#41 - Economics & Growth w/ Max Sacher

Max Sacher

Yeah, that's a really good question. And I say that's a really good question all the time. don't know. It's just like every time a student asks a question when I'm teaching, that's my initial response. That is a really good question, though. Gosh. So Alexander Pope said that the proper study of mankind is man. And that's sort of what economics is about. Basically, when you want to look out and understand society, and you see, some countries are really, really rich.

You you compare to how people live nowadays and it would be magic to people just even 100, 200 years ago. And where did all this amazing material wealth come from? What sort of systems and societies allowed that to happen? And then you look at some other countries that, you know, it's really heartbreaking kind of the poverty that exists over there. You say, wow, you we have such disparities in this world. We have had such growth. You know, what determines, you know, how

the day to day of how people live their lives. And economics is really the subject that tries and attacks that question, tries to understand why are some countries rich, why are some countries poor, why do some people succeed and some people don't. And it's a really rigorous framework as well, right? Because there could be a five trillion different answers to that question. And so how do you systematically have a way to answer those really, really important questions? I think that's what drove me to economics.

Jeff Albaum

Damn, yeah, that's a really good answer to that question. Holy smokes.

Max Sacher

I don't know why everyone doesn't do a PhD in economics. mean, you just look out at your day-to-day life and look at the complexity of just every single object and the coordination required to produce every object you interact with. That's done through the economy. I just can't see how you can't look at the world and wonder and then want to understand that and not go to economics.

Jeff Albaum

Right.

So then, with that wonder, curiosity, like how did you get then get, obviously it sounds like the finance route became, okay, it's a different route to get to actually the same destination. That's the destination I wanna get to and I can get there by studying finance instead of economics for the reasons that you laid out earlier.

Max Sacher

A little bit. mean, so I would say I don't want to say anything controversial, but I have I have my opinions and I'm going to say my opinions. But I think also in its own way, economics has also kind of lost the lost its central purpose. Right. You can go and you can look at like sort of like the top income papers that are being published. And it's it's just not about what you would think economics is. I think that's really due to like Gary Becker, who really started saying, wait, we can use our economic framework to start looking at

Jeff Albaum

Yeah, please.

Max Sacher

you know, all sorts of, you know, random questions and then people need to publish papers to get tenure. And so you have all these papers that sort of have lost the plot a little bit. And I think finance, because it's a lot smaller and a lot more focused on a specific subject, kind of like to me, feels a lot more like classic, the kind of classic econ that I like. And so I think that's another reason of why Wadipichi and finance is a lot more interesting to me.

Jeff Albaum

Got it.

Sure, sure. And do you have like a sub-specialty, like a category within broader finance that you're working on?

Max Sacher

Yeah, so actually right now I'm working on a couple of different projects with like private equity and private credit as well. So we've been looking at the news. There's been a lot of stuff in the news about private credit, how a lot of the firms that they invested in, they marked all these loans and they're probably all marked wrong. So the investors are gonna be losing a lot of money. And so we're kind of looking at private credit and this sparking of their loans right now.

Jeff Albaum

Okay.

Okay, wanna, sure, sure. Let's define a couple of those terms, because I think I hear private credit and I think I've said that phrase many times. I couldn't tell you what it means. What is, when someone says private credit, when you refer to private credit, what does that mean if I'm a third grader?

Max Sacher

but sort of like the private space.

Yeah, sure. So you want to start a business, but you don't have enough money to start a business. So you have to go get a loan. Well, traditionally you could go to a commercial bank, you Chase, but your Chase bank branch and say, Hey, I want to start a business. Can you loan me money? And after 2008, a lot of these banks got really constrained on the risk that they can take. And so when you go to Chase bank, they say, no, sorry, we can't give you a loan. And so basically,

guys with really, really big pockets said, well, we don't want to participate in the commercial banking system. We can just set up our own firm that just gives out loans instead of taking in deposits. And so we take money from rich investors and loan that out. And so now when you want to go start your business, instead of going to the commercial bank, you can go to, say, Blackstone or BlackRock or KKR, and they'll give you a loan instead.

Jeff Albaum

Got it.

Got it, got it, got it, okay. If I'm on the consumer end, like as a business owner, can I think of that similarly to like, you know, you open a credit card, sometimes they'll offer you like a personal line of credit where they're like, oh, you can have this at whatever 12%. Is that a similar idea? But it's just one, you're going to a credit card company, one, you're going to these KKR private credit company.

Max Sacher

So, the revolving line of credit is a little bit different from like a traditional loan. They offer both, but most of what we see is more like your traditional loans where you have, you know, some face value, some expiration date and some interest rate. So it's not quite like a credit card. It's more like a mortgage.

Jeff Albaum

Okay.

Like a mortgage. Okay, gotcha. Gotcha. Okay. Man, that's awesome. I feel like that's that's super interesting. what and then what about the private equity stuff are you working on?

Max Sacher

So this is really recent. But so I have this other paper where I look at sort of real estate. This is sort of like still in that real estate area. But one thing that's become really, really popular in private equity is what's called serial acquisition. So you take a really, really fragmented industry. And so you may have this have happened with your doctor, right? So, you know, lot of dentists or doctors have their own practice. So it's a really fragmented industry. Private equity comes in and will buy up

you know, all the practices in a particular area and basically, you know, do what private equity does, make them more efficient, but also how the race prices as well. And so there's been some papers looking at these serial acquisitions in healthcare and sort of what impacts that had, but I'm curious and okay, well, they've also been doing these serial acquisitions and inputs into construction. So you look at like HVAC and electricians, those kinds of guys. So they've been getting bought up a lot by P E and sort of consolidated. The question is, is so what

effect does this have when it comes to the cost of building a house? So that's another project I've been working on. So this is really, really, really preliminary. it could 100 % change in a month from now. I just want to preface with that. But it looks like when they do these serial acquisitions, the cost goes up. So they come in, they buy all the HVAC, and then it becomes more expensive to install HVAC in homes. So then the next question is, does this

Jeff Albaum

Interesting. Can you share like some of what you're finding or is too soon?

Okay.

Max Sacher

these house braces that I don't know yet.

