Scale Determines Technology

The robotaxi business is getting another entrant, but also a different kind of entrant. Zoox, a decade old startup purchased by Amazon in 2020, is expected to launch this year. It has developed a vehicle specifically aimed at the autonomous ride share market without a driver seat or controls, sliding doors in the middle, a seats facing each other. No one will mistake the Zoox car pictured below for a sports car, but its features are specific to the purpose.

Most entrants, like GM's Cruise pictured below, have modified "off-the-shelf" cars that will have inefficient vestigial elements from when they had human drivers. 

Retrofitted cars that make sense at small scale, may imply relatively higher marginal costs at large scale.They represent a low fixed cost/high marginal cost technology. Zoox's design represents a higher fixed cost/lower marginal cost technology. Its features are more efficient for short-haul, dense traffic, intracity rides but require more substantial upfront investment. Zoox is banking on realizing economies of scale once the service takes off. 

GM canceling plans for its Cruise suggest that at least they expect a greater scale.

The Egg Market Rebounds

To prevent the spread of bird flu, 166 million birds were culled, most toward the end of 2024. Since the US typically has about 400 million egg-laying hens at any time, this was significant. With fewer hens, the supply of eggs also fell causing egg prices to more than double. Thankfully, this market disruption already appears to be behind us. A recent USDA report shows that production and egg prices have mostly recovered to where they were a year ago. 

 

Damn that's fast. And just in time for Easter egg hunts. Not even the Ag sector expected the recovery of the egg industry so quickly. Just last month, Farm Progress forecasted, "The U.S. poultry industry could take a year or so to recover from the recent HPAI outbreak." They were only off by 11 months.

The speed of this adjustment is a testament to market forces. With prices doubled, egg producers saw a huge opportunity for short-run profits. Hens that might have been "retired" a year ago would be kept in service a bit longer. Chicks that might otherwise have been deemed unacceptable would be allowed to mature. Had the policy response instead been to impose egg price ceilings to prevent price gouging, the blunted profit motive would have weakened the supply response. Allowing the market to operate alleviated the shortage in short order. 

S&P 500 Largest Ten Firm Transitions

The Visual Capitalist produces many wonderful visualizations. This one displays how fast firms rise into and fall out of the the top US 10 firms. 

 

Re-shoring as a response to tariffs?

Google on the re-shoring response to 2018 Appliance Tariffs:

In response to the 2018 U.S. tariffs on washing machines and other appliances, both LG Electronics and Samsung shifted manufacturing operations to the United States, effectively reshoring some production. The tariffs incentivized these companies to establish or expand manufacturing facilities in the U.S. to avoid the tariffs on imported appliances.

...The tariffs were credited with creating 1,800 new jobs in the U.S., but also raised consumer prices by an estimated $1.5 billion, according to one study. The study also concluded that the tariffs resulted in a high cost per job created.

Re-shoring of Nvidia Chips in response to 2025 Tariff threats:

Contract chipmaker Taiwan Semiconductor Manufacturing (TSM) has started production of Nvidia Blackwell chips at its plants in Phoenix.

Contract assemblers Foxconn and Wistron are building supercomputer manufacturing plants in Houston and Dallas, respectively. Mass production at both plants is expected to ramp up in the next 12 to 15 months, Nvidia said.

Reciprocal tariffs as a tit-for-tat strategy in a repeated prisoners' dilemma

Trade policy has the characteristic of a Prisoners' Dilemma game: free trade is the best outcome (no tariffs), but that is not a Nash Equilibrium because any country can do better by imposing tariffs on imports.  The Nash equilibrium is for all countries to impose tariffs on imports.

One way out of this prisoners' dilemma is to play tit-for-tat (do whatever your rival did last period) because it gives foreign countries an incentive to keep their own tariffs low:  if foreign countries put a tariff on imports from the US, their exports to the US will be treated similarly.  

However, President Trump is computing reciprocal tariffs as (Trade Deficit with US)/(Exports to the US).  This measure is determined largely by foreign investment in the US, not foreign tariffs on US goods.  For example, China sells ￥to buy $ to invest in the US to buy US Treasuries.  Such an increase in demand for $ raises the price of a $ relative to the ￥.  The stronger $ makes Chinese exports look cheap to US consumers.  This is both a US Trade Deficit (the US buys more Chinese goods than China buys US goods), and a Chinese Investment Surplus (China invests more in the US than the US invests in China).

