Macro Roundup

Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future(New York: Penguin Press, 2022)

"... In 2020, murders in the United States spiked more than 27 percent — the largest percentage increase in at least six decades. Last year, murders went up again. Those murders resulted in the deaths of thousands more Americans, and returned the U.S. to homicide rates not seen since the mid-1990s. (While murders and violent crime overall are up, other crimes are down.)...Most homicide victims are Black. And Black Americans were eight times as likely to be murder victims in 2020 as their white counterparts.... the murder rate last year was higher than at any point since 1996, based on data from large U.S. cities collected by the crime analyst Jeff Asher.... there are three broad explanations...typically point to... The pandemic...A weakness for this theory is timing: The murder spike took off in May and June 2020, months after Covid began to spread in the U.S. Other countries didn’t experience similar spikes during the pandemic. But that doesn’t rule out the pandemic’s role. There could have been something specific to America’s pandemic response that led to more deadly violence, which could have taken months to emerge.... Changes in policing....Police officers, scared of being caught in the next viral video, may have pulled back on proactive anti-violence practices. More of the public lost confidence in the police, possibly reducing the kind of cooperation needed to prevent murders....he timing supports this theory, with homicides rising unusually quickly shortly after George Floyd’s murder and the ensuing protests. Killings also spiked in 2015 and 2016, after protests over policing during those years.... More guns. Americans bought many more guns in 2020 and 2021 than they did in previous years. The guns purchased in 2020 also seemed to be used in crime more quickly than firearms bought in previous years. And Americans seemed more likely to carry guns illegally in 2020. In short: Americans had more guns, and were possibly more likely to carry and use them...."

German Lopez, "Examining the Spike in Murders,"New York Times, January 18, 2022, https://www.nytimes.com/2022/01/18/briefing/crime-surge-homicides-us.html

Examining the Spike in Murders

In 2020, murders in the United States spiked more than 27 percent — the largest percentage increase in at least six decades. Last year, murders went up again.

Those murders resulted in the deaths of thousands more Americans, and returned the U.S. to homicide rates not seen since the mid-1990s. (While murders and violent crime overall are up, other crimes are down.)

The effects are felt unequally across the country. Shootings are historically concentrated in impoverished, minority communities. In a typical U.S. city, a small segment of neighborhoods account for most of the violence.

Most homicide victims are Black. And Black Americans were eight times as likely to be murder victims in 2020 as their white counterparts.

In the hardest-hit communities, gun violence is so common that it’s become a part of life. “I hear gunshots every day,” Angela Hernandez-Sutton, who lives on Chicago’s West Side, told The Sun-Times. “I just listen to hear where they’re coming from, then move to the front or the back of the house.”

Such daily experiences have gotten relatively little national attention. Anna Harvey, a public safety researcher at New York University, told me the concentration of violence probably explains why. White and affluent Americans have been less directly affected by the murder spike, but they’re also more likely to influence what news outlets cover and what politicians talk about.

The violence remains a grave example of racial inequality in the U.S. We have real solutions, with strong evidence, to deal with the problem, experts said. But those solutions need support from the public and lawmakers to go anywhere.

Why murders spiked

From 1991 to 2014, America’s murder rate plummeted by more than half. Experts still don’t agree on why that happened. Among the many possibilities: mass incarceration, changes in policing, reduced exposure to lead and video games keeping more young men occupied.

But the murder rate last year was higher than at any point since 1996, based on data from large U.S. cities collected by the crime analyst Jeff Asher.

The pandemic. Covid disrupted every aspect of life in the past two years. Social services and supports that help keep crime down vanished overnight. Schools could no longer keep unruly teens safe and distracted. A broader sense of disorder and chaos could have fueled a so-called moral holiday, in which people disregard laws and norms.

A weakness for this theory is timing: The murder spike took off in May and June 2020, months after Covid began to spread in the U.S. Other countries didn’t experience similar spikes during the pandemic.

