Scott Galloway's Blog, page 8

Second Mouse.AI

As stupid as Apple’s Vision Pro is, Apple Intelligence is that … intelligent.

Innovation Is Overrated

Specifically, disruptive innovation — the kind that marks a “before” and “after” in our lives — is terrible for shareholder value. Some innovators that changed our lives:

Seattle Computer ProductsXerox PARCGridPalmNetscapeFriendsterBlackberryAlta VistaNokia

Combined market capitalization: $21 billion. And that’s only because Blackberry and Nokia somehow still exist. (Xerox donated PARC to a nonprofit in 2023, valuing it at $132 million.) Just four of the companies that capitalized on the innovations of the departed — Microsoft, Apple, Google, and Meta — register a market capitalization of $7+ trillion. The second mouse often gets the cheese. Tesla didn’t invent the consumer electric car (GM), Visa didn’t invent the credit card (Diner’s Club), McDonald’s didn’t invent fast food hamburgers (White Castle), and Coca-Cola didn’t invent soda (Dr. Pepper). One firm enjoys a market cap larger than all five combined — Apple is a second mouse the size of a blue whale.

I-brand

“AI,” has seen a brand equity implosion in 2024 similar to that suffered by the Supreme Court, Twitter, and elite colleges. The promise of the AI brand is that it will either save us/kill us all. It has done neither. Any time saved by AI has mostly been chewed up listening to breathless media reports on management (or lack thereof) drama at Microsoft AI (some people call it OpenAI). The brand is the offspring of capitalism and the Bravo Channel. Staggering increases in shareholder value mixed with IP theft, hallucinations, and constant catastrophizing. It’s as if Rupert Murdoch got married, for a sixth time, to SkyNet. I’m especially proud of the previous sentence. Apple’s move to shitcan the AI brand, and opt for Apple Intelligence, is the best brand move of 2024. The worst? A: A toss up between a chardonnay-fueled decision to hang the Stars and Stripes upside down or the zombie apocalypse of useful idiots on US campuses.

Apple Intelligence

“Apple Intelligence” is more than a great brand move; it encapsulates the company’s strategy. Take something invented elsewhere; make it more consumer friendly, easier to use, and more reliable; mix in world-class industrial design; and print billions. Artificial intelligence is for tech bros and data scientists. Apple Intelligence is AI for the rest of us. Shrewd.

The tech press has spent the past 18 months telling us Apple is behind on AI. While in the next breath reporting on the AI gaffes produced by its rivals. And that’s the point. Apple is always behind. Apple is a distinctly inventive company — its $30 billion R&D budget generates 2,000+ patents per year. But it’s mainly improving vs. inventing: ways to more precisely cut white cardboard boxes to deliver its new devices; new glues to bond layers of glass and plastic together in its phones. For the big stuff, like the mouse, digital music, and multitouch screens, it lets someone else traverse the Sierra Nevadas first.

What has Apple really been “behind” on? The Economist estimates that AI will generate $20 billion in revenue for AI “leaders” Alphabet, Amazon, and Microsoft in 2024, a whopping 2% of their combined revenue. Apple makes close to $20 billion just from Airpods. Think about that — all that hype and increased shareholder value, rivaling the GDP of Germany, and the AI industry is (so far) the same size as Airpods. The media tells us Apple isn’t an attractive employer for cutting-edge AI researchers because of its secrecy. But the company is content to let artificial intelligence scientists work elsewhere and publish their work and exchange ideas freely.

Siri, but Better

When Apple does try to be cutting-edge, it confirms the merits of its slower approach. When it launched Siri in 2011 (using technology it acquired), Samuel L. Jackson introduced the digital assistant science fiction had been promising us. Even today, Siri doesn’t work as well as promised in 2011. I just asked her the same question Jackson asked in 2011 — “Find me a store that sells organic mushrooms for my risotto” — and she gave me a list of UPS stores. Siri is Apple’s most glaring failure, even more so than the Vision Pro — the headset is a sideshow, an insurance policy Tim Cook purchased in case that mendacious fuck (one guess) was right about headsets. Apple spent couch change just in case Zuck knew hardware. He didn’t. Siri, however, is supposed to be at the heart of Apple’s most important products. Apple has the brand equity and capital to absorb mistakes like these, but the missteps show that being first is not the winning strategy.

Alexa and Google Assistant are better than Siri, but they aren’t better enough. They also came out too early, got bogged down in the Sierras, and were forced to eat each other. Too much? If Apple Intelligence delivers on the promises made this week, this version of Siri will be the product Apple should have waited to launch. Apple has learned to underpromise, in contrast to the rest of the AI committee, who tell us, in hushed tones, how concerned they are about AI. That’s an obnoxious humblebrag. The anti-Apple crowd growled that Android already has many of Apple’s new features. It does, sort of, if you have the right phone and can navigate a complex ecosystem. It has “artificial intelligence.”

Apple Intelligence’s integration of ChatGPT also elegantly eliminates an existential threat. Few firms have the consumer resonance and cheap capital to launch a handheld phone. It’s been reported that OpenAI is planning to develop an AI phone — with former Apple designer Jony Ive. But why would you want a ChatGPT phone when you can have ChatGPT on an iPhone?

Cabbage

On the day of Apple’s Worldwide Developer Conference, when Apple Intelligence was introduced, the stock declined 2%. However, as with an intelligent joke, it took a beat to absorb the real insight.

From a shareholder standpoint, Apple Intelligence has positioned the company to (again) create the (second)-most-profitable licensing deal in history. Much of Apple’s shareholder value hasn’t come despite competition from Microsoft or Google, but because of it. Specifically, Apple’s ability, as gatekeeper to the Earth’s billion most affluent inhabitants, to pit the two against each other. Alphabet pays Apple $20 billion each year to make Google the default search and gain VIP access to the premier club on the planet. It’s likely $19.8 billion of that hits the bottom line. At a P/E of 32, the Alphabet deal is responsible for 20% of Apple’s market cap. Incorporating OpenAI’s ChatGPT positions the business to put ball gags on both MSFT/OpenAI and Alphabet and molest them, as they’ll be forced to pay billions for direct access to Apple’s users. At launch, Apple is reportedly letting ChatGPT in for no fee, but don’t expect that to last, as Apple is likely erecting a toll booth — and it will surely take its usual cut from premium chatbot subscriptions bought via iPhone. The market figured this out, and over the next two trading days Apple added $300 billion in market cap. Apple Intelligence, by any other name, is this decade’s Apple monopoly tax.

Contextual Intelligence

“Generative AI” has been the anodyne buzzword in tech since ChatGPT launched, but there’s something more powerful: Contextual AI. I don’t need AI to know everything about Icelandic history or sinus medication. I need it to know about me. The most impressive AI feature on my iPhone is Memories. I don’t know how or when it was added, but it’s powerful. Out of nowhere I get notifications — “You have a new memory” — and there is a cropped image of my boys on their first day of school, the younger one clinging to his mother, that flows into another image of the older one not comforting him. All set to music that morphs my older son’s disposition into endearing from … indifferent. But I digress. I use AI for brainstorming and research; thus far that hasn’t affected my life nearly as much as the ability to more easily search my photos — a feature Apple Intelligence will enhance. A well-timed Memory renders me a chocolate mess, in a good way. No number of parameters in GPT-5 will generate that.

Integration into the Apple ecosystem was the theme of the Apple Intelligence announcement, giving the AI the context of our email and messages, calendar, browser history — the whole storehouse of information already on our device. Post-launch, Apple Intelligence will start to reach out to third-party apps and services beyond our devices. That’s where the real cheese lies — “Scott, how’s your shoulder pain? Do you want me to make an appointment with your physical therapist?”

Design matters, and Apple’s AI features will reflect that. But Apple’s greater advantage at this stage of its evolution isn’t design, or technology, or distribution, though all are best in class. Its advantage is that for the wealthiest billion people on Earth, an iPhone is the first device they see in the morning and the last before they go to sleep, and it’s never more than a few feet from them throughout the day. Everything I do is on my phone. The LLM that gets my discretionary spending will be the LLM that gets me. And that means it has to live on my iPhone.

Less Downside

Another advantage of the second mouse strategy is that when you fail, it’s a whole lot cheaper. The exit wounds are clean and heal quickly. Meta has burned $46 billion to stuff the same drawer that has your Nike Fuelband with Zuckerberg’s VR hallucination. Apple’s cheaper call option on the metaverse can be quietly killed in a few years with no lasting damage. In innovation-driven industries, how you fail is almost as important as how you succeed. I predicted the Vision Pro would be a failure when it launched, but I didn’t sell Apple stock.

2025

Next year will probably be the year that real winners and losers start to emerge in AI. We’re still in the Netscape stage, when the technology itself is the innovation. Because our government spent the last 40 years asleep at the switch on antitrust, the usual Big Tech giants will fight for AI supremacy, and Apple is holding a strong hand. Not just because of its second mouse strategy, but also thanks to its vertical integration. There is a lot of money to be made adopting an asset-light model — see Airbnb, Shein, Nvidia, more on that in another post — but Apple’s contrary approach has its advantages.

Apple Intelligence requires massive computational power to run LLMs on the device, but that’s key to its contextual awareness, speed, and reliability. When these features roll out later this year, they will only work to their fullest on the latest Apple devices — giving a billion or so users of older editions a reason to upgrade. Then they’ll work on every future iPhone — and iPad and Mac. This sharpens an edge over Alphabet, which can’t ensure every Android phone has the necessary hardware to run Gemini Nano, the Android LLM equivalent to Apple Intelligence, or even access to the updated OS. Android’s Achilles heel has long been this fragmentation — what you see running on Pixels in the keynote takes years to filter down to the phones most Android users actually own.

Future Memories

I spend a great deal of my wealth on homes in nice places. The goal is to live where my sons, and the people they collect, will come visit me. I think a lot about death. It gives me power/courage to live a bit louder and less fearfully. And when the ass cancer comes, I plan to be in a beautiful place, surrounded by people who will miss me terribly, a shit-ton of heroin, and Tom Petty, who’ll be joined by his best friends from the eighties. In addition, I plan to live my life over again, courtesy of Apple Memories. And that’s the real promise of technology: not to explore new worlds in a dildo or reduce customer service costs; but to save people time so they can spend more moments with loved ones … and feel closer to them. Tech’s promise isn’t artificial intelligence but native intimacy.

Life is so rich,

P.S. On Prof G Markets this week, Ed and I spoke with Morgan Housel, author of The Psychology of Money, about how FOMO, doom, and ego affect your investment behavior. Listen and subscribe here.

 

The post Second Mouse.AI appeared first on No Mercy / No Malice.

Hoarders

Throughout human history, if we had access to more than we needed, we kept the excess to survive in leaner times. Having surplus items also signaled wealth and desirability as a mate, and key rituals often depended on precious items being stored safely. Our ability to store crops was key to developing an agricultural economy. Artisanal objects, to be preserved for centuries, made us feel closer to God — the most beautiful items were kept in houses of worship, which then became stores of value. The industrial age, and ensuing mass production, created the mother of all good problems, which soon became just a problem: superabundance. Our instincts have not kept pace with productivity or processing power. We not only gorge, we hoard.

Failure to Launch

It’s incredibly challenging to ascend through the soupy atmosphere of youth, and sate our desire for things and experiences, when an entire economy and society runs on one incentive: more. It’s a cliché, but true: The first million (i.e., launch) is the hardest and most dangerous. The Falcon 9 Heavy rocket, which travels thousands of miles, burns a third of its propellant in the first mile. Most folks who reach orbit keep the engines roaring. They aspire to travel from multi-millionaire to billionaire to Bezos. Also, it gets easier once you’re in space — a touch of thrust/effort moves you thousands of miles vs. feet. Capitalism favors capital, so more quickly becomes irresistible. Unable to turn off the boosters, many überwealthy people become hoarders, obtaining more for no other purpose than amassing more.

Exhale

My father and mother were never more than two degrees of separation away from economic anxiety. Yes, my mom was disappointed that my dad left her for another woman, but her financial fear was worse. How would she take care of me, and herself, by herself? I never realized, and most people never will, how much economic anxiety we carry until the weight has been lifted. Economic security brought something else I did not anticipate: a multiyear exhale.

Not having been able to afford a home nurse when my mom was going through chemo, the feeling of failure when I later lost my business — the same month my oldest son was born — was acute. I still register an ache in the small of my back remembering those moments. It’s unacceptable, full stop, that an economy where one company (NVDA) can add the GDP of Australia in one calendar month also has large swaths of the population who live with this profound anxiety. What is the ratio of the explosion of billionaires to deaths of despair in America? My gut tells me it’s positive, when any decent society would demand the size of these cohorts be inversely correlated.

This anxiety is largely absent in other, less wealthy countries. Incumbents will make excuses that these countries sit on oil or are more homogenous. Pro tip: That’s a bullshit narrative meant to wallpaper over just how fucking outrageous it is that six people control more wealth than the bottom half of America, and pay an average tax rate of 6%. Also, we produce more oil than any country in the world. But I digress.

