Streetwise Professor

A brief follow-up on SVB (which kinds of sounds like a venereal disease, which is kind of apropos I guess).

During the GFC I wrote about how bank capital requirements were like price controls. A regulator can never set the “right” prices–in this case, the shadow costs of assets with different risks. It will underprice some risks, and overprice others. Banks will hold too many of the assets where risk is underpriced, and too little of the assets where the risk is overpriced.

Bank capital requirements focus primarily on credit risk, rather than interest rate risk. SVB incurred very little if any capital charge to hold Treasuries and agency debt, because they are viewed as “safe” from a credit risk perspective. But they did allow SVB (and other banks) to take on interest rate risk.

Very low or zero capital charges on Treasuries fall into the there-are-no-coincidences-comrade category. The government wants to encourage holding of Treasuries and agencies. Big deficits to finance, after all. As Niall Ferguson, Charlie Calomiris, and others have pointed out, governments regulate and structure banking systems first and foremost to facilitate government finance, not private capital markets.

Related to this is the issue of stress tests. The relaxation of regulation passed in 2018 meant that banks of SVB’s size no longer had to undergo stress tests. But the recent government stress tests would not have really stressed SVB: they only tested for a 200 basis point increase in interest rates, not the 400+ increase we have experienced. So SVB would have passed anyways.

In the immediate aftermath of the GFC I expressed skepticism about stress tests. I called the Tinker Bell Economics–“We believe! We believe!” That is, they are intended to assure everyone about the safety of the banking system, rather than to actually test the safety of the banking system.

The unstressful interest rate stress scenarios also plays into the idea that the Fed and Treasury don’t want to do anything to dampen banks’ appetite for government bonds.

One last comment. Many historical banking system crises are the result of yield chasing in low interest rate environments. Low yields (a) allows banks to borrow cheap, and (b) induces banks to chase yield by taking on more risk.

We obviously operated for years in a low rate environment, courtesy of the Fed. Yield chasing was an inevitable. SVB chased yield.

In sum, yes, SVB’s execs were rats. But the government designed the maze (capital requirements, low interest rates) and baited it with cheese. So when the government says that they are going to fix the problem, don’t believe them. But believe this: especially given the United States’ huge debt and deficits, any “fixes” will be rigged to protect the Treasury market, and the devil take the hindmost. Which would be you.

To continue the Silicon Valley theme.

Stanford University is Silicon Valley’s brood mare: from scientists and engineers to executive to lawyers, its offspring are legion in the tech sector.

And the Stanford Law School was recently the site of one of the most disgusting displays of political thuggery in recent memory–which is obviously saying something.

Fifth Circuit Court of Appeals Judge Kyle Duncan was supposed to speak at a Federalist Society gathering at the Stanford Law School. But he could not speak, because he was heckled by a group of leftist students. Duncan asked for an administrator to intervene to restore order.

Stanford Law DEI administrator Tirien Steinbach stepped in–and delivered a harangue against Duncan. Free speech? Bah! said Steinbach. You don’t deserve freedom of speech because your speech harms us. (Sticks and stones may break my bones etc. is SO passe.)

But others exercised their right to free speech:

Other questions were less academic. “I fuck men, I can find the prostate,” one student asked, according to Rosenberger. “Why can’t you find the clit?”

Excuse me? Did this conversation occur in a law school or a bath house?

Meanwhile, several other profile-in-courage Stanford administrators stood around with their thumbs up their asses, and did nothing.

The blowback was immediate and intense, and Stanford issued an apology which said that the events transgressed Stanford’s “institutional commitment to freedom of speech.” Duncan graciously–and incorrectly, in my view–accepted. Incorrectly, because it let them off far too easy.

Institutional commitment to freedom of speech? At Stanford? (Or at pretty much any “elite” university for that matter.) Anyone who says this is obviously insane, and needs to be committed to an institution.

An apology is not enough. All of the deans of the law school should be removed, and Steinbach should be fired. The students who engaged in this conduct should be expelled. Pour encourager les autres.

“Whoops, my bad” does. Not. Cut. It. What transpired at Stanford was a crime against the academy and against the legal academy in particular. To prevent its recurrence there–and hopefully elsewhere–draconian measures are necessary.

But they won’t be taken. Because I am sure that the university only admitted error grudgingly because of the avalanche of criticism, not because they agreed that a grievous wrong had been done, and because (as was shown in the 60s, as described by Alan Bloom and Thomas Sowell and others) when it comes down to it university administrators are cowards.

These are the people who presume to rule us. And from the government’s reaction to Silicon Valley’s demand for a bail out, evidently they do. But there will come a point when the ruled will no longer submit.

Bank failures tend to come in waves, and we are experiencing at least a mini-wave now.

Banks fail for three basic reasons: 1. Credit transformation: deterioration in borrower creditworthiness, usually due to an adverse economic shock (e.g., a real estate bust). 2. Maturity transformation: borrowing short, lending long, and then getting hammered when interest rates rise. 3. Liquidity transformation combined with an exogenous liquidity shock, a la Diamond-Dybvig, where idiosyncratic depositor needs for cash lead to withdrawals that exceed liquid assets and therefore trigger fire sales of illiquid assets.

The two most notable failures of late–Silicon Valley Bank and Silvergate–are examples of 2 and 3 respectively.

