18 February 2018

A Failure of Empathy and the Preposterous Notion of 197 Shootings in Legislatures in the First 18 Years of This Century


"We all are born with a certain package. We are who we are: where we were born, who we were born as, how we were raised. We're kind of stuck inside that person, and the purpose of civilization and growth is to be able to reach out and empathize a little bit with other people. And for me, the movies are like a machine that generates empathy. It lets you understand a little bit more about different hopes, aspirations, dreams and fears. It helps us to identify with the people who are sharing this journey with us."
- Robert Ebert, film critic


There have been 197 school shootings in the first 206 months of this century. Congress has not passed a single piece of legislation in response to the fact that more than 3 people are being shot in schools - more than one of them killed - each month. 

It is true that this problem of shootings in America is complicated. It is also true that high school students feel that trigonometry is complicated and yet we - rightfully - force them to work on trig problems. Shootings are complicated but not more than any of thousands of problems that are given out each day to millions of students. We ask them to solve these problems because it will make them better. 

A failure of empathy is the root of Congress's lack of response to this carnage. Let's do a simple thought experiment, changing out schools for legislatures.

There have been 197 shootings in legislative bodies in the first 206 months of this century. Congress has not passed a single piece of legislation in response to the fact that more than 3 people are being shot in congress - more than one of them killed - each month.

Does anyone believe that the above paragraph could ever exist in the real world? After just 19 shootings in legislatures - 19 stories about congresspeople rather than students or legislative aides rather than teachers - does anyone believe that new laws would not quickly be passed?

Maybe the most essential feature of any leaders is empathy. What help would you need if your mom were single and poor and you had no access to mentors? What help would you need if you were an aspiring entrepreneur without access to mentors? What would it be like to be faced with the prospect of 30 years of commuting an hour each way to work? What would it be like to be on your third military deployment in two years? Leaders who make communities happier places are leaders who can empathize with people they are not and understand what would help.

In no small part because our legislators cannot understand what it would be like to go to work each week wondering if theirs will be the legislative body where the one congressperson will go berserk and begin shooting, or where some madman with an AR-15 will walk into the deliberative chambers to begin systematically shooting helpless, frightened congresspeople, they will not do a thing for our students and teachers. "Women and children first," is not a phrase heard on this ship of state.

A terribly conservative friend who loves Trump told me that what he likes best about him is that "Trump's a fighter." I guess one emphasis for leadership would be to find someone who fights, even though most of the people he fights with are fellow Americans. For me, I like the idea of empathetic leaders.

16 February 2018

The Switch That Triggered the Rise of the West (Can Also Be Switched Off)


"I am not an advocate for frequent changes in laws and constitutions, but laws and institutions must go hand in hand with the progress of the human mind. As that becomes more developed, more enlightened, as new discoveries are made, new truths discovered and manners and opinions change, with the change of circumstances, institutions must advance also to keep pace with the times. We might as well require a man to wear still the coat which fitted him when a boy as civilized society to remain ever under the regimen of their barbarous ancestors."- Thomas Jefferson

From the time of Homer (roughly 1,000 BC)  until Marco Polo (about 1300 AD), incomes were stagnant.

Starting about 1300, productivity began to rise and with it came a remarkable transformation in life. In the 18th century, life expectancy in England was about 35 to 40 years and now it's about 80.  Incomes are up about 30X from when Shakespeare was buying ink. What happened in England was fairly representative of what happened in the US, Canada, Germany, France and the rest of what we now call the West.


Change in income from century earlier
Since the 1700s the median income for each century has steadily gone up. From 1700 to 1900, per capita GDP tended to be about 62% higher than it was a century earlier. That was the reward for creating more capital and making it more productive. From 1900 to 2000, per capita GDP tended to be about 158% higher than it was a century earlier. That was the reward for creating more knowledge workers and making them more productive. So far this century, per capita GDP tends to be about 250% higher than it was a century earlier. This is the result of continued gains in capital, knowledge workers and their IT, and - most importantly for this century - the increasing power of entrepreneurship.