Jeff Albaum

Right, right. But so doesn't that like kind of and again, I took I like got I think a C plus and like econ 101. So like I don't I'm going to say words in terms that probably don't make sense. But like, doesn't that kind of make sense if you take supply and demand? Like if you have the idea with more competition is it lowers prices, right? So by definition, if you're buying up all the competition and putting it in consolidating into one that decreases competition and it makes sense, they would increase prices, no.

Max Sacher

So there's kind of two forces at work. So yeah, you're totally correct. There's this one force of, okay, we come in, we, because there's less competition, right? We're able to raise the price. But on the other hand, you know, why does private equity come in? Well, they think that they can acquire this firm and lower costs, right? We can run this firm more efficiently. And how can we like take over the market? Well, if we charge a lower price at lower costs, we could actually make more money. And so, you know, there's this professor at NYU,

Jeff Albaum

Mm-hmm. Mm-hmm. Mm-hmm.

Sure.

Max Sacher

Sabina Howell, in lot of her work, actually in private equity comes in because they're able to run firms more efficiently. They actually lower prices and are beneficial for consumers. And so this is kind of the classic trade-off that regulators have to work with when they review mergers. There's always these two forces of, okay, there's less competition, but you might get economies of scale or more efficiencies from larger firms. And so it really is an empirical question what the ultimate effect is of consolidation.

Jeff Albaum

Interesting.

Right.

Got it. Got it. Got it. Dude, that's wild. So what like when you when you get together with your colleagues, do you like do you guys discuss like what's the best way to run an economy? Like what is the like what is like and obviously it's a huge question and there's so many inputs and there's so many outputs. But like at the end of the day, when all is said and done, like what kind of economy would you as an individual want to live in? Like you guys discussed that. Like around the water cooler.

Max Sacher

I don't know if that particular question has ever come up, but I think a lot of the the conversation is, I noticed this like weird thing that's going on that doesn't quite fit in our framework. Like, how can we, how can we explain this? know, there, there is a lot of room for, for debate, you know? So I'm like a pretty, guess like rationalist guy. think people are pretty good at what they do. And so I'll say, you know, this is probably like some sort of efficiency that they figured out.

And I have another, you know, PhD student here, Tommy Brown, who just got a job at BYU actually. And he's like a very behavioralist. So he's always, he's always telling me like, no, it's like people are being, you know, dumb, they're making a mistake here and the firms are kind of exploiting them. And so we usually like clash a little bit in, how we interpret sort of the same sort of fact that we see.

Jeff Albaum

That's so interesting. like, what do you, where do you like, do you guys think that you come at it with different persp... I mean, obviously you do because you're both individuals, but like, how does that influence like, I don't know, work that you do or like, does that, does it influence work that you do?

Max Sacher

No, definitely. So he does a lot of work on retail. So retail investors are people like you and me who aren't at firms. does a ton of work on retail investors and how basically when they play in these big financial markets, they're taking advantage of a lot. So he has this really interesting paper on basically limit orders and market orders. So just to define that, when you go to the stock market,

Jeff Albaum

Thank you.

Max Sacher

And say, Hey, I want to buy, you know, a hundred shares of Tesla. Well, you can specify just a hundred chairs. can say, okay, I want to buy a hundred chairs of Tesla at a max price of $150 a share. So keep trading until it hits this pricing stop. And basically the, the classic result is that, okay. You know, you can never pay more doing the limit order. Then compared to a market order, right?

So because the limit order specifies a max price, and the market order could go above that max price, the limit order you're always gonna pay less.

Jeff Albaum

So wait, just to convert to the limit order, you say, don't want to pay $150, I don't want to pay above $150 for a share of Tesla versus the market order is I want to buy a share of Tesla, whatever the price is. Okay.

Max Sacher

Exactly. Exactly. And so, you know, it seems like pretty obvious that you're going to end up paying less, even if you might not get all your shares, but you're going to end up paying less with the market order with the sorry, with the limit order.

Jeff Albaum

with the limit order. So, okay, but so what does that have to do with, like, how does that take advantage with retail investors? I understand the connection.

Max Sacher

Yeah, great. I'm just setting the playing field. So he has this. So it's really interesting. So it turns out though, when you when us go on our Robin Hood app to actually buy a stock, well, our order doesn't go right to the exchange. There's these really big guys like Citadel, who will say, okay, instead of, you know, sending that order to the exchange, we'll fulfill it with our giant stock of Tesla shares. Now, when they do that, they're required to give you a certain amount of price improved.

Jeff Albaum

Okay.

Max Sacher

over, over the market by getting that order flow. And so they have to say, okay, Tesla's trading at a hundred dollars. We'll fulfill their order for $99.99. They have to give you some price improvement. What's really interesting is the price improvement for the market order is actually larger than the price improvement for the limit order. And so when you submit your, your limit, so you'll get 10 cents off for doing a market order.

Jeff Albaum

Okay.

Okay. Okay.

Max Sacher

Whereas you only get five cents off doing a limit order. And the idea is, is that more sophisticated investors, people who might have more information are going to be the ones submitting the limit orders. It's like more sophisticated investor. And so Citadel knows this and says, okay, well, we want to incentivize, you know, kind of the dumb people. And so we'll give a better price improvement with the market orders. And so he basically saying, oh, like we teach everyone that you can't, you know, you can always do better with the limit order. That's basically not.

Jeff Albaum

Okay.

Limit orders. Whoa.

Whoa.

Max Sacher

because we have these really big players like Citadel.

Jeff Albaum

So I didn't know that. when you buy or sell a stock via Robinhood or Vanguard or whatever your brokerage is, so that actually doesn't go directly to the stock market. That goes through, there's another company that sits in the middle.

Max Sacher

Yeah. So, there's these firms. Yeah. Like Citadel, there's three big firms. Citadel is the only one I can remember off the top of my head, but they, they, will pay these guys for the order flow. And so they'll pay Robinhood like one cent to be able to fulfill the order instead of it going right to the, to the exchange.

Jeff Albaum

Okay.

and they're getting millions and millions and millions of orders every day. So they're just racking up, you know, one cent times millions and millions is a lot of money.