In some respects, SVB is the most astounding. Not because a bank failed in the old fashioned way, but because it was funded primarily by the deposits of supposed financial sophisticates–and because of the disgusting policy response of the Treasury and the Fed.

SVB took in oodles of cash, especially in the past couple of years. The cashcade was so immense that SVB could not find enough traditional banking business (loans) to soak it up, so they bought lots of Treasuries. And long duration Treasuries to boot.

And then Powell and the Fed applied the boot, jacking up rates. Bonds have cratered in the last year, and took SVB’s balance sheet with it.

Again, an old story. And hardly a harbinger of systemic risk–unless such reckless maturity mismatches are systemic.

SVB was the Banker to the Silicon Valley Stars, notably VCs and tech firms. These firms are the ones who deposited immense sums in exchange for a pittance of return. Case in point, Roku, put almost $500 million–yes, you read that right, 9 figures led with a 5–into SVB!!!

I mean: WTFF? Was the Treasurer a moron? For who other than a moron would hold that much in cash in a single institution? (Roku claims its devices “make your home a smarter.” Maybe they should have hired a smarter treasurer and CFO, or replaced them with one of its devices). Hell, why is a company holding that much in cash period?

A few of these alleged masters of the universe (like Palantir) saw the writing on the wall and yanked their deposits: deposits fell by a quarter on Friday alone, sealing the bank’s doom. Those who were slow to run howled to the high heavens over the weekend that if there was not a bailout there would be a holocaust in the tech sector.

Even though the systemic risk posed by SVB’s failure is nil (or if not, then every bank is systemically important), the Treasury Department and the Fed responded to these howls and guaranteed all the deposits–even though the FDIC’s formal deposit insurance limit is $250,000. You know, .05 percent of Roku’s deposit.

When evaluating this, one cannot ignore the reality that the Democratic Party is completely beholden to Silicon Valley. This is beyond scandalous.

Occupy Silicon Valley, anyone?

Treasury Secretary Janet Yellen insulted our intelligence by assuring us this is not a bailout. Well, it’s not a taxpayer bailout, strictly speaking, because the Treasury is not providing the backstop. Instead, it is being funded by a “special assessment” on solvent banks. Which are owned and funded by people who also pay taxes. And such an “assessment” is a tax in everything but name–because it is a contribution by private entities compelled by the government.

The policy implications of this are disastrous. The whole problem with such bailouts is moral hazard. What is to stop banks from engaging in such reckless behavior as SVB did if they can obtain seemingly unlimited funding from those who know that they will be bailed out if things go pear-shaped?

And the regulatory failure here demonstrates that bank regulation–despite the supposed “reforms” of Frankendodd–can’t even catch or constrain the oldest bet-the-bank strategy in the book. Free banking–no deposit insurance, no bailing out of depositors–couldn’t do worse, and would likely do better.

No, the failure of SVB is not the scandal here. The scandal is the political response to it. This reveals yet again how captured the government is. This time not by Wall Street, but by tech companies and oligarchs that are currently the primary source of Democratic political funding.

A couple of weeks ago the Silvergate story looked juicy, but SVB has put it in the shade. Silvergate also grew dramatically, but on the back of crypto rather than SV tech. It became the main banker for many crypto firms and entrepreneurs. The crypto meltdown did not affect Silvergate directly, but it did crush its depositors, the aforesaid crypto firms and entrepreneurs. They withdrew a lot of funding, and an old fashioned liquidity mismatch did it in.

In traditional banks, deposit funding is “sticky.” Banks that rely on wholesale funding (“hot money”) are more vulnerable to runs. Silvergate’s funding was not traditional sticky deposit funding, nor was it hot money per se. It was money that was pretty cool as long as crypto was cool, and became hot once crypto melted down.

A run started, but the run was precipitated by a liquidity shock. Simple story, really.

Silvergate’s failure was not a scandal. SVB’s failure per se was not a scandal (except to the extent that our vaunted banking regulators failed to prevent the most prosaic type of failure).

Again–the scandal is the politically tainted response that will have baleful consequences in the future, as the response virtually guarantees that there will be more SVBs in the future.

This week, FBI Director Christopher Wray matter of factly stated: “the FBI has for quite some time now assessed that the origins of the pandemic are most likely a potential lab incident in Wuhan.”

Now he tells us!

Wray’s remark did not unleash a frenzy of invective, in contrast to the Department of Energy’s earlier expression of the same conclusion. For example, the truly nasty piece of work Colbert screeched that the DoE needed to “stay in its lane.” (Colbert’s is apparently the I-get-to-tell-the-government-to-stay-in-its-lane lane). Colbert has not provided Wray similar instruction. Other media outlets that criticized the DoE have also been notably silent about Wray’s revelation.

Although the admission that this was the FBI’s view is what has been most commented on, what stands out to me is that it has been “for quite some time now.” How long, exactly? And why has the FBI hidden its lamp under a basket for so long?

And crucially: why is it lifting the basket now?

Is this part of a telling-the-truth-slowly strategy on the part of the administration? Is Wray trying to get out ahead of future revelations and keep the FBI’s skirts clean?

Suffice it to say that knowing him, his motivation for saying this now is political, and for purposes of self-preservation, not some commitment to the truth. After all, Wray is a past master at dummying up or evading questions (“sorry, Senator, I can’t answer because I have a plane to catch”).

