I don't think a sovereign wealth fund is a thing one can intelligently be "for" or "against", generically. That's like being asked to take a position on chlorine. I'm against chlorine if the proposal is I should breathe it. I'm for chlorine as part of a water purification process. You really do need to be more specific. There are versions of social wealth funds that I'd oppose, others about which I'd be enthusiastic. I did a talk on the subject several years ago, if you have an hour to kill.

I think people focus too much on the asset and benefits side of social wealth fund proposals, and too little on the effects of how the funds might be financed. In an American context, much of the reason to want a social wealth fund is to divert financial flows from where they would otherwise go.

For example, here's Tyler Cowen:

It is true that the expected rate of return of the US stock market is higher than the US government’s borrowing rate. But what matters is the net social increase in investment value, not the nominal returns on the government’s portfolio. If the government buys some of my mutual funds, for instance, and it earns the 7% return that I would otherwise have earned, there is no net increase in social value. On paper, the sovereign wealth fund looks like a big success, but the government has simply issued more debt and redistributed some equity returns away from the citizenry and toward itself.

Cowen elides questions of distribution. Who is this "citizenry"? To whom do equity returns actually go?

While much of the public owns some shares, fully the majority of US stock market wealth, in dollar terms, is owned by the richest 1%. Only 7% is owned by the bottom 90%.

The government "[r]edistribut[ing] equity returns from the citizenry and toward itself" has another name. It's called a tax. It's a tax that falls almost entirely on the rich, but is experienced painlessly, in the form of returns foregone relative to a counterfactual. The rich find themselves with just a bit less opportunity to get richer.

I wrote about precisely the phenomenon Cowen describes in 2018:

A sovereign — er, social — wealth fund is a taxation machine. It is an automatic taxation monster. It takes the miracle of compound growth that capitalists are always on about and turns it into a miracle of compound taxation, effectively taxing wealthier cohorts (those who would otherwise own the SWF assets) an ever increasing share of income year after year without requiring any new legislation, and with minimal distortion of investment behavior.

To see how this works, let’s imagine that we want to simulate the flows of an SWF+UBD. We’ll imagine a very simple scenario. Let’s define a “notional” SWF. The SWF is going to be financed by a tax enacted just once, which will yield $1T in Year 0. The tax take will grow with nominal GDP, which we will model as growing at 5% annually. Beginning at the end of Year 1, the SWF will make payouts. For simplicity, we will base payouts and returns on the end-of-prior-year balance. That is, we are conservatively assuming that the taxes we collect within a year are unavailable until the year following. We will assume a constant rate of investment return of 8% per year. Echoing Bruenig’s proposal, we will have the SWF payout 4% of the prior year balance each year.

However, instead of actually forming the SWF, let’s say that the government were to decide that there’s no need to intervene in the miraculous private sector with actual state ownership, that the assets can remain, um, efficiently managed in private hands but the government will simply use the tax system to reproduce the flows an SWF would generate. As it would if it actually formed the SWF, in Year 0 it would enact a tax, which would raise $1T. At the end of Year 1, it would have raised an additional $1.05T from the same tax. The notional SWF would have enjoyed the same $1.05T as new contribution. However, the notional SWF, if it had actually been constituted, would have also earned $0.08T as investment returns. In order to simulate the SWF flows, the state would have had to adopt a new capital tax of $80B. In Year 2, we have the same effect again. The originally enacted tax now raises $1.1025T, and the new Year 1 tax brings in $84B (assuming that both grow in line with GDP), for a total intake of $1.1865T. However, investment returns on the prior year SWF balance of $2.09T would have yielded $167.2B, which when added to the same take of $1.1025T from the initial tax, yields an inflow of $1.2697T. So, to bring the total inflows in line with what an SWF would have done automatically, the government would have to impose a new tax of $83.2B.