As a result of the policy, US tariffs on foreign goods are set to dramatically increase, which will lead to tit-for-tat responses from foreign countries which will result in less trade.  From Chapter One, we know that voluntary transactions create wealth, and with fewer of them, we are all poorer.  

It might some sense to set reciprocal tariffs equal to actual tariffs on a country-by-country basis, i.e.,(reciprocal US tariffs on foreign goods) = (foreign tariffs on US goods). 

However, see: WSJ: Reciprocal Tariffs Make No Sense

The U.S. trades with roughly 200 countries. Is Washington ready to impose and manage 2.6 million individual tariff rates? The lobbying pressures for exemptions and exceptions on the U.S. side would be enormous. This would fill the swamp, not drain it.

BOTTOM LINE: Reciprocal Tariffs, as calculated, would harm the US.

HT:  Mike, Donna

Will the world run out of resources?

Only if you ask an ecologist.

"We are using 50% more resources than the Earth can sustainably produce, and unless we change course, that number will grow fast—by 2030, even two planets will not be enough," says Jim Leape, director general of the World Wide Fund for Nature International (formerly the World Wildlife Fund).

To get the right answer, ask an economist.  They will point out that when a good gets scarce, its price increases, which gives consumers an incentive to conserve or find substitutes, and producers an incentive to find more of it.

Until about 10 years ago, it was reasonable to expect that natural gas might run out in a few short decades and oil soon thereafter. If that were to happen, agricultural yields would plummet, and the world would be faced with a stark dilemma: Plow up all the remaining rain forest to grow food, or starve. 

But thanks to fracking and the shale revolution, peak oil and gas have been postponed. They will run out one day, but only in the sense that you will run out of Atlantic Ocean one day if you take a rowboat west out of a harbor in Ireland. Just as you are likely to stop rowing long before you bump into Newfoundland, so we may well find cheap substitutes for fossil fuels long before they run out.

REPOST from 2014

Remove barriers to progress!

Open Philanthropy's Progress and Growth Fund

• ...scientific and technological progress that creates ideas is the main driver of long-run growth...But ideas don’t automatically raise living standards; economic growth requires turning them into technologies that can disseminate throughout society. 
• Burdensome government regulations and institutional constraints are increasingly slowing the pace of this progress and creating artificial scarcity. 
• Restrictive zoning and land use regulations have created housing shortages in many major cities, driving up rents and preventing people from [moving to] to centers of economic growth and innovation. 
• Similar constraints hinder scientific and technological innovation — key institutional funders ...burden researchers with excessive paperwork and overly lengthy grant review processes, [leading to] low-risk, incremental research over higher-risk but potentially transformative ideas. 
• ...environmental review laws slow a wide variety of infrastructure projects, including green energy. [Irony is my favorite kind of humor.]

HT:  MarginalRevolution

Revealed Preference: people like inequality

 From Bryan Caplan's Bet On It:

“In their recent article,‘Why People Prefer Unequal Societies,’the psychologists Christina Starmans, Mark Sheskin, and Paul Bloom found that people prefer unequal distributions, both among fellow participants in the lab and among citizens in their country, as long as they sense that the allocation is fair: that the bonuses go to harder workers, more generous helpers, or even the lucky winners of an impartial lottery (Pinker 2019).“

And they move into neighborhoods with more inequality. From research by Prof Douglas Coate (Rutgers):

...I find that two-bedroom home sale prices are not adversely impacted by income inequality in favor of the well off in the community. In fact, the results show these prices may be slightly higher in communities where high quintile households receive a greater share of community income

Historical conservationists are the bad guys

 Economist:

[Cambridge, MA] is “becoming a barbell society,” ...The poor got help and the wealthy lived well, but ... young families leave for cheaper places. “One of the biggest signs that something was going wrong,” says Mr Azeem, is “when you can’t create space for the next generation.” 

But now, they are relaxing zoning to allow " six-storey residential buildings citywide ... People are waking up to the fact that land use regulation has something to do with housing costs”. 