Wray’s statement, and the DoE’s, is of course vindication to those who argued the possibility, and indeed the likelihood, of a Wuhan lab leak. Though some claimed this was a deliberate leak–part of a Chinese biowar strategy–I and most others who favored the lab leak hypothesis believed it was accidental, while not ruling out that the research itself was military in nature.

Of all of the media- and government-enforced narratives, the one that excoriated and anathematized anyone who advanced this hypothesis was always the most puzzling to me. Why did it matter SO much to the establishment where COVID originated?

Short of a needed (but unlikely to occur) lustration, the best we can do is reason from the clues that we have, starting with (a) who was clearly behind the campaign to discredit this hypothesis?, and (b) cui bono?

The answers to both questions are the same: the CDC, and in particular, Anthony Fauci. The release of Fauci’s emails last year revealed that he, others at CDC, and CDC adjacent scientists and NGOs almost immediately orchestrated a campaign to denigrate this hypothesis and those arguing for it, and advance the natural origins alternative. The Twitter files have subsequently revealed government efforts (including, I might add, the efforts of Wray’s FBI) to censor those even discussing lab leak origins as well as other transgressions of the COVID party line.

The media, of course, quickly snapped to attention, saluted, and relentlessly promoted Fauci’s/the CDC’s narrative.

And how did this benefit Fauci and the CDC? Well, the only razor I’ve shaved with in the last 44 years is Occam’s, and his razor says: because Fauci and the CDC were deeply implicated in the activities of the Wuhan Institute of Virology.

In other words, Fauci et al doth protest too much, which implicates them as surely as Lady Macbeth. (Although the Lady at least had the decency to go mad out of remorse, which Fauci has not, suggesting that he is a sociopath, if not a psychopath.)

(I note that the Democratic Party is also a beneficiary, as it used the discrediting of the lab leak hypothesis as a way of discrediting Trump, who had asserted it.)

Every day that a natural host is not discovered is another strike against the natural origins hypothesis, and gives further weight in support of the leak alternative. Three years with no host identified despite an intense search–and the keen interest of the CCP in finding one–makes the natural origins hypothesis highly incredible.

Unlike Fauci, I am not invested in either hypothesis: I am invested in the truth. I am also heavily invested in antipathy to censorship, especially censorship at the behest of interested actors in government. The suppression of any discussion over the lab leak hypothesis, and the anathematizing of anyone who dared speak it, represents a very dark episode in American history.

And the hits keep on coming. Recent evidence (the Cochrane Report) demonstrating the inefficacy of masks. The accumulating evidence on the lack of efficacy of the mRNA “vaccines”–and the health risks they create. And perhaps most importantly, the accumulation of overwhelming evidence that the costs of lockdowns massively outweighed any benefits.

With regards to the latter, the release of WhatsApp messages from the execrable Matt Hancock, formerly the UK’s Secretary of State for Health and Social Care, and more recently reality show contestant, demonstrates that despite all of the arrogant assertions that those in power were acting in the name of Science, they were actually acting in the name of power. Lockdowns were not a well-intentioned policy error, they were a malign policy forced on the public by loathsome figures like Matt Hancock (and Tony Fauci and Deborah Birx and dozens of others in virtually every country of the world, save Sweden).

I called bullshit on the failures of governments even to evaluate trade-offs with respect to lockdowns from the very time they were first mooted. And “whoops, my bad!” won’t make it all better–as if these disgusting creatures even have the decency to say that: they admit nothing.

What makes it all the more egregious and infuriating is that these same people who were the industrial scale producers of disinformation and misinformation also dared (and continue to dare) to scold us (and punish us) for promoting disinformation.

When in fact, there is a tsunami of evidence showing that those who questioned them from the first were right, and they were wrong.

In light of all this, I think that what Wray is doing is trying to get to high ground ahead of the tsunami hitting land in DC, London, etc. It’s cold comfort, in light of the havoc of the last three years. But revenge is a dish best served cold, and God willing the dish has cooled enough in these past years to make the time of reckoning nigh.

Though I seriously doubt there are enough lampposts.

I can always use a good laugh, and noted nitwit Nikole Hannah-Jones has provided one:

Other than being Black, what exactly is Sowell's expertise in slavery or history?

— Ida Bae Wells (@nhannahjones) February 10, 2023

Oh Nikki, where to possibly begin? I suggest you start with Race and Culture: one whole column of the index lists the mentions of the subject of slavery in the book. Then maybe Black Rednecks, White Liberals. (Though that may result in a messy explosion of your magenta-maned head.) And for a bit of self-knowledge, Intellectuals and Race. But in point of fact, analyses of slavery are found throughout Sowell’s massive literary output. (When thinking of him, I am reminded about a quip someone made about Paul Johnson: it’s not the amount he’s written that astonishes, it’s the amount he’s read.)

And not just North American slavery, but slavery around the world. And that’s precisely why he can speak with far more authority and insight on whether slavery in British North American colonies, and later the United States, was somehow unique and makes the U.S. the most fallen of nations, than can Hannah-Jones and her ilk.

And history generally. Again. Look at at his incredible record of scholarship, which includes detailed expositions and analyses of a wide variety of historical issues, such as immigration.

