
It’s impossible to foresee exactly how this will play out. Before I sign off, Trump’s sclerotic policies will undoubtedly have lurched again (see above: toxic uncertainty). But what’s clear is that Trump’s trade war will thrust America’s allies into the arms of its adversaries. To quote Winston Churchill: “There is only one thing worse than fighting with allies, and that is fighting without them.” We’ve moved to the “worse” part of the equation. One country is playing the long game, however, and positioning itself to exploit America’s self-harm: China.
When I first moved to New York, I started boxing with a trainer, who convinced me that I had a gift (I was paying him) and talked me into entering a tournament. I was dumb enough to do it. I remember the bell, and the bright lights as I lay flat on my back. More than two decades later, my nose still veers to the right. It turns out a 23-year-old, 5-foot-8 guy who knows how to box and weighs 190 pounds, is a reasonable facsimile of Mike Tyson when matched up against a 38-year-old professor. My rookie strategic mistake: assuming your adversary won’t hit back.
After Trump detonated his tariff bomb in that now infamous Rose Garden ceremony, China responded swiftly and aggressively, declaring it would match the president’s taxes with its own levies on imports from the U.S. Although Trump later said he’d pause “reciprocal” tariffs for most countries for 90 days, he raised tariffs on China’s exports to 145% in a desperate cry for some sort of big (i.e., small) dick relevance. China has vowed to “fight to the end.” The difference: Xi means what he says. Trump is the other guy.
While a trade war will likely hurt China more, that misses a key point: China is willing to endure more pain. Remember, we left Vietnam after losing 58,000 men compared with more than 1 million for the North Vietnamese and Viet Cong. I love the U.S., but the notion that Americans are going to tolerate 50% fewer toys under the Christmas tree and $3,500 iPhones is laughable.
Amid the chaos, Europe is pitching itself as “reliable, predictable, and open for fair business.” The EU has signed trade deals with Mexico, Chile, and Mercosur — a South American bloc that includes Brazil and Argentina — and aims to finalize a pact with India by the end of the year. As the markets melted down, and the president’s acolytes took to CNBC to make excuses for giving the wheel of the world’s largest economy to a madman, European Commission President Ursula von der Leyen visited Central Asia to seal a new strategic partnership.
Among the countermeasures Europe is considering if talks with Trump fail are imposing tougher regulation on American Big Tech and taxing digital services. And there’s the insult to the injury. Europe loses revenue that trades at about 0.3x price/sales (Mercedes), while we lose revenue that registers at about 8x price/sales (Meta). This is not apples for apples, but apples to aircraft carriers … and we are on the wrong side of the trade.
Trump could also thrust Europe into the arms of China. The two sides agreed to restart negotiations after the EU hit Chinese-made EVs with greater tariffs last year, with Europe willing to take a “fresh look” at pricing. China, the world’s second-largest economy, is holding its first economic dialogue with South Korea and Japan in five years and carrying out a broader “charm offensive” aimed at redirecting exports away from the U.S. China is touting itself as a global trade champion, minus the toxic uncertainty. In a meeting with Spain’s prime minister today, Xi Jinping called for closer collaboration with the EU to defend economic globalization and resist Trump.
Regardless of how skillfully America’s trading partners react, Trump’s tariffs will inflict significant global damage. Tariffs on European exports could reverse any gains from Germany’s planned defense and infrastructure spending, while also hitting Italy, Ireland and other countries especially hard. At the same time, China is coping with Trump’s measures at a time when it’s trying to attract foreign investment to tackle anemic growth and deflationary pressure. Even governments in Africa that Trump has contemptuously dismissed as “shithole countries” find themselves in his crosshairs.
In addition to sending shock waves around the world, the tariffs will lead to carnage at home. Trump believes that taking the effective U.S. tariff rate to levels we haven’t seen in a century will spark an American manufacturing renaissance, make the country more self-reliant, and correct decades of unfair trade imbalances. In pursuit of this fever dream that will never turn to reality, we’ve decided to fight a war on every front. Each nation will see products imported from the U.S. rise in cost as they respond with their own tariffs. However, the U.S. will see an increase in the cost of all imports as we take on the world.
If you know the 1930 Smoot-Hawley Tariff Act, it’s likely you recall the scene from Ferris Bueller’s Day Off, the 1986 Matthew Broderick movie. Anyone? Anyone? Smoot-Hawley imposed sweeping tariffs on imported goods to protect American workers — sparking a global trade war and deepening the Great Depression in the process. U.S. tariffs under Trump will be even greater.
