The Market Route For A Wealth Tax

The billionaires spent over $300 million to defeat a California initiative for a wealth tax. The tax would have imposed a one-time 5 percent tax on the net worth of anyone living in the state with more than $1 billion in wealth. Their spending was successful, with more than 60 percent of votes going against the initiative. 

While proponents of a wealth tax proved unsuccessful at the polls in their efforts to downsize the billionaires, it seems the financial markets are doing the job for them. The S&P 500 index fell 4.4 percent on Thursday, more than reversing its post-election rally on Wednesday. The NASDAQ dropped 5.5 percent, losing more in one day than what the wealth tax would have taken from the billionaires over 5 years. 

Some of the billionaires fared particularly badly. Larry Ellison, who has controlling interests in CBS, CNN, and TikTok, has most of his wealth in Oracle (ORCL). Its stock lost almost 7 percent of its value in regular trading, and another 1.3 percent in after-hours trading, as of this writing (6:00 ET). Former trillionaire Elon Musk did even worse. SpaceX lost 9.0 percent in regular trading and another 1.3 percent in after-hours trading. Tesla (TSLA) lost 10.8 percent in regular trading, with a further drop of 1.9 percent in after-hours trading. 

Those mourning this loss of wealth need to think more carefully about what it means. If stock prices were being driven by irrational exuberance, rather than economic fundamentals, as I and others have argued, the sooner prices correct, the better for the economy. 

We are seeing a massive diversion of resources to the buildout of data centers. The cost comes to roughly $1 trillion a year, or 3 percent of GDP. If these data centers are not going to pay off, because the demand for high-priced AI isn’t going to be large enough to pay for the buildout, the sooner we stop it, the better. These resources can be far better used elsewhere. As for the people who bet on the stock of these companies, well, they should have understood the risks.

There is some evidence that investors in the market see this story as well. The stock of the hyperscalers, the hugely profitable companies that are now borrowing heavily to finance data centers, was less hard-hit than the rest of the market. Microsoft (MSFT) was down 3.6 percent. Meta (META) was down a bit less than 4.0 percent. Amazon (AMZN) fell 2.2 percent. Google (GOOGL) was down just 1.9 percent. 

Of course, Oracle, the smallest of the hyperscalers, was down far more, but unlike these other four companies, it does not have a massively profitable business to fall back on. If investors are seeing the AI buildout as being an enormous waste, they would see it as good news that these companies don’t lard themselves up with massive debt they won’t be able to repay. 

This story also fits the disaster that is hitting the neoclouds, the companies that are building data center capacity exclusively for AI. The stock of CoreWeave (CRWV), the largest of the neoclouds, fell 9.8 percent in regular trading and another 2.8 percent in after-hours trading. Its stock price is down 61.8 percent over the last year. Core Scientific (CORZ) fell 10.8 percent in regular trading. Nvidia (NVDA), which makes its money by selling the chips for the data centers, lost 9.3 percent of its value in regular trading. 

Is this the big one? It’s too early to say. Remember, when the tech bubble burst in 2000-2002, it was not a straight path downward. There were many reversals where the market recovered much of its lost value. There is little reason to believe this time will be different. 

But we have to remember: The stock market is not the home team. If the price of overvalued AI stocks is coming back to earth, that is good for the economy, even if it’s bad news for many of our favorite billionaires.