Moreover, Sowell’s approach to history stands in stark contrast to 1619 Project-style leftist “history”: In Sowell, history is a reservoir of facts and data against which theories are tested, whereas in Hannah-Jones’ “work” it is something to be twisted and distorted in order to make political and ideological points.

Thomas Sowell has had a major impact on my life and thinking since I was in college: his Knowledge and Decisions profoundly affected, and continues to affect, how I think about economics, law, and policy. Although somewhat dated because many of its examples were current at the time it was published 43 years ago, the underlying conceptual framework and analyses are timeless: it is astounding at how the intellectual errors that Sowell analyzed back then curse us today–most notably, his theme that there are no solutions, only trade-offs, something that politicians ignore daily, with COVID policy being one of the most egregious examples.

To my mind, Thomas Sowell is the most impressive public intellectual (and intellectual, period) of the past 50 years. The breadth and depth of his scholarship is unsurpassed, and his steadfastness and courage in the face of vicious criticism from lilliputians like Hannah-Jones is truly remarkable. He is a true intellectual: Hannah-Jones and her ilk are intellectualoids, at best. People with intellectual pretensions that far outstrip their abilities, and who pass off agitprop as scholarship. Only idiots think them geniuses.

One of the highlights of my academic career occurred when Sowell wrote an oped defending me against the New York Times’ slanders. No doubt his unfortunately extensive experience with slanders directed at him motivated and informed what he wrote. And the slanders continue, as Hannah-Jones’ ignorant tweet reveals. But sometimes, as in this instance, the slanders are so ridiculous that they elicit only laughter.

Today is the first day of the second year of the Russo-Ukraine War, and there is every indication that 25 February 2024 will mark the first day of the third.

Putin gave one of his increasingly demented speeches on what used to be called Red Army Day. In a nutshell (emphasis on nut) he claimed that this is an existential . . . something . . . against the “collective west,” land of godless pedos. Apparently this is a preemptive war intended to defend Russia against an impending onslaught from Nato.

Which Putin’s own actions give the lie to: according to UK military intelligence, Putin has committed 95 percent of his combat power (such as it is) to fighting Ukraine. Which would leave the rest of Russia’s long borders with godless western pedos completely open to their attack. Not something someone fearing such an attack would do.

Speaking of borders, Putin’s wannabe mini-me, your favorite narcoleptic and mine, Dmitri Medvedev, ranted that it was necessary to push back Russia’s border with Poland by a significant distance. Er, I though math was a big deal in Russia. I guess not. A simple inductive proof demonstrates that this implies that Russia would have to absorb the entire European continent in order to achieve security. Which demonstrates the futility of any attempt to find a end to hostilities based on “addressing Russia’s security concerns.” Their security concerns are unaddressable, except by dissolution of the west.

The rationalizations and projections and aspersions in these speeches don’t really matter. What matters is that they show that Putin will continue to grind on, fighting to the last Russian, to . . . . Who knows? I am reminded of Santayana: “Fanaticism consists of redoubling your efforts when you have forgotten your aim.” The war has become an end in itself, not as Clausewitz famously said, politics carried out by other means.

Fanaticism or no, the prospect is for war without an end in sight. So just how is that going?

Late last year and early this there were repeated warnings of an impending Russian offensive. Some people are still talking about an “impending” offensive.

Wrong. Nothing is impending: the offensive has started. And it is going about as well as previous offensives. Arguably worse, actually. One way to summarize would be Wellington’s remark regarding Waterloo: “They came on in the same old way, and we sent them back in the same old way.“ Though Napoleon made it “the nearest run thing you ever saw” (again in the words of Wellington), on most of the front in Ukraine it is not a near run thing at all.

Why do I say the offensive has started? Several reasons. First, Putin is in a hurry. He has demonstrated his impatience time and again. Second, the evidence on the ground: the frequency and intensity of Russian attacks has increased (even if the results have not). Third, the time of year: in not too long the raputitsa will make maneuver and advance very difficult. Fourth, the Russians have every incentive to try to get ahead of the next wave of equipment (notably tanks and air defenses) that the west is (slowly) supplying to Ukraine.

The main fighting has centered on the town of Bakhmut. The Russians have “succeeded,” at the cost of immense casualties, shoving back Ukrainian positions a few kilometers here, a few hundred meters there.

If Russia takes Bakhmut, so what? Itself it has no real strategic importance. The battle reminds me of say Pork Chop Hill in Korea in 1953. The hill had very little intrinsic military importance. But the Chinese and the Americans invested it with a symbolic importance–we can’t let those other bastards have it!–and hence spent many lives and countless artillery fires to take it. Or fights over useless bits of blasted terrain in Verdun, 1916, Fort Douaumont, for example.

Bakhmut is like that. It has become important because both sides have made it a test of wills and capability.

Even if Russia takes the town, it has no ability to break out and exploit into the Ukrainian rear. Bakhmut is an infantry and artillery battle, and shoving back the Ukrainian front a bit here or there will just shift the location of the next infantry and artillery battle. This is like WWI, where even local gains could not be exploited because of the inherent limitations on movement of the attacking forces.