Spent

It’s fashionable to disdain spending, but spending puts money back into the economy, often at points with the most impact, generating wages and opportunities. I don’t understand people who are wealthy and don’t spend their money. Being social creates jobs for waiters, bartenders, and busboys. All jobs I had in college: A busy night at the Westwood Marquis, Chart House restaurant, or Monty’s Steakhouse (ask your parents if they lived in West LA in the nineties) could change my life that week. It takes hundreds of hands to make a new car or refurbish a vacation home. This isn’t an argument for trickle-down economics — we don’t need to put more money in the pockets of the wealthy. But the money they have is better spent in the economy than hoarded in the market. Consumer spending makes up two-thirds of economic activity in the U.S., and the top fifth of households by income account for nearly half of that spending. A million dollars in entertainment spending supports 6.5 jobs directly and another 22.5 indirectly.

Eudaimonia

Modern research confirms Aristotle. Long-term, sustainable happiness doesn’t come from wealth, but from relationships with others. The real gift of wealth is being freed from the economic anxiety that can stress nearly every relationship. Economic insecurity can rob us of happiness, but wealth offers diminishing returns. The lifestyle and entertainment opportunities available to someone with $10 million in assets differ in modest degree from those available to someone with $100 million. Going from $100 million to $1 billion is likely a wash. You can buy a football team, but you’ll also need private security. I know many centi-millionaires and a few billionaires, and I have witnessed no evidence, scientific or anecdotal, that wealth beyond relief from economic anxiety, and the ability to do wonderful things with your family, results in any incremental increases in happiness. If there’s nothing to be gained above a certain amount, and nearly everything to buttress low-income households … then isn’t a highly progressive tax policy, at the very top income levels, a no-brainer?

Give It Away

One form of spending that’s proven to generate reward and happiness is giving. The more you spend on others, the greater your increase in happiness. In fact, giving to others provides both passing pleasure and long-term happiness, something borne out in numerous studies: MRI scans show that giving money to a food bank lights up the same pleasure center in our brain that responds to cocaine. People who do small acts of kindness for strangers report being happier for weeks afterward. Volunteering is correlated with a stronger sense of well-being. Giving money away has been shown to have a similar correlation with happiness as making more of it. In sum, if/when you hit your number (good problem), why wouldn’t you spend or give away your incremental wealth? Why wouldn’t we pursue real wealth — happiness, a sense of belonging, being part of something bigger than ourselves?

Virtue vs. Signaling

Any philanthropic effort is probably better than none at all, but not all giving is created equal. There’s too much tech- and finance-bro PR boosting, and not enough actual giving.

Exhibit A: In 2010, ambitious Newark mayor Cory Booker wanted to attract $200 million to fix Newark’s corrupt and broken public school system. He convinced Mark Zuckerberg to pledge $100 million, and investor Bill Ackman to add $25 million. Then he, Zuck, and Governor Chris Christie all went on Oprah to announce their grand plan. After the show aired, Zuck went back to depressing teens and coarsening our discourse, Christie became a full-time presidential candidate, and Booker rode the attention to D.C. The $200 million disappeared into the same corrupt and broken school system without a trace. Were they wrong to invest in Newark’s schools? No, just not effective. Without a sustained, structural investment in infrastructure, money from the wealthy is often just a sugarhigh.

Exhibit B: Far too much billionaire philanthropy isn’t giving, but a 12-carat misdirection: shuffling money to avoid taxes and sustain dynasties. Forty-one percent of giving from the ultra-wealthy goes to private foundations and donor-advised funds. These organizations pay board members, consultants, and others, donate money to one another, and may never plant one tree or dig one well. Many are warehouses for money to grow tax free, in effect subsidizing billionaire investing with taxpayer money. The super-wealthy have weaponized the tax code to hoard wealth and then take the moral high ground with philanthropy that is camouflage for taxes owed. For every dollar a billionaire donates to charity, the government loses 74¢ in revenue.

Exhibit C: The Giving Pledge is a promise to give the majority of your wealth away by the time you die. The Pledge receives a lot of press. Bill Gates and Warren Buffet introduced it in an effort to spur billionaire giving above the anemic 10% that’s been the norm. The good it has done, however, is dwarfed by its promise and PR. “Giving” excludes political donations, but that’s about it, and notably permits the same private foundations that billionaires have long used to avoid actually giving anyone else a dime. There’s an organization behind the Pledge that coordinates events and conversations between members, but I believe this has (mostly) been window dressing, obscuring an obscene level of income inequality that runs unfettered. Gates and Buffet are richer than when they started giving; the 73 members of the Pledge, who were all billionaires in 2010, have tripled their collective wealth in the past decade. Wouldn’t a more apt name be “the Hoarding Pledge”?

Her

I have written before about MacKenzie Scott, who practices a below-the-radar approach to giving that is inspiring. Operating with a small team, she vets possible recipients quietly, often without their knowledge, and makes sizable grants with no strings attached, no PR fanfare, nor any demand for input on issues she has no domain expertise in. She’d given nearly $2 billion before making any public statement, and has given away $14 billion to date. Her fellow PNW mega-billionaire, Melinda French Gates, left the Gates Foundation last month to focus her philanthropy on organizations working on behalf of women and families, and she’s already announced $1 billion in gifts spread across dozens of organizations.

There’s more than meets the eye here. Evolutionary theory suggests kin selection and inclusive fitness comes more naturally for women, who are raised to be more empathetic and have an easier time forming social bonds. Women are also socialized to be more nurturing, cooperative, and community-oriented. The previous sentence is a decent disarticulation of generosity. Women develop a desire to help others without personal recognition. Eighty-five percent of charitable giving decisions in affluent households are made or influenced by a woman. In sum, women give differently. There’s more emphasis on the giving part.

Number

I hit my “number” almost a decade ago. I purposefully paused and spent a great deal of time and consciousness on erecting scaffolding to update/temper my instinct to acquire more wealth. I decided I would spend a great deal of money on experiences with my family or services that gave me more time to spend with them and my friends. I likely only have a third of my (chronological) life left, but I’m intent on living 4/3 of my life in that remaining time. Meaning, I want to have a series of experiences that make me feel closer to family and friends and squeeze as much juice from this 7 continent ellipsoid as possible.  

After molesting the Earth for 30 years for business, it became obvious that staying in the most beautiful places, in the most iconic cities meant nothing when I was there alone. The previous sentence could also describe my thirties. It’s as if that decade never happened, as I was mostly alone. Another observation I’ve made roaming Terra is that the U.S. is the best place to make money and Europe the best place to spend it — one of the reasons we moved to London. In addition, I have a self-imposed tax of 100%. Each year, I add up my spending and give that same amount, or more, away. The surprise, for me, around giving is how masculine it makes me feel. I feel my strength and skills are protecting and providing.

Hoarders

The hoarding I’ve described above is relevant to only a small percentage of the population. What is more prevalent is the hoarding of goodwill. Each of us has wealth in the form of good intentions, positive gestures, and comity toward others. Do you hoard this goodwill? The first 40 years of my life I was cheap with my emotions, not telling people how impressive they were or how much I admired and cared about them. This is the real environmental waste in our society: possessing the resources to help people feel better about themselves and not sharing that capital. After finishing this sentence, I am going to clear my mind and wish you well. I want you to be happy and prosperous. I (really) do wish you well. And there’s no reason to hoard that sentiment.

Life is so rich,

P.S. On the Prof G Pod this week I spoke with Jessica Tarlov about Trump’s conviction and what it means for American politics. Listen here.

P.P.S. Most people aren’t using AI for strategy — and they should be. In July only, you can take Section’s AI for Strategic Decision-Making workshop for free. Sign up here.

 

The post Hoarders appeared first on No Mercy / No Malice.

Agency

To: Grads

From: Prof G

Subject: You got this

America, and the Western alliance it leads, is dysfunctional. It’s also less dysfunctional than any other society. Why? America’s alchemy of individualism, rights, education, innovation, capital, diversity, entrepreneurship and generosity creates a substance found elsewhere but not at this potency. I spend a great deal of time digesting data and media. And there’s a fissure between them. The data reflects a cold but comforting truth: The hand you’ve been dealt is better than you’ve been told.

There are paths to prosperity in our imperfect economy. There are paths to love and lasting relationships in our imperfect society. There are paths to fulfillment and meaning in our imperfect culture. The paths are there, and we collectively have an obligation to make the investments to ensure they stay broad and illuminated. However, you must walk them. Much of your future is outside of your control, but if you’re a graduate of an American university (the finest in the world), then more of it is in your control than nearly anybody else. What ultimately dictates your success relative to your environment is the choice you make to walk, and the resilience you find to keep moving. In a word, agency.

Agent You

Agency is the capacity to take the actions of your choosing, and through those actions shape your future and the world you live in. More than that, it is the recognition that you have the potency to make it happen. Agency is a fundamental aspect of human autonomy and identity. Individuals who perceive themselves as agents are more motivated, capable, and resilient. A society made up of immigrants has superior genes — they have DNA that naturally connects risks, and a propensity toward action, with better outcomes. I think, as a dad, one of my responsibilities is to help my sons connect actions, good and bad, with outcomes. To help them develop pattern recognition between action and reaction.

Gen Data

Pundits and policymakers have a fetish for statistics. “Women between 25 and 34 eat three times more yogurt than men older than 45 who make under $62,000 per year.” “The lowest income quartile of U.S. households use debit cards at Walmart on holiday weekends more often than the top three quartiles combined.” I spend much of my professional life looking at data sets and making broad generalizations. Many of which are not encouraging. However, you are one data point … not the set.

You are not your cohort. You are not sentenced to be the average of your peers, the median of your race, or the mean of your gender. Agency begins with this insight. Within the mass of humans lumped together by statisticians, on several dimensions, you are an outlier. Your range of possible outcomes is invisible to the statistician’s eye. Statistics are observations, not conclusions.

Big Pie

The pie of economic prosperity is not sliced evenly. It skews toward certain fields and backgrounds, and increasingly toward incumbents. Ours is a winner-take-most economy. Jeff Bezos’ net worth ($200 billion) is 100,000 times that of the median cardiologist ($2 million). Bezos is a brilliant entrepreneur, but he’s not 100,000 times more so than a doctor who literally holds patients’ lives in their hands. And while Bezos is the prime mover, Amazon’s value creation requires the work of 1.5 million employees, of whom only a handful enjoy a net worth 1/10,000th the size of Bezos’ ($20 million).

Yet even as our system allocates $200 billion to Bezos, there is more pie to go around. The U.S. economy generates $27 trillion in annual output, and more every year. That’s a prosperity volcano. In 2019 less than 10 million U.S. families had more than $1 million in wealth. In 2022 it was 16 million. We increased the number of millionaire households by 60% in just three years. This is mainly self-made wealth. Only 21% of American millionaires have received any inheritance, the same percentage as the population at large. There are 600,000 millennial millionaire households, and “while the average millennial has 30% less wealth at the age of 35 than baby boomers did at the same age … the top 10% of millennials have 20% more wealth than the top baby boomers at the same age.” In sum, we have inordinate income inequality, and that’s bad. However, the silver lining is the scales are tipped toward those who bring a sense of agency. If the previous sentence sounds as if I’m putting lipstick on a pig, trust your instincts. Still, there’s a lot of prosperity.

Paths to Prosperity

Many cultures and economic systems suppress agency, pushing people toward conformity, often to the benefit of existing elites. Ground zero for a lack of agency is the culture supported by the zombie apocalypse of useful idiots on campuses. But I digress. Last week on Prof G Markets, my co-host Ed Elson made a powerful point about the U.K., where he grew up. His school gives two kinds of grades, one for the quality of the work and one for effort. Officially, the “best” grade was to score at the top in both categories. But the culture rewarded something else: The true best grade went to the student who got the highest mark on quality and the lowest mark for effort. Success should be accidental; striving is uncouth. Former Prime Minister Boris Johnson personified this — a man of undeniable brilliance who was utterly committed to the culture of non-effort, reflected in a highly manicured image of dishevelment.

Who succeeds in a culture that discourages agency? The incumbents, those who already have wealth. Agency is churn, the essence of upward mobility. Caste systems are meant to relieve you of existential stress, because agency has a dark side. In America, the view/belief that you can accomplish anything implicitly whispers in your ears that, if you don’t, it’s your own fault.

America offers unprecedented agency. That is why millions of people walk across continents to reach this place, and why we spend billions militarizing our southern border to keep the inflow manageable. Pro tip: America has not only benefited from immigration, but illegal immigration specifically, because the undocumented do dirty jobs at modest wages, pay taxes, and use fewer resources. Anyone who tells you immigrants are here for a handout is taking you for a fool. People don’t walk through jungles and traverse rivers for a welfare check. They come for the same reason my parents crossed the Atlantic in a steamship: to exercise their agency. Open borders are unacceptable, and a security threat, but we need to have a sober conversation re why we have turned a blind eye to illegal immigration for 40 years. Hint: money.