But: “The minute someone tries to put a six-storey building in a residential zone that has historically been no higher than 35 feet, there’s going to be immediate negative pushback,” from "powerful historic conservationists"

Can income buy happiness?

 

Economist: 

The magazine article focuses on explaining "residual" happiness, the vertical distance between the line and the observation), i.e., how happy is a country controlling for its GDP. 

But elephant in the graph is the HUGE positive correlation between GDP and Happiness, likely caused by innovation, free markets, and less regulation, topics the left-leaning magazine doesn't want to talk about.

Compensating differentials: wind turbines

From MarginalRevolution:  Danish houses near wind turbines have 12% lower prices.

Foreign aid: "send a person a fish every day, and he forgets how to fish."

John Cochrane recommends the Economist article Aid cannot make poor countries rich.

From 2004 to 2014, foreign aid increased by 75%, but it didn't help:

• 2004, William Easterly: aid was just as likely to shrink the world’s poorest economies as to help them grow. 
• 2005, World Bank: grants and loans did not move the needle on growth. 
• 2019, IMF reached a similar conclusion. 
• 2025, Centre for Global Development, “There is no country that has really grown from aid.”

In what seems like evidence-based decision-making by the donors:

• President Trump has stopped much of US foreign aid.
• Sir Keir Starmer chopped Britain’s aid budget from 0.5% to 0.3% of GDP.
• France, the most generous Western donor after America, will this year reduce aid by 35%.
• Germany is considering cuts, too.

Effects of Tariff increases

Article by Joshua Hendrickson

The U.S. dollar is the world’s reserve currency, and the U.S. Treasury security is the global reserve asset. This means, respectively, that the dollar is the primary currency used in international trade, and that foreign central banks and other institutions store wealth in terms of dollars with Treasury securities.

...the dollar, because of its reserve status, tends to be overvalued. This makes foreign goods cheaper for U.S. consumers, but it also makes foreign labor and production cheaper ... a dynamic that has hollowed out America’s industrial base.

...

While imposing duties on imports will raise prices for American consumers, it will also appreciate the value of the dollar, ...

Tariffs might generate some revenue in the short run, but their larger effect—bringing countries to the negotiating table—could help the Trump administration achieve its [other] long-term objectives.

Software Deveopers and AI

I ran across this image that seems to support the idea capital/labor substitution in software development (see earlier post). Stack overflow is the preeminent site for software developers to get coding questions answered and/or find bits of code that will solve a current problem. But, being human intermediated, it could be slow and sometimes trolls will lead you astray. Its site volume seems to have started to decline with the advent of ChatGPT, the first, and most widely used LLM. Chat GPT can provide answers instantly, though some it may take some "prompt engineering" to get the specific answer you need.

Interestingly, much of the relevant training data come from stack overflow. Which means that asking ChatGPT is asking stack overflow but with computer intermediation. If ChatGPT allowing coders to get answers faster is leading to a decline in the demand for software developers, this suggest that AI is making software developers so much more productive that there is less demand for them. (edited)

Tariffs May Not Boost Domestic Investment

Alcoa would seem to benefit from an increase in demand for domestically produced aluminum from the imposition of 25% tariffs on steel and aluminum. All they have to do is ramp up existing US capacity. This quote from Alcoa CEO William Oplinger.in the WSJ suggests maybe not.

“We make decisions around aluminum production that have a horizon of 20 to 40 years,” he said. “We would not be making an investment in the United States based on a tariff structure that could be in place for a much shorter period of time.”

Who knows what tariffs would be under the next administration. Instead, he is bracing for a loss in 100,000 U.S. aluminum industry jobs due to tariffs targeting the metal. He is not explicit, but this would be the case if customers plan to cut back purchases due to their reduce operations or their ability to find cheaper substitutes. 

Innovative Strategic Levers

Is narc'ing on your competition the prisoners' dilemma equilibrium?

Egg Market Makers

The WSJ reports on the Egg Clearinghouse, or ECI while we are in the midst of the recent dramatic egg shortage and increase in egg prices.

While the article mentions that some have suggested price gouging, it seem more likely that supply has shifted in because temporarily, there just are not enough egg laying hens to supply the market.