Commerce Secretary Howard Lutnick sees a future in which Apple’s iPhones are assembled in America, eliminating what he called a Chinese “army of millions and millions of human beings screwing in little, little screws.” With Apple making most of its iPhones in China, a trade war means the company will have to eat the costs or raise prices and shift the pain to its customers — a scenario that could drive the cost of a high-end iPhone to as much as $2,300 from about $1,600 and slash Apple’s market cap.
Although the company has diversified production to other countries, those nations too have been targeted. And — sorry, Howard — Apple isn’t going to make iPhones in America. If the company chose to relocate production to the U.S., they could cost an estimated $3,500. Lutnick asked why iPhones can’t be made in the U.S. with robotics, but he also seems to realize that automation won’t fuel a sharp rise in manufacturing jobs. The insanity of believing “this time” will inspire a better outcome led to Apple shedding the value of Walmart in three trading days.
Even if America were to undergo a manufacturing revival, it would take years to realize. Intel estimates it takes three or four years to complete construction of a semiconductor fabrication plant. U.S. producers also import an array of items, from car parts to electronic components, relying on countries including Mexico, China, and Canada.
Trump’s tariffs ignore other important factors. As the number of manufacturing jobs has plunged since the 1970s, U.S. wealth has surged, with the country relying increasingly on knowledge-economy jobs in areas ranging from software development to financial products. America has made a conscious decision to move to higher-end businesses that pay better than traditional manufacturing roles.
To be sure, industrial towns across the nation have experienced painful declines, and many Americans have been left behind. But I don’t see young Americans clamoring to work on an assembly line. There are better ways to address America’s economic problems, lift people out of poverty, and tackle inequality. One is to hike the federal minimum wage to $25 an hour from a pathetic $7.25, as I’ve argued before.
There’s another reason this is idiotic: America exports higher-margin products and imports lower-margin ones. Contrast Nvidia, which enjoys a 56% profit margin selling highly valuable computer chips, with Mercedes, the German carmaker, which expects a profit margin of no more than 8% this year. U.S. exports also create much more market value — Tesla recently traded at more than 8x revenue, while Toyota traded at less than 0.8x revenue — meaning the tariffs will punish American companies more.
Before he’s even reached the 100-day mark, Trump has given lap dances to a murderous dictator in Russia, ambushed the democratically elected leader of Ukraine at the White House, sought to undermine the rule of law, jeopardized the country’s position as a global research leader, and threatened to take over Greenland and annex Canada. Canada, which hid Americans in Tehran during the Iranian hostage crisis.
By isolating itself and splintering its economic alliances, America is on a dangerous course that will weaken its economy and imperil its dominance on the global stage. It’s as if Xi Jinping and Vladimir Putin are running the country, not Trump and Vance.
White House officials said the U.S. is considering offers from 15 countries and is close to trade deals with some of them. Does anyone believe that? Regardless of how these talks unfold, confidence in America is rapidly eroding. Rebuilding trust and repairing the economic damage will take many years.
The definition of stupid is hurting others while hurting yourself. Let’s hope the Republicans riding shotgun will realize the guy with his hand on the wheel is crazy. My prediction: Within six months, U.S. tariffs will be largely the same as when Trump decided to Make America 1890 Again. U.S. citizens will opt for Netflix and Novocaine over outdoor plumbing and child labor. Xi will not back down. With Trump, he’s come to the same conclusion as Succession’s Logan Roy re his own kids: “You are not serious people.” Stupid, just fucking stupid.
Life is so rich,
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2025-04-03 02:56:15
It’s tax season in the U.S. Sixty-million-plus Americans’ taxes are so simple, the IRS could process them automatically and just send a bill or refund check. Instead, the average American spends $270 and 13 hours filing their taxes each year. Spoiler alert: The IRS is the least popular federal agency.
Last month, DOGE came for the tax man. Half the IRS workforce, 90,000 people in total, is reportedly on the Green Mile. Meanwhile, Republicans in Congress are inching closer to extending Trump’s 2017 tax cuts. This is good news … for the wealthy, i.e., Owners. Lowering tax rates and decimating IRS enforcement capabilities is stupid — we get $12 back for every $1 given to the agency — but it’s only a misdirect. We talk about tax rates and enforcement when the real juice is the tax code. Our tax code exacts a high price on Earners. And the price is even higher when enforcement is rendered a paper tiger, as the shortfall is either added to the debt or used as a pretext for cutting Medicare, Medicaid, Social Security, and other programs. As Warren Buffet once said, there is class warfare in America, “but it’s my class … that’s making war, and we’re winning.”