Nowhere can a business idea attract so much funding ($260 billion in VC last year, $50 billion in SBA loans) or recruit so much talent (nearly 60,000 new Ph.D.s per year, 120,000 MBAs). These resources attract high-agency individuals — 5.5 million small business applications were filed in the U.S. in 2023, a record number that’s nearly doubled in the past eight years. Living in London, when speaking at an event, people usually ask me to compare/contrast the U.S./U.K. It’s fairly simple. Some people thought it was a good idea to leave everything behind, and get on a boat. Others thought it was a stupid idea and stayed. Fast forward a couple centuries and Americans are 25% more likely to start a business with access to five times the venture capital.

We live in an era of unprecedented reach. This is not limited to the U.S., but the U.S. is the epicenter. If you have something to say and a compelling way to say it, you can reach hundreds of millions of people without gatekeepers or sponsors. In 2012, Jimmy Donaldson was a 13-year-old with a YouTube channel. Today, MrBeast is 26 and has a YouTube channel … with a $48 million production budget reaching hundreds of millions and generating $700 million in annual revenue. Entertainers, activists, and commentators from Greta Thunberg and Liza Koshy to X González and Charli D’Amelio have exercised their agency to achieve global influence without relying on traditional gatekeepers.

This is a profound shift. Before he became “the most trusted man in America,” Walter Cronkite edited his high school paper, worked on his college paper, called baseball games on the radio for two years, spent nearly a decade reporting on WWII from Europe for UPI, and worked for another decade hosting a slew of news and opinion shows for CBS before finally getting the anchor chair of the CBS Evening News in 1962. He was 52 years old. Before Samuel L. Jackson became the highest-grossing actor of all time, he performed Off-Broadway for 16 years; then another unknown, Spike Lee, started casting him in small film roles; and it was another six years of minor parts before Pulp Fiction made him a star. He was 46 years old. You can get further, faster in the U.S. in our era than in any place or time in history. Until tomorrow. The bad news is there are more people with more agency (i.e., competition) and a crowding of spoils to the winners.

Agency is not individuality. You exercise agency whenever you make a choice to shape your own life. Choosing marriage is exercising agency. Asking for more responsibility at work, or volunteering at a local institution, or putting $100 a month into an IRA — these are all choices to act and shape the world. Using social media to connect to people and share ideas can be an exercise of agency; scrolling TikTok all evening is not. The stoics taught us to focus on what is in our control. Agency is an embrace, and broadening, of what is in our control.

Passivity Party

America rewards agency, but American politics is experiencing a crisis of passivity. For generations, conservatism served as a bulwark of personal responsibility against the left’s nanny-state tendencies. The modern Republican party, however, has embraced the brand of victimhood. Its leaders have figured out the best way to be heard is to claim they’ve been censored. Censored … give me a fucking break.

It’s an act. The leader of the GOP owns his own social network. The nation’s self-appointed protector of free speech from the woke mob owns another. The wealthiest and most powerful tech bros find common cause in their victimization. Meanwhile, on the left, cataloging and obsessing over every historical wrong ignores our progress and (worse) robs young people of their agency, leaving too many believing the die has been cast re their fate. No, it hasn’t.

Besides being no way to govern, leaning into the rhetoric of victimhood suppresses agency. If you tell people from an early age they are doomed, you will suppress their confidence and increase the likelihood they won’t try. Why would they? Agency and democracy go hand in hand, and the first task of the authoritarian leader is to diminish agency. The likely misinformation lollapalooza surrounding this fall’s election won’t be advocating for a specific candidate or position, but flooding the zone with so much misinformation that people feel overwhelmed and decide just to stay home. The Biden team has stated that their real competition is the couch.

I-agency

More than elections, or your career, your well-being and happiness are a function of your relationships. One of my biggest mistakes, something that’s stood between me and a sense of peace and reward, is not recognizing that I had the power to protect, repair and enhance my relationships. More than “find your passion” (bullshit), or other advice some formerly important person, dressed up as a kitchen utensil vomited at you at commencement … this is what I wish I had known post-graduation:

Don’t keep score.  

Whenever I felt I was in the minus column re a relationship (i.e., giving more than I was getting), I would be frustrated and inject disappointment and anger into the relationship. However, we all naturally inflate our contributions and diminish the other party’s. In addition, relationships are a give-and-take and rarely in perfect balance. Decide what type of friend, lover, son, colleague you want to be … and put away the scorecard. Rather than constantly revisiting if/when my dad was there for me as a kid, I now just focus on being the son I want to be. It’s liberating.

Notice.  

Your job in an intimate relationship is to show up, to give witness to someone’s life. That you notice. Sometimes you need to push back, or offer a solution. However, I’ve found, most of the time, our job is to notice. To care that the person is upset, to listen, to empathize with their upset and register how much their happiness and well-being mean to you. I am exceptionally rational, and this has been a superpower professionally. But it’s been a weakness personally, as I believe there are a series of steps to fix and understand everything. When the better solution is just to listen … and notice.

Forgive/check yourself. 

You do have agency, more than you think. But a cruel truth is that much of what happens to you is in fact out of your control. My best decision was to be born in 1960s California. So try hard and be kind. But when things go poorly and you are hurt, really hurt (heartbroken, laid off, make poor investments, lose someone you love), realize there are millions of people who’ve experienced the exact same thing and gone on to live wonderful lives. On the flip side, realize that when you get promoted, register professional success, or find yourself in a good relationship, you should acknowledge (again) much of this isn’t your fault, and you should be grateful and lower your risk profile. You are never more susceptible to a big mistake than after a big win, as you fall under the delusion that it’s (all) you … vs. good fortune.

Finite.

“Wow, life has gone SO slowly,” said nobody, ever. My superpower is atheism … no kidding. I believe, at some point, I will look into my son’s eyes and know our relationship is coming to an end. And that’s OK. I like what the great philosopher Mae West said: “You only live once. But if you do it right, once is enough.” This belief in the end has unlocked the courage to take risks and (mostly) ignore social constructs that get in the way of coloring outside of the lines or risking embarrassment expressing my emotions. I got emotional on the Chris Wallace show yesterday. I was discussing some of the men who mentored me when I was a boy, and felt a rush of embarrassment. Jesus Christ, who cares? When on my deathbed, I will find comfort in having lived out loud, even if that meant shedding a few tears on CNN.

We are a mite on an unremarkable rock circling a pedestrian star in one of 200 billion solar systems that make up billions of galaxies. You are insignificant and remarkable all at once. To dwell on your failures, not take risks, and not love and register the beauty around you with reckless abandon fails to recognize a universal truth: Everything and everyone you’re worried about will be gone soon, really soon. This is your instant, your moment. Why wouldn’t you be kind to yourself, love others, forgive yourself, forgive others and create joy for you and your loved ones wherever, whenever possible? Your heartbreak, disappointment, and grief will be the receipts for the joy and the agency you forge. Heartbreak, disappointment, grief, joy … I wish for you all of these things.

Life is so rich,

P.S. This week on the Prof G Pod I spoke with London Business School Professor Andrew Scott about the road to a healthier, longer life. Listen here

P.P.S. Section is sitting down with Superhuman’s Zain Kahn next week to talk about Supercharging Your Career With AI.

The post Agency appeared first on No Mercy / No Malice.

Bubble.ai

Note: This newsletter is not investment advice.

Five years ago, Nvidia was a second-tier semiconductor company known for giving Call of Duty better resolution. Today it’s the third-most-valuable company on Earth, with a dominant 80% share in AI chips, the processers underpinning the largest, fastest creation of value in history ($8 trillion). Since fellow AI supernova OpenAI released ChatGPT in October 2022, Nvidia’s value has increased by $2 trillion, or about the value of Amazon. This week, Nvidia reported monster quarterly earnings — its core business, selling chips to data centers, was up 427% year over year.

Last year, at Cannes, Jensen Huang introduced himself to me and said “I love your videos.” Not recognizing him, I asked if he’d like a photo. He said yes, we took the snap, and I kept walking. Since then, his company has added $1.3 trillion in value. I did Ketamine therapy, stopped drinking for 17 days, and installed a router with only the help of YouTube. It’s been a big year for both of us.

There is near-universal agreement on the AI market’s revolutionary potential, a historic consensus that explains the upward trajectory of AI stocks. In sum, everyone is barking up the same tree … which makes us stupid. It also inspires a question: Are we in a bubble?

Bubble Psychology

In the 1630s, tulips were not getting any prettier or more useful, but people bid them up because they believed they’d be able to sell them to someone else at an even higher price. Aka the “greater fool” theory. Meme stocks could best be defined as the greatest fool theory, as many buyers are convinced they are part of a movement. Pro tip: If someone tells you to “stick it to the man,” you are usually the stick. These kinds of bubbles are fragile, and they rarely get large in terms of the broader economy or last very long.

Bubbleicious

Multitrillion-dollar, economy-distorting bubbles occur when pure bubble psychology overlaps with real economic potential. This manifests as a self-propulsion machine — stock price increases validate assumptions and encourage more aggressive projections, which draws more speculators, who don’t want to miss out, and so on, and so on. Exogenous factors including low interest rates (i.e. cheap money) can fuel them, but bubbles typically have an economic growth engine and an enduring technology at their core:

The dot-com bubble of the late 90s was predicated on a thesis that proved out: The internet was the most transformative technology of this millennium, poised to create unprecedented value. That did happen, and several of the companies that appeared wildly overvalued turned out to have been bargains.The housing market bubble of the 2000s was a function of low interest rates, financialization, and other external factors, but under all that was a correct thesis: Land is finite, houses are essential, and we don’t have enough of them. Nearly two decades later, we still don’t.Crypto was a bubble largely fueled by psychological nonsense — the Bored Apes should have been called Bored Tulips. But blockchain technology made a case for providing real benefit, and the resilience of Bitcoin indicates it likely will endure as a store of value.The Bubble This Time

The financial media will digress to one of its favorite games, “Is this a bubble or is AI for real?” The answer is yes. AI’s economic promise feels real, obvious even. And that is what makes a bubble inevitable. Bubbles emerge in unexpected ways, for unpredictable reasons. Big bubbles inflate in similar ways. A transformative innovation emerges, capital rushes in, valuations increase, speculators add fuel, the atmosphere heats, the bubble grows, the cheap capital supercharges growth, and the wheel turns.

Of course we are in a bubble now — how could we not be after the mind-blowing debut of ChatGPT? AI is amazing, but the bubble-multiplier effect is very much in play. According to the Economist:

The combined market value of Alphabet, Amazon, and Microsoft has jumped by $2.5trn during the ai boom. [This value creation] is 120 times the $20bn in revenue that generative AI is forecast to add to the cloud giants’ sales in 2024.

That was in March. Now it’s $3 trillion. So the market is valuing AI revenue at 150x. Pre-AI, Microsoft was valued at about 10x revenue, Alphabet at 5x, and Amazon at around 4x. Growing into this AI multiple will require these businesses to find another $500 billion in annual revenue among them, in addition to continued expansion of their non-AI business, the equivalent of adding more than Alphabet’s revenue.

The darling of AI, Nvidia, has been painted into a corner of good problems. But, nonetheless, a corner. NYU prof Aswath Damodaran has calculated that Nvidia, to justify its valuation, will need not only to continue to dominate the market for AI chips, forecasted to grow aggressively, but also to dominate another market of similar scale. Think about this: Built into the price of Nvidia is the expectation the company will find another market as big as AI, and achieve similar dominance.

At the peak of the dot-com bubble, Google was a newcomer with the second-most-popular search engine, and Meta didn’t exist. Today hundreds of AI startups aim to replicate that sort of success. One prominent VC tracks 1,400 AI startups, even in a tight VC investment climate. As the IPO pipeline widens, more firms will emerge … and submerge. Many will fail — it’s a bubble — but not all.

There are two important questions regarding AI, and neither is “are we in a bubble?” We are. The important questions are “when will it pop” and “who will endure?”

Get Rich Quick

Timing a bubble’s pop correctly is likely the fastest way to become a billionaire, as the move in your direction, and the leverage on capital, is violent. John Paulson’s hedge fund made $15 billion timing the housing bubble in 2007 (including $4 billion for himself); Michael Burry made a few hundred million and had a movie made about him, The Big Short. But timing is everything, and aggressive short positions can also pop. Burry shorted Tesla in 2020, only to watch it double before unloading his short … at the peak. George Soros took “whopping losses” shorting the dot-com market in 1999. Legendary investor Julian Robertson turned $8 million into $22 billion before he, too, bet against the dot-com bubble … and gave up on his play a month before it popped. Showing up early sunk Tiger Management. If that name sounds familiar, it’s because Robertson subsequently staked Tiger Global, which suffered from PTSD — the firm lost $60 billion staying long on tech in 2022. The lesson(s) from investing history all point to one thing: Nobody has any idea. The way to get rich is slowly, buying the whole haystack via low-cost ETFs. But I digress.

Public Service Announcement: Nobody knows what will happen — you should diversify and not try to time the market.