The deadliest outbreak of avian flu in history has resulted in the death of more than 100 million U.S. chickens, turkeys and egg-laying hens since 2022, according to the Agriculture Department. Once infections are identified in a single bird on a farm, whole flocks are often eliminated to prevent further spread, creating supply shortages in some regions and grocery stores.

As a consequence, the number bids to buy eggs is now more than double the offers to sell. 

 

 

 

Wither the Software Developer?

The employment market for software developers sucks right now. ADP released a study from their payroll data in June, 2024 that included this graph.

It hasn't got better since. But why the severe and persistent decline?

• The decline begins in Spring 2020 so responding to the COVID-19 pandemic could be a cause. But this does not explain why the decline continues.
• The growth of AI is making them so much more efficient that you need fewer of them. But this may only explain maybe the last two years or so.
• The growth of cloud computing means that much of what software engineers do is outsourced to a supplier that can eke out economies of scale in software development. With Software as a Service (SaaS), code can span multiple enterprises instead of being used solely in-house. 

Evidence for this last explanation comes from the timing of cloud computing adoption.

Whichever the cause, I think a takeaway is that all explanations will persist and the market may not rebound very soon.

What do Ferrari and Hermes have in common?

 WSJ:

With a list price of $3.7 million, Ferrari’s new “hypercar” was revealed to the public in October with a twist: It wasn’t available for sale....

Money isn’t enough to buy a top-of-the-range Ferrari. You need to be in a long-term relationship with the company.

By leveraging the rabid fandom of its customers through a business model based on uber-scarcity, the storied Italian company is enjoying a new golden age. Following an almost tenfold increase in the stock since its initial public offering almost a decade ago, Ferrari is now worth $90 billion, making it the most valuable car company in Europe—despite delivering just 13,752 vehicles last year.

 John Yun on Hermes:

Aggrieved ... plaintiffs in California have filed a class-action suit against Hermès alleging that [customers are] “coerced” to spend $1,300 on a shawl or $820 on a belt before being “allowed” to hand over an additional $12,000 or more for a Birkin bag...

In antitrust language, the specific allegation is that Hermès is engaged in an illegal tying scheme—where the French company is leveraging its market power in handbags (i.e., the “tying product”) into ancillary goods, such as scarves, belts, jewelry, and shoes (i.e., the “tied products”).

How long before someone sues Ferrari for "tying" sales of new cars to past purchases?

Should you buy IVF insurance?

Baby or Your Money Back 

It’s that simple. If your IVF is not successful after 2 cycles, you make an insurance claim. You get] your money back.

BUT, only if you qualify.  So the insurance company insures only those with a high chance of success.  

HT: MH

How Europe must respond (or not)

 Economist:

Let us spell out the reality Europe faces. It is an indebted, ageing continent that is barely growing and cannot defend itself or project hard power. ...

Paying for this rearmament will take a fiscal revolution. ...In order to bear that, Europe will have to cut welfare: Angela Merkel, Germany’s former chancellor, used to say that Europe accounted for 7% of the world’s population, 25% of its GDP but 50% of its social spending. To raise growth, Europe must press ahead with obvious but endlessly delayed reforms, from unifying capital markets to deregulation.

Arbitraging Influencers

The WSJ recent;y reported on lawsuits by Internet influencrs against the makers of browser extensions that seek out discounts. These extensions, such as  as PayPal Honey, Capital One Shopping and Microsoft Shopping, automatically seek out discounts that might exist elsewhere and apply them at checkout. Influencers no longer get credit for directing their followers to the retailer. 

“If the customer clicks on…the Plaintiff’s [influencer's] affiliate link and then at checkout clicks on the Honey pop-up, then the business tracks the sale as originated from Defendant [browser extension], and Plaintiff [the influencer] will receive no credit for the purchase,” one suit against PayPal said. “Honey erases Plaintiffs’ affiliate links and replaces it.” 