Max Sacher

It's a lot of money. Yeah. So this is like a pretty controversial. It's called payment for order flow. And it's a pretty controversial topic, I would say.

Jeff Albaum

Okay.

So yeah, has there ever been a study that looks at, what if it did just go, what if the orders went directly from the consumer to the market? And then how would that, what would that do to the price of the stock as you're buying it? So to use the Tesla example, okay, if you buy it at $100 Citadel gives it to you for 99.99, would the market give you 99.98? Like.

Max Sacher

That would be, it'd be a hundred dollars. So basically it's called reg NMC. This is like the, price improvement. So Citadel does have to give you a better price than you would get going to the market. So that's basically their, that's their argument for why it's beneficial to.

Jeff Albaum

them. Got it. Got it. Got it. So what's the ins...

What's the incentive? Because then isn't Citadel selling it at a loss, quote unquote?

Max Sacher

Well, they make money on the flow, right? They make money. Basically they're, they're perfectly hedged against, you know, any big movements in the price. And so they make money by, you know, so they'll buy it on like the spread between buying and selling. So when you buy it, so, the price is like a hundred dollars, but when you want to buy, you have to pay like a hundred and two when you want to sell, it'll be like 98. Right. And so there's some sort of spread and they make money off the spread.

Jeff Albaum

Okay.

But if

Okay. Okay.

Got it. Got it. Got it. Okay. Dude, that's wild. That's so interesting. Do you have like personal thoughts about that? Like, do you like that or do not like that?

Max Sacher

That's a good question. are my thoughts on payment for order flow? It's tough to see who, you know, I don't think the little guy is getting screwed over there. I think the fact that they have to improve the price and it improves a lot of liquidity of the market is probably, I'm convinced enough that it's probably a fine thing to happen. mean, Citadel does get a lot of private information out of it as well.

Jeff Albaum

Right.

Yeah.

Max Sacher

So they probably make a lot of money trading on that in like the more sophisticated markets as well. But I don't think it's the retail guys who are getting screwed over by payment for the club.

Jeff Albaum

Interesting, interesting, Does your work sit in the intersection between regulation and behavior? Do you learn or do you teach a lot about the way governments govern and how that affects markets? Or are they kind of separate?

Max Sacher

Well, the thing is, is, you a market.

This is okay. know, a market is kind of like an emergent thing from how you set the rules of a game. Right. So like, you know, not, not all markets are the same. You say the word market, right. But markets are very diverse. Right. You know, you have different kinds of competition, different levels of competition, you know, the price mechanism itself can be different, right? You can have like an auction is a kind of price mechanism. That's very different from, sort of like a limit order.

Jeff Albaum

Okay, ooh, I like that. That's a cool definition.

And what does price mechanism mean? What does price mechanism mean? What does that mean?

Max Sacher

But just like how you're allocating the resource, right? So think of like an auction is one particular mechanism, right? That determines a price that decides, you know, who pays what and who gets the good. Whereas you have like, you know, just think of like going to a store where there's a posted price and that's kind of a different way of deciding, you know, who gets what and how much they pay, right? And that's driven by, you know, when I go to the store, you know,

Jeff Albaum

Okay.

Sure.

Sure.

Max Sacher

don't want to haggle over the price. I like the security in that, but that's driven by the institutions and what people expect. So it's difficult to separate the markets that we find ourselves in from sort of how we're setting the ground rules of how you interact in those markets.

Jeff Albaum

Right.

Right, right, okay, that makes sense. So do you have a point of view on, yeah, sorry, go.

Max Sacher

Yeah. so if, sorry. So if you want to like teach about, you know, financial markets, well, yeah, you have to teach about the regulation because the regulation is kind of what drives the behavior you see in those markets. The market is not separate from how we're setting our institutions.

Jeff Albaum

Got it.

Got it. Got it. Got it. Okay. So, so kind of going back to like, what do you think is the best economy? Like, I kind of want to harp on that for a second, because like, I'm always so curious, like, I meet someone from like, I lived in Canada for a year, right? And I, I was 15. So I wasn't thinking about like, why is Canada different from America? Or like, and like, I love meeting people and just ask them, like, what do you think? Like, what do you love about your country? What do you not like about your country? And obviously, like, we live in really weird political times, like some people love America and other people's like, hate it.

But like, I'm just always so curious, like when you're looking at countries and economies and around the world, like what do you see as like the best? Like what do you see as like the thing that we should all be striving to be more like from an economic and like day-to-day civilian perspective, I guess. Small question.

Max Sacher

Yeah, a small, uncontroversial question. It's funny. So, but here I think I have a small, uncontroversial answer. you know, ultimately, I think like, you know, I got into this for one reason. I think there's only one thing that really matters and it's growth. And as bad as it is, I think there's only one number that matters and that's GDP, right? Like...

Jeff Albaum

Okay, okay, so what does that mean? Gross domestic product. But what does that mean if I'm a third grader?

Max Sacher

It's just how much stuff does your country make?

Jeff Albaum

Okay. Okay.

Max Sacher

How many buildings, how many planes, know, how many computers does your country produce? I think that's just the most important number. Like we haven't cured poverty yet. Once we cure poverty, then we can start worrying about, you know, who gets what. But I think first we need to make sure everyone's getting something, know, there's enough for everyone to get something. That's kind of like the first step. And so we need like a GDP.

Jeff Albaum

Sure. Okay, okay.

Max Sacher

And then you say, OK, who has the biggest GDP? Well, that's the US.

Jeff Albaum

Okay, interesting. so I think what I'm hearing you say is like, in order to... like, the fact that we have poverty isn't actually a question. It's not a problem of like, we don't make enough stuff. We make plenty. It's just a question of like, okay, how do we get stuff to everyone? Really? Okay, okay.

Max Sacher

I disagree. No, think, yeah, yeah. So I think a lot of people say, oh, we produce so much, you know, it's just, you know, and then we throw out so much. I think we're still fundamentally constrained, you know, by what we can do. And so I think, you know, I think there we need to increase GDP even more. I think a lot of our problems are not enough growth and not like a question of inequality.

