As Israel starts a war with Iran, and the U.S. considers how deeply involved it wants to get, one lesson from history is abundantly clear. Wars cost hugely in direct physical devastation, yes, but they also have a huge hidden economic cost, in distorting the market and encouraging policymakers to seize further power and narrow the economic space in which the market can operate. War is nearly always unattractive because of its direct costs, but wise policymakers will realize that its indirect economic costs may be orders of magnitude greater and hence decide against it on every occasion in which they can do so. Continue reading →

When you look at the arc of global industrial progress and the emergence of new technology, one decade stands out: the 1880s. That decade saw the arrival of electric light and power, which revolutionized everyone’s lives. It also saw the automobile, the safety bicycle, the first process for large-scale aluminum production, the Hollerith tabulating machine, the arrival in common use of the telephone and the phonograph, the linotype, the first moving pictures, the first skyscrapers and the discovery of radio waves by Heinrich Hertz. Vaclav Smil in “Creating the Twentieth Century” (© Oxford University Press, 2005) argued that the apogee of technological advance came from 1867 to 1914; the 1880s formed the very pinnacle of that crest. So, what were they doing right in that decade, and how can we get closer to replicating it? Continue reading →

President Trump has proposed to privatize the two housing finance agencies Fannie Mae and Freddie Mac, now in public ownership after their collapse in 2008. While the fisc might benefit in the short term from such a deal, the risk to taxpayers of a second collapse and bailout is high, for risk correlation reasons I will explain. The Fannie/Freddie structure is a relic of the dozy socialist New Deal; it is unnecessary and imposes excessive hidden risks on taxpayers, who would always be forced to bail them out in a crisis, as in 2008. Much better to kill them off and allow home mortgage finance to be provided by the market, as it should be. Continue reading →

President Trump’s threat to remove Harvard’s ability to take international students is appropriate. The university has admitted far too many dozy offspring of the Chinese Politburo and has allowed intellectual standards to collapse into a morass of woke incoherence. The first sign of sharp decline, as far back as 2006, was the university’s firing of its then President, former Treasury Secretary Larry Summers, for offenses against wokery. The quickest and least painful way for Harvard to recover its intellectual rigor would be to hire him back forthwith – he’s only 70 – with a free rein to discipline its recalcitrant faculty and slash its bloated and useless administration. Continue reading →

In research for my forthcoming book on global industrialization, I have been examining recently the career of the Japanese business titan Eiichi Shibusawa (1840-1931). Shibusawa, still something of a national hero in Japan, was effective head of the Dai-Ichi Bank from its founding in 1873 until 1917. More important, having while working for the Ministry of Finance introduced the concept of broadly held public companies to Japan, he was then involved as a private equity investor in the founding of nearly 500 of them. A superb networker, he both invested his own money and brought together resources and management for each new company, focusing always as his Confucian ethic demanded on the long-term interests of both the company and Japan. His approach, while difficult to pull off, would greatly improve the private equity business today. Continue reading →

President Trump this week described the EU as “in many ways nastier than China.” The media responded with the usual shrieks of outrage, but he had a point. The EU bureaucracy has imposed a structure on Europe that is perpetually Socialist, deeply anti-democratic and utterly intolerant of dissent. Traditionally, the EU benefited from being democratic and having better civil liberties than China, but those benefits are rapidly being eroded. We should consider the possibility that Europe would be very much better without the EU superstructure. Continue reading →

President Trump recently threatened to remove Harvard University’s non-profit charitable status. That is an excellent idea. However, it should not be limited to Harvard, but extended to all charities, eliminating all their tax preferences. The Charity Industrial Complex, representing about 5.5% of GDP in nominal value, subtracts far more than that from our wealth for two reasons. First, like the government, its members determine their success by non-market metrics; hence consume more resources than they generate. Second, the Charity Industrial Complex has increasingly been used as a cover for subversive activities directly detrimental to the social, political and economic health of the nation and the world. Continue reading →

In our 2010 book “Alchemists of Loss” Kevin Dowd and I examined the record of Wall Street risk management leading up to the 2007-08 financial crisis and concluded that it was seriously lacking. The universal assumption of “Gaussianity” caused participants to lose sight of the possibilities of “fat tails” where the probability of bad outcomes is seriously understated and “long tails” where potential outcomes are far worse than the model shows. It is by no means clear that Wall Street has cleaned up its act (certainly, it has not employed us to help it do so)! It is, however, increasingly clear that the mis-assessment of risk spreads far beyond Wall Street. Continue reading →

The investment management business has suffered from investors moving their money to index funds, which have much lower fees and are purely mechanical in their investments. Also, much investor money has been diverted to private equity and hedge funds in the belief that those investments offer higher returns. The Efficient Market Hypothesis suggests that it is impossible to outperform the market, yet numerous professional investors substantially underperform it, which by the EMH ought to be equally impossible. Yet investment managers are not stupid; they are by and large among the most intelligent and well educated of mankind. I would suggest that the problem is structural: the act of managing money for somebody else, whether a client or a committee that can remove your job, produces incentives that are highly detrimental to good investment performance. Continue reading →

The U.S. Congress is currently debating the Budget for the year to September 30, 2026, where past mostly Biden-era profligacy has left a $2 trillion deficit. I want therefore to discuss what the final Budget should contain, focusing mainly on the tax provisions rather than the expenditure cuts, which should clearly be as Draconian as possible. There is much facile moaning about the end of U.S. economic hegemony; it can be restored, but only with a collection of provisions that close much of that $2 trillion hole. I will also discuss how much closure is needed. Continue reading →