The West started this parade but it no longer leads it. Singapore has higher per capita GDP than the US, England, or Germany. There is nothing uniquely British about industrial economies or uniquely American about entrepreneurial economies. Anyone can lead this parade but why did the West start it? I think it's because of a unique approach the West took to its defining institutions.

Social invention is an overlooked component of progress. Banks, corporations, and nation-states matter as much in this story of progress since 1300 as trans-Atlantic ships, steam engines, and computers. The very notion, though, that these institutions are merely tools - no different than engines or electronics - is what has made the West different.

People within the the West have taken three distinct approaches to institutions.

Social Conservatives and Social Inventions as Sacred
The first approach is the most obvious. You come to awareness as a small child, growing up with the wonder of a church, the splendor of a king, the wealth of a bank and when you become an adult you accept that this is the way things are. Realizing how instrumental are these institutions to your world, you fight to defend them as they are.

Social conservatives treat social inventions as sacred. These are the loyal Catholics who see in the Protestant Revolution a route to hell and social chaos. These are the royalists who see in challenges to the crown a tumult of conflicting claims for authority, a challenge to all that is sacred. These are the capitalists who see conspiracies in the Central Bank that "runs" things, feeling instead that the banker should be left inviolate and unregulated.

They are quite right that these institutions keep us from chaos. I personally feel like institutions - social inventions - are the simplest reason that we have more control over our lives than do the great apes.

Radicals and Social Inventions as Disposable
Radicals go to the other extreme. They are well aware of how awful the church or state or bank has been. The French Revolutionaries outlawed religion at one point. The Enlightenment was about science and rationality and religion was all about superstition and dogma; it had to go. Radicals knew the church was merely an obstacle to progress and had to go.

Whether it is atheists who want to eradicate the churches, communists who want to shut down financial markets, or anarchists who want to outlaw laws, the radicals quite accurately see all that is awful about these social inventions and want them gone.

They also don't have a clue about how important are these flawed institutions to civilization, to modern life.

The radicals and social conservatives are an important part of the conversation and should always be heard; left in charge, though, they'll only ruin things. They're important voices who should never actually be given power to change anything but instead should only have power to point out problems and make suggestions.

Power over these social inventions should instead be given to people who are not naive enough to believe we can live without them or naive enough to believe that they should be defended in some current or (more often) idealized past form.

Social Inventions as Tools
Progress has been made by the folks who see social inventions as tools. Not sacred things that need protection. Certainly not as disposable. Progress has followed from people who realize how important the church is to how people construct meaning and gain empathy and compassion, become more loving and happy even when life hits one with the inevitable tragedies of illness, death, financial setbacks or even wars and pandemics.

The ones who see church, state and bank as mere tools realize that - just as with cars or can openers - these tools are more valuable as more people are able to use and define them. "We are all priests," as Martin Luther claimed, or "All men are created equal," as Jefferson wrote express the sentiment of those who don't think that popes or kings should have a unique right to define the institutions that so define us.

And the social inventions as tools people are the ones who are unafraid to change these institutions to make them work better for who we really are and aspire to be than who we imagine our ancestors once were. A church is not sacred but it is precious. What does this mean? Everything about it should be challenged except for what it does for people; a church is more important than a juicer only because of what it makes. Fresh orange juice is lovely but meaning and compassion can make the difference between whether or not you even feel like it's worth it to get out of bed to make that orange juice.



The West has led the great parade of progress in no small part because it has treated its vital institutions as mere tools and subject them to challenge and redesign as if they were products no different than cars or radios. They're not sacred. They're not disposable. We've made progress by changing our relationship to church, state, and bank, making them tools for anyone rather than just popes, kings, and bankers. We will make progress again in this generation by making a similar shift in how we treat corporations, turning them into tools for employees to create wealth and jobs and not just tools reserved for CEOs (who, by the way, are also employees).  Freedom of religion, the spread of democracy, the American Dream and the popularization of entrepreneurship have treated - and will treat - our big institutions as mere tools. That orientation is essential to progress.

So why mention all this? Because in the wake of the Great Depression, extremists seized governments everywhere; fascists and communists took control and progress halted or reversed everywhere they did. Now, in the wake of the Great Recession, extremists are again gaining power.