This post was originally published last May, but the war remains the same: Owners are crushing it, Earners are getting crushed, and the battlefield, aka the U.S. tax code, continues to be a weapon of mass distraction.
Over the past several decades, America has waged a covert war against the young. One front in this war is our income tax system, which favors Owners over Earners. Young people are almost all Earners, while Owners are typically older, and the tax code is a wealth-transfer vehicle for Owners to garner a greater share of our common wealth. The good news? It can be changed … back.
If you get a paycheck, whether it’s salary or freelance, and that’s how you pay your bills, you’re an Earner. Owners, on the other hand, might collect wage income, but their real money comes through profits from investments: stock sales and dividends, rent from property, and other income streams derived from the ownership of assets. To be an Earner is noble; you work for a living, and labor is a sacred thing. Labor is the source of food, shelter, entertainment, and every material pleasure of society. We even celebrate it with a holiday, the first Monday in September. Pro tip: If you want to celebrate Labor Day somewhere awesome, try as hard as you can to become an Owner.
Owners also get a celebratory day. It’s April 15. Another pro tip: If you’re ever featured in a commercial calling you a “hero,” it means you’re getting fucked. The most fortunate in our society have no holiday, as they don’t need one. They recognize that holidays wallpaper over the inequity faced by anybody who gets a day in their honor.
Income taxes for Earners are deceptively straightforward. Take your annual income, subtract the standard deduction ($24,000 for a married couple), make a few other calculations, and then pay a percentage of what’s left to Uncle Sam. And the income tax rates for most people are low: A two-adult household making less than $100,000 per year pays 10% or less in federal income tax. Many pay much less, or none at all. Sounds reasonable, right? But there’s a catch. Several … catches.
First, for those paying “only” 10% or less of their wages in income taxes, other forms of tax are a heavier burden. At the federal level, Social Security and Medicare add almost 8%. Then all the states collect taxes, and most state tax systems are “regressive.” All told, lower-income people pay a greater portion of their income in taxes than many rich people.
Sales tax, property tax, and other government revenue sources (licensing fees, permits and filing fees, and car registrations) take a larger bite out of lower-income households. In “low-tax” Florida, the most regressive state, low-income families (Earners) pay 13.2% of their income in state and local taxes, the middle class pays 9.1%, and the top 1% (Owners) pays just 2.7%. In fact, lower- and middle-income Florida households pay about the same in total taxes as they would in “high-tax” California. The next time you hear someone complain about low-income people who “don’t pay any taxes,” remind them that income tax doesn’t exist in a vacuum — low-income people often pay over 25% of their income in taxes.
There’s a myth that the rich don’t pay their fair share of taxes. The reality is most “rich” people — the super-earners — pay more than their fair share. A married household making more than $500,000 per year is in the top 5% of households by income and pays an effective federal income tax rate around 25%. Half a million dollars may seem like a lot, but careers that pay that well require expensive college and graduate degrees, entail long hours, and offer little job security, and they’re typically in high-cost-of-living locations with high state income tax — in New York or California, add another 10% on to that 25%. With other taxes, including sales tax, the total tax burden borne by mid-career professionals can reach 40% of their income. The baller who makes seven figures plus is often working for the government: Their (total) effective tax burden can approach 50%. Until, that is, they make the jump to lightspeed (i.e., become an Owner).
Think of building wealth as launching a rocket ship into orbit. Rockets burn 95% of their fuel to escape Earth’s soupy atmosphere and incessant gravity. Once you get to orbit, you’re a master of the universe — covering thousands of miles with just a touch of propulsion. Wealth is similar. The atmosphere is your expenses; the distance traveled, your income. Most of us never generate enough current income to make the jump to space and become an Owner — save enough to invest so our primary source(s) of income are passive. Investing is difficult, if not impossible at low income levels. Saving your first $100,000 is incredibly hard. The next $100,000 is tough, but you now have momentum and start to see the curvature of the Earth. Once your current income is substantially greater than your expenses, and you’ve deployed an army of capital that fights for you and your family in your sleep, you’ve made the jump. What we’ve done with the tax code has rendered the atmosphere thicker and gravity stronger. Go to law or medical school, or live at the office, and you’ll see your (current) income increase, but you’ll also lose a bigger share to taxes, and the harder it gets to save and escape the gravity of being an Earner.