But that doesn’t rule out the pandemic’s role. There could have been something specific to America’s pandemic response that led to more deadly violence, which could have taken months to emerge.

Changes in policing. The fallout from the 2020 racial justice protests and riots could have contributed to the murder spike. Police officers, scared of being caught in the next viral video, may have pulled back on proactive anti-violence practices. More of the public lost confidence in the police, possibly reducing the kind of cooperation needed to prevent murders. In extreme circumstances, the lack of confidence in the police could have led some people to take the law into their own hands — in acts of street or vigilante violence.

The timing supports this theory, with homicides rising unusually quickly shortly after George Floyd’s murder and the ensuing protests. Killings also spiked in 2015 and 2016, after protests over policing during those years.

More guns. Americans bought many more guns in 2020 and 2021 than they did in previous years. The guns purchased in 2020 also seemed to be used in crime more quickly than firearms bought in previous years. And Americans seemed more likely to carry guns illegally in 2020. In short: Americans had more guns, and were possibly more likely to carry and use them.

Research generally shows that where there are more guns, there is more gun violence.

These three factors could have also played into each other. The pandemic might have driven more people to violence, but the police might have been able to prevent at least some of that violence if they had remained proactive or had worked better with the public. Without so many guns, what violence did occur could have ended up less deadly.

“All three played a role,” Richard Rosenfeld, a criminologist at the University of Missouri-St. Louis, told me. “What’s difficult is to assign priority to one compared to the others.”

Solutions

I plan to write more about the potential solutions to violence in future newsletters. But I will outline a few here. Some are short-term fixes while others are for the long term.

In the short term, there’s solid evidence for policing — specifically, more focused policing, targeting the people and places most likely to be violent. With some of these strategies, the police work with other social services to lift violent perpetrators out of that life.

“I’m as much a reformer as anybody, but the short-term solutions around high violence are mainly punitive,” John Roman, a researcher at the University of Chicago, told me. “There’s no getting around that.”

In the long term, experts support a range of solutions that enrich both individuals’ and communities’ socioeconomic standing over time; they include preschool programs, summer job initiatives, raising the school dropout age, greening of vacant lots, more streetlights and expanded drug treatment. There’s also good evidence for gun control and higher alcohol taxes.

The short-term and long-term categories aren’t in conflict — and can complement each other. Both are likely necessary to reverse the murder spike and prevent future increases.

“…The average venture-capital fund launched in 2011 outperformed the S&P 500 by 7% per year. But that statistic understates the astronomical returns earned by a few top performers—and the mediocre returns earned by the rest. Between 1979 and 2018, the median fund underperformed the S&P 500, while the top 5% of funds nearly tripled the index’s performance. The investor Bill Gurley, of Benchmark, describes venture capital as a “grand-slam business.”In “The Power Law,” business journalist Sebastian Mallaby argues that venture is defined by its most extravagant successes. A few deals explain the majority of returns, a few funds drive the majority of asset-class performance, a few wild ideas change the world. Venture’s contribution to innovation and entrepreneurship is massive. Mr. Mallaby notes that between 1995 and 2019 venture-backed companies accounted for nearly half of U.S. nonfinancial IPOs. These firms are orders of magnitude more likely to launch an IPO than startups that don’t receive venture backing….Mr. Mallaby believes this success is the result of a unique mind-set: “the patina of the counterculture” combined with “a frank lust for riches.”…”

Daniel Rasmussen, “‘The Power Law’ Review: Chasing Unicorns,”Wall Street Journal, February 2, 2022, https://www.wsj.com/articles/the-power-law-review-chasing-unicorns-11643842474

‘The Power Law’ Review: Chasing Unicorns

The average venture-capital fund launched in 2011 outperformed the S&P 500 by 7% per year. But that statistic understates the astronomical returns earned by a few top performers—and the mediocre returns earned by the rest. Between 1979 and 2018, the median fund underperformed the S&P 500, while the top 5% of funds nearly tripled the index’s performance.