On the left we have activists who see banks as evil. And on the right we have activists who see banks as sacred. The first group doesn't understand the importance of banks, the second group doesn't understand the importance of regulating them and subjecting them to a central bank. Those on the left aren't numerous enough in the states to spoil capital markets but those on the right actually are in Trump's government. Trump is moving to deregulate banks so that banks are tools for bankers and not the community, not for everyone. The social conservatives don't believe in Keynesian economics (most recent evidence of that is the fact that they protested deficits when unemployment was high and now want larger deficits now that unemployment is low) or monetary policy.

Social conservatives are also working to reverse democracy. In 1789, only white, property-owning Protestant men could vote. About every 50 years, another group gained voting rights until, by the end of the 20th century even minority women who rented could vote. Courts have repeatedly ruled that Republican efforts to reverse voting rights are actually targeted at reversing that, taking power from minorities and the poor to vote.

Finally the continued effort to impose a religious definition of when life starts (at the instant of conception) and dismissing any other reasonable definition is an attempt to encroach on freedom of religion, the freedom of women to follow their own conscience and belief about when sperm and egg become a baby.

Social conservatives are wonderful to have in a community. They remind us that family as an institution really does matter, that churches make lives better for so many, that banks and the state create order we would not have without them. We should listen to them. But social conservatives are better reminders than managers; put in power, they treat as sacred what any forward moving community treat merely as as tools that are best used by many rather than a few.

Prosperous and happy communities will continue to construct institutions that are tools that help people to create meaning and be compassionate. They may not even call these institutions churches - and that is part of the genius of lumping freedom of religion under the first amendment along with freedom of assembly, speech, and press, the realization that it is the freedom to form thoughts and express them that is at the heart of religious freedom.

Prosperous and happy communities will continue to construct institutions that are tools to allocate and create capital that helps to fuel progress in productivity and profits. Again, they may not even call these banks but they will be tools that make people richer and able to afford now what they cannot pay for until later.

Prosperous and happy communities will continue to construct institutions that are tools for governing, for creating policies that make their world safer, easier to navigate, and more likely to offer them lucrative options and freedom to live a life as they please - whether in the form of neighborhood planning boards or the UN or any level of government between.

Prosperous and happy communities will continue to construct and revise institutions that are tools for creating wealth and jobs, new technologies and new products and services and in the process of creating value for customers, suppliers, stockholders and the community.

And the communities that prosper the most will never pretend that these tools should be reserved for the elite. They will never pretend that they are not necessary. They will never pretend that they are anything but tools.

What has fueled progress for the West is treating these great institutions as tools. Every time we've instead treated them as disposable or sacred, progress stalls or even reverses.

06 February 2018

Shout it - Yellen was Flawless at the Fed (Hopefully It Won't Be Another Century Before Another Woman is Fed Chair)

This Monday was our first day with Janet Yellen as Fed Chair in four years. The market marked her departure with the biggest ever one day drop in the Dow. Now that's a send off.

The job of Federal Reserve Chair has become more important since Congress has become more dysfunctional. In an ideal world, the government has a mix of fiscal and monetary tools to use to help to smooth out the inevitable bubble and busts of an economy. Now we really have just monetary policy, the tool of the Fed. In the recovery from the Great Recession, when unemployment was still above 8%, the media and Republicans made a great deal of noise about deficits. Now that unemployment is only 4.1%, the Republicans have decided to add another trillion to the debt this year with no noise from Republicans (they're the ones creating this) and very little noise from the media. This is backwards and the Fed has had to work against Congress in their efforts to keep the economy from extremes during the recovery. Yellen has done that flawlessly.

For 100 years we had Fed Chairmen. Then, four years ago, Obama appointed Janet Yellen to succeed Ben Bernanke as Fed Chair. Here is how the economy has performed during her four-year term.

The uninterrupted streak - a new record
When Yellen took over as Fed Chair, the American economy had been creating jobs every month for 40 months. That's great but on two different occasions, the streak had lasted longer: 46 months in the mid-2000s and 48 months in the late 1980s.