The problem stems from a standard industry practice. Influencer affiliates include a link into their content for interested followers to make purchases of a brand. The industry has settled on the practice of "last-click attribution." When the extension replaces the influencer attribution with its own, the influencer does not receive credit for the sale. This is kind of like paying someone to stand outside of a high-end boutique informing eager customers that they can save at a discount store. The brand wants to price discriminate by selling through both the boutique and the discounter, but it doesn't want the discounter to interrupt too many of the high-end sales. Actually, it more like a billboard company advertising discounters just outside the boutique. The boutique is suing the billboard company.

Is your master's degree worthless?

Economist:

In America returns are especially large in computer science and in engineering. They are slightly smaller in other science subjects, in part because an undergraduate degree in these already bumps up salaries by quite a lot. Teachers who bag graduate degrees in education tend to earn more, even if wages for the profession as a whole are fairly low, because many American school districts automatically raise the pay of those who have them.

Would Thomas Jefferson approve of DOGE?

From ChatGPT:

Thomas Jefferson would likely have mixed feelings about a Department of Government Efficiency, depending on its scope and function.

• Why He Might Approve: 
•  Limited Government & Fiscal Responsibility – Jefferson was a strong advocate for minimizing government waste and ensuring efficient use of public funds. If such a department worked to reduce bureaucracy and streamline operations, he might have supported it. 
•  Republican Virtues – He believed in a government that served the people effectively without unnecessary complexity, so an effort to improve government efficiency could align with his ideals. 
• Why He Might Disapprove: 
• Bureaucratic Expansion – Jefferson was skeptical of centralized power and large government institutions. The very creation of a new department could be seen as adding more layers to the bureaucracy he often opposed. 
•  State vs. Federal Power – He strongly favored states’ rights and decentralized governance. If the department operated at the federal level, he might argue that efficiency efforts should be handled at the state or local level instead. 
• Final Thought: If structured as a temporary commission to identify inefficiencies and reduce waste, Jefferson might have supported it. But if it became a permanent federal agency with expanding influence, he would likely have opposed it as a contradiction to his vision of a small, decentralized government.

All he wants is "good pricing"

Fron WKRN:

“There are too many liquor stores in Lebanon, just at the rate that more stores are opening. I never really felt that way before,” Andrea Ross, the owner of Cheers Wine and Liquor, said. “We know multiple liquor store owners in Lebanon [TN] that are great people, great business owners, but in order for us to continue to be able to provide good pricing and all the things that we offer, we have to be able to sustain the business.”

For anyone who has not read Chapter 6, what the incumbent liquor store owner means by "good pricing" is high pricing. To the residents of Lebanon, good pricing is low pricing. 

• By limiting competition from entrants, the city council create incentives for incumbents to support their reelection campaigns.
• Does the city council have enough information to make good decisions about the number of liquor stores, and the incentive [see above] to do so?

HT:  MH

Adverse Selection in Genetic Insurance Markets

A new paper by Azevedo, Beauchamp, and Linnér (ABL) finds that some predictions are coming true and that may be a problem. Economists predicted that the Human Genome Project would uncover many markers for diseases that may not present themselves until much later. For two decades, these predictions were hard to come mainly because single-gene mutations are not as informative. ABL show that more recent improvements developed from data on nearly half a million people in the UK Biobank has become much more predictive. This affects insurance markets.

In many countries, but not the US, a market for Critical Illness Insurance (CII) is growing. 

Critical illness insurance (CII) pays out a lump sum in the event that the insured person gets diagnosed with any of the medical conditions listed on the policy (Brackenridge et al., 2006). The lump sum can be used as the policyholder wishes. The policy pays out once and is thereafter terminated.

Consumers with bad test results should gobble up insurance. CII providers will have to adjust rates for this adverse election. Consumers with good test results will not find the insurance worth it. Will CII providers require genetic tests? Will they be allowed to risk rate their policies? As the predictive power of genetic testing improves, as it surely will, these issues will become more acute.

Hat tip: Marginal Revolution

Can President Trump break the International Corporate Tax Cartel?

 From the Economist:

The international tax system has long suffered from two related problems: firms go to great lengths to book profits in low-tax jurisdictions, and governments thus have strong incentives to compete with each other in cutting levies so as to attract investment [only a dirigiste would consider this a problem]. Hoping to forestall a [competitive] race to the bottom, 136 countries reached a [collusive] compromise in 2021 to overhaul tax rules—the outcome of talks held under the auspices of the OECD, a group of mainly rich countries. The crucial element was that governments would impose a minimum tax rate of 15% on the profits of multinational companies.