In WWI the Allies achieved something resembling breakout and exploitation in late-October, early-November 1918 only because the German army had been bled white in its spring offensives and the allies had amassed overwhelming superiority in infantry, artillery, armor and airpower, not least because of the arrival of hundreds of thousands of Americans.

The Germans made gains in their 1918 offensives, but those eventually also culminated far short of objectives due to the inherent limitations of trying to take large areas at speeds dictated by logistics and the pace of horses and men on foot. Nearly the same limitations the ground pounding Russian army faces today.

The Germans were in much better shape in March-May 1918, moreover, than the Russians are now. They could bring hundreds of thousands of relatively fresh, and experienced, troops from the East to spearhead the offensive. The Russians are scraping the bottom of the barrel, throwing the unfit and untrained into futile assaults in which their lifespans are measured in hours, at most.

As I noted near the beginning of the war, one reason for Russian failure then was they attempted to use armor without infantry. Now they are attempting to use infantry without armor–and when they do attempt to use armor, as they did recently at Vuhledar, the result is a bloody shambles. But without armor any possibility of exploitation is nil.

Meaning that stalemate is in prospect indefinitely.

The stalemate has brought about one change in Russian politics: the dogs are no longer fighting under the carpet, but in plain sight. In particular, the ghoulish-looking (and face it, just plain ghoulish) Yevgeny Prigozhin has been attacking publicly the Russian defense establishment. Festernik has taken credit for the gains at Bakhmut and Soledar (such as they are), and claims that the defense ministry and army have caused the slaughter of many Wagner troops by withholding artillery ammunition. Further, the nationalist right has been attacking the military for its incompetence–with good reason.

All is not well in Muscovy, in other words, and in contrast to history, some of the unhappiness is being played out in public.

Objective conditions imply that the internecine struggle will get only worse. It is the product of failure on the battlefield, and no end of such failure is in sight. A new year of war has begun, but it will not be different than the old year. A dreary verdict, but the only one the facts support.

Nina Khan’s FTC has indicated that it will outlaw non-compete clauses in labor contracts. Be skeptical. Be very skeptical.

My priors are that such restrictions are unwarranted, especially when originating in the Khan FTC.

For one thing, this brings to mind Coase’s dictum that the knee jerk response to any non-standard contracting practice is that it is the result of monopoly (or in this instance monopsony) power. Coase argued that instead most such practices economize on transactions costs. Research dating back more than a half century reveals that many practices frequently branded as monopolistic, such as resale price maintenance, exclusive dealing, and exclusive territories, reduce transaction costs associated with free riding on information. Non-compete clauses can obviously serve this function by preventing an employee who obtains proprietary information at company X from supplying that information to company Y. Eliminating this protection on property rights to information will result in less investment in this information.

Furthermore, although the monopoly/monopsony explanations that Coase belittled at least involve the application of economics, the Khan FTC has basically thrown economics out the window. (It has definitely thrown Chicago School economics–which provided efficiency rationales for RPM, etc.–out the window.) Instead, her FTC has embraced Brandeisian big-is-bad, unconventional-is-bad antitrust. The Khan Theory of Antitrust Enforcement is akin to Potter Stewart’s theory of pornography: she knows an antitrust violation when she sees it. It is a very subjective approach completely contingent on her non-economics-based subjectivity.

Moreover, the process at the Khan FTC is highly dubious. The Chairwoman is alleged to run roughshod over staff and other commissioners–as epitomized by the resignation of the FTC’s Republican Custer, Christine Wilson. This furthers suspicions that this proposed rule is purely the product of Khan’s uneconomic, idiosyncratic mind and prejudices, rather than on sober analysis.

So my priors are that anything that comes out of the Khan FTC is likely bilge.

But priors can be modified by evidence! So let’s look at the economics of a ban.

So as not to keep you in suspense: this analysis provides no reason for me to change my priors. To the contrary.

Evidently the rationale for this ban is that non-competes are a means of exercising monopsony power. Where to begin?

First, given the plethora of participants on both sides of labor markets–including markets for fairly specialized labor–there is considerable room to be skeptical that monopsony power is severe. This is particularly true for information workers for whom non-competes are most likely used.

This is especially the case today, when the reduced cost of remote work sharply mitigates one of the factors that could conceivably create a quasi rent that an employer could extract, the cost of moving.

Not that this would be a major issue for a lot of information workers anyways. Due to well-understood agglomeration effects (that have been operating since, say, the heyday of New England cotton milling in the antebellum US!) firms of a particular type, and hence employees of this type of firm, tend to be geographically concentrated. So an employee with valuable information can find work at another firm that can use that information without having to move, or move far.

Indeed, this can explain why non-competes exist in the first place. Employers in industries with a high degree of spatial agglomeration cannot rely on the costs of relocation to prevent competitors from poaching employees. Thus, I would predict that non-competes are more likely in industries where agglomeration effects operate, whereas the monopsony power theory would predict the opposite.

To make it more specific: I predict non-competes would be more prevalent in places like Silicon Valley, whereas the monopsony theory would predict that they would be less prevalent there (because employers would have less market power when relocation costs and hence quasi rents are low).