Not once did the jobs report come in negative during her time as Fed Chair. The streak is now 88 months and counting; she set a new record each month for the last 40 months of her tenure, shattering the old record and bringing the unemployment rate down from 6.7% to 4.1%. No other Fed Chair presided over a time in which every single monthly jobs reports was positive.

Second best annual job growth
Uninterrupted job creation makes it easier to create a lot of jobs. During her four years the economy did. Only one Fed Chair - Miller who served for only 17 months during the 1970s - presided over a higher annual average job growth.  (And wasn't it curious how the media continued to whine about so-so job creation rates, as if they had any instances of it being better during a four year or longer Fed term?)

Second best annual rate of stock market return
The market returns during her tenure were also second to only one other Fed Chair - Volcker. It seems fitting that the market began falling spectacularly after her last meeting Wednesday and before Powell's first day of work Monday. (Speaking of which, Powell did have a miserable start in his first two days. After Monday's huge sell off, the market return for his first day worked out to a 99.9% annual return which would have made him the first Fed Chair to have lost the entire stock market in his first year on the job. "Where are the returns Jerome?" "I don't know. Yellen seems to have taken them when she cleared out her desk.")

Lowest Inflation
The Federal Reserve has two goals: keep unemployment and inflation low. No one presided over lower inflation rates than Yellen. The goal is 2%. Her highest year was 2.1%. Only Bernanke - who was dealing with horrendous unemployment rates - was close to her and most Chairs were more than double that.

Trump, unsurprisingly, decided that Yellen's performance wasn't good enough to warrant a second term and thus hers will be the shortest term of any Fed Chair since 1979 when Carter decided that inflation was too high and he needed to truncate G. William Miller's term and replace him with Volcker.*

Of course it was unsurprising that Trump would replace Yellen. In Trump's final campaign ad, he lumped Yellen with Clinton, Soros and other world leaders as "globalist" financiers "who don't have your good in mind."

As it turns out, for a woman who didn't have our good in mind, she did pretty good. I'd go so far as to say that her performance was flawless. Let's hope it's not another century before a president has the good sense to appoint the second woman to head the Fed.

----------------------
*(It's worth noting that when Carter interviewed Volcker for the job as Fed Chair, Volcker warned him that his approach to squeezing out inflation would hurt the economy short-term and about the time Carter was running for reelection the economy would be in bad shape. Carter said, But this is what we need to do. And sure enough, in November of 1980 when Americans elected Ronald Reagan to take Carter's place, unemployment was at 7.5% and continuing to rise.)




01 February 2018

General Intelligence and General Stupidity - Smart People Know the Difference

As an old guy I've given up on the notion of meeting someone who is brilliant. So, if I'm told that someone is brilliant, I want to know in what. Because while I know that the most we can hope for is having one thing that we're really good at - if we're lucky, even great at. That's what we can hope for , being pretty good or even great at at least one thing. But the only guarantee we have is that there will be at least half a dozen tasks and activities that make us look like complete idiots when we try them.

So it is too simple to say of someone, "He's brilliant," or "He's an idiot." You have to be more specific and clarify on what task is he brilliant or an idiot.

The ideal politician would be brilliant at two things: politics and policy. Politics makes you successful at the ballot box, it gets you elected. Policy makes your community successful - your average person able to make more money and live longer. Ideally a politician would be great at getting elected and enacting effective policy. I think FDR is an example of this. FDR got elected president four times. He helped the country navigate its way out of the Great Depression and through World War II. He wasn't ideological but was open to experimentation, trying whatever he thought would work to lower unemployment from the 25% it was when his presidency started. And he knew that the Nazis were not just "their" problem but were ours. He had press conferences twice a week and his willingness to answer questions on the host of issues the country faced gradually won over even hardened journalists. He also gave a weekly radio address; years after he'd died, his wife Eleanor said that people would approach her to say how much they missed having him explain "their government" to them. By the end of his presidency the country - indeed - the world was a better place. That's the simplest measure of effective policy.

You haven't heard of the worst politician. Not only can this guy not get elected or get any media coverage, but he has truly bad ideas. He might be ranting to some long-suffering friends in a coffee shop diner somewhere but he's not winning any elections. Bad at politics and bad at policy.

