E (14:55)
Half on one side, half on the other. And despite all of that similarity, just by changing the economic setup from top down to capitalism, radically different economics and lifestyle outcomes were achieved. When inequality spikes, it is understandable why people start asking things like should billionaires exist? But top down economic control doesn't just fail to rectify it and deliver prosperity, it systematically destroys the economy. And even more importantly, it doesn't just destroy the economy, it destroys innovation and the human spirit itself. People living in the east didn't just lack money, they lacked optimism, hope and confidence in their future. And that's not peculiar to the East German variety of top down control. That's the nature of top down control itself. And yet today, when faced with extreme wealth inequality, they still gravitate towards trying to fix the problems of runaway wealth inequality by going after the symptom, in this case billionaires rather than the actual ever escalating debt and money printing. It's understandable to pursue dramatic change when social mobility is declining and debt is and insanely high prices make the American dream effectively impossible. But the fundamental problem is that top down populist solutions might feel good in the short term because they punish the wealthy, but they make our problems worse, not better. Economies, like ecosystems, are complex, adaptive systems that respond to incentives. When you disincentivize innovation by confiscating the rewards of your most successful citizens, economic growth slows, wages go down, prices go up on a purchasing power basis, innovation declines and everyone suffers redistribution. Forced wealth seizure and aggressive top down control might temporarily reduce symptoms, but the core economic and cultural illness remains untouched and all you have effectively done is equalize everyone at zero. Given the importance of a thriving middle class, if taxing billionaires out of existence worked, I'd be all for it. But historically we've seen this scenario play out again and again. When governments attempt aggressive top down interventions like the Soviet Union, North Korea or East Germany, economic prosperity disappears, replaced by widespread poverty, cultural stagnation and a pervasive sense of hopelessness. And the Nordic countries, Denmark, Finland, Iceland, Norway and Sweden, which are often praised for their social democracies, have their own set of trade offs. They trade low income disparity for high taxes, lower gdp, curtailed growth and extensive welfare systems that create immigration problems. In 2023, US GDP per capita was $81,000, significantly higher than Denmark, Sweden and Finland. Only Norway beat the U.S. and that's because of massive oil reserves, not because their economic policy delivers strong growth. Further, Sweden's GDP per capita growth slowed noticeably post1970 when when they implemented high tax policies. Unlike the US which has lower taxes and has consistently outperformed them. In 2024, the US alone accounted for 49% of all global venture capital funding, while the entire EU, including the Nordic countries only accounted for 13%. The scope and scale of America's innovation dwarfs the entire world. And the Nordic countries in isolation are a rounding error. Their markets are small and their high tax environments deter the kind of risk taking needed to compete on the world stage. Especially when your competition is China. Oil and gas make up a full 20% of Norway's GDP. Without oil, Norway's GDP per capita drops below the US. Additionally, the Nordic model's high taxes and generous welfare only work in homogenous small populations with high trust and face massive challenges when scaling to a large diverse country like the US in 2023, Nordic countries had among the highest tax to GDP ratios, Denmark at 46.7%, Sweden at 42.6%, Finland at 41.9% versus the US at 27.7%. Also, in the Nordic countries, aging populations are also beginning to strain the welfare systems. Finland's pension costs have risen at an exponential 3.2% each annual, compounding growth for nearly a decade. To get specific about immigration, Sweden's immigrant unemployment rate is 15.4% versus just 3.6% for natives, tensions are mounting. Like everything, it's a trade off. If you don't regulate capitalism at all, you get the madness of the Gilded Age. In America, if you regulate it too much, you get socialism. If you aim for the middle, you stagnate. If you so how do you do this? Well, welcome to Part five. The real solution if you want to delete Billionaires, you've got to focus on the structural problems that give rise to them in the first place. Just as you don't cure brain cancer by taking Advil, you don't cure inequality by taxing billionaires back to millionaire status. Advil just masks the root cause of the headache and taxing just stagnates our economy. Said another way, focusing on billionaires is like blaming a fever instead of the infection causing it. And the infection we face right now goes to the very heart of America's monetary structure, economic incentives and cultural values. Billionaires emerge naturally, inevitably, from a system that rewards debt driven speculation, asset price inflation and entitlement instead of real productivity, genuine innovation and disciplined ambition. Debt and money printing. Debt and money printing, that should be the area of focus. The inequality that makes people so angry arises out of debt and money printing. And the gimmes that angry people vote for only makes things worse. And so we begin to spiral. The more we deficit spend, the