The investor Bill Gurley, of Benchmark, describes venture capital as a “grand-slam business.” In “The Power Law,” business journalist Sebastian Mallaby argues that venture is defined by its most extravagant successes. A few deals explain the majority of returns, a few funds drive the majority of asset-class performance, a few wild ideas change the world.

Venture’s contribution to innovation and entrepreneurship is massive. Mr. Mallaby notes that between 1995 and 2019 venture-backed companies accounted for nearly half of U.S. nonfinancial IPOs. These firms are orders of magnitude more likely to launch an IPO than startups that don’t receive venture backing. The U.S. economy’s dynamism depends in large part on the Silicon Valley ecosystem.

Mr. Mallaby believes this success is the result of a unique mind-set: “the patina of the counterculture” combined with “a frank lust for riches.” Venture capitalists will fund almost any idea, no matter how seemingly crazy or unreasonable. But the checks stop coming if measurable results are not forthcoming, forcing every company to constantly confront the harsh realities of a competitive marketplace.

Boston was once the leader in venture capital. The legendary Georges Doriot, who taught at Harvard Business School, is considered the father of venture capital for his role in founding American Research and Development in 1946. But Doriot couldn’t bear to see the companies he invested in fail, and his focus was more on people and patriotism than profits. “Capital gains are a reward, not a goal,” he told his underpaid employees.

Silicon Valley, by contrast, developed into a ruthless ecosystem that accelerated corporate evolution by killing off the weak while helping the strong to pursue technological and market dominance. Mr. Mallaby tells a gripping fly-on-the-wall story of the rise of this unique and important industry based on extensive interviews with some of the most successful venture capitalists.

Arthur Patterson, the “self-consciously cerebral” co-founder of Accel, devised a systematic approach centered on the idea of the “prepared mind.” In an off-site meeting in 2003, the firm’s partners identified social networking as one of the most promising new innovations and a focus for the firm’s deal makers. Months later, a young partner named Kevin Efrusy persuaded Mr. Patterson to visit a new company called Facebook. The firm would invest about $13 million—and earn a profit of $12 billion when Facebook went public.

In contrast with Accel’s patrician intellectualism, Sequoia Capital built its reputation on immigrant grit. Three of the firm’s top deal makers hail from abroad: Michael Moritz from Wales, Douglas Leone from Italy and Roelof Botha from South Africa. Sequoia’s partners first connected with Arash Ferdowsi, the co-founder of Dropbox, through a Persian rug merchant whom the firm had hired to network with the Bay Area’s Iranian-American community. Patrick and John Collison, two brothers from a small town in Ireland, founded Stripe, the fast-growing payments company. They partnered with Sequoia, John told Mr. Mallaby, because of the firm’s reputation for backing “young immigrant founders with pluck.”

Though the book focuses on the winners, Mr. Mallaby doesn’t shy away from criticism, especially in his description of the decline of Kleiner Perkins. The firm was successful in the 1990s, but lead partner John Doerr became more interested in virtue signaling than in profit making. He started a cleantech fund, based on a conversation with his teenage daughter about saving the planet, that put a significant dent in the firm’s long-term track record. And he embarked on a highly publicized gender-equity campaign to hire female partners, only to see some of the most talented women quit and then see the firm be sued by a disgruntled employee for gender discrimination.

Telling stories of rich investors betting on young visionaries and earning insane profits could become tediously repetitive, but Mr. Mallaby writes a fast-paced narrative. He also has a journalist’s eye for revealing details: Mr. Patterson, of Accel, serves a new recruit a dinner consisting of nothing but 12 ears of grilled corn and a bottle of Bordeaux; an executive assistant at Sequoia scrambles a replacement Porsche for a chief executive when his car breaks down at 3 a.m.; one bigwig uses a silver bell to summon his waiter at his San Francisco mansion.