View from Adlai Stevenson College at UC Santa Cruz
My college was named after Adlai Stevenson, who ran for president in 1952 and 1956. I don't pretend to know much about him but by all reports his policy solutions were thoughtful and ahead of his time but he ended up running against Eisenhower, the man who led the Allied troops against Hitler. Stevenson was seemingly gifted at policy but not terribly effective at politics - at least at the national level.

Which brings us to Trump. He might understand the media better than anyone in my lifetime. He continues to dominate news coverage of every cycle, regardless of what seems to be going on anywhere else. He was so good at politics that he was able to get elected without having held any office before and having been caught on tape bragging about grabbing women by the pussy. It seems highly probable that he had help from Putin but the punchline is that he won the election. He won by offering to make the country more like the former Confederacy, his base. The states whose lifestyles, decisions and policies put them at the bottom of every meaningful list - from household income to life expectancy - all thought he had the best ideas (well, 8 of the 10 poorest states) and the states at the top of every meaningful list (well, 9 of the 10 richest states) all voted against him. He wants to renege on trade deals, lower immigration, and build walls in a time when the most prosperous counties, states, and countries are more tightly integrating with the rest of the world rather than sealing themselves off from it. Trump is an idiot savant, a man brilliant at politics and an idiot at policy.

For my nickle, this makes him the most dangerous man in politics. If he were this bad at policy but just as bad at politics, he might have a talk radio show but he wouldn't have the White House. If he were as naturally gifted at policy as he is at media coverage and politics, it would be a joy to have him in the White House.

Which brings me back to the claim that no one is generally intelligent at everything. We all have our weaknesses, our areas of absurd inadequacy and stupidity. There is, though, one way to not make this evident. People who are aware of their areas of weakness and don't do that thing they do so poorly - whether it be choose their own clothes or tell jokes or dance or calculate equations or analyze data - are people who seem really with it. A person who knows his limits is a person who can leave a great impression; you don't see him look foolish.

And this is might be Trump's biggest weakness of all. He understands policy and governance so poorly that he doesn't even understand how poorly he understands it. The final thing that makes him so dangerous? He doesn't even know that he's bad at what he's bad at. Sadly, Trump won't be the guy who leaves you with such a favorable impression because he only does what he's great at; instead, he insists on showing you how badly he does what he thinks he does so well.

The closest thing to general intelligence is the ability to discern what we are intelligent at and what we're stupid at and focus on the first and avoid the second. Sadly, we're led by a guy who doesn't even have enough intelligence to know the difference between what he's brilliant at and what he's stupid at.

22 January 2018

The Trick is Finding Someone Whose Unusual Interest in Dwarfs Has Forced Them to Sell Their Art

From the early 1500s to early 1600s, the English destroyed a lot of art. Perhaps as much as 98% of their paintings and statues as part of their rejection of Catholicism and its rather worldly reliance on images. 

King Charles (the king who ruled until the Puritans cut off his head in 1649) revived an interest in art. An avid collector, at one point he was able to get a good deal on some great paintings (among them a Titian) because a certain Gonzaga family had fallen on hard times morally and financially; only interested in sex with dwarfs, they sold him paintings in order to get money to purchase a rather extraordinary Hungarian she-dwarf for a high price. (Yes. The actual woman. Not a painting of her.)

Had Shakespeare only lived a few more decades, he could have included accounts like this in his plays. As it is, we have only stories of passionate teens and mad kings.

[This is a story that was casually dropped into conversation on Andrew Marr's Start the Week podcast today. It struck me as remarkable.]

05 January 2018

The Real Culprits in the Trump Presidency

We've watched a year of extreme incompetence in Trump's presidency. Not only does he not understand trade or war or trade wars or any of a hundred other topics intrinsic to governing, he lacks interest in these topics or the cognitive ability to process any data or narratives with more subtlety than a bumper sticker. Since Twitter has allowed a doubling of character limits to 280, even his tweets have taken on a curiously rambling tone, becoming even less coherent. Every successful politician represents some serendipitous match of time and destiny; it may well be that one of the chief reasons for Trump's political success is that his thoughts and policies don't need to be packaged to fit into a 140-character limit but are actually birthed whole at no more than 140 characters. Twitter was the perfect medium for Trump, a medium serendipitously designed to the exact dimensions of his cognitive limits.  

