Well, we are at war with Iran. Or perhaps we have always been at war with Iran? Though to be clear, it is not a war with Iran, merely a targeted, limited combat operation… of indeterminate length, scope, and objective.
As Michael Brendan Dougherty notes at National Review, “without the administration fully articulating the ends, it becomes almost impossible to judge whether the means are sufficient to get us there.” And while one can find much excitement on X for American excellence in ordinance, Oren points out, “no one doubts that the U.S. can drop large numbers of bombs on Middle Eastern countries and blow up boats in international waters. The skepticism has more to do with seeing what that has and has not accomplished, and where it tends to lead.”
In the meantime, speaking of Oren and excitement on X, he has a story to recount:
I found myself in a Twitter fight last week with the University of Chicago’s Richard Thaler, a Nobel laureate in economics and the best-selling author of Nudge. Twitter fights are tedious. I try not to subject readers to them too often, but we are here to understand America, and realizing that even the most accomplished economists are so frequently undeserving of our respect is important to that understanding. So humor me for a moment.
The catalyst for this particular discussion was my recent American Compass podcast episode with Thaler’s colleague, Luigi Zingales, who had sent out a tweet promoting the conversation. Out of nowhere, Thaler piped in: “do you agree with Oren Cass that share repurchases are evil? What about dividends?”
This is what the kids call “catching a stray.”
So I observed, in response, “economics as religion... If you construe a case for banning share buybacks as an argument that they are ‘evil,’ you may be afflicted by a case of market fundamentalism.” And off we went…
Richard Thaler: Why do you want to ban them if they are not evil?
Oren Cass: I think we should prohibit via regulation a firm’s management trading in its own stock because the incentives to do so are badly misaligned with the firm’s and economy’s long-term health.
But I’m much more interested in your idea that regulatory prohibitions should be applied only to things that are “evil.” Is that really your view? I mean, in securities regulation alone, it seems like that is pretty far off the mark, unless you’re saying we shouldn’t have securities regulation?
RT: You are reading too much into “evil”. Harmful? What about dividends? Share issuance à la GameStop is pretty bad but buybacks on average signal that the price was too low. Insider trading is bad. So is trading by members of Congress. Only ban bad stuff. Am I then religious?
OC: You made an assertion that Oren believes “share repurchases are evil.” I thought it was possible you really do think people only support bans for “evil” things, but clearly not. So it was just a baseless and inappropriate attempt to malign me. Fine.
What is your evidence that “buybacks on average signal that the price was too low”? The empirical evidence that I’m aware of suggests the opposite, with the exception of small-cap companies with large information asymmetries (which would then bring us to the insider trading inquiry...).
RT: Ok done here. Send me an email if you want to have a civil discussion. Firms buy back shares for lots of reasons including using them to give employees stock options. Yes they can be mis-used by top execs to meet targets, but go after that!
[Editor’s Note: He was not done here. He returned the next day…]
RT: Some useful background from my friend and co-author Owen Lamont. Failing to read his blog posts is an own-goal.
RT: Nice quote from Ken French: “Buybacks are divisive. They divide people who understand finance from those who don’t.”
So what can we learn from this dialogue?
1. The dysfunctional culture in economics runs deep. Thaler is a behavioral economist. “He investigates the implications of relaxing the standard economic assumption that everyone in the economy is rational and selfish, instead entertaining the possibility that some of the agents in the economy are sometimes human.” These are the people who are supposed to save us from the market fundamentalists, injecting more realistic assumptions about real-world decisionmaking into foolishly abstract economic models.
But Thaler cannot help himself. For some reason, he feels drawn to jump publicly into a discussion with Zingales, not to make some learned point, but to try to make fun of somebody whose views are insufficiently Economics(tm). We can infer, using tools from behavioral economics, that he anticipates such behavior will elicit a positive reception.
2. Unfortunately for Thaler, the joke is on him. It turns out he doesn’t know as much as he thinks he does about stock buybacks; rather, he’s operating on precisely the unsophisticated assumption of market efficiency that has gotten his discipline into so much trouble.