Second, although non-competes can potentially create quasi rents ex post, ex ante potential employees can negotiate contract terms (or at least reject terms offered by a potential employer). Employers can attract employees only if the other terms of the contract (including pay, but also other terms) compensate for the restriction on the employees ex post options. As long as the ex ante employment market is largely competitive, contractual terms will compensate (or more than compensate) for the employee’s ex post loss of freedom. If (due, for instance, to information disclosure problem) non-competes are wealth enhancing, the Coase Theorem comes into play. Employers and employees will negotiate other terms that make both better off.

Third, even granting arguendo that non-competes are a way of exercising market power ex ante (a dubious proposition), eliminating non-competes does not eliminate the market power, so it is by no means clear that eliminating non-competes will make employees better off. Rapacious, monopsonistic employers will just find some other way to exploit their market power. And that could make employees worse off. Eliminating an efficient way of exercising market power makes the pie smaller, and it is likely that both employers and employees would both suffer as a result.

This raises the issue of why monopsonists would prefer to use non-competes to exercise (ex ante) market power, rather than just paying lower wages/salaries, or offering fewer benefits. Perhaps you could view it as a form of price discrimination where employers exploit differences among employees by offering a menu of contracts with different pay and non-pay terms (including non-competes, or not) to extract rents. Even if that’s what’s going on, it is well known that the welfare effects of price discrimination–and hence of its restriction–are highly ambiguous.

That is, even if non-competes are a way of exercising market power, eliminating this particular way of doing so does not necessarily mean that market power will decrease: firms may instead utilize less efficient ways of exercising it.

One Chicago School staple is that a monopolist has no incentive to engage in things like exclusive dealing in order to extend market power: it can extract the maximum profit by just charging the monopoly price. Hence, there is likely some non-monopoly leveraging explanation for such contracting practices. Similar logic applies to exercise of monopsony power.

The pushback against Chicago resulted in the creation of a lot of highly stylized, not to say contrived, models in which such monopoly leveraging can occur. Nice models! Never seen one that applies to a real world situation.

I therefore surmise that even if employers have ex ante market power, it is unlikely that non-competes enhance that market power, and that eliminating them will make employees better off–because the elimination does not reduce the ex ante market power.

The empirical evidence that supposedly supports the ban is that elimination of non-competes is associated with higher wages. Even putting aside my skepticism that wages are a sufficient statistic for employee welfare (since so many other terms of employment can be varied), it must be recognized that there are reasons why elimination of non-competes in competitive labor markets could boost wages for some.

Elimination of non-competes essentially gives employees property rights in valuable information. Absent non-competes they can effectively sell this information, whereas they cannot do so (or are limited in their ability to do so) when non-competes are in place. Since the information cannot be sold separately, it is bundled with the other services supplied by the employee. All else equal, employers (including an individuals current employer and potential employers) are willing to pay more for the information-service bundle than the service alone. That means higher compensation.

As Coase and subsequent scholars (including prominently my thesis advisor Lester Telser) noted, contractual restrictions can be ways of creating or protecting property rights in information. It is highly likely that’s the role that non-competes play, especially given their widespread use in tech and other information industries. Therefore, be skeptical indeed about the FTC proposal. Indeed, even if you believe that instead non-competes are in part a means of exercising market power, you should not conclude that their elimination will make employees better off because the market power remains even after one means of exercising it is constrained.

We should all fear the Wrath of Khan generally, given her economic ignorance, and indeed her hostility to economic reasoning. We should especially fear it in her latest attempt to reshape private contracting in what is arguably the largest market in the United States–the market for labor, and for information intensive labor in particular.

The embarrassment of this administration is ballooning, as if one could have thought that possible as bloated as it was already. Apparently in a belief that “Trump did it!” is kryptonite to any criticism, some anonymous DoD person told reporters that Chinese balloons had transited continental United States airspace on at least three occasions when the Donald the Dreaded was POTUS.

Virtually everyone in Trump’s national security upper echelons–including people who hate him, like Bolton and Esper–immediately called BS. They all said they were never informed of this. So what are the possibilities?

First, it never happened and this is just somebody making shit up to clean up after Joe. Always a real possibility.

Second, it did happen, and the balloons were detected in real time, but the DoD decided to withhold this information from the commander in chief. That would be a scandal of major proportions. And sad to say, it is believable.

Third, the administration’s elaboration: the previous balloons weren’t detected in real time, but they were uncovered after the fact by the intelligence agencies through some undisclosed means. Although all of these explanations are disturbing in their own way, this would be the worst. It would imply a gaping hole existed in US detection technology. Although the administration claims that THIS TIME they detected the balloon as soon as it passed over the Aleutians, and this suggests that the vulnerability has been addressed, we can’t be sure whether it’s just that NORAD got lucky this time.

There must be a public investigation, by Congress, to determine which of these explanations is the correct one.

With regards to the first explanation. Why did the WaPo rely on a single source for a story like this? Why won’t the Pentagon reveal who made the statement to the reporter? Note that the story–if it was true–would have involved the leak of highly classified information: a crime. If it wasn’t true, a “senior” official is spreading–wait for it–disinformation, supposedly the greatest threat to “our democracy.” Either alternative is unacceptable, and should result in the investigation, termination, and perhaps prosecution of the perpetrator. And he should be identified immediately while these steps are proceeding.

Letting the balloon traipse from Alaska to South Carolina (apparently on a tour of US nuclear facilities) is bad enough for the reasons discussed in my earlier post. But this clumsy attempt to exonerate Biden through whataboutism (“whatabout Trump!!!”) makes things even worse. It reveals the US military and Department of Defense to be incompetent, mendacious, or both.