Jeff Albaum

Okay.

Interesting. And when you say growth, does that usually mean like top line GDP? is that is that kind of the top line? Like think of like revenue of a country.

Max Sacher

So yeah, so now it gets like a little more nuanced. I would say like productivity is really the most important number. So given some inputs, how much can you produce? How many outputs can you make?

Jeff Albaum

okay, okay.

Okay, gotcha. Yes, you five going in. How many do you make? What's your output?

Max Sacher

So yeah, the fancy word for this would be like TFP, total factor productivity.

Jeff Albaum

okay. I've never heard. Okay, cool. That's a really okay.

Max Sacher

Yeah, that's like the fancy term in econ. But again, I also want to say, you know, I'm wandering into like macro territory here and macro was like my worst subject. And so this is like, you're getting like a real, you know, econ 102 opinion on the macro stuff here. But that is my opinion. mean, I guess it is a little more philosophy as well. But that is my opinion is that if we just made more stuff, things would be a lot better.

Jeff Albaum

Okay, okay, fair enough.

Sure.

Interesting.

Max Sacher

And think a lot of politics is kind of a side game to the fact that there's still scarcity.

Jeff Albaum

Interesting. Can we talk about the national debt for a little bit? I feel like I don't understand a lot of it. Any government, to my understanding, brings in money through taxes, and that's their revenue driver. And then they can spend on whatever they want, infrastructure, roads, schools, hospitals, all that stuff.

And so my understanding is like the US brings in, let's keep the math easy, a million dollars and they spend way more than a million dollars. And so they're able to bridge that gap by, I think, printing money. That's my understanding. No. OK, so how do they how do they bridge that gap?

Max Sacher

Well, why can't they print a bunch of money? Well, if you printed a whole bunch of money, the money would quickly become worthless, right? So money, right? What do you do with money? Well, you have to buy real goods with that money, right? And so everyone has $10, but there's still the same amount of goods being produced. Well, I'm going to start charging more for that one good because 50 people want it now. And so if you print a whole bunch of money, you're going to get a whole bunch of inflation.

Jeff Albaum

Okay.

Sure.

Sure. Sure. Okay.

Okay. So, so, so

Max Sacher

Money is tied to the real economy. So how does the government fund itself? It borrows money.

Jeff Albaum

Yeah, how does it work? Okay. From who?

Max Sacher

And so from who? From really rich people and from other countries and from like a lot of funds as well. every gosh. So this is another side. I also don't do bond markets, but basically every year, every six months, I think the government has an auction where they require.

I there's like five firms to bid on their debt. They say, hey, we're gonna sell $2 million worth of six month bonds. We're gonna sell $4 million of one year bonds and $10 million of 30 year bonds. And this debt is gonna go on auction between these five different firms and whoever else wants to submit a bid. And that's who then basically loans the government the money.

Jeff Albaum

And it's just the money that they need to make up the difference. So if they bring in a million dollars, they're spending 2 million, there's a million of difference. So they need to go out and raise a million dollars to cover the difference. And that's what a, is that what a bond is? A bond is just like a

Max Sacher

Yeah, listen.

Bond is another word for alone. Yeah, finance loves creating terms for things you already have heard of. But yeah, bond is just alone. It's just alone. Yeah.

Jeff Albaum

Okay.

Okay. And so the government is saying, Hey, we need we need more money. So let's go raise it from these five firms. So who are the five firms? Those are just like private companies.

Max Sacher

So these are really big banks. But also, these guys are required to bid. can also, other firms who want government, US government debt can also participate in the auction as well. But it's just that these guys are required because the government wants to make sure somebody will buy its debt. It's guaranteed to fund itself. And so these guys say, okay, well, I think they get some sort of privileges as well.

Jeff Albaum

Okay.

Right.

Max Sacher

I'm not totally sure. There is a lot of plumbing that I'm not.

Jeff Albaum

Dude, that's crazy. Wait, wait, so the government is like, yo, we didn't bring in enough money. We gotta go get some money. Also, we mandated the fact that at least five companies have to bid on our debt. Anyone else can come too, but those five have to or else. Dude, that's wild.

Max Sacher

Yeah, that's my understanding of a little bit of how the plumbing works. Yeah. There's a lot of plumbing that goes into it. Yeah.

Jeff Albaum

That's so wild.

So is going back to like your growth, I guess philosophy, like is your point of view that like, okay, yeah, debt's a problem. Like you shouldn't. Is that a problem? I guess before I ask that.

Max Sacher

It's, um, what's that? Uh, it's like a gosh, I can't remember who, said it, but he said, you know, how did I, how did I think it might've been him? You know, how did I become poor very slowly at first, then all at once, you know, and, um, government debt is similar. It's like, it's not a problem until yeah, it really is a problem all at once. Um, and so, you know, I think everyone kind of knows that

Jeff Albaum

Yeah. Yeah.

Until it is. Yeah.

Max Sacher

You know, the U S is on a pretty unsustainable path. What? Yeah. With the spending, with its debt at some point, people aren't going, you know, the government won't be able to, you know, pay all these loans back or, know, the, you know, the interest payments are going to itself need, debt, you know, going to become too high. And so at that point, the bonds are probably going to become worthless because the government's going to have to default or inflate its way out of it.

Jeff Albaum

with spending, from a spending. Yeah.

be too high. Yeah.

Max Sacher

And that becomes a really, really nasty situation to be in. But when that happens, I don't think anyone knows. So it's just a bit of a ticking time bomb, but it is a problem. you know, nobody, nobody wants to be the guy that says, Hey, I'm going to cut the spending and, you know, raise the revenue. It's politically kind of unfeasible. No party seems to care anymore.

Jeff Albaum

Nobody knows.

Right, right.

Right, right, yeah, that's interesting. So would growth still help, I guess it would help that problem. It's unclear if it would solve the problem.

Max Sacher

Yeah, I don't think there's any realistic growth path that allows us to grow out of our debt. But growth would definitely make it a lot less of a problem because the government would bring in a lot more revenue.

Jeff Albaum

Okay.