Now that Wolff's book is revealing so much that - as James Fallows says - is an open secret, pundits are coming out critical of his staff for not outing him as grossly incompetent. Among the many open secrets about Trump is the fact that the man who was already prone to repeat stories in a thirty-minute cycle has reduced that cycle to about 10 minutes. This is a man bragging about the size of his nuclear bomb button, threatening nuclear war against the poor people of North Korea whose lives have already been ruined by one madman and could now be ended by another. He's easily distracted and apparently has little interest in consequences. 

The Republican Congress, too, has been criticized for worrying more about protecting Trump than the country. Ryan and McConnell haven't had courage enough to criticize Trump on any of his tweets, positions, or evidence of madness and incompetence. 

There is a group, though, that bears the most responsibility for Trump and has not been criticized at all: Republican voters.

Republican voters excitedly voted for George W. Bush and Dick Cheney. These voters cheered on an invasion of Iraq and then screamed about a stream of refugees from Iraq and the rise of ISIS out of the chaos of that country. These voters cheered deregulation of financial markets and then screamed about the Great Recession that quickly destroyed a decade's worth of jobs in just a few years. Like moths to a flame, they want their hand on the burner but are mad about it hurting. These are not people who understand cause and effect that takes months or years to play out. These people are upset about the number of Muslim refugees who have come into Europe but don't see it as connected to their insistence that we literally bomb Iraqis to liberation. These people were upset about the number of unemployed but don't see it as connected to their cheering for deregulation, or in simpler terms, removing rules that made financial markets more fair and safe. ("Why do you make our kids wear helmets when they don't want to!" Games later, "How could you let our kids get these kinds of head injuries?")

Undeterred by how badly the Bush Cheney experiment went, Republican voters went all in on a vice presidential candidate who showed about as much understanding of policy as someone who distractedly listens to talk radio as if it were background music. Sarah Palin was simple minded but photogenic, a beautiful woman unafraid to speak like an internet meme and Republican voters fell in love with her.

Most recently, Republican voters have given us a man who repeatedly demonstrated his disdain for women, his ignorance of policy, his lack of morals and his disregard for truth, data, or experts.

Republican voters will excitedly support some new candidate once Trump is institutionalized (whether this institution is a home for those with Alzheimer's or criminal convictions is as yet uncertain). It would be best if they did not. At this point conservative voters are like that friend who has been thrice married to men who have each turned out to be abusive who is nonetheless convinced that she should marry again. Someone has to tell this woman that her judgement is bad and her husbands are worse, no matter how exciting she finds them.

Republican voters are the real culprits here. If not for them, Trump would be a comical figure, a TV star who took himself too seriously but was nonetheless amusing for that very reason, like a character on Seinfeld. Instead, Republican voters who cannot tell the difference between comedy and tragedy or lies and revelations have given him more power than anyone else on earth. 

29 December 2017

Why You Should Never Loan Money to - or Vote for - Someone Who Invokes God

I just finished Seth Stephens-Davidowitz's fascinating book, Everybody Lies. One of the ideas behind this is that we are more likely to reveal ourselves in private searches than we are in social media posts. Interestingly, there is data on what Americans look for when they search and thus, data on who we are.

One of the things he shares is words that predict whether someone is more or less likely to pay back a loan. A website prosper lets people offer a story about why they need a loan and folks reading this can decide whether or not to loan them money. Three economists analyzed the stories and tried to identify which words would be a leading indicator of who would pay back loans and who would default. (About 13% of people who borrow do default, never paying back the loan.) This is what they found.