Imagine if taxes worked like this: Everything you spend that’s remotely related to work is deducted from your taxable income. Clothes you wear and food you eat during the work week, your car, your internet and cellphone bills, furniture and square footage where you work at home (e.g., kitchen table), etc., all taken off your income before taxes. Pretty much anything you do on days you’re working, deductible. All past investments in education, deductible. If you spent more than you earned, as you did in college and graduate school, you can roll over those losses as deductions in future years. In the meantime, deduct any credit card interest you’re paying. Any money you don’t spend? That’s not taxed until you retire and start spending it. If you give it to your kids, it’s never taxed at all.
If this sounds familiar but awkward, it is. It’s our tax code, through the lens of the Owner. The federal income tax code looks progressive: The highest marginal tax rate is 37%, more than 3x what the average American pays. But published tax rates are a weapon of mass distraction. They are the “rack rate” published on the door of your hotel room. Owners never pay the rack rate. They barely pay at all.
Unlike Earners’ taxes, Owners’ taxes are complex. As a result, determining the total tax burden of the very wealthy is difficult, but here’s what we know: In 2020 the 26,000 households with an income over $10 million paid 25.5% of their reported income in federal taxes, plus 5% to 10% in state and local taxes. But, as I explain below, much of the cash they receive isn’t taxable income, and most of the increase in Owners’ wealth is never taxed at all. The Biden Administration estimated that the 400 wealthiest households pay an effective income tax rate of just 8.2%, and ProPublica found that the wealthiest 25 households pay just 3.4%. We can’t say for sure what percent Owners pay on average, but it’s less than most of their employees pay. This complexity results in a transfer of wealth from Earners to Owners. The tax code has exploded from 400 to 4,000 pages in the past few decades. If you have GPS (advisers, loopholes for the wealthy), you want races run at night.
If the government is meant to decrease suffering and add happiness, then our current system makes no sense. Paying taxes of $5 million on $10 million in income is the difference between flying first class and flying private. Paying $15,000 on $60,000 in income might mean forgoing a second child.
Capitalism means accepting a society of winners and losers. And that’s OK. Wealth is a great reward for hard work, and talent is what drives us to create value. Capitalism has brought prosperity to billions over the past 150 years. The problem is the system, if left unchecked, becomes increasingly inequitable and unsustainable. We’ve morphed from capitalism to cronyism, rigged in favor of Owners. How? Three ways: calculation, timing, and collection.
Amateurs focus on tax rates. Professionals zero in on the calculation of the income to which those rates apply. In the 1950s the highest federal income tax bracket was 91%. Except nobody paid it. The tax code was a mosaic of loopholes, ensuring high-income taxpayers were able to shield most of their income. Now the top rate is 37%, but while the colors and fabric have changed, the Owner’s tapestry of tax avoidance still exists.
Owners receive cash from a range of sources: rent from tenants, dividends from stock, interest from loans, distributions from trusts, profits from investment partnerships, loans and lines of credit from banks, proceeds from asset sales, and more. Much of this income is shielded by pages of tax code defining what is, and is not, taxable. Owners who invest in the oil business leverage tax code provision section 263 (intangible drilling costs), section 613 (percentage depletion), section 611 (cost depletion), section 167 (geological expenses), section 199 (domestic production deduction), section 193 (tertiary injectant expenses), and section 469 (active losses). That’s just one industry.
Entrepreneurs are barely visible to the Treasury standing behind the tax code. Section 1202 excludes the first $10 million received in the sale of a business, a provision that saved me millions of dollars when I sold my firm L2 several years ago. When working at the firm — earning — I was paying 40+% taxes. But when I sold the business, my tax rate on the proceeds — owning — was 17%. Even before selling, every small business owner gets an enormous shield, the power to push all manner of personal expenses through the company income statement, thus making them tax deductions for the business rather than taxable income for the Owner.