Sure, sure. Maybe this is a silly question, but like, what do governments spend money on? And if you don't know, that's totally fine. Like I kind of put you on the spot here. Like, you know, like we have a household budget. We pay rent, we buy food, and I'm sure governments do the same thing. But like at a certain point, if we were like, oh crap, we're spending a lot more money than we're bringing in. Like we have to go out to eat less. Like, does that happen in governments? Is that a thing?

Max Sacher

Yeah, so.

This is a good question as well, because it lets me tell another joke. Right? So the classic joke is that the US government is an insurance company with an army. So what does it spend most of its money on? Social Security, Medicare, Medicaid, and then the US military. And that's like almost

Jeff Albaum

I

Okay...

Okay, so those are.

Max Sacher

I'm not going get the number right off your head, but those are like the real, big, maybe like 60, 70, 80 % of government spending is Medicare, Medicaid, social security, and the military. And the thing is, so there's also two kinds of spending. There's discretionary spending and non-discretionary spending. So non-discretionary, it's legally mandated into law how much the government has to spend, right? Your social security is determined by a formula.

Jeff Albaum

Holy smokes.

Okay.

Okay.

Max Sacher

So, you know, when the budget comes around, you know, legislatures, they don't get to decide how much is going to Social Security, how much is not. We just know that that's a fixed amount that has to be paid by law. Same thing with Medicare and Medicaid. That's non-discretionary, right? The government just has to spend that money, unless Congress comes around and passes a new law about, you know, Social Security or Medicare and Medicaid, which again is, you know, politically unfeasible, economically probably not. And then the rest is like discretionary spending.

Jeff Albaum

Right.

Okay.

Sure.

Max Sacher

So, you know, we have choice about how much we want to give to the military, how much we want to spend on SNAP and that kind of stuff. But that really is not going to solve the budget, right? You want to solve the budget, you have to go after one of these really big programs.

Jeff Albaum

Got it, got it. Or, and, probably and grow. So like you want to grow and like cut big, big expenditures, big line items on your budget.

Max Sacher

and breath. Yeah.

Yeah, it's tough though, because every dollar of government spending is a dollar in somebody's pocket. it's not as if there's a lot of waste. mean, if you're the guy getting the dollar, it's not waste. So it's really tough to find good ways to cut and get back on track, I guess.

Jeff Albaum

Sure.

Sure, sure.

And I'm sure it's probably way easier said than done too, because you could say like, why are we spending all this money on X? But like you said, to the person getting those dollars, it's a, again, as a rationalist, people are doing a good job and they care about what they do. you know.

Max Sacher

Yeah, and it's tough to say, you know, we're going to cut the spending to your grandfather's medical care, which kind of is what that's we're going to cut medical spending to, you know, people who are poor people. It's just the political capital is just not there.

Jeff Albaum

Right, right. So.

Right.

So how do other countries do it? this is a total not data backed at all. This is like a pure feeling. So this is probably super incorrect. But I feel like a typical Canadian or a typical European feels wealthier to me. There's a feeling of like the person working at a coffee shop takes vacation. And again, I don't know what that is or why that is.

But and maybe again, it's completely wrong. But like how do other countries figure it out? Or like they do seemingly have pretty not great, but pretty good health care. Like everyone's pretty happy with it. Pretty good quality of life. Yeah, the taxes are high, but like it seems to work. So what have other countries figured out that we haven't or vice versa? Is that just a question of, okay, all of that extra goes to our growth? I don't know if that makes sense.

Max Sacher

Thank

Yeah, so I would say there's two questions there. One is like about standards of living and the other one is about healthcare. I'm happy to admit that healthcare in America is like particularly screwed up. It's a real clutch of a system that kind of like emerged really, really poorly after World War II. It really is not great and I think a lot of other countries have much better systems than us. Germany in particular.

Jeff Albaum

Mm-hmm. Okay, okay, fair enough. Yeah.

Max Sacher

I think has a pretty well run system. The issue again is like, it's so entrenched here that until there's some sort of catastrophe, nothing is really ever going to fix the healthcare here. Yeah, our healthcare system has a lot of issues. It really is. mean, it's this real, yeah, we were really set down a really bad path and...

Jeff Albaum

Interesting.

You

Max Sacher

know it's not going to be able to. On the other hand, let's talk about the standard of living. I mean, I'm happy to delve into both. In undergrad, I did do a little research in healthcare econ, so I know a little bit about that. But on the standard of living thing, I think this is just kind of a trade-off between American lifestyle and the European lifestyle. So think if you look in terms of consumption, Americans actually just consume.

Jeff Albaum

Yeah, yeah.

Okay.

Max Sacher

a lot more, a lot more and a lot bigger things. look like our houses are bigger, our cars are bigger, you know, we take bigger vacations when we take vacations. If you look at consumption, Americans consume lot, right? But when you look at Europeans, I think like, you know, they take a lot more leisure, but they consume a lot less. And so that's sort of the trade off, I think that you see there. And so that's more of a, I would say like a cultural thing than an economic system thing. If...

Jeff Albaum

Yeah.

Sure. Sure.

Got it, got it, got it, fair enough.

Max Sacher

you know, the French wanted to consume the same sort of size houses and consume in the same way as Americans, they could do it, but then they would look a lot more like America and probably not as much because they produce a lot less as well. But I think that's more sort of a cultural thing of, you know, how they choose to live their lives than sort of like ultimately the economic system.

Jeff Albaum

You

Sure.

Interesting. Interesting. That makes sense. question I've always thought about is like, why? I feel like in America, we have 50 different states, right? And my wife always gives me crap because she thinks it's really funny when I ask this question. if we have 50 different states, why don't we run 50 different experiments to figure out like, okay, there's a federal grant to go fix healthcare. Like wasn't Obamacare modeled after what Mitt Romney did in Massachusetts?

Max Sacher

Yes. Yes.

Jeff Albaum

So like, why don't we do like all like the every four years, the other conference nationalize healthcare. And it's like, whoa, wait, why don't we like, like, why doesn't California who has a bunch of money. You make like California care and like give all their citizens free healthcare and like figure it out. And I'm sure it's going to be wonky, but then you fix it over time. And you like, you iterate on it you make it better. And then that goes up to the national level. Like I've never understood why. States don't run these little experiments and then bring it up. Like, does that happen? Or is, I guess it did with Massachusetts, but.