more inequality there is. The more inequality there is, the more we vote for a bigger piece of the pie. And the more we do that, the more we hollow out the middle class and create the phenomenon we of the rich getting richer and the poor getting poorer. It is mechanistic to pull out of this nosedive. We've got to get out from under the $36 trillion in government debt that is costing us a fortune in interest payments alone. And to do that, we have to execute on what Ray Dalio calls a beautiful deleveraging. If you want to learn all about that, just watch this video right here. We've also got to get rid of the Fed and we've got to hold politicians accountable to a balanced budget. And perhaps most importantly, we need to reclaim the top spot globally for social mobility. We've got to get housing prices down. We've got to stop handing out absurd government backed loans for college that can't be discharged in bankruptcy court. And we've got to get back to the promise on the Statue of Liberty. We have to allow people to breathe free in a well regulated democracy built on capitalism. The dark reality of rent control. In New York City, 60% of rent controlled apartments are in buildings over 75 years old. Many of them are falling apart because rent controls make it impossible for landlords to maintain the building. At the peak of New York City's rent control Crisis in the 1970s, the South Bronx was losing nearly 30,000 housing units per year to abandonment and arson. That's equal to losing an entire apartment building every single day. And politicians are once Again, running on platforms of rent control. History really does repeat. The South Bronx and part of Harlem have already experienced severe disinvestment and abandonment due to rent controls. In the 70s and 80s, rent controls and related regulations made property maintenance financially impossible for landlords. And as a result, entire neighborhoods were left desolate and crime ridden. By 1980, the Bronx had lost over 300,000 residents, leaving behind empty buildings, burned out properties and economic stagnation. 300,000 people left. The story is both insane and highly instructive in terms of how to deal with the current economic and populist crisis. Starting in 1943, New York City had implemented emergency rent controls. This is during World War II and was intended to be a temporary measure to prevent wartime profiteering. The regulations capped rents at artificially low levels, significantly below market value. And this absolutely battered the financial viability of owning and maintaining a building. Now, maybe it wouldn't have been a big deal had the regulations been dropped, but there's nothing quite as permanent as a temporary measure. And so, despite the post war economic boom of the 50s and 60s, creating a massive increase in demand for housing, the regulations held with rents artificially capped. Landlords had little to no financial incentive to invest in building new rental housing. So they didn't. And consequently supply remained stagnant despite massively rising demand. Now, even if you grant that the politicians had good intentions, which may not be wise, but even if you do, these controls didn't keep rents low. Instead, they created a housing shortage and a dual housing market. It went something like pre war. Rent controlled units became increasingly rare and severely underpriced relative to market conditions. So a parallel housing market emerged. Since the small number of new units that actually managed to get built and enter the market weren't subject to the rent control regulations. They reflected the actual free market value and commanded extremely high rents. Government interventions were artificially keeping supply low, creating a massive imbalance in supply and demand. The severe supply shortage caused rents to skyrocket in these new units. Did people realize at this point what was going on? Namely, that housing was so limited and under maintained due to rent control, that people were willing to pay an ever increasing fortune for a well maintained building? Nope. The skyrocketing prices just made the public even more angry. And once again, not recognizing the actual cause of the price increases, people voted for more governmental intervention, the very thing that was causing the problem. And thus it made the problem even worse. And so the spiral continued. And under massive public pressure, in 1969, the city introduced the Rent Stabilization Law. This Policy sought to also control the newer apartments that were previously avoiding the rent limitations. It was designed to be a separate, less severe form of rent control known as rent state stabilization. It allowed for minor increases, but still held rents well below market rates and forced landlords to seek approval for any major rent increases, which once again stifled the income streams that are necessary for property maintenance and upgrades. And is so often the case with emotionally driven government intervention, the new rent stabilization law failed to actually address the root cause, namely the lack of financial incentive needed to propel investors to take a risk on building new housing and or invest in maintenance. The additional layer of complexity brought on by two types now of rent control also served to confuse the market even further, discouraging new development and perpetuating the chronic housing shortages and deterioration. So say it with me now. The death spiral continued at an accelerating pace. In 1971, under Mayor John Lindsay's administration, New York City extended stringent rent control rules, significantly limiting