...Unlike America’s withdrawal from the World Health Organisation and the Paris climate agreement, the OECD framework is not a formal treaty that America can leave. Rather, it is a common approach that depends on governments each passing legislation to impose top-up taxes on companies that pay less than the 15% minimum. This means that, if some countries choose to tax a multinational firm at a lower rate, others can claim the difference.

In other words, if the US doesn't tax its corporations at 15%, foreign countries can claim the difference.

...Mr Trump hopes to break this logic by promising brutal retaliation. Any country that imposes a top-up tax on an American company would, in his administration’s view, be guilty of extraterritorial overreach. In executive orders issued on January 20th, the day of Mr Trump’s inauguration, it said that it could respond by doubling taxes on citizens and firms from any offending countries. These orders displayed his advisers’ talent for unearthing obscure statutes that serve their goals: the law that allows the doubling of taxes on foreigners has been in place for nine decades without being used. Even if Mr Trump’s objection to the OECD deal was expected, his threat’s ferocity surprised observers.

Airline Yield Management

 It had been hard to manage an airline in the Covid-19 and early post-Covid-19 era. As Alison Sider
 at the WSJ reports:

Airfares plunged in the early months of the Covid-19 pandemic, only to soar in 2022, when airlines couldn’t add flights quickly enough to keep up with the frenzied urge to travel. Then prices tumbled when airlines expanded service and flooded into popular routes. Now airlines are constraining supply and lifting prices. 

Now it looks like things have settled back into a yield management problem. The quantity demanded has been  rising for the past three years, but the seems to have plateaued.

Airline price increases have begun to outpace inflation.

This suggests that demand has shifted out enough that it is constrained by airline capacity. Airline load factors have rebounded to pre-Covid-19 levels. At these higher prices, Airlines would like to sell more seats, but there are no more seats, at least in the short-run.

Is $5,000 enough to screen out bad dates?

That is how much it costs to join Tawkify.  A friend said he found his dates interesting (so it was)  but complained about the distance he had to travel to meet them.  

Would eliminating DEI improve government procurement?

Yes, by 15%.  From a paper by some middling economists,

Mergers, Cartels, Set-Asides, and Bidding Preferences in Asymmetric Oral Auctions, The Review of Economics and Statistics, 2000, vol. 82, issue 2, 283-290.  

The SBA [Small Business Administration] set-aside program limits auction participation to "small" firms... The set-aside program has numerous analogies in other areas of government contracting in which, for example, bidding is restricted to minority-owned firms (Froeb and McAfee (1988)).

The costs of the SBA program can be simulated by assuming that small, high-cost firms evolve into large, more efficient firms. The expected price change under this hypothetical scenario is computed over all 51 [Forest Service] auctions... . On average, [timber] price [revenue to the govt] would increase by 14.8%. 

Gig Work as Entrprenerial Training

There can be many hurdles to becoming an entrepreneur, particularly for those without a background in business startups. New findings from Denes, Lagaras, and Tsoutsoura indicate that Gig work can help budding entrepreneurs overcome these hurdles. Using data from U.S. Tax Returns, they can track individual's sources of income.

We find that gig workers are more likely to become entrepreneurs, particularly those who are lower income, younger, and benefit from flexibility. We track all newly created firms and show that gig workers start firms in similar industries as their gig experience, which are less likely to survive and demonstrate higher performance. Overall, our findings suggest on-the-job learning promotes entrepreneurial entry and shifts the types of firms started by entrepreneurs.

Of course the obvious benefit from Gig work is that we consumers have more choices to acquire goods and services. This is a static benefit. But a dynamic benefit is that Gig work becomes a stepping stone for workers to realize their potential. They will create new goods and services or they provide competitive pressure on existing suppliers. Policies that limit Gig work could undermine an economy's growth potential.
 

 

Do Environmentalists and NIMBYs share blame for LA fires?

The Economist thinks so:

Strict regulations in LA require new homes to be fire-resistant, but most homes are not new. NIMBYism and convoluted environmental rules make it extraordinarily difficult to build, so much of the housing stock pre-dates the modern building code and is packed with flammable wood.