If I knew when the AI bubble was going to detonate, I wouldn’t be discussing it here but selling everything to buy deeply out-of-the-money put options in MSFT, NVDA, and other AI stocks, cash out after the crash, and buy Australia. Alas, I’m more confident about how, vs. when, the pop will play out.

Airpocket

Airplanes follow flight patterns, calculated to maximize safety and passenger comfort while minimizing fuel use. Atmosphere is not a static medium, however, and sometimes planes encounter localized areas of rapid air movement, aka turbulence. A sudden downdraft can cause a plane to drop hundreds or thousands of feet in seconds, an event known as hitting an air pocket. Most are harmless, but strong downdrafts can be terrifying and dangerous. Just this week, a Singapore Air 777 dropped so sharply that one passenger was killed and six more sent to the hospital.

Modern airplanes recover from hitting an air pocket in seconds, but frothy markets take longer to find their footing. Here’s one scenario: A major non-tech company (e.g., Walmart, JPM, Procter & Gamble) will announce it is paring back on its AI initiatives. Shuttering its AI team, calling off a joint venture, etc. “We remain optimistic about the long-term impact of AI on our business, but we are not seeing the ROI initially projected and are scaling back our level of capital investment in this technology.” The same cycle that drove prices up will pare them, only faster: Analysts will identify which AI players were selling to the company, and every CEO on every earnings call that week will be asked if they’re cutting back their AI spend. Trend reversals travel through earnings calls like cold viruses through kindergartens, and by the end of the month, no CEO will want to be on the last helicopter out of AI Saigon. AI stocks will decline, and once they do, speculators will begin selling, creating a stampede for the exits. Trillions of dollars in market cap erased in weeks. Someone will time it perfectly. Most won’t.

The air pocket that popped the dot-com bubble blew in from the east. On Friday, March 10, 2000, the Nasdaq hit 5,049. The next Monday, Japanese economic data showed the country’s economy had contracted in the fourth quarter of 1999, and the bad news was enough to spook the speculative market. The day’s downdraft hammered the Nasdaq to its fourth-biggest point loss ever. It wouldn’t break 5,000 again for 15 years. The housing bubble hit its own air pocket seven years later, in March 2007, when mortgage lender New Century Financial collapsed. The market’s momentum continued for a few months but peaked in October before spiraling toward Earth.

Bubble Blast

The collapse of a major bubble can have far-reaching effects. The collapse of the housing bubble in 2007 spread into the banking system in 2008 and threatened the global economy — if you’re between the ages of 16 and 94, that will, hopefully, be the most significant financial event of your lifetime.

We. Hope.

The dot-com meltdown mostly hurt people who could afford it, who’d taken an eyes-wide-open risk. I knew a lot of them — 100 of them worked for me. We called half of them into a conference room and laid them off, which still nauseates me when I think about it. The sin was hiring them in the first place — zealous hiring is a hallmark of bubble economics, both a symptom and a cause in the self-reinforcing cycle of bubbles. They were (mostly) great people, but we’d bought the same trope as everyone else: If you hire them, it (revenue) will come. The same was true all over the Valley and in the mini-Valleys that had sprung up in the bubble (Silicon Alley in NYC, Silicon Forest in Seattle — there were even a few Silicon Prairies). As in every Patagonia vest recession, most of those who were laid off are highly educated, employable young people who went on to other opportunities. There were second-order effects as well. There was a mild recession in 2000, which was bad especially for people entering the workforce or hoping to retire, and telco firms that had banked on never-ending broadband expansion got crushed. The broader market decline pushed companies with heavy pension obligations into bankruptcy.

Right now, it feels like the AI bubble is more in dot-com territory than housing-crisis country. But the bigger it gets, the more leveraged we become, and the larger the blast radius. It would be healthy if some of the air came out in 2024, but Nvidia’s monster quarter will likely keep inflating the sector.

Cisco

Timing the bubble’s end is less interesting than looking past it. If AI is half the technological breakthrough it feels like, it’s going to sustain long-term value creation … but where? One aspect of this bubble that’s caught my attention recently is how similar the narrative we hear today about Nvidia is to what people said about Cisco during the dot-com runup. Cisco is/was a hardware company that makes a lot of the gear the internet runs on. In 1999 it was the ultimate “picks and shovels” play, the company every tech fund had to have in its portfolio, and the stock you owned if you considered yourself a serious investor, not a speculator. Let the kids buy Pets.com and Amazon. That’s essentially the narrative on Nvidia today.

Only it turned out there was a lot of that “serious” money, and boring Cisco increased in price 40x between 1995 and 2000. When everything crashed in 2000, Cisco went with it. Though the smart buy took less of a beating than Amazon, and much less than Pets.com, which went out of business that fall.

Long term, Cisco did “OK,” staying in business and beating the Nasdaq through most of the 2000s, though it hasn’t kept pace with Big Tech’s surge since 2020. (Long-term comps to an index like this are rigged against individual stocks, since indexes benefit from survivorship bias.)

Was Cisco a better bet than Amazon? Not even close. In fact, if on March 10, 2000, the peak of the bubble, you’d put a tenth of your money into 10 of the riskiest dot-com stocks rather than Cisco, you would still have outperformed Cisco (and the broader market) by over 15x, as long as one of those risky stocks was Amazon.

Pop

There are plenty of differences between dot-com and AI, and between Cisco and Nvidia. For one, Nvidia’s runup has been fueled by spectacular earnings growth as well as hype, while Cisco benefitted from the time-limited Y2K investment boom. But when the “safe choice” is one of the frothiest stocks, we are a) in a bubble, and b) no longer playing it safe. The market is not necessarily rational in the short term, but over the long term, risk and return align. If Nvidia is the sure thing in this market, then it will generate sure-thing returns — aka it will track the market. If you’re expecting Amazon circa 1999-2024 returns from Nvidia, then you should also expect Pets.com risk. This is not your pilot speaking, but do buckle up and make sure your tray table is secured.

Life is so rich,

P.S. This week on our new Thursday edition of the Prof G Markets podcast, Josh Brown, co-founder and CEO of Ritholtz Wealth, returned to the show to discuss what’s driving the current bull market. Listen here or watch.

P.P.S. Section’s popular AI Crash Course runs June 10-17. Sign up now and become an AI guru in one week.

The post Bubble.ai appeared first on No Mercy / No Malice.

Earners vs Owners

Over the past several decades, America has waged a covert war against the young. One front in this war is our income tax system, which favors Owners over Earners. Young people are almost all Earners, while Owners are typically older, and the tax code is a wealth-transfer vehicle for Owners to garner a greater share of our common wealth. The good news? It can be changed … back.

Pwned

If you get a paycheck, whether it’s salary or freelance, and that’s how you pay your bills, you’re an Earner. Owners, on the other hand, might collect wage income, but their real money comes through profits from investments: stock sales and dividends, rent from property, and other income streams derived from the ownership of assets. To be an Earner is noble; you work for a living, and labor is a sacred thing. Labor is the source of food, shelter, entertainment, and every material pleasure of society. We even celebrate it with a holiday, the first Monday in September. Pro tip: If you want to celebrate Labor Day somewhere awesome, try as hard as you can to become an Owner.

Owners also get a celebratory day. It’s April 15. Another pro tip: If you’re ever featured in a commercial calling you a “hero,” it means you’re getting fucked. The most fortunate in our society have no holiday, as they don’t need one. They recognize that holidays wallpaper over the inequity faced by anybody who gets a day in their honor.

Income taxes for Earners are deceptively straightforward. Take your annual income, subtract the standard deduction ($24,000 for a married couple), make a few other calculations, and then pay a percentage of what’s left to Uncle Sam. And the income tax rates for most people are low: A two-adult household making less than $100,000 per year pays 10% or less in federal income tax. Many pay much less, or none at all. Sounds reasonable, right? But there’s a catch. Several … catches.

First, for those paying “only” 10% or less of their wages in income taxes, other forms of tax are a heavier burden. At the federal level, Social Security and Medicare add almost 8%. Then all states collect taxes, and most state tax systems are “regressive.” All told, lower-income people pay a greater portion of their income in taxes than many rich people.

Sales tax, property tax, and other government revenue sources (licensing fees, permits and filing fees, and car registrations) take a larger bite out of lower-income households. In “low-tax” Florida, the most regressive state, low-income families (Earners) pay 13.2% of their income in state and local taxes, the middle class pays 9.1%, and the top 1% (Owners) pays just 2.7%. In fact, lower- and middle-income Florida households pay about the same in total taxes as they would in “high-tax” California. The next time you hear someone complain about low-income people who “don’t pay any taxes,” remind them that income tax doesn’t exist in a vacuum — low-income people often pay over 25% of their income in taxes.

There’s a myth that the rich don’t pay their fair share of taxes. The reality is most “rich” people — the super-earners — pay more than their fair share. A married household making more than $500,000 per year is in the top 5% of households by income and pays an effective federal income tax rate around 25%. Half a million dollars may seem like a lot, but careers that pay that well require expensive college and graduate degrees, entail long hours, offer little job security, and they’re typically in high-cost-of-living locations with high state income tax — in New York or California, add another 10% on to that 25%. With other taxes, including sales tax, the total tax burden borne by mid-career professionals can reach 40% of their income. The baller who makes seven figures plus is often working for the government: Their (total) effective tax burden can approach 50%. Until, that is, they can make the jump to lightspeed (i.e., become an Owner).

Think of building wealth as launching a rocket ship into orbit. Rockets burn 95% of their fuel to escape Earth’s soupy atmosphere and incessant gravity. Once you get to orbit, you’re a master of the universe — covering thousands of miles with just a touch of propulsion. Wealth is similar. The atmosphere is your expenses; the distance traveled, your income. Most of us never generate enough current income to make the jump to space and become an Owner — save enough to invest so our primary source(s) of income are passive. Investing is difficult, if not impossible at low income levels. Saving your first $100,000 is incredibly hard. The next $100,000 is tough, but you now have momentum and start to see the curvature of the Earth. Once your current income is substantially greater than your expenses, and you’ve deployed an army of capital that fights for you and your family in your sleep, you’ve made the jump. What we’ve done with the tax code has rendered the atmosphere thicker and gravity stronger. Go to law or medical school, or live at the office, and you’ll see your (current) income increase, but you’ll also lose a bigger share to taxes, and the harder it gets to save and escape the gravity of being an Earner.

Orbit

Imagine if taxes worked like this: Everything you spend that’s remotely related to work is deducted from your taxable income. Clothes you wear and food you eat during the work week, your car, your internet and cellphone bills, furniture and square footage where you work at home (e.g., kitchen table), etc., all taken off your income before taxes. Pretty much anything you do on days you’re working, deductible. All past investments in education, deductible. If you spent more than you earned, as you did in college and graduate schools, you can roll over those losses as deductions in future years. In the meantime, deduct any credit card interest you’re paying. Any money you don’t spend? That’s not taxed until you retire and start spending it. If you give it to your kids, it’s never taxed at all.

If this sounds familiar but awkward, it is. It’s our tax code, through the lens of the Owner. The federal income tax code looks progressive: The highest marginal tax rate is 37%, more than 3x what the average American pays. But published tax rates are a weapon of mass distraction. They are the “rack rate” published on the door of your hotel room. Owners never pay the rack rate. They barely pay at all.

Unlike Earners’ taxes, Owners’ taxes are complex. As a result, determining the total tax burden of the very wealthy is difficult, but here’s what we know: In 2020 the 26,000 households with an income over $10 million paid 25.5% of their reported income in federal taxes, plus 5% to 10% in state and local taxes. But as I explain below, much of the cash they receive isn’t taxable income, and most of the increase in Owners’ wealth is never taxed at all. The White House has estimated that the 400 wealthiest households pay an effective income tax rate of just 8.2%, and Pro Publica found that the wealthiest 25 households pay just 3.4%. We can’t say for sure what percent Owners pay on average, but it’s less than most of their employees pay. This complexity results in a transfer of wealth from Earners to Owners. The tax code has exploded from 400 to 4,000 pages in the past few decades. If you have GPS (advisers, loopholes for the wealthy), you want races run at night.

If the government is meant to decrease suffering and add happiness, then our current system makes no sense. Paying taxes of $5 million on $10 million in income is the difference between flying first class and flying private. Paying $15,000 on $60,000 in income might mean foregoing a second child.

Capitalism means accepting a society of winners and losers. And that’s OK. Wealth is a great reward for hard work, and talent is what drives us to create value.  Capitalism has brought prosperity to billions over the past 150 years. The problem is the system, if left unchecked, becomes increasingly inequitable and unsustainable. We’ve morphed from capitalism to cronyism, rigged in favor of Owners. How? Three ways: calculation, timing, and collection.

Calculation

Amateurs focus on tax rates. Professionals zero in on the calculation of the income to which those rates apply. In the 1950s the highest federal income tax bracket was 91%. Except nobody paid it. The tax code was a mosaic of loopholes, ensuring high-income taxpayers were able to shield most of their income. Now the top rate is 37%, but while the colors and fabric have changed, the Owner’s tapestry of tax avoidance still exists.