Max Sacher

So I think in areas where states can experiment, you look at education, right? I think you have lot of different educational systems at the state level that get tried. And every couple of years you see, ooh, look at the miracle that happened in this state. Why don't we do this at a natural level? So I think in certain policy areas, you definitely see that part of federalism being implemented. But I am of the same mind as you, right? I think that is like,

Jeff Albaum

Mm-hmm.

Max Sacher

one of the really great strengths of the American system is this federalism between the states and the federal government. And I'm also curious as to why, you we don't run a whole bunch of different experiments and see which works and which doesn't. Maybe there's some sort of, you know, political thing happening at each state level where, you know, since they're all states and they all sort of have probably a similar political game to play at the state level.

things that aren't feasible in California probably aren't feasible in Illinois as well. And so as much as we would like to run the experiment, because states can select into the experiment or not, if one state doesn't want to do it, then probably all the other states don't want to do it as well. And so you would probably have to force the experiment from the top down, which then kind of sort of defeats the purpose of the federalism. But I think in certain areas, right,

Jeff Albaum

Mm-hmm.

Interesting.

which, yeah, that gets tricky.

Max Sacher

Like we saw it in in healthcare and we saw it, we see it in education. I think.

Jeff Albaum

Mm And I think didn't Stockton California run like a UBI experiment? I think they did it for like a year.

Max Sacher

Maybe. I'm not familiar. But there also is this other issue, right? California wants to do a wealth tax. But, you know, one big critique that people bring up is, well, people can just leave California. There's pretty low moving costs as well. And so say you do want to run this experiment. Well, if people don't like it, you won't be able to run it on anyone. You're going to lose. It's really, really bad. So there's a lot of risk there as well for states to change the status quo.

Jeff Albaum

Okay.

Right.

Right. Right.

Right, right.

Max Sacher

So I think there's some risk aversion also playing into it.

Jeff Albaum

Interesting.

That makes sense. What are your thoughts on the wealth tax? And I know very few details other than like what I've read in the headlines is like, you will be taxed. It's like a one time thing and you're taxed on all of your assets, right?

Max Sacher

I'm also not super familiar with, with what it is in, particular. to me, I think a wealth tax is a little bit, foolish. first it's really, really tough to measure wealth. you have all these, these assets that don't, that aren't traded, that don't have a price and, you now have to put a price on them and say how much you have to pay for it. But also it makes it really, really difficult to save. Right. So.

Jeff Albaum

Right.

Max Sacher

You you earn your income and then you go save your income. You already paid a tax on your income. Now you're paying a tax on the income that you're trying to save. And ultimately, what does that savings do? Well, that sort of is what gets invested in and drives the growth. And so a tax on wealth is really a tax on saving, which I think ultimately is really bad for the economy. I think if we wanted a tax, think a consumption tax is really the one that makes the most sense to me.

Jeff Albaum

Mm-hmm. Right.

Right.

Right.

Hmm.

What does that mean?

Max Sacher

You can think of it sort of as like a sales tax, right? So, you you want to go buy something, you have to pay basically based on that consumption, right? And so there's, you know, consumption, income and wealth, all kinds of things you can tax, they're slight, they're all ultimately some, yeah. So I think the consumption tax is the one that makes the most sense in my mind.

Jeff Albaum

Right. And isn't like, I totally agree with you. I think that makes a lot of sense. I just have like, just to play devil's advocate. Please.

Max Sacher

Okay, well then let me say why you shouldn't agree with me. So why do we not have a consumption tax? Well, consumption tax is regressive, right? So if you have, right, so a progressive tax means the more money you make, the more, right, so you pay 10 % on your first thousand dollars, or you can pay 20 % on your next, on the $10,000, right? So the tax, as you make more money, you pay more. Well, regressive means that, you know, say the tax on your first thousand dollars was 20%.

Jeff Albaum

What does that mean?

Max Sacher

And then the tax on your $10,000 was 10%. Right. And so as you make more money, the less taxes you pay. That's actually how a consumption tax works. So if you make, right. So if you make less money, you basically just because you have a fixed cost of living, you just have to spend more of your income. And so people who make less money spend more of their income on consumption. And so therefore we'll be paying a higher tax. And so it actually charges, you know, poor individuals more.

Jeff Albaum

Mmm, okay.

How?

I see, I see, OK.

Max Sacher

consumption tax. There's ways around that, obviously. You can just, you know, give a subsidy, give a tax break to people who make less money to, you know, but, you know, that makes the system slightly more complicated. You know, so there are, there are still drawbacks that you need to consider. There's, no perfect tax system. But I think if you weigh the pros and cons, I think a consumption tax would probably be the best tax.

Jeff Albaum

Got it. Got it. Got it.

Right.

Sure.

Right, right.

Max Sacher

But you can totally disagree with that. There's definitely a debate to

Jeff Albaum

But is it, I thought the whole thing with like, yeah, I just want to look, just to push back on a little bit of what you said, that it's kind of a tax on savings. I hear that, that makes sense to me. If you're someone who's saving, like you make money, then you're saving money. And then like, yeah, you don't want to tax that person's savings. But I guess the pushback would be like, if you're a billionaire, right? Like that's measured somehow, like, and that's a measurable thing, right? Like you're called a billionaire because, assumingly, your net worth is a billion dollars.

Max Sacher

Yeah.

Thanks

Max Sacher

Yeah.

Jeff Albaum

And like, isn't it kind of the thing? And maybe I don't know if this is, I thought it was like, like if you're in that super ultra net worth category, like you're actually salary might be really low. Like I think Jeff Bezos' salary is like quite low, but he's able to just like borrow against his shares of Amazon.

Max Sacher

Zero. Well, there's a lot of these CEOs that have a zero salary. They get no money. Yeah.