landlords ability to increase rents even when properties required major repairs or capital investments. And guess what happens when you do that? Landlords who found their maintenance costs regularly exceeding the allowable rent income decided not to make even basic repairs because if they did, they were going to go bankrupt. This only worsened the housing crisis. In response, in 1974, New York established the Division of Housing and Community Renewal, introducing even tougher enforcement mechanisms for regulated rents because, well, the beatings will continue until morale improves. Unfortunately, that kind of strict enforcement and those penalties only further discouraged landlords from investing in regulated properties as profitability was now extremely limited. This caused property values to decline yet again and the abandonment rate on buildings began to rise even faster. So by the mid-1970s, despite capped rents, property taxes and utility costs soared. This placed enormous additional financial pressure on the landlords who were already in dire straits. And to make the situation even more impossible, high taxation rates were combined with high inflation at the time, dramatically increasing maintenance and operating costs, driving even more landlords to abandon their buildings. That's the unfortunate cause and effect of policies like rent control. When landlords become unable to cover the escalating cost of their buildings due to frozen or minimally increasable rents, more and more of them will be forced to abandon their properties or reduce maintenance significantly until everyone is living in slum like conditions. By the late 70s, many landlords, faced with ridiculous regulations and financial hardship, resorted to not just intentionally neglecting the properties or outright abandoning them. In some cases, properties were deliberately burned for insurance compensation since insurance payouts became more financially viable than trying to Work with regulated rental income. Arson rates surged dramatically, with up to 40% of the fires in the Bronx being attributed to arson. 40%. Entire neighborhoods became characterized by burned out buildings, abandonment, and severe urban decay. But if you've been iced out of the housing market and can tell the game is rigged against you, you're understandably going to sour on capitalism. Because people don't map the physics of money, the nature of supply and demand, and the complexity of the economy at large, they are inevitably going to fall back on what they do. Understand politicians. So in 1977, yet another attempt at federal intervention was made, called the Community Reinvestment Act. This is getting crazy. The CRA was designed to encourage banks to provide loans to maintain properties despite the rent controls. Unfortunately, due to local regulatory hurdles, limited market incentives, and financial constraints that come with rent stabilization, the CRA's impact was initially limited and of course failed to reverse the decay. With decades of failed interventionist policies, New York fell into a financial crisis and the city was forced to make substantial cuts in municipal services like the fire department, the police department and sanitation. The South Bronx and Harlem were particularly hard hit with a massive acceleration of property abandonment. The effects of these policies were devastating. Neighborhoods were left economically desolate and crime ridden, creating conditions often described as economic ghost towns. By 1980, nearly half of the housing units in the South Bronx had been abandoned or destroyed, largely as a direct consequence of regulatory decisions. Economic stagnation became entrenched, with unemployment in the Bronx exceeding 25%. And this kind of self inflicted wound isn't unique to New York, it's seen all over the world. Stockholm had a housing crisis. Their rent control policies created an 11 year waiting list for a basic apartment. By 2022, severe shortages led many young people and families to live in overcrowded housing or remain with parents into their late 20s and 30s. Additionally, property owners stop investing in the housing stock, leading to visible deterioration. San Francisco also had their own major problems. Their long term rent control policies led directly to a 15% spike in housing shortages between 2015 and 2023, dramatically reducing availability and driving up market rents for newer tenants. Stanford researchers found that San Francisco's rent control caused landlords to withdraw from the market or convert units into condos or short term rentals. In 2020, Berlin ran into similar problems when they imposed stringent rent controls, freezing rents at June 2019 levels. And within a year, new rental housing permits declined by nearly 40%, exacerbating shortages and making housing even less accessible for new renters. The exact opposite of the desired outcome. Santa Monica also implemented strict rent controls in the late 1970s, and guess what? By the early 90s, research showed that these controls significantly reduced the housing supply and increased rental costs for non controlled units, pricing out young professionals and contributing to the economic stagnation in the area. Post World War II rent control policies also battered the UK, resulting in severe underinvestment in housing maintenance. By the late 1970s, significant portions of the UK's rental stock were classified as unfit for human habitation. If this pattern of governmental intervention creating the very problem it's trying to solve is happening all over the world, what is going on? That which is predictable should be avoidable.