Income that’s acquired by selling an asset for more than you paid for it is a capital gain, and isn’t subject to ordinary income tax rates. Capital gains rates (federal) max out at 23.8% instead of 37%. That’s still not the biggest loophole. Capital gains are only taxed when “realized” (typically when sold), so Owners’ assets grow tax deferred (some you can depreciate as they go up in value) and their sales are timed to minimize taxes. Earners lose 20% to 50% of their gains (from sweat) every year, a massive gravitational pull. Owners enjoy cleaner propulsion: As their wealth grows, the taxes are deferred until they sell … if they ever do.
But wait, there’s more. The biggest tax break Owners can register is dying, which resets the “basis” of their assets, so their heirs never pay taxes on the increase in value. Still, there’s more. The most indefensible loophole award goes to the “carried interest loophole” which permits investment fund managers to pay capital gains rates on their compensation. Tax policy groups have been lobbying to close this loophole for years, and Congress nearly did it in 2022, but Senator Kyrsten Sinema took $2 million from the private equity industry (aka Owners) and saved their $14 billion loophole. It’s well known that our leaders are whores. What’s more surprising, and disappointing, is what cheap whores they are ($2 million for $14 billion). But I digress.
Owners are so tax-advantaged that, if they do have earned income, they often shield that from taxation as well. Donald Trump paid virtually no income taxes on the $427 million he made from The Apprentice — where he had an actual job — by offsetting that cash income with paper losses on his real estate properties (real estate is another of the most tax-advantaged industries). In 2007, Jeff Bezos made $46 million in actual income, yet he paid zero dollars in federal income tax, because he was able to shield that income with paper losses as an Owner (in reality, his wealth increased $3.8 billion that year). In 2011, not only did Bezos pay no income tax again, he claimed and received a $4,000 child tax credit — a program intended to lower child poverty. If you paid federal income tax in 2011, you helped feed Jeff Bezos’ kids. Don’t worry, he’s fine.
A key advantage of control over timing is state income tax arbitrage, practiced often by company founders. Several years ago, the media discovered the phenomenon of California entrepreneurs moving to Texas and Florida, and there was a lot of jazz hands about those states’ friendly business climates and youthful energy. The truth was simpler: Texas and Florida have no state income tax, and many of those founders were about to recognize enormous gains via sales of stock that had become worth billions. Elon Musk, who moved to Texas in 2020, sold millions of shares of Tesla, saving an estimated $2.5 billion in California income tax. When Washington State enacted a tax on income from asset sales, Jeff Bezos decided to spend more time with his father in Florida, which has no income tax, and sold 50 million shares of Amazon after he relocated. If taking advantage of Washington’s schools, roads, and tech ecosystem to build wealth, and then declining to pay taxes to the state sounds wrong — and a massive additional burden on middle-class taxpayers who can’t peace out to Coral Gables — trust your instincts.
The best time to pay taxes is never, using the infamous “Buy, Borrow, Die” tax strategy. Wealthy Owners take out loans secured by assets such as company stock or real estate, and live off the loans (which are not considered taxable income) instead of selling the assets (which would incur a taxable gain). When the Owner dies, the stock goes to their heirs, who, with their “stepped-up basis,” can sell enough stock tax-free to pay off the loans and start the cycle anew. This creates dynastic wealth, the lack of which used to be a key point of differentiation between Europe and the U.S. Used to be.
All of these strategies are legal and enabled by the complexity of the tax code. But that complexity also affords Owners another means of avoidance: cheating.
Skirting taxes stems from the complexity of the tax code itself. Wealthy filers can take deductions that don’t apply or classify income in inappropriate ways. And without an exhaustive analysis of the facts, there’s no way for the IRS to determine what they’ve done. Some of the losses Trump used to offset his income from The Apprentice may have been illegal — the IRS believes he claimed hundreds of millions of losses on a Chicago real estate project twice, burying the double-dip under a mountain of tax paperwork so tall it’s taken the IRS a decade to dig through it. (The IRS likely stopped digging after Trump took office for a second term).
Owners can also choose to cheat bluntly, failing to report substantial income and making up fake expenses and losses. This was New York hotelier Leona Helmsley’s strategy. Before going to prison for tax evasion, she told her housekeeper, “We don’t pay taxes; only the little people pay taxes.” Offshore entities are a time-honored strategy for tax evasion. Trump’s campaign manager, Paul Manafort, concealed $16.5 million in income from the IRS in foreign bank accounts.