Mr. Mallaby’s “More Money Than God,” published in 2010, was a narrative history of the hedge-fund industry based on extensive insider interviews. “The Power Law” can feel, in part, like a spinoff of the earlier book, substituting venture funds, which have profited from the rise of smartphones and cloud computing, for hedge funds, which have struggled to keep up with a soaring S&P 500.

In his closing words in “The Power Law,” Mr. Mallaby warns that it’s “unwise” to bet against venture. But public markets have recently turned against IPOs and other venture-backed companies, sending venture-style portfolios like Cathie Wood’s ETF into steep losses. With the IPO window closing and tech stocks selling off, some venture investors might well be thinking: “There but by the grace of God go I.” Only time will tell if Mr. Mallaby has timed the publication of his book with the peak performance of the venture-capital asset class.

Justin Fox highlights just how progressive American income taxes are overall, outside of the top.1%, "...The very fine slices at the top of the income distribution are a relatively new addition — before 2015 the top 0.1% was as narrow as it got, although the IRS subsequently updated the numbers back to 2001 — and they allow one to see an interesting characteristic of the federal income tax. On the wholequite progressive, in the sense that those with higher incomes face higher rates. But this progressivity reverses within the top 0.1% (taxpayers with adjusted gross incomes of $2.5 million or more in 2019),with the very highest earners paying out a markedly smaller share of their income in taxes than those in the bottom nine-tenths of the top 1%....For taxpayers in the top 10%, the federal income tax is what matters most, and changes in income tax rates within the top 10% over the past two decades make for an interesting tale. Rates haven’t ended very far from where they were at the beginning (this is the same data as in previous chart, with everybody in the bottom 90% combined into one group)...here’s the percentage of adjusted gross income going to each of the income groups from the bar charts at the beginning of this column, in 2001 and 2019. Every group in the top 10% has seen its income share rise, while every group below it has seen its share fall. But the top 0.01%, the group that faces lower average tax rates than those just below it in the income distribution, still accounted for just 4.4% of all adjusted gross income in 2019, and the top 1% accounted for 20.1%. Again, that may understate those groups’ true income shares somewhat, especially that of the 0.01%, but it’s an indication that despite their gains since 2001, the very highest incomes still represent a pretty small share of overall incomes...."

Justin Fox, "How U.S. Income Tax Policy Became Mostly About the 1%," Bloomberg, January 29, 2022, https://www.bloomberg.com/opinion/articles/2022-01-29/u-s-income-tax-policy-is-mostly-about-the-1

How U.S. Income Tax Policy Became Mostly About the 1%

There have been some major changes to the U.S. individual income tax code over the past two decades — notably the tax cuts of the early 2000s, their partial rollback in 2012 and the 2017 tax reform/cuts. The net result of them all is maybe not what you’d expect: federal income tax rates fell for every income group since 2001, with the very highest earners seeing the smallest decline (in percentage terms at least) and those with incomes in the 50th to 60th percentiles down the most.

The very fine slices at the top of the income distribution are a relatively new addition — before 2015 the top 0.1% was as narrow as it got, although the IRS subsequently updated the numbers back to 2001 — and they allow one to see an interesting characteristic of the federal income tax. On the whole it’s quite progressive, in the sense that those with higher incomes face higher rates. But this progressivity reverses within the top 0.1% (taxpayers with adjusted gross incomes of $2.5 million or more in 2019), with the very highest earners paying out a markedly smaller share of their income in taxes than those in the bottom nine-tenths of the top 1%.

But that’s a story for another day! For taxpayers in the top 10%, the federal income tax is what matters most, and changes in income tax rates within the top 10% over the past two decades make for an interesting tale. Rates haven’t ended very far from where they were at the beginning (this is the same data as in previous chart, with everybody in the bottom 90% combined into one group):

When there are few capital gains to be realized — as in the wake of the global financial crisis in 2009 — this effect is much reduced. Tax rates fell for everybody else that year because incomes were lower, but the top 1% saw their rates rise because they were more dependent than usual on ordinary income.