Owners receive cash from a range of sources: rent from tenants, dividends from stock, interest from loans, distributions from trusts, profits from investment partnerships, loans and lines of credit from banks, proceeds from asset sales, and more. Much of this income is shielded by pages of tax code defining what is, and is not, taxable. Owners who invest in the oil business leverage tax code provision section 263 (intangible drilling costs), section 613 (percentage depletion), section 611 (cost depletion), section 167 (geological expenses), section 199 (domestic production deduction), section 193 (tertiary injectant expenses), and section 469 (active losses). That’s just one industry.

Entrepreneurs are barely visible to the Treasury standing behind the tax code. Section 1202 excludes the first $10 million received in the sale of a business, a provision that saved me millions of dollars when I sold my firm L2 several years ago. When working at the firm — earning — I was paying 40+% taxes. But when I sold the business, my tax rate on the proceeds — owning — was 17%. Even before selling, every small business owner gets an enormous shield, the power to push all manner of personal expenses through the company income statement, thus making them tax deductions for the business rather than taxable income for the Owner.

Income that’s acquired by selling an asset for more than you paid for it is a capital gain, and isn’t subject to ordinary income tax rates. Capital gains rates (federal) max out at 23.8% instead of 37%. That’s still not the biggest loophole. Capital gains are only taxed when “realized” (typically when sold), so Owners’ assets grow tax deferred (some you can depreciate as they go up in value) and their sales are timed to minimize taxes. Earners lose 20% to 50% of their gains (from sweat) every year, a massive gravitational pull. Owners enjoy cleaner propulsion: As their wealth grows, the taxes are deferred until they sell … if they ever do.

But wait, there’s more. The biggest tax break Owners can register is dying, which resets the “basis” of their assets, so their heirs never pay taxes on the increase in value. Still, there’s more. The most indefensible loophole award goes to the “carried interest loophole” which permits investment fund managers to pay capital gains rates on their compensation. Tax policy groups have been lobbying to close this loophole for years, and Congress nearly did it in 2022, but Senator Kyrsten Sinema took $2 million from the private equity industry (aka Owners) and saved their $14 billion loophole. It’s well known that our leaders are whores. What’s more surprising, and disappointing, is what cheap whores they are ($2 million for $14 billion). But I digress.

Owners are so tax-advantaged that if they do have earned income, they often shield that from taxation as well. Donald Trump paid virtually no income taxes on the $427 million he made from The Apprentice — where he had an actual job — by offsetting that cash income with paper losses on his real estate properties (real estate is another of the most tax-advantaged industries). In 2007, Jeff Bezos made $46 million in actual income, yet he paid zero dollars in federal income tax, because he was able to shield that income with paper losses as an Owner (in reality, his wealth increased $3.8 billion that year). In 2011, not only did Bezos pay no income tax again, he claimed and received a $4,000 child tax credit — a program intended to lower child poverty. If you paid federal income tax in 2011, you helped feed Jeff Bezos’s kids. Don’t worry, he’s fine.

Timing

A key advantage of control over timing is state income tax arbitrage, practiced often by company founders. Several years ago, the media discovered the phenomenon of California entrepreneurs moving to Texas and Florida, and there was a lot of jazz hands about those states’ friendly business climates and youthful energy. The truth was simpler: Texas and Florida have no state income tax, and many of those founders were about to recognize enormous gains via sales of stock that had become worth billions. Elon Musk, who moved to Texas in 2020, sold millions of shares of Tesla, saving an estimated $2.5 billion in California income tax. When Washington State enacted a tax on income from asset sales, Jeff Bezos decided to spend more time with his father in Florida, which has no income tax, and sold 50 million shares of Amazon after he relocated. If taking advantage of Washington’s schools, roads, and tech ecosystem to build wealth, and then declining to pay taxes back to the state sounds wrong — and a massive additional burden on middle-class taxpayers who can’t peace out to Coral Gables — trust your instincts.

The best time to pay taxes is never, using the infamous “Buy, Borrow, Die” tax strategy. Wealthy Owners take out loans secured by assets such as company stock or real estate, and live off the loans (which are not considered taxable income) instead of selling the assets (which would incur a taxable gain). When the Owner dies, the stock goes to their heirs, who, with their “stepped up basis,” can sell enough stock tax-free to pay off the loans and start the cycle anew. This creates dynastic wealth, the lack of which used to be a key point of differentiation between Europe and the U.S. Used to be.

Collection

All of these strategies are legal and enabled by the complexity of the tax code. But that complexity also affords Owners another means of avoidance: cheating.

Skirting taxes stems from the complexity of the tax code itself. Wealthy filers can take deductions that don’t apply or classify income in inappropriate ways. And without an exhaustive analysis of the facts, there’s no way for the IRS to determine what they’ve done. Some of the losses Trump used to offset his income from The Apprentice may have been illegal — the IRS believes he claimed hundreds of millions of losses on a Chicago real estate project twice, burying the double-dip under a mountain of tax paperwork so tall it’s taken the IRS a decade to dig through it.

Owners can also choose to cheat bluntly, failing to report substantial income and making up fake expenses and losses. This was New York hotelier Leona Helmsley’s strategy. Before going to prison for tax evasion, she told her housekeeper, “We don’t pay taxes; only the little people pay taxes.” Offshore entities are a time-honored strategy for tax evasion. Trump’s campaign manager, Paul Manafort, concealed $16.5 million in income from the IRS in foreign bank accounts.

The Treasury’s analysis suggests $600 billion in owed taxes are not paid every year, equivalent to the total income taxes paid by the lowest-earning 90% of taxpayers. The avoidance is solely the domain of ownership income — 99% of the taxes owed on wages get paid. Owners can do this because Congress has starved the IRS of funding, and the agency audits fewer and fewer returns each year.

Tax Relief

Remedying these inequities is nowhere near as difficult as it would be to address many of the other challenges facing America. The most obvious and glaring remedy is to fund the IRS, enabling it to collect hundreds of billions in taxes owed but not paid. The Inflation Reduction Act was supposed to allocate $80 billion to the IRS over the next 10 years, but Republicans have attacked the measure, cutting $20 billion from the plan and keeping the IRS budget flat in 2024. Every $1 invested in tax enforcement targeting the wealthy returns $12 in revenue. To be clear, this isn’t harassment but enforcement. Most externalities are a function of incentives, and the government has incentivized owners to be incredibly aggressive on their tax returns, as there is little chance they’ll get caught. If you were on a highway with no police, would you speed?

Eliminating the special treatment given to capital gains is a simple fix that would increase tax revenue without increasing the tax burden of most Americans, reduce the incentive to cheat through misclassification, and make the tax system more fair. So would eliminating the step-up basis upon inheritance, which wipes away billions in taxes owed by the wealthiest people with little justification or social benefit. We should remove the income cap on social security tax (currently a paltry $160,000), which would help shore up the social security trust fund and make the tax code (not rates) more progressive. We should restore the highest marginal tax rate (for owners) to 40%. Biden and congressional Democrats have proposed all of these changes in recent years, but to no avail.

Since ownership carries with it some inherent tax advantages, a transaction tax would raise revenue from ownership in a fair manner. Numerous proposals, including one from Mike Bloomberg, for a 0.1% tax on securities trades and other financial transactions could raise nearly $80 billion per year, with the potential side benefit of damping high-frequency trading, which adds volatility without benefit to the markets. We should also levy a compute tax on cloud and AI services, as the wealth created by these innovations is accruing mainly to the wealthiest Owners. Compute is the new energy, and this is a chance to avoid the mistakes of fossil fuels, where we give tax breaks to Owners and stick Earners with gas taxes, among the most regressive surcharges in our system.

Finally, and most transformationally, Congress should take a chainsaw to the tax code, cutting the thousands of handouts to the ownership class that have been stuffed into it by lobbyists. Theoretically, finding the political will shouldn’t be difficult, as the majority of Americans are getting screwed by lawmakers representing a small number of their fellow citizens. Ironically, the Trump tax cuts paved the way for this change — by doubling the standard deduction, Trump ensured that just 10% of taxpayers take any itemized deductions — meaning 90% of voters should support eliminating the rest of them. Still, it may be a challenge, as the most valuable asset Owners own … is Congress.

We should reinvest some of the hundreds of billions of dollars per year gained by these changes to make the system fairer for Earners (i.e., the young):

Expand the child tax credit and the earned income tax credit and raise the floor required to pay any tax at all. (Currently it’s set by the standard deduction at $14,600/$29,200 for single/married households.) That would shield more lower-income households from federal income tax and reduce the impact of regressive state and local taxes.Lower the rates paid by higher-but-not-highest-income taxpayers, the professionals and entrepreneurs whose 60-hour-a-week climb up the professional ladder shouldn’t be rewarded with a 45% tax burden. This will make earning the way to ownership (aka the American dream) more feasible.

Below is a rough revised set of brackets that, with greater enforcement and the elimination of the Trump tax cuts on corporations, should get us to the same or greater revenue:

Patriot

I am troubled by the trend away from patriotism, fomented by a tech-billionaire class that conflates luck with talent, shitposts America, and prosecutes an economic war on the young. But America’s promise does not resonate unless it’s backed by performance. We diminish what’s great about America when we fail to talk about what’s broken in America. Especially when the fixes are within our grasp.

In defense of shielding Owners, lobbyists and our representatives in D.C. argue the wealthy are our most productive citizens, can better deploy capital, and need incentives to keep innovating. There is some truth to this notion, but we aren’t lowering taxes on the bulk of today’s innovators, the super-earners, or on future innovators, young people. Instead, we are ensuring a failure to launch by transferring more wealth to Owners/seniors. The three legs of the tax stool are corporations, super-earners, and super-owners. Corporate taxes are at their lowest levels since 1939 and the wealthiest Americans are paying single-digit tax rates, meaning the entire funding burden of our country rests on the super-earners and the young, who’ll have to survive the tsunami of debt we are aggregating to finance this inequity. This is capitalism collapsing under its own weight.

America, like any country, is a product — a mix of benefits that come at a price. America has been the best value (globally) for the better part of three centuries. Other than drugs, there is no other product so many people are willing to risk their lives to obtain. However, the value of America has diminished for super-earners and the young. We’re charging the former too much, and keep asking the latter if we can borrow their credit card. The bad news? This was deliberate, our decision. The good news? We can decide to fix it.

Life is so rich,

P.S. Our #1 business podcast, Prof G Markets, is now twice a week and getting its own feed. Subscribe here for new episodes every Monday and Thursday.

P.P.S. I’m sitting down with Mo Gawdat (formerly CBO of Google X) to talk AI and Happiness on May 30. Join us — it’s free.

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Big Energy

Einstein defined the 20th century with the revelation that mass is a form of energy. Today’s theoretical physics posits something more fundamental: Mass and energy are all information. The 21st century will be defined by the recognition that the most powerful form of energy is the manipulation of information: compute. The companies that control compute will be the most dominant businesses in history.

Energy has been the tail that wags every dog from the beginning of economies. Yet the narrative in the equity markets now is that Big Oil has passed the reins to Big Tech. It’s a practical observation: The majority of the most valuable firms in 1980 and 2024 were/are in energy and tech, respectively. However, the construction of acres of data centers and the energy investments needed to power them reflect a deeper convergence. AI is accelerating Big Tech’s transformation from an industry that sells computers to an industry that sells compute. And in a knowledge economy, compute is energy.

Power Up

Ten thousand years ago, energy was the only industry. The world ran on thew (muscle power), and food was the energy source. Settled agriculture in the fertile Middle East created surpluses, and economics emerged as the science of trading that surplus — exchanging energy. We then unlocked the energy in organic matter (wood, coal, oil), machines supplanted muscles, and the energy business became the business of powering machines. Oil’s unrivaled source material for machine power has created wealthy nations out of deserts. Big Tech companies may dominate the league tables of market capitalization, but energy remains the revenue king. Six of the 10 largest firms by revenue are energy companies, and the industry generates more revenue than any other. However … tech looks more similar to energy each year.

CapEx = Moats = Profits

The energy business requires massive capital expenditures, allocated on data and faith, offering unrivaled payoffs for those who wager correctly. If the whaling industry is the origin story of venture capital, energy is the original gangster of CapEx. Investment across all energy sources will total $2.8 trillion in 2024. Fossil fuel companies, responsible for $1 trillion of that CapEx, generate $4 trillion in revenue. ExxonMobil spent $23 billion on CapEx in 2023, and made $36 billion in profit. The investments are chunky: The UK’s newest nuclear plant, under construction in Somerset, is projected to cost $57 billion. Planning the 20th century energy’s mega-projects required the development of a new science of forecasting, Shell’s famous “scenario planning” process. Side note: Scenario planning is not predicting the future, but determining which decisions will register the best outcome(s) across several possible futures. 