Jeff Albaum

Right, right, right. So their income, quote unquote, is like super low, but like they can go and use their ownership of their companies to get loans to buy their yacht or their house or like whatever it is. So like, isn't there a way that you could just tax like not like just tax that as some sort of incremental gain if that's what you were really trying to get is like, okay, like you can't just use your own like whatever thing you're putting up as collateral that clearly has a value. Right. And so like

Max Sacher

the world.

Jeff Albaum

There needs to be some sort of, when you go to buy the thing, whatever the sale price was or whatever the payments are, like that's taxed as if it were income. I don't know if that makes any sense, but...

Max Sacher

Thank

So I think there's two things here. One is like, there's this like thing that they do where they pledge their stock is collateral and borrow the money to spend to stay liquid. It's a lot of people say, okay, we shouldn't tax wealth because they can't really do anything with that wealth because it's very liquid. And then people will come back and say, well, you can, you know, borrow against that and turn your wealth into something liquid. And then I guess the other question I guess was like,

Jeff Albaum

Mm-hmm.

Sure.

Max Sacher

Can't we, know, is there some way to tax it? I guess that was the question.

Jeff Albaum

Well, I guess, Nadi, I feel like the argument for a wealth tax is like, okay, like we want to bring in more tax revenue, right? At the end of the day, that's, I think, the goal. But then if it becomes like, if you start that and then everyone leaves, then you have less people to tax, you're like, crap. That didn't work.

Max Sacher

Yeah, I mean, I guess another reason to tax this is, but I think this is a silly reason is you don't like inequality. So you just want to punish the rich people as well. mean, yeah, you could tax wealth. just think it's because wealth, wealth is savings and it gets, you know, when you allocate it, gets to a productive resource. Say you tax wealth, well, it's Jeff Bezos now it's in device to do. He's now it's in device to spend more money, buy more things.

And that actually makes things more expensive for us. If there's less things available, it's all going to Jeff Bezos that actually makes things more expensive for everyone else. So it's actually best allocated basically sitting in that stock market.

Jeff Albaum

Hmm

Interesting. Do you have a point of view on if you should punish wealthy people or not?

Max Sacher

But yeah, you can probably predict what I'm going to say, but I don't think so. I don't think our day to day lives are really that affected by having very, very wealthy people. I think what really matters more is am I improving in my own life? And I guess that's again where growth comes in, right? You know, if the economy is growing, what do I care if somebody is getting a lot more of that growth as long as I'm improving myself? I think that's that makes people satisfied. And so I think a lot of people are in great inequality.

Jeff Albaum

Yeah. Ooh, yeah.

Right.

Max Sacher

when they're really mad at slow growth.

Jeff Albaum

Hmm, interesting, interesting, interesting. Or like, yeah, you feel that you're not getting the growth that other people seem to be getting. Right? Interesting. And do you think that's a distinctly... yeah, go for it. Do you think that's like a distinctly American perspective? Like, do think that other countries around the world feel that way? Or it is a little bit of like a uniquely American idea?

Max Sacher

Yeah, I mean, you know, you go ahead.

Jeff Albaum

Because I think you're right. think if people like if you do feel like you're improving in your life, it's awesome. But I think if you don't feel that you're improving your life, it would it would suck. Right. You're like going back to like the totally feeling I said of like a person working in a European coffee shop being able to take vacation. don't know if that's true. But I also feel that like in other countries, your like quality of life is between a four and an eight. Like you're never going to go below a four or above an eight versus in America. It's like negative two to twelve. Like

If you're poor in America, like that would suck. But also you have the opportunity to go up to a 12. But if you're in another country, like your floor is lower, but your ceiling is lower. Again, totally feelings based. That's not rooted in any sort of data.

Max Sacher

Yeah.

Yeah, yeah, I'm just an American. stuff, stuff to say what my what it's like in other countries. But I think other countries. You know, are are more concerned with inequality than we are, for sure. I think I think you see that with just how they have more generous social safety nets, but they also have higher taxes as well. And then you look at.

Jeff Albaum

Mm-hmm.

Max Sacher

actual inequality, right? And in America is a lot more unequal than a lot of other countries. But I don't think that that is what matters. I don't think that's what people actually get upset about in their lives. I don't think anyone is going around mad at their lives because of Jeff Bezos. I think they project sort of like their own frustration with the lack of the economy working for them on Jeff Bezos and say, hey, inequality is the cause when really slow growth is the cause.

Jeff Albaum

Mmm

Interesting.

Max Sacher

But there is no person you can point at and say, hey, you're the one causing slow growth. Let's just take everything you've got. so politically, it's a lot harder to sell than saying, hey, look at this guy on his yacht. You could just have some of his yacht and your life would be better.

Jeff Albaum

Sure. Right. Look at that rich jerk. Let's go take his yacht. What? Totally. Is there a way you said like, there's not something you could point to like, that's slow growth. Like what if you were king of the world for a day, like what would you do to either accelerate growth or you can take it with whatever you want? Like what would you do with the 24 hours that you had?

Max Sacher

Right. mean, it's a compelling story.

Yeah. Well, this is why I got into economics was to figure out, you know, why some countries grow more than others. I don't know if I have an answer is the issue as well. You know, I think I think I think ultimately have to be pretty unsatisfied with with the economics profession that we don't have silver bullets. I think markets work pretty well. You know, you want to let markets work.

You just want to get out of the way of a lot of people trying to work to improve their lives. Gosh, if I could just change one or two things.

I'm not so sure. should have something. Consumption tax instead of an income tax, think would be pretty good.

Jeff Albaum

Okay, with tax breaks for low income earners.

Max Sacher

No, yeah, probably, I'd probably try and like, you know, control C, control V, Germany's healthcare system. But no, I think ultimately like America in terms of, you know, this sort of general slow growth period we exist in, I think America has been doing pretty well. We have like this pretty, another thing that really drew me to finance is, you know, well, what kind of is this sort of engine of growth?

Jeff Albaum

Okay.

Mm.

Max Sacher

is like these new young firms, entrepreneurs starting things up. And so I was really curious. I'm like, okay, how can we, you know, create more entrepreneurship, get more genius ideas out there? And I think this is actually something America's really good at because we have this really developed ecosystem for financing new risky ideas, right? You look at like, where's AI coming from? It's all US firms, right? And so I think...