And so on. Each year, to reproduce the same net flows from private capital holders as would “naturally” have occurred had there been a SWF, the state would have to enact a brand new tax, in addition to still collecting the taxes enacted in prior years. Under our assumptions, each year’s new tax is slightly smaller as a share of GDP than the prior year’s, but in reality, that would depend upon investment returns, gdp, and dividend payouts. Whenever investment returns net of dividend payouts exceed GDP growth, the effective new tax that would need to be imposed on capital holders becomes larger as a share of GDP than the prior year’s tax. (Here’s the little Mathematica simulation the numbers in this section are drawn from: [pdf][nb])

We can all, as Mike Konczal put it on Twitter, “spitball” about politics. But I think it fair to say that it would be difficult to sustain the political will to cumulatively impose new taxes on capital holders, every year, year after year after year over a period that might span decades. But the “gimmick” of actually using the proceeds from a single tax, enacted once and continued indefinitely, to purchase capital assets, generates the same effect as this compounding tax schedule in a way that seems natural and inevitable and legitimate under the norms of present-day capitalism. If we accept that other capital holders get to enjoy the miracle of compound returns, why shouldn’t a fund owned in equal shares by all citizens get to enjoy the same? Actually constituting a SWF delivers a regime of effective taxation that, I think it is fair to say, ordinary politics simply could not.

If you think it is a good thing to let the "miracle of compound growth" cumulate endlessly in wealthy private hands — creating permanent, ever-expanding gaps between the rich and the less rich, entrenching a system of wealth-stratified caste — then yes, you should oppose the state "[r]edistribut[ing] equity returns from the citizenry and toward itself".

If, however, you think letting compound growth continually expand the advantage of the already wealthy is not great, if you dislike living in a society whose economic, political, and cultural life is increasingly vandalized and held for ransom by mad billionaires, then perhaps it would desirable to divert equity returns away from "the citizenry" and towards purposes whose benefits will be much more widely shared.

The state, of course, is corrupt as fuck. But in its worst corruption, nothing that the state does at scale results in benefits as lopsidedly plutocratic as the dollar distribution of investment returns when they compound in private hands.

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Both Donald Trump and Kamala Harris have promised "No Tax On Tips". Tax experts generally argue it's a bad idea. Whatever rules you invent to cabin what counts as a nontaxable tip, people will work pretty cleverly to reclassify their own income as that to avoid paying taxes.

"No Tax On Tips" is intended to help lower-income service workers — waiters and bartenders, perhaps manicurists and hairstylists — not, say, hedge fund managers who are arguably also in a "service" occupation. Yet, in the discussions I've encountered, the presumption is the "tax" referred to is the income tax.

But that's idiotic! Low-end tipped workers pay far more tax on their tips as FICA taxes — the employee portion of Social Security and Medicare taxes — than they do as income taxes. If the intention is to help low-end service workers, we should interpret the pledge as referring to Federal payroll taxes, rather than the income tax. This would not be welching on the promise candidates have made. It would fulfill the promise more completely, by offering more relief to the groups targeted than income tax relief would.

A "no FICA tax on tips" pledge does not entirely prevent gaming to avoid the tax. But, when combined with occupational limitations and penalties for fraudulent claims, it will prevent nearly all gaming of the proposal by higher income earners. At higher incomes, the vast majority of ones Federal tax burden is the income tax. The higher ones income, the lower the relative burden of the payroll taxes. High income people won't risk criminal liability for fraud to evade a small fraction of the taxes they face.

If the employee-side FICA tax on tips were simply eliminated, that would harm the solvency of the Social Security and Medicare trust funds, and reduce the benefits tipped workers could expect to receive. Fortunately, we've already addressed this problem on the employer-side, so we know what to do.

There is already a FICA Tip Credit that food-service employers can claim against the FICA taxes they pay on tips. (The credit was enacted as a means of increasing employers' motivation to ensure that tip income is reported.) The FICA Tip Credit is an income tax credit, granted after contributions have already been mad to the trust fund. So it does not affect trust fund contributions.

Suppose we do the following:

1. Leave tips notionally taxable as they are.

2. Enact a refundable, employee-side FICA Tip Credit for the full amount of Federal payroll taxes due on applicable tips.

3. As we did with the expanded Child Tax Credit, have the IRS remit payments of the tax credit monthly. Funds would be disbursed directly to the Social Security and Medicare trust funds, on each employee's behalf.

4. Do not withhold FICA taxes from tips.

Pay stubs would show total Social Security and Medicare taxes due, then the credit for FICA taxes on tips, reducing the total withheld.