Now Big Tech is flexing its own thew. In 2024, the tech giants will spend the GDP of Finland ($300 billion, give or take), mainly on data centers — the modern equivalent of oilfield development. Alphabet spent $12 billion in the last quarter alone, up 90% year over year, Microsoft spent $14 billion, up 79%, and Amazon $14 billion. Tech does not match global energy investment yet, but individually, Alphabet, Amazon, Meta, and Microsoft will spend more in CapEx this year than ExxonMobil, Chevron, or Saudi Aramco. Meta operates 18 data centers that cover the same area as 19 Disneylands. The Core in Las Vegas, one of the world’s largest data centers, has its own hype video. (About 1 minute in, it gets … impressive.)

Big Tech’s profits are also historic, and growing. Last week, Alphabet added $200 billion in market cap (to reach $2 trillion) after beating profit estimates by 25%, and Apple also added $200 billion after an earnings beat and announcing a $110 billion share buyback. Both generated more net income than ExxonMobil in 2023, as did Microsoft.

More, I Want More

Energy companies can justify these investments because our imagination for uses of energy is limitless. The iron law of big(ger) energy: The more we generate, the more we use. There’s no such thing as too much energy. Energy is the antithesis of GLP-1 drugs. With energy, the more we consume, the hungrier we get.

Energy = Prosperity

Wealth and energy consumption are correlated. It’s not just power for profligate lifestyles, but productive power: light, cooking and storing food, communications networks, building, transport. Academic estimates of optimal per capita energy consumption only trend up. No number of energy-efficient microwaves and double-paned windows can counter the consumption of billions moving into the middle class: Global energy consumption is projected to increase 44% by 2050.

Tech’s appetite is also insatiable. Tech’s Iron Rule is Moore’s Law: Processing power doubles every two years. Nitpicking about the technical details aside, the principle has held true since 1965. “How will we use this power?” Queried nobody, ever. Intel, a client of my first firm, Prophet, impressed on us its singular strategic vision. They invested massive CapEx in fabrication plants for chips they hadn’t invented for applications they hadn’t imagined. In sum, “If we build it, they will come.” Nobody needed a faster chip until Apple showed the world a graphical user interface, until Netscape browsed the Web, until God (Google) began responding to any prayer/query with millions of answers, or until a new god (ChatGPT) responded to your prayer with a single answer. Intel stumbled with the transition to mobile, but the paradigm hasn’t changed. There’s no such thing as too much compute.

The New New Energy

Big Tech isn’t just similar to the energy business, it is the new energy business. AI’s growing power requirements make this concrete. AI compute requirements are doubling every 100 days, dramatically countervailing the gains in efficiency that every AI evangelist boasts about after vomiting that it will save/destroy humanity. Training the trillion-plus-parameter models being stewed in a medium-size city (San Francisco) requires the energy consumption of a small country. One ChatGPT request requires 10 times the energy of a Google search. In five years, the incremental energy demand of AI will be equivalent to 40 million homes — more than California, Texas, Florida, and New York combined. Data centers make up 3% of total U.S. power demand, but that’s projected to triple by 2030. BTW, 2030 is the same distance into the future as the finale of Game of Thrones is in the past (2019).

To feed their data centers, tech companies are investing billions in energy production and storage. The WSJ reports Big Tech execs descended on this year’s annual oil and gas conference, hunting for energy. Bill Gates was the featured speaker. Amazon, the largest corporate buyer of renewable energy, has over 500 projects operating or in development. Announcements of new data centers are accompanied by commitments to develop new wind and solar farms to provide the power.

Compute = Energy2

The convergence of tech and energy reflects tech’s transition from selling computing tools to selling compute itself. We don’t buy DVD players and discs, we stream. We don’t buy maps, we get directions. We don’t purchase film, we capture images. Apple, the most profitable product company in history, depends on services for growth. Amazon, the Apple of retail, is a data center business that offers retail.

AI pushes this trend to everything and everyone. Search, the most profitable business in history, will be replaced by Answers. Spreadsheets and browsers will be replaced by agents. “Apps” and “programs” will be mutable, evolving code organisms raised by other agents. According to energy conference keynote speaker Bill Gates: “Agents will affect how we use software as well as how it’s written. …. They’ll replace word processors, spreadsheets, and other productivity apps. Businesses that are separate today — search advertising, social networking with advertising, shopping, productivity software — will become one business.” Sam Altman believes that compute will be “the currency of the future,” the world’s most precious commodity.

In the 21st century, humanity has added a new page to physics, a new form of energy: compute. Just as our bodies convert the chemical energy of food into heat and mechanical energy, as solar panels convert the sun’s electromagnetic energy into electricity, data centers convert electrical energy to compute, and it powers the digital economy. As with other forms of energy, compute is created by the largest companies in the world, who have staggering capital to build moats the width of the Amazon (the river). As with other forms of energy, its consumption is inextricably linked with prosperity and growth. Compute defies economic gravity — increased supply speedballs demand. The future of energy isn’t renewable, but computable.

No Free Lunch

The passing of the torch from energy to tech felt good for a hot minute, because energy has gotten too in touch with its dark side. Energy firms invented the term “externality”: carbon, corruption, and capitalism as a Sith Lord. In contrast, tech felt better. Mark, Sheryl, Larry, Sergei, and Jeff were just too cute, too likable to be that evil … they even told us they would do no evil. Jeff’s laughter, Sheryl leaning in, Mark hunting with a bow and arrow:

Just. Fucking. Adorable.

But then kids started harming themselves, misinformation proliferated, and our discourse became coarse. Wait … the tech lords are not better than the titans of Big Oil, they’re worse. Actually, they’re neither — they are the same.

Any arbitrage of one substance to another for economic gain creates emissions. Plants to beef: methane. Fossil fuels to motion: carbon. Attention to advertising: rage. To believe the great arbitrage of compute won’t create extraordinary externalities is to believe that Zuckerberg/Sandberg/Brin/Bezos would prioritize the well-being of the commonwealth over their wealth. If we could go back 100 years to the beginning of the fossil fuel era, or 20 years to the start of social, what would we do differently?

Many argue that Big Tech is capitalism collapsing under its own weight. A jockey who’s lost control of a thoroughbred. Regulating compute is similar to a 5-foot, 110-pound jockey mounting a Tyrannosaurus Rex. We know it will be ungainly. The bigger question is, will it be violent?

Life is so rich,

 

P.S. Watch my TED talk on how the U.S. is destroying young people’s futures. In the past seven days, 7.5 million people (the population of Arizona) have watched the rant.

P.P.S. Get on the waitlist for Section’s AI for Business Mini-MBA. It’s free, and you’ll get a discount when the program opens enrollment.

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Enemies

For any species to endure, it must find reward in two things: sex and conflict. The importance of the sex drive is obvious. But if we’re not wired for conflict, we’ll meet the same fate as if we never reproduced. Evolution is a competition for resources, and conflict is inevitable. The ecosystem isn’t much concerned with who plays fair: Everything is prey to something else; conflicts arise over resources, mates, territory, and pride. We either develop a reward system that deftly chooses battles, or we’ll be consumed by a species that does.

Humans are not immune. We evolved hiding in the trees while stronger, faster, and more sharply clawed creatures roamed the savanna. So we developed a robust neurological system for identifying threats, gauging their severity, and responding quickly, often before we’re conscious of the threat level. But fight-or-flight wasn’t enough to shepherd us out of the forests. First we had to develop our superpower: cooperation. The cocktail that’s made us the apex of apex predators is cooperation on the rocks of conflict. Under threat, we become a “band of brothers,” establishing “sisterhood” to “fight the power” and form “one nation, indivisible.”

Love Thy Enemy

This system, however, is always on. It feels bad to be scared, but good to be angry. Especially good when we’re surrounded by others who validate our anger and direct it toward the chosen threat. This dynamic is often referred to as “tribalism,” but that misses the point. Tribes are defined by their enemies. They help us convert danger and anxiety into brotherhood and glory. Spiritual leaders preach we should love our enemies. Evolution teaches us to love having enemies.

Rallying support under the threat of a common foe is an ancient tactic. Historical foes Athens and Sparta united to fight the Persian Empire, and Rome’s rivalry with Carthage is credited with holding its fractious republic together. The U.S. shaped a half-century of foreign policy on countering the threat of communism. Most profoundly, House Stark and the Targaryen forces allied to combat the undead. But I digress.

We love conflict. As General Lee said at Fredericksburg: “It is well that war is so terrible, or we should grow too fond of it.” This is likely even more true today, when technology and culture have severed so many of our traditional bonds and left young people aching for connection and community. According to a recent UNICEF report, “The proportion of people willing to participate in demonstrations has increased to its highest levels since the 1990s, and the number of protests has also risen in this period.”

Know Thy Enemy

Most rivalries are harmless, but they point to a darker tradition. Because we enjoy unity in the face of threat, we seek out enemies, even if we need to manufacture them. Or we let others manufacture them for us. Scapegoating is the go-to in the demagogue’s handbook.

This week, Donald Trump told Time magazine that he would consider deploying the military against immigrants inside the U.S., characterizing undocumented entry as “an invasion.” He claimed that “over the last three weeks, 29,000 people came in from China, and they’re all fighting age, and they’re mostly males.” He’s right that there has been a sharp rise in the number of Chinese immigrants crossing the southern border — thousands have made it to New York, in fact. The New York Times has been documenting their arrival.

But it takes a warped perspective to see enemies among these people, sleeping in bunk beds, working the dangerous/dirty jobs American citizens don’t want. I see my parents, risking everything to find a better life. Also, these new immigrants are our lifeline. They paid $500 billion in taxes in 2021 and made up 22% of all entrepreneurs. Their children are the most fiscally productive cohort in America. Without immigration, we’d be in population decline, which is the surest way to go into recession and lose influence on the global stage.

On Campus

The conflict in Gaza has reverberated throughout U.S. higher education, catching many flat-footed despite predictions that there would be disruption in academia and that DEI would begin eating its tail and turn racist. U.S. universities have an important legacy of protest. However, there’s been a troubling presence of antisemitism in these campus protests. Its extent is disputed and unclear, but it is happening, and history has taught us there is no such thing as “antisemitism light.” While all forms of bigotry are condemnable, antisemitism carries a unique danger due to the long history of setting up Jews as the go-to, manufactured enemy. It’s essential for any group advocating for a cause to actively combat any hateful messages that exploit our primal instincts to identify fake enemies. I believe the greatest threats to America aren’t its true adversaries, but the voices that tell us to hurt others who pose no real danger. The Jewish girl leaving the library to get a manicure is not your mortal enemy. These hateful messages have such power because they trigger our deep enemy-identification system.

We join movements because of their goals, but also, increasingly, because joining makes us feel good. That’s not an insult — joining is the reason we do everything; it triggers our reward system in some way. Camping out on college quads or barricading buildings is a social aphrodisiac. These experiences generate powerful feelings of common identity and give us the intense sense of “belongingness” we crave — especially among young people who lack the same connective tissue earlier generations enjoyed on campus. Covid and identity politics have sequestered and divided students from one another.

And of UCLA

At my alma mater UCLA on Tuesday night, counterprotesters attacked the pro-Palestine encampment and a multihour pitched battle ensued. Little of this has anything to do with the humanitarian crisis in Gaza. There’s an African proverb that if a child does not feel the embrace of the tribe, they will burn it down to feel warmth. I wonder how many of the student protesters are burning the village to feel warmth. When enthusiasm overwhelms reasoned analysis, you find yourself on the steps of your college admin building demanding: “The revolution should be catered.” We should, and will, cut a wide berth for 19-year-olds pushing the boundaries of their intellectual freedom and testing limits. Put another way, they pay us to make mistakes in a safe environment. When their expression, however, impairs another student’s right to a safe college experience, they should be suspended or expelled.

At UCLA, they expel 91% of the (potential) students during the application process. Shouldn’t restricting the access of Jews to campus facilities be on par with not having perfect SATs? Elite universities need to accept, and exit, more students. Finally, there is, in my view, no excuse for any faculty or administrators to disrupt our mission to educate. They have a right to free speech, meaning they cannot be criminally charged for what they say. However, these are adults being paid to do a job, and when they make that job harder for the rest of us, or for the students and their families to even have a commencement ceremony, they should be fired.

Go into the lobby of any organization and start screaming at your fellow employees and setting up a tent in the cafeteria, and see how that turns out. The arrogance and self-aggrandizement of faculty at elite universities, who unilaterally changed their job description to “social engineer,” is obnoxious. You sign the back, not the front, of the college’s checks — do your damn job.

Stupid

UC Berkeley Professor Carlo Cippolla developed a deft construct for identifying the “stupid”: people who hurt others while hurting themselves. We’re all, at different points of our life, stupid. We instinctively turn on our parents (i.e., when we are teens), because it makes it easier to leave the pack, and it’s healthy to question the ways things have been done. “I hate you!” said every teen … at some point. We’re also prone to stupidity and a lack of grace with our spouses and friends. Hate and envy are similar to Wi-Fi: hyperlocal. People who care about us often bear the brunt of our moods and disappointments, which have nothing to do with them. Students on campus who feel animosity for their country, not to mention their fellow students, are hurting others and themselves.