Biden didn’t say anything either at a shout or a whisper about the balloon in his State of the Union address. He obviously wants this to go away. It can not be allowed to go away. It is a national security embarrassment of the first order, and Austin, Milley, the head of NORAD, and the head(s) of the intelligence agency or agencies that allegedly discovered previous violations of US airspace ex post facto must be hauled in front of Congress for a public grilling.

And then, perhaps, keel hauled.

The carnival of the Chinese balloon transcontinental transit is bringing musical flashbacks, such as this from 1983:

Or going even further back–deep into my childhood:

Groovy, baby.

Seriously though, I am of mixed minds regarding the decision–the Pentagon’s according to Biden–to defer destroying it until it had traversed the US from sea to shining sea. On the one hand, I can perhaps see that there is intelligence value in observing it. On the other, it makes the United States look pathetic before a strutting China.

On balance, I believe the latter consideration substantially outweighs the former. The lame excuse given for not puncturing it with extreme prejudice earlier–that its fall would endanger people on the ground–belies an intelligence collection motive: if that was the reason, just say so! At least that sounds more boss:

And what are the odds of someone on the ground being hurt in Alaska, the Yukon, or even eastern Montana FFS?

And was the benefit to us of the intelligence we collected on the balloon greater than the value of the intelligence the balloon collected on us?

And perceptions are reality. It’s not like this is a new super weapon. Pretty sure we had figured out everything it was doing and capable of doing during the time it was flying over thousands of miles of trackless waste–if we didn’t already know before it breached US airspace over the Aleutians. But the image of a spy balloon flying with impunity over the fruited plain does convey the image of a “pitiful, helpless giant” (to quote Nixon, reading what the just-retired Patrick Buchanan wrote). This is especially true given that there is a pitiful, helpless mental midget holding the position of Commander in Chief.

This reinforces the image of fecklessness that hangs around this administration like a bad smell. And fecklessness encourages recklessness. That is, we have to think about how Xi interprets this, and believe me, he’s not going to believe “we were protecting people on the ground” line for one second.

He may laugh, though.

But after he’s done laughing, he’ll incorporate what he surely perceives as an image of weakness and indecision into his calculus regarding Taiwan and other points of potential conflict.

This raises the question of motive. After all, China has supposedly reined in its “wolf warriors” and was trying to present a more conciliatory face to the US, and the world. Blinken was supposed to meet with the Chinese to help reset relations. (Nod was to remain in the White House.)

One possibility is that this was a test–would the US still proceed with a rapprochement despite a provocation (humiliation, in fact)?

Another possibility–never to be dismissed in one party (but many faction) states–is that elements in the CCP (including, perhaps, aforesaid wolf warriors) wanted to derail any rapprochement, and figured that creating an incident like this was the way to achieve that objective.

Given the opacity of the CCP/Chinese government, it’s hard to say. But under either scenario, the return message should have been: don’t fuck with us. Instead, we sent the message that we are eminently fuckable.

For their part, the Chinese lost their shit when an F-22 FINALLY took down Chairman Xi’s Amazing Flying Machine.* To which we should have replied: fuck you and the balloon you rode in on, commies. Instead, we gave a mealy mouthed, diplomatic reply.

We are in a very fraught period with China. We are trying to recover from “locust years” (as Churchill called them) of military distraction and decay and recover at least a semblance of our former naval and air dominance over China. China is ruled by a megalomaniac with ambitions to crown his achievements by retaking Taiwan. The last thing do do under those circumstances is to convey weakness. And regardless of the true justification for allowing the balloon to traipse over American unhindered, that’s exactly what happened.

The phrase “the balloon went up” means that the situation is very serious. It dates from WWI, when the appearance of a reconnaissance balloon was a harbinger of an artillery barrage incoming. Well, the balloon went up, and to my mind, was brought down far too late.

*The F-22 took down the balloon with an AIM-9X Sidewinder. A testament to how sensitive the heat seeking infrared sensor on that weapon has become. In early versions of Sidewinder it was necessary to get right on the tail of an adversary for the guidance system to be able to pick up the heat signature of the engine. To be able to take down a balloon, which has far less of a heat signature than a MiG’s exhaust, is pretty impressive.

The F-22 pilots used the call signs Frank1 and Frank2, apparently an homage to WWI “Balloon Buster” ace Frank Luke (whom Eddie Rickenbacker called the best pilot in WWI). There is some irony here, though, because it is clear that the current Pentagon leadership is shall we say slightly less aggressive than Lt. Luke.

After much hemming and hawing, too-ing and fro-ing, Germany has finally relented and agreed to the provision of German-built Leopard II tanks to Ukraine. Apparently the deal clincher was an American agreement to supply 30-odd M1A2 Abrams MBTs. These will join a modest number of Challenger IIs to be provided by the UK.

This is an important development, but not an earth shattering one as some on each side are saying. Some pro-Ukrainian western observers assert this will allow Ukraine to recapture all its lost territory-including Crimea-from Russia. On the other side, which includes the Russians and many right wing populists in the United States, this is the next step to Armageddon. As Trump put it: “today tanks, tomorrow nukes.”