CA gov prevents voluntary wealth-creating transactions

From REASON:

On January 7, Newsom issued a state of emergency as fires spread in Los Angeles County. On Tuesday, Newsom signed Executive Order N-7-25, prohibiting buyers for three months from "making any unsolicited offer to an owner of real property" in fire-affected areas "for an amount less than the fair market value of the property or interest in the property on January 6, 2025."

I sent Newsom a copy of Chapter Two.

High US interest rates strengthen dollar, weaken Asian equities

Economist: Jan 13, 2025

The dollar reached a two-year high against a basket of major currencies, bolstered by a strong jobs report, released on Friday. The data dampened expectations that the Federal Reserve will cut interest rates aggressively in 2025. Share prices in Asia fell, as investors fear that prolonged high interest rates in America will draw capital to the dollar, draining funds from weaker currencies and emerging markets.

Is ESG investing illegal? In TX it is.

Breaking:

...US District Judge Reed O’Connor found that the airline breached its fiduciary duty ... by prioritizing ESG considerations over the financial interests of participants.  ... The court criticized American Airlines for allowing its asset manager, BlackRock, to advance goals unrelated to maximizing returns for plan participants.

“ERISA does not permit a fiduciary to pursue a non-pecuniary interest no matter how noble it might view the aim,” O’Connor said, according to separate reporting by Bloomberg Law. He went on to maintain that ESG investments “often underperform traditional investments by approximately 10%

See related posts:

• The paradox of ESG investing.
• Can ESG investing stop climate change without sacrificing returns?
• Is ESG investing illegal?

Price controls destroy wealth: California Fire Insurance

Noah Smith via Marginal Revolution, and Kim Mai Cutler.

•  The CA insurance regulator is elected, and is reluctant to allow higher rates for fire insurance, despite the big risks, lest she be voted out of office. 
• As a consequence, expected profits are low, so a majority of top insurers have stopped issuing fire insurance in CA. In 2024, State Farm decided not to renew tens of thousands of policies in the state, including about 1,600 in Pacific Palisades.
•  Instead, CA becomes the insurer of last resort through it FAIR program.
• FAIR insures risks of about $458B but has less than $700M in cash. The Jan 9, 2025 fires may cost FAIR about $24B. As a result, CA residents may face big surcharges to shore up FAIR's finances.
• Expect more insurance companies to exit the state because insurers in the state are on the hook to pay into the plan when FAIR can’t cover its claims.

BOTTOM LINE: insurance rates are too low and dont cover expected losses. Furthermore, they are not risk adjusted, so low risk homeowners subsidize higher risk ones. And the risks are getting worse, due to regulation that delays and deters fire prevention efforts, like controlled burns.

UPDATED WSJ:  

FAIR now covers about half a million homeowners who can’t obtain private coverage. Its exposure has ballooned to $458 billion as of last September from $153 billion four years earlier, with $5.9 billion in exposure in the Palisades. Yet it has only about $700 million cash on hand to pay claims.

The capitalist revolution Africa needs

Economist:

In the coming years Africa will become more important than at any time in the modern era. Over the next decade its share of the world’s population is expected to reach 21%, up from 13% in 2000, 9% in 1950 and 11% in 1800. As the rest of the world ages, Africa will become a crucial source of labour: more than half the young people entering the global workforce in 2030 will be African.

This is a great opportunity for the poorest continent. But if its 54 countries are to seize it, they will have to do something exceptional: break with their own past and with the dismal statist orthodoxy that now grips much of the world. Africa’s leaders will have to embrace business, growth and free markets. They will need to unleash a capitalist revolution. ...

In the past decade, as America, Europe and Asia have been transformed by technology and politics, Africa has, largely unnoticed, slipped further behind. Income per person has fallen from a third of that in the rest of the world in 2000 to a quarter.

Mortgage debt is rising, but lending standards are strong

From CalculatedRisk:

The bottom line is there will not be a huge wave of distressed sales as happened following the housing bubble. Most homeowners have significant equity, were well qualified, and have a mortgage with low rates that they can afford.

Leftys get screwed again