At home, in school, on the job, or in your community, do you register the commitment, goodwill, and love of the people closest to you? Or are you being stupid?

Life is so rich,

P.S. My TED Talk on America’s war on the young was released this week — watch it here.

P.P.S. My lecture on The State of Young People is coming up. Sign up to hear my takes on wealth, government, social media, and more.

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Forewarned

For years, we’ve been making predictions. The objective isn’t only to be right more than we’re wrong, but to catalyze a productive dialog that might shape better outcomes. If you get most/all your predictions right, you’re not predicting … you’re stating the obvious. Also, predicting societal ills, or worse, can highlight a threat and inspire action to cauterize it. Your neuroses serve a purpose: to keep you out of harm’s way, because sometimes there’s a lion behind those reeds. In sum, the best way to predict the future is to make it, but there’s a corollary: The best way to prevent the future is to predict it.

Last year, after Silicon Valley Bank collapsed, we started getting texts and calls from people urging us to write about another threat — the impending meltdown in commercial real estate. Office buildings, in particular, are declining in value at historical rates, thanks to a storm of reduced demand (WFH) and rising interest rates. As a result, billions in debt is based on book values that are grossly out of step with market conditions. The prediction? When those loans come due, debtors will default and creditors will be crushed, triggering a crisis 10 times worse than the SVB mess. That math was right when the prediction was made, but predictions make their own math. The Fed and FDIC were also predicting a crisis, so it now appears we may avert one: This week the Wall Street Journal reports that “Banks Believe They Are Well-Prepared for Commercial Real Estate Fallout.”

Anxiety Brain

The human brain has extensive circuitry devoted to imagining, and worrying about, the future. The seat of memory, the hippocampus, extrapolates possible futures from our experience of the past. Our default-mode network — the components of the brain most active when we’re not focused on a specific task — includes the brain regions concerned with the past and the future. Whenever we aren’t asking our brains to do something specific, they default to contemplating the future. And worrying about it. An overactive default-mode network is associated with anxiety and depression, but a healthy measure of anxiety is one of humanity’s most valuable adaptations, comparable to language and the opposable thumb. NYU neuroscientist Joseph LeDoux says anxiety is “the price we pay for the ability to imagine the future.”

Having kids is a lifelong lesson in imagining the future. And anxiety. Several years ago, when my family was on a safari, my oldest son contracted salmonella. An hour into a game drive, he needed to go to the bathroom, urgently. He immediately began jogging away from the jeep in search of privacy. I ran after him — my hippocampus has seen too many TikToks that involve adorable animals seeking midafternoon refreshment from a lake in the savannah only to be taken for a swim by a large semiaquatic reptile.

What I remember most distinctly is how compelled I was, how visceral and present the fear of predators felt. Nature has bred me to worry, because eventually, there will be a lion. It’s good to be worried, but the problem is modulating — did I turn the stove off? I (no joke) worry about this, despite not knowing how to actually turn the stove on.

Unexpected

A million years of evolution and an overly dramatic media have sensitized us to imaginary plane crashes (the average American is 2,200 times more likely to die in a car accident than in a plane crash) and unlikely child abductions (28% of parents are “very worried” about a risk that is “effectively zero”). We are well armored against an array of vanishingly unlikely but cinematically potent threats. NASA recently spent $325 million to nudge an asteroid off course, as part of an ongoing effort to protect us from the one-in-a-million chance of a catastrophic asteroid strike on our home planet. I wrote about Daniel Kahneman a few weeks ago — his work illuminated many of the cognitive biases that sometimes misdirect our healthy sense of anxiety toward the wrong risks.

Since anxiety leads to preparedness, it’s usually the things you don’t worry about that get you. In early 2020 I was worried about a lot of things, from the occupant in the White House to preparing for a talk at SXSW. I dismissed the first reports of the coronavirus as hysteria. But the world was unprepared, lacking the equipment and training for a pandemic. The exceptions? A few nations with recent experience battling SARS, notably Singapore, were more anxious, and thus more prepared.

Over/Under

Nature programmed us to be anxious; it’s key to how we got here. But we shouldn’t let our instincts control every choice we make around what to worry about and how to respond. Our anxiety is a powerful tool, weakly tethered to an unreliable targeting system. Uncorrected by rational thought, we tend to worry too much about cinematic but unlikely risks (asteroids, sentient robots) and not enough about problems that are hard to visualize (viruses, blackouts). A good rule of thumb is that if Hollywood has made more than one movie about a threat, it’s probably not something we need to be scared of.

Following are some places we believe we may have over/underprepared:

Overprepared: In anticipation of the commercial real estate crisis, banks have been padding their loan reserves for months, sacrificing earnings for stability. The banks aren’t going into this correction blind, but their anxiety is ring-fencing the damage to some of the wealthiest people on the planet: commercial real estate owners. Some upheaval in the market is good — it creates churn and gives new entrants opportunities. We need more churn and disruption, as we’ve had a 15-year-long bull market after the largest bailout in history artificially elevated prices. There’s a decent chance, if the drawdown was a shock, office owners might claim this was a black swan event that warranted a bailout. However, the public can’t ignore the $7 trillion in debt we issued during the last bailout.

Underprepared: Whatever they’re worth, those office buildings aren’t much use to anyone without electricity, and one of the looming threats to our economy that doesn’t get enough attention is the state of our electrical grid. The average transformer is 40 years old; moreover, our grid was built for a more stable climate and a world run on fossil fuels. The massive Texas blackouts in 2021 cost the state $90 billion and killed 240 people. Since then, the state has mainly built additional natural gas backup generators, doubling down on the system that didn’t work in 2021. Nationally, Biden’s infrastructure bill included some funding for grid improvements, but likely not enough.

Overprepared: Fortress America is well defended against … whom exactly? Our trillion-dollar military ensures that no adversary can descend on the homeland. Our globe-spanning navy, air superiority, and premier fighting force (2.9 million strong) is insurmountable for a rival kinetic force. Experts say 100 nuclear weapons is the most a nation could have any feasible use for. We’ve got over 5,000, maintained at a cost of $40 billion per year.

Underprepared: The U.S. hasn’t been attacked by another nation since German U-boats landed saboteurs in Florida and New York in 1942, and it’s been nearly a quarter-century since the terror attacks of 9/11. But while we continue to build defenses against foreign invaders, there were 231 incidents of domestic terrorism between  2010 and 2021. Synagogue shooters, cop killers, and election deniers are daily threats we fight with patchwork programs and the deadweight of denial and appeasement. Politicians are held captive by the gun lobby and unwilling to pursue criminals who might vote for them. There are few more discouraging signals about the state of our nation than the emergence of insurrectionists, and other agents of chaos, as a voting block that warrants representation in government.

The Department of Homeland Security and the FBI don’t properly track white supremacist and anti-government violence and threats, leaving Congress unable to assess the effectiveness of counterterrorism agencies and to see whether they are making any discernible progress in combating domestic terrorism.

Overprepared: James Cameron said it would happen in 1997 (specifically, at 2:14 a.m. Eastern Time, on August 29), and he’s not the last to overestimate the risk of sentient AI. ChatGPT is impressive, and there are real economic benefits flowing from LLMs, but the notion that a technology that only recently mastered creating images of hands is going to start thinking for itself and orchestrate societal collapse is science fiction … with an emphasis on fiction. The loudest AI doomsayers created these models. It is techno-narcissism: I have created the singular “thing” that will create/save humanity, and now’s the time to convince regulators that I care … really care. Skynet was taken out by a single mom (twice!). I think we got this.

Underprepared: AI doesn’t have to be sentient to pose a threat — sentient actors are the threat. The 2024 election is going to be the World Cup of online disinformation, as AI supercharges these tactics. Social media bots sound like real people and can engage one-on-one in real time with millions. Deepfake audio and video clips show candidates saying hateful or foolish things. India offers a preview: A skilled AI content creator says hundreds of politicians have asked him for fake material. Some even want badly produced fakes of themselves they can release to discredit any bad press, even legitimate press. China used fake AI content to attempt to sway an election in Taiwan and is using the same tactics in the U.S. Congress is considering legal barriers, but nothing will come of it before the election. The people running the platforms that will deliver these threats to our screens are predictably claiming “it’s too complex” and “this is government’s problem” and “free speech” — all of which is bullshit. However, the liability shield of Section 230 will be enough to keep them unaccountable for another cycle.

Worthy of Worry

Steve Jobs said having kids is like having your heart run around outside of your body. Life is worry, and the most rewarding things in life are consequently sources of real worry. Just as grief is love’s receipts, anxiety is a recognition you are not in control.  And having others in your life you care about is a loss of control. I’ve been so anxious, my whole life, about a lack of relevance or economic security. I am overprepared for this. The risk is that we allocate too much energy to shaping the views of people who will not be with us at “the end.” And, when it comes to the people who will be, we don’t worry enough. Yes, it’s important you are comfortable. However, it’s profound that you have peace with who will be in the room to comfort you. Put another way, are you worried about the right things?

Life is so rich,

P.S. Every Wednesday on The Prof G Pod, I answer our listeners’ questions about business trends, entrepreneurship, career pivots, and more. If you have a burning question, send a voice memo to officehours@profgmedia.com

P.P.S. Section’s new Build an AI Product bootcamp is open for enrollment. Early bird pricing closes in 24 hours, so get 40% off when you enroll now.

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War on the Young

This week I spoke at TED2024, the iconic program’s 40th anniversary event. I joined RuPaul, Kesha, and two different astrophysicists on the stage in Vancouver. I was given 15 minutes, and took 17, to riffle through 47 slides articulating what I believe is the greatest challenge facing the U.S. It’s not inequality, climate change, or war in the Middle East, but an issue that threads these threats together: America’s war on the young. A war of mutually assured destruction.

A decent proxy for the success of a society is how it treats children. Not how individuals parent, but the success of the structures, incentives, and leadership charged with preventing a tragedy of the commons. In sum, can we answer a simple question: Do we love our children? In 2024 America, the rejoinder is disheartening.

Breach of Contract

We’ve broken the social contract that binds America: Work hard, play by the rules, and you’ll be better off than your parents were. For the first time in our nation’s history, this is no longer true. Today’s 25-year-olds make less than their parents and grandparents did at the same age, yet they carry student debt loads unimaginable to earlier generations. Neither the minimum nor median wage has kept pace with inflation or productivity gains, while housing costs have outpaced them. The statistics on children’s and young adults’ well-being are staggering.

None of this is lost on young people, and the shattering of the social contract has left them feeling rage and shame. Half of Americans older than 55 say they are “extremely proud” to be American; that number drops to 18% among 18- to 34-year-olds. This weakens the immunity system of America, allowing minor cuts to U.S. society to bring on deadly opportunistic infections. Just as when someone in your life blows up at you, it is about the issue at hand … and it isn’t. American youth’s warranted concern on social justice issues, despite remarkable progress on all these issues, turns seamlessly into rage.

Hoarders

We don’t lack the resources to level up young people and present the opportunities afforded my generation. But the cohorts who benefited most from the extraordinary post-war economic boom of the 20th century have pulled the ladder up behind them. In 1989 adults under 40 held 12% of household wealth, while those over 70 held 19%. Today those under 40 command just 7% of household wealth, while those over 70 control 30%.

Higher education is the most effective means of closing the generation gap. But the incumbents have artificially constrained access, sequestering opportunity largely to wealthy households, peppered with a few freakishly remarkable kids from the lower 90% to smear vaseline over the caste(ing) of higher ed. Elite schools tout their financial aid, emphasizing that students with median household incomes pay little or no tuition, but it’s a headfake. Being more generous with a select few low-income students only  wallpapers over exclusivity, when the goal should be to eliminate it. We have simply reshuffled the elites.

Harvard’s undergraduate class size has been static at 1,600 for half a century, while its endowment has grown nearly 500%. When your top-line revenue is up sixfold but you purposefully do not increase production, you are no longer a public servant but a Chanel bag. Single-digit admissions rates are the ultimate vanity metric, something deans and donors brag about at cocktail parties, when they should be a mark of shame. As I’ve proposed before, we should offer higher ed a grand bargain: Redirect the money earmarked for bailing out the one-third of America that has attended college to increasing freshman seats and reducing costs. The Biden administration’s proposed student loan bailouts shrink the tumor, but don’t address the underlying cancer — declining affordability and accessibility.

Capital vs. Sweat

We have elevated capital over sweat (i.e., labor). The public is numb to this mythology, benefitting the incumbents who’ve created it. Back in 2008, when the market crashed, young(ish) people like me, coming into our prime income-earning years, were able to buy growth stocks at low valuations. The foundation of my economic security was buying Amazon at $7 ($179 today) and Apple at $7 ($167 today) and Netflix at $12 ($611 today). Ever since, however, we’ve inflated asset prices by pumping them full of steroids and stimulus using low corporate tax rates and bailouts that are financed on the backs of young people. “Keep me rich, on your credit card,” said every American over the age of 50 to citizens younger than them. In sum: Real median income from labor is up 40% since 1974, while the S&P 500 is up 4,000%.