The content of reconciliation laws is limited in the Senate by the Byrd rule, which generally disallows items that do not affect outlays or revenue. The Byrd rule also prohibits initiatives that would increase the deficit beyond the fiscal years covered by the budget resolution.

With most of the tax cuts from a decade earlier set to expire, Congress passed the American Taxpayer Relief Act of 2012, which is technically the biggest tax cut in U.S. history but didn’t feel like because it simply made the Bush tax cuts permanent for all but the highest earners. The result was a big tax increase for the 1% and no change for everybody else.

It also wasn’t entirely uncomplicated. To comply with reconciliation rules, most of the individual income tax provisions in the 2017 law were temporary. The AMT break is due to expire in 2025, which if allowed to happen will affect an estimated 7.6 million taxpayers that year, according to the Tax Policy Center. It also didn’t deliver its benefits evenly across the country. Thanks to another provision of the 2017 law that limited deductions for state and local taxes, HENRYs in low-tax states benefited much more from the AMT changes than those in high-tax states — although on average even the latter saw their federal income taxes reduced.

The permanent changes in the 2017 tax law were on the business side, with the biggest being a reduction of the top corporate income tax rate from 35% to 21%. Opinions differ on how a cut like that affects personal incomes. The mainstream view is that corporate shareholders bear most of the burden of the corporate income tax, and as high earners own most corporate shares, they pocket most of a corporate tax cut. But some economists argue that corporate taxes weigh most heavily on the incomes of rank-and-file workers because they’re less mobile than investors and thus less able to escape high rates. Income changes since the 2017 law actually give a little support to the latter view, with the share of overall adjusted gross income going to the top 1% falling in both 2018 and 2019.

Compared with the 2001 and 2003 tax cuts, then, the 2017 edition wasn’t all that skewed toward the very rich. Occasional Democratic claims that it was assume that (1) the corporate tax burden falls mostly on the highest earners and (2) all the temporary provisions in the 2017 law are allowed to expire, which given past experience seems unlikely to happen.

Yet the regressive turn at the top of the income distribution, while smaller than a decade ago, remains. A bit of it, to be sure, is an inflation-caused illusion: A $1,000 capital gain from the December 2021 sale of an asset purchased a decade earlier, for example, represents not $1,000 in real income but $809 in income and $191 in inflation, if you go by the consumer price index. Also, there are economic arguments for keeping capital gains taxes low (and some against) that I’m not going to get into here. On the other hand, the very wealthy have ways to reduce their taxable income that aren’t available to the rest of us, meaning that the above charts probably overstate the share of their true income going to taxes.

With that in mind, here’s the percentage of adjusted gross income going to each of the income groups from the bar charts at the beginning of this column, in 2001 and 2019.

Given the information presented above, it’s understandable that some Democratic lawmakers want to find new ways to tax billionaires. Doing so might well make the tax system fairer. But it should also be clear that the bipartisan consensus that seems to have emerged over the past two decades that no one outside the top 1.5% or so should have their taxes increased (the Biden administration’s stated cutoff is an income of $400,000) limits how much money can be raised from the income tax.

The across-the-board reduction in effective tax rates since 2001 has brought with it a commensurate reduction in individual income tax revenue, from 9.4% of gross domestic product in fiscal year 2001 to 8.1% in 2019 (it fell even further, to 7.7%, in 2020 but some other things were going on in 2020). 1 Fiddling around with the taxes of the 1% isn’t meaningless in this context — individual income tax revenue went from 7.1% of GDP in fiscal 2012 to 8% in fiscal 2014, after the tax increases on the highest earners had taken full effect — but it won’t pay all the bills.

1) Yes, tax cuts may sometimes boost GDP,(1) I’m aware of no credible economic model in which the reductions in taxes since 2001 would have boostedGDP enough to pay for themselves and(2) actual GDP performance since 2001 has been dismal, with annual real growth of just 1.9%.