Tipped employers would get paid the full value of their tips, without any Federal payroll tax deducted. If their incomes are high enough to be subject to income tax withholding, they would still suffer that. But that's small potatoes for lower income workers.

Overall, lower income workers would enjoy much bigger paychecks than they would have under a "no income tax on tips" interpretation.

Workers would experience no penalty in terms of future Social Security and Medicare benefits from the program.

And it just wouldn't be worth it for high-income workers to try to fashion themselves cosmetolologists for a small tax benefit and large risk of jail time.

Price regulation is in the ether. I find the "debate", such as it is, stupid. Some forms of price regulation, under some circumstances, can be helpful or even necessary. Badly crafted or misapplied price regulation can indeed lead to gluts, shortage, mangled incentives, and destructive allocations. It really does depend.

If you already know whether you like a "ban on price gouging" without having seen the details of the proposal, you are just an ideologue, one way or the other. If you hold yourself out as an economist and you are taking a strong position on the proposal at its current level of unspecificity, might I recommend my recent piece on authority minimization?

Rather than get ahead of ourselves, let's discuss a form of price reform that is occurring already, without any impetus from the state. The American Prospect recently did a full, remarkable issue on pricing, emphasizing price discrimination or "personalized pricing".

I find it a bit counterintuitive that it's my friends at The American Prospect who get upset about this, rather than my friends at George Mason University. (With genuine affection, I consider GMU Economics to be the lightbearer for Hayekian economics, now that the man himself has left us.)

A common apology for first degree price discrimination is that it's "efficient". And it is, in one narrow sense. Let's review the Econ-101-style diagrams below (modified from an old piece):

The upper-left-hand diagram shows the Marshallian equilibrium that we ordinarily imagine as efficient. When the price — there is just one price, the same public price for everyone — has groped to where the supply and demand curves meet, both the quantity exchanged and total surplus is maximized.

The bottom row shows two pathological cases. If the price is prevented from finding the equilibrium price — whether by private market power or by public regulation — there is "deadweight loss" (the red triangles). Total surplus is reduced.

Surplus is a problematic measure of welfare, but Econ 101 courses disgracefully treat the two as interchangeable, so the smarty-pants pundit class does the same. Under this analysis, price-setting, whether by states or by monopolies, makes the collective "us" prima facie worse off.

The diagram on the upper right depicts "perfect" or "first degree" price discrimination. That's when sellers know precisely the maximum amount each potential customer would be willing to pay for an item, and charges precisely that. No real-life seller can know preferences so perfectly, but digital tools now surveil, study, cluster, and predict our behavior pretty well. In an app, on a website, even in a grocery store, pricing can increasingly be tailored to us.

Notice that in this diagram there are no scary red triangles, there is no deadweight loss. The quantity exchanged and the total surplus are the same as at the Marshallian equilibrium. So first-degree price discrimination is "efficient".

The difference from the competitive equilibrium (upper-left) is only distributional: In the single-price, Marshallian case, consumers and producers split the surplus. In the price-discrimination case, producers enjoy all the surplus, and consumers enjoy none. The purchases are "worth it" to buyers, but just. Whatever consumers have bought is worth barely more to them than the dollars they have spent. Sellers, on the other hand, receive a lot more money than it cost to market the good.

To a certain kind of economist, distribution doesn't matter, or is a second-order concern. That is far from my own view. People "on the left" tend to dislike price discrimination, because producer surplus (business profit) goes disproportionately to the already wealthy, while consumer surplus would have been more broadly distributed.

If you are Hayekian, you should have a different but equally fatal concern.

From Hayek's The Use of Knowledge in Society:

[T]he economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place... [T]he ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them... But the “man on the spot” cannot decide solely on the basis of his limited but intimate knowledge of the facts of his immediate surroundings. There still remains the problem of communicating to him such further information as he needs to fit his decisions into the whole pattern of changes of the larger economic system...

[T]his problem can be solved, and in fact is being solved, by the price system...