He seems to believe that we would never ban something unless it is evil. (Much better to “nudge,” using the superior wisdom of the technocrat to manipulate the common man into making the decision preferred at the University of Chicago.)
He makes an empirical claim, “buybacks on average signal that the price was too low,” but declares the conversation over rather than providing support for the claim. Probably a wise move, because he’s simply wrong, having gone with the generic theoretical assertion of efficiency without any concern for how buybacks actually function.
In fact, as the Harvard Law School’s Forum on Corporate Governance explained in 2020, “management teams often say they like to buy their stock when it is undervalued, but companies do a poor job of timing the market, often buying at market peaks rather than troughs.” For instance, “a 2019 study by Fortuna Advisors shows that 64 percent of companies in the S&P 500 had negative buyback effectiveness, implying that a company’s buyback return on investment (ROI), though positive, was lower than its total shareholder return (TSR), usually due to poor buyback timing and suboptimal capital allocation decisions.” Yes, “some studies suggest that companies are good at taking advantage of undervalued stock prices during buybacks. Further examination by McKinsey & Company, however, concludes that this finding is driven almost entirely by small-cap companies with large information asymmetry.”
What’s going on here? Morgan Stanley explains, “in theory, buybacks should add value to ongoing shareholders and provide them with an ability to time their tax liabilities. In practice, companies regularly tie the magnitude of their buyback programs to the dilution that [stock-based compensation (SBC)] causes and look to buybacks as a means to manage [earnings per share (EPS)].”
Thaler’s follow-up the next day makes for a bizarre coda. Having finally thought of some evidence, he returns to the conversation. This is reminiscent of one of my favorite Seinfeld plotlines, in which George, after being insulted at a meeting, thinks of a lame comeback too late to deliver it. He then orchestrates a whole ‘nother meeting just to deliver the line (“the jerk store called, and they’re all outta you”), only to get to one-upped and mocked yet again.
Thaler doesn’t have evidence, he has a friend’s blog post. It’s mostly a blog post about stock issuance, not stock buybacks. The one study it cites on under/overvaluation is mostly about issuance, too. And it’s two decades old. That’s significant because one key, more recent finding is that buybacks used to reflect undervaluation. But not anymore. “Repurchases in the 2000s are weaker undervaluation signals than in the 1980s and 1990s,” according to the Handbook of Corporate Finance (2022). “Although stock prices still tend to jump at the announcement of repurchases, they no longer consistently rise in the long-term.”
In this respect, the whole debate is reminiscent of the one about private equity, which indeed generated impressive returns in its early years, but now fails to beat a simple public market index.
3. Thaler is exceedingly confident in his ignorance. Thaler concludes with a quote from Ken French, that “buybacks are divisive. They divide people who understand finance from those who don’t.” Good one. Ironically, this attitude is precisely the one that Zingales critiqued on the podcast, when he observed: “Economics is so hierarchical and so homogeneous. ... [Economists] believe in meritocracy, but then we look at people’s pedigrees and whether you graduate ... I can have as many citations as I want. It doesn’t make me right.”
By the end, Thaler has even conceded the case. While he initially said of buybacks, “I have not heard a case against them,” he concludes that, “yes they can be mis-used by top execs to meet targets, but go after that!” So there is a case against them, and one he would support going after. How exactly would policymakers go after “mis-use by top execs” while permitting what he apparently considers the vital other uses? Perhaps that’s just another question that divides people who understand finance from those who don’t.
But it does bring us back to where we started: Thaler’s question of whether the criticism of buybacks also applies to dividends, which likewise return capital to shareholders. It does not, precisely because dividends do indeed facilitate the legitimate purpose of payouts to shareholders while allowing much less room for gaming. Banning buybacks while permitting dividends is exactly the way to go after misuse by top execs without interfering at all with capitalism’s valuable operation.