We’ve protected the wealth created by ownership at the expense of income earned by labor through the tax code, which favors gains from investments. Gains from stock sales are taxed at lower capital gains rates. Real estate holdings can appreciate tax free, and once sold, the gains can be rolled into another investment. Again, a series of transfers of wealth from earners (youth) to owners (seniors).

Representative?

And what taxes are collected are increasingly redistributed to the generation who needs them least. In 1985 the federal government spent three times more per capita on seniors than it did on kids. By 2019 that ratio had risen to eight times. We’ve cut senior poverty from 17% in the 1970s to 9% today, which is admirable. But child poverty has risen over that same period, from 16% to 19%.

The “demo” in democratic is failing us, as seniors vote seniors into office who then vote themselves more money. With neither age limits nor term limits, and incumbent reelection rates over 90%, congressional seats have become lifetime appointments. Nancy Pelosi may be the sharpest 83-year-old in Congress, but her time has passed: She has a daughter who was born during the Johnson administration, when less than one-third of homes had a color TV. Does our leadership really relate to the challenges facing a 15-year-old girl being sent messages on extreme dieting by Meta, or the budding addiction crisis of young men on phone-based gambling apps? We need churn to recalibrate and transfer wealth, but it’s been dampened with retardants that cost trillions. D.C. has become a cross between The Walking Dead and The Golden Girls — its denizens see the living (young) as nutrition, vs. the future.

Minotaurs

To appease King Minos of Crete, ancient Athens sacrificed seven young men and seven young women to the Minotaur he kept under his palace. Then Theseus slew the Minotaur. Today in America, we’re offering an entire generation to the Minotaurs of Big Tech, and our Theseus, Congress, can only stand by and make speeches. Teen depression and self-harm, bullying, loneliness, and obesity have shot up since social media began haunting them 24/7. Since 2017, Congress has held 40 hearings on children and social media and passed nothing to address the problem. Democrats and Republicans have introduced legislation, including to age-gate social and to reform Section 230 (which immunizes internet platforms from most litigation), but nothing gets done. At the last dramatic reading of what ails us, Senator Dick Durbin admitted to failure: “The tech industry alone is not to blame for the situation we’re in. Those of us in Congress need to look in the mirror.” We need to make tech platforms liable for the harms they cause; we should eliminate Section 230’s liability shield for algorithmically elevated content — freedom of speech isn’t free.

Buck Stops

The U.S. is the 10th-happiest country in the world for people over 60, and the 62nd-happiest for people under 30. Young people are economically disadvantaged, threatened by climate change, and voiceless thanks to our dysfunctional politics. And they’ve been manipulated from childhood by a toxic cocktail of paleolithic instincts, medieval institutions, and godlike technology. We have broken the social contract, and younger generations aren’t going to fulfill their end of it. In 1993, 60% of 30- to 34-year-olds had at least one child. Today that number is 27%. Young people aren’t meeting or mating, and the consequences will be dire. Young people’s labor powers the economy, and their taxes pay for the services consumed by old people. Without robust youth employment, Social Security will go bankrupt, debt service will consume the federal budget, and the commonwealth will collapse. We’ve created a future so unappealing, youth is opting out.

Fixable

The incumbents will throw their arms up like an 8-year-old who refuses to take responsibility. The plea of complexity is an illusion — every problem we have levied on young people can be addressed. We have the hard part figured out: how to grow the economy at a sustained rate to pay for programs that might turn things around. Here are just a few programs and fixes we could try.

I had my first child at 42, and it changed my life. I became more responsible, focused, concerned about the future, and empathetic. In sum, I became a better American. Children make us better. We care for our kids, but do we love children? Somewhere along the way, we lost the script as a society. If we have the resources to address these issues — and we do: Nvidia added a quarter of a trillion to the economy in 5 minutes post-earnings — but continue to look the other way, then we have to ask: Is America worth investing in? And do we really love our children?

Life is so rich,

P.S. On our latest Prof G Markets episode we discuss ByteDance and events betting. Listen here and tune in every Monday.

P.P.S. I’m giving a lecture and sitting for a Q&A on the State of Young People with Section on May 14. Sign up — it’s free.

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Think Slow

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Daniel Kahneman, who died last month, leaves an extraordinary intellectual legacy. Few people have unpacked our behaviors with greater insight than Kahneman and his longtime collaborator, Amos Tversky. In the wake of his passing, we’ve been reflecting on the many ways his work has shaped our thinking. Something I wish I’d figured out when I was younger is that greatness is in the agency of others. I have often tried to identify a guide or sherpa for different aspects of my life. Jesus and Muhammed Ali are my Yodas around social issues (love the poor, be fearless and poetic) and Peter Drucker informs my views on the economy (the purpose of an economy is to create a middle class), etc. Professor Kahneman helps me navigate the strait between instinct and decision. Some thoughts:

Homo Irrational

Kahneman studied how humans make decisions, and the shortcuts our minds take, unbeknownst to us. These shortcuts are efficient; they foster a key skill for survival, the ability to make rapid decisions with incomplete information. We have to make thousands of decisions every day, and we couldn’t leave the house if we had to objectively analyze every choice: breakfast, outfit, route, music, etc. 

Our efficiency comes at the cost of accuracy: Many instinctual decisions will be poorly calibrated (i.e., wrong). To facilitate the requisite speed, our brain buttresses our decisions with artificial confidence. Kahneman’s body of work demonstrates that we are often wrong but frequently confident. These shortcuts and mistakes are present in the structure of our brains, and impossible to avoid, but recognizing them helps us discern between trivial and important decisions and invest the appropriate intellectual capital. Put another way, take a beat and you increase the likelihood of making a better decision. 

Though he was a psychologist by training, Kahneman got his Nobel Prize for economics. Before him, economists “relied on the assumption of a ‘homo œconomicus,’” as the prize committee wrote, a self-interested being capable of rational decision-making. But Kahneman “demonstrated how human decisions may systematically depart from those predicted by standard economic theory.” That dry language obscures an intellectual nuclear detonation. Expectations about human decisions — whether to work at a certain job, how much to pay for a specific good — are the foundation of economic theory. Kahneman showed those expectations were incorrect.

Loss Aversion

One of Kahneman and Tversky’s earliest insights was the simple observation that we feel the pain of loss more intensely than the pleasure of profit. It’s irrational to an economist, but we put more value on not losing $100 than we do on gaining $100.

 

We also have a skewed perception of probable gains and losses: We overestimate the likelihood of unlikely things. Insurance is a profitable business because people would rather suffer a series of guaranteed small losses (premiums) to avoid the risk of a single but unlikely catastrophic loss. The healthy profit margins of insurance companies reflect our tendency to overestimate the likelihood of calamities. Overestimating an unlikely outcome is also the secret behind the lotto, which offers terrible odds. Some examples of how this has influenced my actions. (Note: I am not claiming these are the right way to put Kahneman’s insights to use, just my way.) What I’ve done:

I actively limit the number of decisions I have to make to preserve neuron power for the key ones. I have other people order for me at restaurants; I have a uniform for work/working out, wearing the same thing every day, and someone else buys my clothes. I delegate the majority of decisions at Prof G Media — I participate in a one-hour weekly editorial meeting and check in with my executive producer 2x per month on business issues. I have not planned a vacation in 20 years or put anything on my calendar in 10. Despite having made more than 30 investments in private firms over the past decade, I review few documents, and rarely even sign them. (That’s all handled by counsel.) I try to reserve the largest possible cache of gray matter for research, thinking, storytelling (writing, presentations, etc.), and investment decisions. Over the next five years, I plan to outsource all investment decisions so I can focus on storytelling.

Seven years ago, I canceled all my insurance coverage — health, life, property, flood, etc. I don’t own a car, but when I did, we purchased the minimum amount required by law. This is a position of privilege (don’t cancel your health insurance), as there is no disease or property loss that would cause me financial strain. Since adopting this strategy, I’ve saved $1.4 million in premiums.

My belief in the market’s collective loss aversion has reshaped my investment portfolio over the past decade. The majority (90+%) of my investments used to be in publicly traded stocks. That share is now less than 20%. Instead, I lean into my access to private companies, as I can absorb big losses and withstand illiquidity. Per Kahneman, there have been periods of real pain. In the last 12 months I’ve registered four wipeouts — four investments that dropped to zero. However, two other investments registered a 4x and 25x return. My net return has beaten the market, but it’s been more taxing (emotionally) than just investing in SPY, as I have trouble shaking the big losses — again, making Kahneman’s point.  

Take a Beat

Prospect theory won Kahneman his Nobel, but he’s best known for his seminal  book, Thinking, Fast and Slow. The titular concept — that we have two thinking systems, a fast one for intuitive, emotional insights, and a slow one for logical, calculated decisions — is something that has saved me from … me, dozens of times. 

Our fast thinking system is an incredible tool. It allows us to drive cars, compare prices, recognize friends at a distance, and play sports. But its availability makes us lazy. Why do the hard work of thinking through a problem when we can just “go with our gut”? In any decision of consequence, it’s good policy to slow down, get out of the stimulus-response cycle, and let your slow thinking catch up. That’s not to say we should disregard our gut — just don’t let it take the wheel. 

Specifically, I try to be vigilant about not letting my fast system make decisions that merit the attention of my slow system. Often these are reactions to things that upset me. Last week, a journalist who’s active on social media posted on Threads that Jonathan Haidt and I were “grifters,” and that I did not care about young people. This pissed me off.  

Feeling threatened, my lizard brain took over, and I saw the situation as a conflict, a threat to my standing in the community. That framing, courtesy of my instinctive, fast thinking system, dominated my consciousness for the next four hours, distracting me from my kids and vacation. I drafted an angry response to counter the threat. 

Then I shared the situation with several members of my team. Able to evaluate the situation dispassionately, they were universal in their response. “Let it go.” I was just playing into an attempt to draw attention with ad hominem attacks the algorithms love. (e.g. Trump or Musk.) The learning, other than social media is a cancer? Speaking to others, before acting, is a great way to slow your thinking. 

Happiness, Diminishing Returns, and Taxes

In 2010, Kahneman and another Nobel winner, Angus Deaton, published a study which appeared to show conclusively that income was strongly correlated with happiness at low income levels, but that income above $75,000 had no impact on happiness. The study was widely celebrated, but in 2021 a much less famous academic, Matthew Killingsworth at Wharton, published a paper reaching a contrary conclusion, based on a sophisticated smartphone-based happiness tracking system. 

Rather than ignore the unknown academic challenging him, or using his global fame to undermine the upstart, as is the norm in Congress or pretty much anywhere else, Kahneman teamed up with Killingsworth. They engaged in a collaboration alongside a third academic neutral to the dispute — a process Kahneman pioneered. Working together, they found that Kahneman’s original study had measured the decrease in unhappiness but hadn’t captured the upside high-income people enjoyed. When more carefully measured, happiness did continue rising with income. However, there were dramatic diminishing returns. There were real gains to happiness in moving from $100,000 income to $200,000, but to see that same gain again required another doubling of income to $400,000. Extend the curve, and it flattens further. 

I believe this should influence tax policy. A substantial increase in the progressivity of income tax would offer a net positive in overall well-being. According to the IRS, 26,576 U.S. households reported income of over $10 million in 2020, totalling $824 billion in income. We collected $210 billion income tax from these filers, or 25% of their income. If we collected an additional 25% of just the income over $10 million, there would be little impact on the lifestyle or happiness of these taxpayers. 

But the additional $140 billion in revenue could cut child poverty in half ($100 billion) and end homelessness ($20 billion). These investments would generate a massive increase in the well-being of our commonwealth and a huge economic boon. (These societal ills cost us trillions in lost productivity.) Plus, we’d have enough left over to pay for most of NASA ($25 billion). And rich people love space.

Disassociate

Ideas are yours to play with, disassemble, shape, and apply where needed. I’ve taken the idea of “slowing down” and mixed it with atheism and stoicism to enhance my personal relationships. When my kids are disagreeable (i.e., awful), or my partner is upset/angry, I often respond as if it’s a threat to my authority or value. I reflexively escalate and get back in their face(s). I now try to disassociate. What I mean by that: I take myself out of my “self” and see someone I care about upset. Being an observer, vs. being in the line of fire, inspires different emotions. 

When my kid is agitated, I recognize it’s more about what they are experiencing elsewhere, and they know that — no matter how unreasonable they are — I will still love them unconditionally. When my partner is upset, my role is to notice it, to give witness to their life. Their emotions matter, regardless of my ego or the perceived criticism. I can take arrows, get shot in the face, and never lose sight of my role as their protector. I am the man of the house. If that sounds like we digress to traditional gender roles, trust your instincts. I’ve slowed down, thought about it, and determined it works for us.

Life is so rich,

P.S. Join Section’s free event, How Will AI Change Education?, to learn how AI will upend education from high school classrooms to board rooms.

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