Settle down, everybody. (A big ask, I know.)

Yes, these MBTs are far superior to anything Ukraine currently operates, and to anything in the Russian armory. On every crucial dimension, the western-supplied tanks are superior: firepower, protection (including protection of ammunition), cross country performance, gun accuracy, optics and fire control systems. Optics and fire control systems are especially important because it has been long known that in armored battles, he who shoots first almost always wins. Iraqi tankers found this out to their dismay (if they were lucky enough to be able to find out anything) in 1991 when their tanks began exploding from hits from M1s that they couldn’t even see. Although both the western and Russian tanks have improved in the decades since, the already yawning gap in performance demonstrated in 1991 has only increased over the years.

But quantity has a quality all its own, as Stalin was wont to say. And the fact is that the quantity of tanks being supplied Ukraine is modest. Given the inevitable attrition due to combat and breakdown, the approximately 300 tanks is about enough for one armored division for one big battle.

Consider the use of this type of force on the defense and offense.

On the defense, an armored force of this size and quality could stop Russian armored advances and launch devastating counterattacks–if they are located where the Russians choose to attack, or can get there in relatively short order.

Given the record of the last 11 plus months, moreover, it’s not clear that Ukraine needs this force to defeat a putative Putin armored attack. In February-March of last year, Russia proved singularly incapable of utilizing armor effectively in the offensive, and its tanks proved easy pickings for anti-tank guided missiles. This was in part to (as I wrote at the time) Russia’s incompetence at combined arms tactics: tanks without infantry are extremely vulnerable. Given the dross with which Russian formations are being reinforced with, and the lack of training they have received, their capabilities are almost certainly worse rather than better than a year ago.

Logistical failings also helped doom the Russians in early-2022. If anything, massive attrition in vehicles and the effect of HIMARS has worsened their logistics woes: due to HIMARS, the Russians are being forced to locate their supply dumps well to the rear, increasing the duration of vehicle trips (effectively reducing supply capacity) and increasing the vulnerability of supply convoys to attack by drones, air attack, artillery attack, infiltrators, partisans, what have you.

So although an impending Russian spring offensive is anticipated, there is no reason to believe it would fare any better than the last one, and considerable reason to believe it would fare worse, tanks or no tanks.

Insofar as offensive operations are concerned, yes, the western MBTs can provide a striking force that might break through Russian lines. But a decent-size force of modern tanks is likely a necessary but not sufficient condition for such an outcome.

Successful armored assaults often rely on surprise and indirectness rather than mere smashing power. Tanks deployed against a weakly held section of an enemy line are far more effective than those hitting strong prepared positions. Compare Ardennes (1940, 1944) to Kursk (1943) or even the Seelow Heights (where in April 1945 a massively superior Soviet armored force took horrific casualties to overcome prepared but weakly-held defenses).

Achieving such an outcome requires considerable operational skill and operational security. Recall the lengths to which the US went to conceal its shift of its armored striking force from fronting Kuwait to fronting Iraq some distance to the west in order to be on the Iraqi flank. (In the event, the Marines smashed through prepared defenses in Kuwait, but the point holds). In 1940 and 1944 the Germans were helped by overoptimistic French and then American/British assumptions which led them to leave the Ardennes weakly defended and to discount the possibility of German massing there. At Kursk, the preparations were too massive to be concealed, giving time for the Soviets to construct a defense in depth which ground down the German armored spearheads before they could achieve a decisive penetration and breakout. Subsequently the Soviets launched a massive armored counterattack–against weaker German forces on the flanks. The same thing happened at Stalingrad.

Recent Ukrainian successes suggest some skill at deception and operational security. They evidently duped the Russians into believing the main Ukrainian effort would be in the south but instead the attack started in the Kharkiv region–agains skeleton Russian forces.

But there’s no guarantee of achieving that again, and ironically, the very mass of a big tank force makes deception and operational security all the more difficult.

There’s also the issue of whether the Ukrainian army can carry out the combined armed tactics that are necessary to succeed in an armored strike against opposition. The large casualties they have suffered over the past 11 months has certainly weakened what combined arms skill they possessed prior to 24 February 2022.

Further, there is considerable room to question how deep a penetration Ukraine could achieve. Its logistical capabilities are also limited, and the tanks they are receiving are gluttonous consumers of fuel (especially the Abrams). It would also have to confront the inexorable logic that every kilometer of advance hurts the attacker’s logistics and helps the defender’s.

And with respect to logistics, tanks require considerable maintenance support to begin with, especially when they are on the move. The fact that Ukraine is receiving three different kinds of MBT, each requiring a separate support structure (which will be of suboptimal scales) means that a lower percentage of their tanks will be operating at any time than would be the case for an American division operating a single type of vehicle.

In sum, the new western tanks will help shift the balance in Ukraine’s favor, but are unlikely to do so in a decisive way. I doubt that they will shorten the war appreciably, especially since even though they will likely result in more Russian losses on the battlefield, such losses have clearly not persuaded Putin to consider giving up, especially on terms suitable to Ukraine. And any advances the tanks facilitate will only encourage Ukraine in its belief that it can restore its 2014 borders.

So my prediction is that the western MBTs will mainly shift the line of stalemate to the east. Perhaps a considerable distance, but not nearly the distance Ukraine desires.