Jeff Albaum

Mm-hmm.

Right.

Right. Well, isn't also like a good amount in China?

Max Sacher

Yeah, DeepSeek. If you want to talk about DeepSeek. Actually, China in their electric car industry is actually very impressive as well. Actually, that's pretty I would allow us to import Chinese cars. That would be another thing I would do. Yeah, there you go. these all these trade barriers are really bad. I would get rid of all the tariffs. Let America buy cheap stuff. Why are we taxing ourselves now? I know I think I think like

Jeff Albaum

Yeah, they're bomb.

Mmm. Yeah, yeah, yeah.

Okay.

Yeah, yeah, yeah.

Max Sacher

you know, America is one of the best countries to start a business in. And I think that's, you know, if I could do stuff to make that easier, I would. But I think that's, you know, it's easier if I was king of Europe to say what I would do, because Europe makes it really, really difficult to start a business. It's got really, really tight labor laws as well. And so I think that would be easier for me to intervene in. But I America is kind of in terms of, you know, at least in this period that we live in where it seems like growth is really difficult to come by, America's

Jeff Albaum

Interesting.

Max Sacher

know, muddling along pretty well.

Jeff Albaum

Okay, interesting, interesting, interesting. Dude, you're a beast. I love hearing your thoughts. I've wanted to do this for so long.

Max Sacher

I hope it's everything you were you were dreaming of.

Jeff Albaum

And then some I learned so much. feel like I didn't know probably 80 % of the things you said. I was like, I didn't I didn't know that like T what is it TFP total? Yeah, that's sick. That's like a way cooler measurement. Like why doesn't everyone know that as opposed to GDP? That seems like a way better measurement.

Max Sacher

Total factor productivity, yeah.

Well, GDP.

It's, it's tough to measure and it's not right. like, okay, so we have this idea of total factor productivity, and then you have to go into the data and say, how do we actually measure this thing? How do you, how do you measure putting in four widgets and getting out seven, you know, chunks? Well, it's, it's really not easy, right? GDP also really, really tough to measure, but at least like, you know, we, have spent a really, really long time measuring that thing. It's a little bit less of a theoretical.

Jeff Albaum

Got it, got it, got it.

Max Sacher

construct, right? And so it's a really practical number, whereas TFP is a lot harder to measure. And so, TFP is the thing that matters more, but the thing that we can work with more is GDB.

Jeff Albaum

Got it.

Got it, got it, got it, okay. All right, so maybe we'll keep that for now as a good definition.

Max Sacher

So, I mean, here's another lesson from economics is that everything's trade-offs, right? And so there's, The cost of something is what you give up to get it, right? So when I go to the play, what I'm giving up is the fact that I can't go see the offer. The cost isn't the ticket. You know, when I'm getting my PhD, the cost isn't, you know, the cost through the PhD. I could have been working and making money for these five years, four years, but it'll be more.

Jeff Albaum

Right.

Mmm.

Right.

Sure. Sure.

Max Sacher

So, right, it's trade-offs all the way. So yeah, TFPs like a really nice number, you can't, GDPs, you know, not as great of a number. It's a really, really clunky number, but you can measure it. know, so everything's trade-offs.

Jeff Albaum

Got it, got it, got it. So okay, think, I don't know if we got to the point, like what do you want to do? Like when you finish your PhD, what then? Do you want to go into academia? Do you want to be teaching? Do you want to be doing research? Like all the above?

Max Sacher

All the above, all the above. That's what academia is. Academia is research and teaching. It's finding new ideas and then passing along ideas as well.

Jeff Albaum

Okay.

Well, dude, you're a phenomenal teacher. I feel like I would love to take all of your classes. You like to explain things very, very well. And you're able to dumb it down to people like me, which is, I really appreciate.

Max Sacher

Let's do that to dumb it down for myself.

It's true. It's true. Like I don't feel like I've really understood something unless if I can explain it in a really dumb way. And it just it just bothers me. It just bothers me in my head when I'm like, you know, there's just, know, when you like learn something, but there's still like that little bit of thing that like doesn't quite click with you. And that just bothers me. And so I like just have this drive to to like get rid of that little click, have that thing click in so that I can

Jeff Albaum

Mm-hmm. Dude, that's an Einstein quote.

Yeah.

Max Sacher

really, really forget things. These things should be simple. The world was created by humans, so humans should be able to... Well, that's a big claim I just made. I actually completely take back what I was just about to say.

Jeff Albaum

Right.

What are the classes you're currently teaching?

Max Sacher

So I'm not teaching anything right now, so I'm TAing for a sustainable investments class. But then in the fall, I also TA for investment management. And what I taught over the summer was investment management.

Jeff Albaum

Okay.

Okay, so cool, man. So cool. What are some of the things like, what do like to listen to? Like, are you a big reader? Do you listen to podcasts? you like, what do you consume?

Max Sacher

you

Yeah, so there's a pretty big econ bloggers here. So there's there's quite a few blogs that that I consume. One that I would really recommend is Conversable Economist. So he's the editor at this actually amazing journal called the Journal of Economic Perspectives. And what that journal does is basically it's supposed to be a bridge between, you know, econ academia and the media. And so if you are a journalist and you're curious about a topic,

Jeff Albaum

Okay.

wow.

Max Sacher

Well, the JEP will have an article written by experts in the field for journalists. And so if there's a topic that, you know, I want just like a lay understanding of, I'll go to the JEP. The editor also writes an amazing blog as well. So I would really recommend a conversable economist. And then another podcast I really like is Conversations with Tyler. Tyler Cohn is a really annoying guy, but he has a great podcast as well.

Jeff Albaum

Okay.

Okay, I actually don't know that one. Conversation with Tyler? Okay, all right, sweet. Well, dude, thank you so much for being here. Thank you so much for doing this. I appreciate you. And I'm looking forward to more of me annoyingly asking you questions. Next time we hang out.

Max Sacher

Yeah, this is really fun.

Jeff Albaum

Awesome. Well, thanks so much again, man. I appreciate you. Bye, everybody.

Max Sacher

You're welcome.