But that kind of thinking requires clear-eyed analysis rather than the dogmatic recitation and performative in-group signaling that economists now tend to offer. The Jerk Store seems unlikely to run out any time soon. — Oren
GOOD WEEKEND READS FROM US
American Compass has just released a major new paper on which we both worked, Learning by Doing: Case Studies in Building the Infrastructure for Career Pathways. Everyone loves “apprenticeship” in theory, but what do good pathways look like in practice? We profile six programs across innovative high schools, technical colleges, employers, unions, and partnerships therein. Start with the Foreword:
A startling transformation is underway, in the economy, in the culture, and among policymakers. The ironclad, bipartisan belief in college as the “ticket to the middle class,” in former President Barack Obama’s preferred phrase, that every child should go to college, that the public education system’s primary task is to prepare everyone for college, has begun to crumble.
And this one’s a watch or listen, but last week American Compass helped host a fascinating AI + Labor Summit in Washington, which featured a conversation between Palantir CEO Alex Karp and Teamsters President Sean O’Brien, moderated by Oren. We’ve released it as this week’s podcast.
SPEAKING OF TECH AND LABOR…
Don’t believe corporate press releases with “AI” in the title. From the Wall Street Journal: Jack Dorsey Blamed AI for Block’s Massive Layoffs. Skeptics Aren’t Buying It.
Rather than leading American corporations into a brave new future, some Wall Street analysts say, he is capitalizing on a chance to slash costs at a company with excessive staffing. What began as a company focused on card-payment systems expanded into buy-now, pay-later loans, Jay-Z’s music-streaming platform and bitcoin investments.
But this new working paper from Erik Brynjolfsson is worthy of contemplation: Minimum Wages and Rise of the Robots.
This paper studies how minimum wage policy affects firms’ adoption of automation technologies. Using both state-level measures of robot exposure and novel plant-level data on industrial robot imports linked to U.S. Census microdata from 1992–2021, we show that increases in minimum wages raise the likelihood of robot adoption in manufacturing. Our preferred identification exploits discontinuities at state borders, comparing otherwise similar firms exposed to different wage floors. Across specifications, a 10 percent increase in the minimum wage increases robot adoption by roughly 8 percent relative to the mean.
On X, Brynjolfsson asks, “Does raising the minimum wage accelerate the ‘Rise of the Robots’?” One might ask the corollary question, “Would eliminating the H-2A temporary agricultural visa program accelerate the Rise of the Robots?” The idea that higher labor standards lead to technological innovation, capital investment, and higher productivity is precisely the argument for such standards.
This was the thrust of American Compass’s recent collection, For Whom the Machine Toils:
Are American workers’ interests and American techno-industrial strength in tension? Many say yes, from labor activists who treat technological innovation as a threat, to libertarians who view worker power as an obstacle to technological dynamism, to economists who say that upholding labor standards and protecting domestic industry are both misguided.
They are wrong. An economy in which worker power and industrial power reinforce each other is possible. Rapid technological progress is precisely the formula for increasing both productivity and wages. Worker power, properly deployed, forces capital to invest accordingly, improves the return on that investment, and ensures labor enjoys its fair share. Protection of the domestic market—both workers and industry—was a central tenet of American economic strategy for decades.
Especially, read Michael Lind: “High Wages and Technological Innovation: There Is No Alternative.”
Prediction market Kalshi is allowing people to bet on the likelihood of the “Citrini scenario” that Daniel wrote about last week (i.e., sudden waves of white-collar unemployment sending the economy crashing in a vicious cycle). Supposedly, the benefit of these “markets” is that people put their money where their mouths are, providing better information than the newscycle competition for most outlandish clickbait. Unfortunately, courage here seems rather lacking. Kalshi’s version of the scenario amounts to such milquetoast milestones as 10% unemployment, a 30% decline in the S&P 500, and annual inflation falling below zero.
That’s called… a recession. Those figures were hit, or nearly so, in 1983, in 2009, and in 2020. And even still, our wise wagerers have the probability at 14%. Let’s get some more of these markets going. OpenAI CEO Sam Altman says we’ll either cure cancer or educate the world for free this year. Anthropic AI CEO Dario Amodei says AI might wipe out 50% of white-collar jobs and spike unemployment to 20% by 2030. We’d like to bet against them.