The Treasury’s analysis suggests $600 billion in owed taxes are not paid every year, equivalent to the total income taxes paid by the lowest-earning 90% of taxpayers. The avoidance is solely the domain of ownership income — 99% of the taxes owed on wages get paid. Owners can do this because Congress has starved the IRS of funding, and the agency audits fewer and fewer returns each year.
Remedying these inequities is nowhere near as difficult as it would be to address many of the other challenges facing America. The most obvious and glaring remedy is to fund the IRS, enabling it to collect hundreds of billions in taxes owed but not paid. The Inflation Reduction Act was supposed to allocate $80 billion to the IRS over the next 10 years, but Republicans have attacked the measure, cutting $20 billion from the plan and keeping the IRS budget flat in 2024. Every $1 invested in tax enforcement targeting the wealthy returns $12 in revenue. To be clear, this isn’t harassment but enforcement. Most externalities are a function of incentives, and the government has incentivized owners to be incredibly aggressive on their tax returns, as there is little chance they’ll get caught. If you were on a highway with no police, would you speed?
Eliminating the special treatment given to capital gains is a simple fix that would increase tax revenue without increasing the tax burden of most Americans, reduce the incentive to cheat through misclassification, and make the tax system more fair. So would eliminating the step-up basis upon inheritance, which wipes away billions in taxes owed by the wealthiest people with little justification or social benefit. We should remove the income cap on social security tax (currently a paltry $160,000), which would help shore up the social security trust fund and make the tax code (not rates) more progressive. We should restore the highest marginal tax rate (for owners) to 40%. Biden and congressional Democrats proposed all of these changes, but to no avail.
Since ownership carries with it some inherent tax advantages, a transaction tax would raise revenue from ownership in a fair manner. Numerous proposals, including one from Mike Bloomberg for a 0.1% tax on securities trades and other financial transactions, could raise nearly $80 billion per year, with the potential side benefit of damping high-frequency trading, which adds volatility without benefit to the markets. We should also levy a compute tax on cloud and AI services, as the wealth created by these innovations is accruing mainly to the wealthiest Owners. Compute is the new energy, and this is a chance to avoid the mistakes of fossil fuels, where we give tax breaks to Owners and stick Earners with gas taxes, among the most regressive surcharges in our system.
Finally, and most transformationally, Congress should take a chainsaw to the tax code, cutting the thousands of handouts to the ownership class that have been stuffed into it by lobbyists. Theoretically, finding the political will shouldn’t be difficult, as the majority of Americans are getting screwed by lawmakers representing a small number of their fellow citizens. Ironically, the Trump tax cuts paved the way for this change — by doubling the standard deduction, Trump ensured that just 10% of taxpayers take any itemized deductions — meaning 90% of voters should support eliminating the rest of them. Still, it may be a challenge, as the most valuable asset Owners own … is Congress.
We should reinvest some of the hundreds of billions of dollars per year gained by these changes to make the system fairer for Earners (i.e., the young):
Below is a rough revised set of brackets that, with greater enforcement and the elimination of the Trump tax cuts on corporations, should get us to the same or greater revenue:
I am troubled by the trend away from patriotism, fomented by a tech-billionaire class that conflates luck with talent, shitposts America, and prosecutes an economic war on the young. But America’s promise doesn’t resonate unless it’s backed by performance. We diminish what’s great about America when we fail to talk about what’s broken in America. Especially when the fixes are within our grasp.
In defense of shielding Owners, lobbyists and our representatives in D.C. argue the wealthy are our most productive citizens, can better deploy capital, and need incentives to keep innovating. There is some truth to this notion, but we aren’t lowering taxes on the bulk of today’s innovators, the super-earners, or on future innovators, young people. Instead, we are ensuring a failure to launch by transferring more wealth to Owners/seniors. The three legs of the tax stool are corporations, super-earners, and super-owners. Corporate taxes are at their lowest level since 1939 and the wealthiest Americans are paying single-digit tax rates, meaning the entire funding burden of our country rests on the super-earners and the young, who’ll have to survive the tsunami of debt we are aggregating to finance this inequity. This is capitalism collapsing under its own weight.
America, like any country, is a product — a mix of benefits that come at a price. America has been the best value (globally) for the better part of three centuries. Other than drugs, there is no other product so many people are willing to risk their lives to obtain. However, the value of America has diminished for super-earners and the young. We’re charging the former too much, and keep asking the latter if we can borrow their credit card. The bad news? This was deliberate, our decision. The good news? We can decide to fix it.
Life is so rich,
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