[I]n a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to coördinate the separate actions of different people in the same way as subjective values help the individual to coördinate the parts of his plan. It is worth contemplating for a moment a very simple and commonplace instance of the action of the price system to see what precisely it accomplishes. Assume that somewhere in the world a new opportunity for the use of some raw material, say, tin, has arisen, or that one of the sources of supply of tin has been eliminated. It does not matter for our purpose — and it is very significant that it does not matter — which of these two causes has made tin more scarce. All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin... The mere fact that there is one price for any commodity — or rather that local prices are connected in a manner determined by the cost of transport, etc. — brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.

(Emphasis mine.)

Let's consider a concrete case. I need a new roof, which could be made of tin or plastic. I prefer tin. I'd be willing to pay up to $9000 for a tin roof and $5000 for a plastic roof. A price discriminating monopolist offers me precisely those prices. Which I choose is then a flip of the coin. I've been deprived of information that might distinguish them. At these prices, I'm indifferent between the two options, or even to not buying at all.

Suppose that under a competitive single-price equilibrium, the tin roof would have cost $6000, and the plastic roof would have cost $1000. Because tin is dear relative to my own knowledge of my preferences (my surplus for tin would be $3000, for plastic $4000), I would have economized and purchased plastic, contributing to an efficient allocation. But under perfect price discrimination, my contribution to the as-if "single mind possessing all the information" is reduced to noise, a fifty-fifty coin flip.

Ah! you say, But the price discriminating seller wouldn't behave this way! Megacorp would know the "true" prices of underlying commodities, and would profit more from offering the plastic roof for $4900. At this price, I reliably choose plastic, the seller makes $3900 rather than the mere $3000 it would have made from tin, and tin is economized as it would be in a competitive market.

But then what you are saying is Megacorp's knowledge is sufficient to completely cut me out of the information aggregation process with no loss. My local information has no role to play. Megacorp knows me well enough to prejudge me and perform my role.

And maybe so! I don't know very much.

But it's turtles all the way down. If cartel and price discrimination are normalized, then Megacorp's vendors are also predicting what Megacorp will pay, and providing prices that maximize its own profits rather than reflect underlying social costs. Megacorp is also cut out of any role in the information problem. The system ultimately works — correctly solves the market optimization problem — only if there is some foundational set of vendors, a cartel for whom Hayek's "dispersed bits of incomplete and frequently contradictory knowledge" have been surveilled and aggregated and reconciled after all.

Long ago I tweeted

path to socialism: Amazon solves economic calculation problem and swallows the whole economy. then we nationalize it.

If you think an economy in which price discrimination is normalized can be efficient, then you think Hayek's work is obsolete. The cartel that price discriminates constitutes a capable central planner. If we will have a capable central planner, most of us would have it under the control of an imperfectly democratic state, rather than operate as a maximizer of private shareholders' wealth.

I do not in fact think Hayek is obsolete. Neither Amazon nor ChatGPT can incorporate the ever-changing, infintely dispersed knowledge that drove Hayek's vision.

But if Hayek is not obsolete, if we move towards "personalized pricing", firms will routinely price discriminate but misjudge. On the one hand, that means at least sometimes consumers will still enjoy surplus. Hooray!

At the systemic level, however, it means our optimizer will be badly broken, and we will all be made the poorer. Megacorp will think I'd be willing to pay $6000 for a plastic roof, and so offer it to me for $5900. But for that price, I prefer the tin. A social resource will have been diverted from a high-value to a low-value use, because our price-discriminating planner erred. Multiply this kind of mistake countless times, and Hayek's “economic calculus” goes haywire. We will have destroyed the very purpose and function of markets in our economy.

Either price discrimination can be perfected, and we should move to a centrally planned economy. Or it cannot be, Hayek remains right, and we should insist on competitive markets with single public prices. Which is it?

"I have deliberately used the word 'marvel' to shock the reader out of the complacency with which we often take the working of this mechanism for granted," Hayek writes of the price system.

I find it astonishing how untroubled Hayek's successors now seem by developments that could only be wise if Hayek's marvel has become a museum piece.

Maybe AI really will do a better job of allocating scarce resources than markets and the price system used to. Maybe it really is time to move on.

But you'd think Hayekians would be evaluating that claim skeptically, rather than cheerleading the change.