At least prediction markets are good for something: capitalizing on classified military plans. “The US attack on Iran was preceded by a number of unusually large and well-timed bets that made a combined profit of $330,000 and were placed by 12 suspicious accounts in the days before Saturday morning’s air strikes,” reports the Financial Times. So much value creation.
MORE GOOD WEEKEND READS
In the Claremont Review of Books, Michael Anton gives Laura Field’s Furious Minds its, er, due.
The various endowed-chair professors, think tank senior fellows, national newspaper columnists, and other assorted luminaries who have heaped praise on this book should be embarrassed. That they can, with a straight face, praise it as good scholarship calls into question whether they can any longer recognize even passable scholarship. More likely, however, they know bilge when they see it—but laud this particular bilge nonetheless because it furthers a common partisan interest.
And then kudos to the Wall Street Journal for a clean sweep of the week’s most interesting coverage:
What Is a City When Its Wealthiest Leave? The stickiness that once anchored people and capital to great cities is gone. It is not coming back.
America’s Ranks of Immigrant Truckers Find a Roadblock: English Tests. Over the past year, more than 10,700 truckers failed an English test, disqualifying them from driving.
High Schools Are Losing the Struggle to Block Pot—Even During Class. Legalization makes marijuana culturally acceptable and easy to get; “it was a party in the bathroom.”
CHECKING IN ON TARIFFS
Much has happened since the Supreme Court’s ruling. While some have questioned President Trump’s authority to re-impose a 10% global tariff via Section 122 of the Trade Act of 1974, Peter Harrell (who helped litigate the case against the IEEPA tariffs) argues at Commonplace that the move will very likely withstand judicial scrutiny.
Harrell also emphasizes, though, that seemingly arbitrary moves by the administration—such as quickly increasing the rate to 15%, attempting to impose different rates on different countries, and so forth—would raise more serious issues. So keep an eye on: Bessent Says Global Tariffs Will Rise to 15 Percent This Week (New York Times).
And in the meantime, what happens to the old tariff revenue? The Court of International Trade has ordered refunds (New York Times), delays of which may cost taxpayers billions more in interest (Cato Institute).
Legislation, people… legislation. Like the bipartisan Secure Trade Act, that would codify the global 10% tariff. Rep. Jared Golden, co-sponsor of that bill, has an excellent piece on it all: Our Trade Imbalance Is a Risk to Our Future.
In better news, investment from Japan continues apace. Japan, US Aim to Add Nuclear Power Project to $550 Billion Investment Package (Reuters).
AS FOR CHINA
Let’s wrap up with a couple of interesting stories about cars and chips, where things are not going well for the Chinese.
The Financial Times reported that BYD saw a 41% decline in domestic vehicle sales, offset partly by a 50% rise in export sales. This is the China problem in microcosm: insufficient domestic demand, overreliance on exports, and nowhere to turn if those get shut down.
Speaking of nowhere to turn, China’s efforts to buy advanced AI chips are also struggling. But so is the American case for selling them. The latest news is that “U.S. Considers Capping Nvidia H200 Chips at 75,000 per Chinese Customer” (Bloomberg), but of course that cuts against the stated rationale for selling Nvidia chips in the first place: the desire to “addict” China to the American technology stack. Indeed, such a cap is essentially the exact policy one might expect the CCP to impose if it wanted to ensure both that its companies had access to the Nvidia ecosystem and the best chips for the highest-value uses while also keeping up the pressure to invest in indigenous alternatives.
With exports in doubt, “Nvidia Stops Production of Chips Intended for Chinese Market” (Financial Times) and “has reallocated manufacturing capacity at Taiwan Semiconductor Manufacturing Company away from making H200 chips to its next-generation Vera Rubin hardware.” Doesn’t that imply a tradeoff between manufacturing chips for the Chinese and for the American market?
If we’re not going to get the Chinese hooked on American chips, and more chips for China means fewer chips for the United States, the rationale for these sales is…
While you’re thinking about that, enjoy the weekend!
I laughed out loud when it turned out the line about how share buybacks divide those who understand finance and those who don't ran up against... the Handbook of Corporate Finance.
As long ago as the late 60s when weed was a felony, people would smoke it in the college dining hall.