Terms used in loan applications by people most likely to pay back:
debt-free, after-tax, graduate, lower interest rate, minimum payment

Terms used in loan applications by people most likely to default:
God, promise, will pay, hospital, thank you

As it turns out, people who are dealing with reality are more likely to pay back. These people are talking about real issues, like after-tax income, or minimum payments. It also makes sense that someone mentioning when they might graduate would be a good risk; this person should soon see a drop in tuition and - hopefully - a rise in salary. Their situation is about to change for the better and it makes sense that they would be in better position tomorrow than they are today; they're a good risk.

Meanwhile, people who offer only their word (promise or will pay) aren't forecasting any change in their future situation and thus there is little reason to believe that they'll soon go from needing money to having extra money and being able to pay you back. Hospital, too, suggests why they would need money now but really offers no reason why they'd have more money in the future. (The mention of something as expensive as hospital is an argument for healthcare, not a loan.) Finally, there is good reason why mention of God should be a red flag.

People who mention God in their requests for loans are 2.2X more likely to default than the average person. This is the highest-risk word and it makes perfect sense why that would be.

Only two people would mention God in regards to a loan: people who think he cares about their financial situation and people who are trying to con the religious.

People who think that God cares about their finances cannot, of course, explain why God would first get cash to someone in a first-world country before he would a small child in a third-world country. It's a ludicrous idea on so many fronts and the God who would care that you got a new car that let you stop riding the bus while a child in a refugee camp goes without education is an odd God. Further, these people are not dealing with reality. They're not talking about or thinking about minimum payments or graduation. They are waiting for God to intervene in their finances. That's not likely to happen.

The other folks who would invoke God when asking for money are running a con. Religious people are conscientious and easier to manipulate once you've reminded them of their faith. The mention of God by these con men is done because it is a more effective way to get your money. If they thought that mention of the San Diego Padres was more likely to prompt you to give them money, they'd wax eloquent about the Padres.

The same arguments hold for someone asking for your vote rather than a loan. Anyone who invokes God is either hoping that God will intervene in policy matters or running a con on voters who believe that. Given a choice between a plumber who has training and experience and one who believes the support of the evangelical community will make him successful when he crawls under your kitchen sink for the first time, I'll go with the plumber who has demonstrable skills and - regardless of what God or afterlife he believes in - believes that natural consequences comes from natural - not supernatural - intervention. I'd rather have a plumber with a good wrench than one with a great prayer. And I don't see any evidence that policy is any different.

If someone mentions God when asking for a loan or asking for your vote, just say no. Instead, ask them how they are going to deal with reality. If they are making $1,500 a month now and need a loan for $500, what is going to change in a month when they begin paying back the loan that makes me think they'll have an extra $100 a month rather than be running short by $100 a month? God is not the right answer.

The question of any politician is not whether he thinks God likes him better than his opponent. The question of the guy who wants your vote is no different than the question of the guy who wants a loan: how are you going to deal with reality, making the rash assumption that no miracle will save you?

23 December 2017

Trying to Make Sense of Why Republicans Can't Make Sense of Deficits

It's not clear whether Republicans have given up on caring about the economy or if their ideology blinds them to what even sharp high school students can see. What I do know is that a horde of friends who - presumably fed by Fox news or other conservative news outlets - were loudly fretting about deficits during the recovery are now mum about the deficits that will follow from Trump's new tax cut.

One of the simplest things we know about economies is that when unemployment is high you should increase the size of deficits and when unemployment is low you should lower the size of deficits. This is so obvious that it hardly merits mention and yet Republicans seem to miss this point. I don't know if it is because of a paradigm filter, crass disregard for the larger economy, or simple opportunism that comes from disregarding any goals but tax cuts.

Deficits stimulate the economy. That said, there are deficits that are good stimulants and deficits that are poor. The best deficit comes from spending money on things like infrastructure that will leave an economy more able to grow. Ideally, a deficit stimulates the economy short term and lays the foundation for higher productivity in the future.  The worst deficit just adds more money to wealthy people who are unlikely to spend much of it. (If your net worth is $3 million and you get another $10,000 in tax cuts, you are less likely to spend any of that money than someone whose net worth is $10,000.) Good or bad, a deficit stimulates the economy, although to different degrees.

As trade makes up a bigger part of the economy, deficit spending it more likely to drive up asset prices like stocks and homes; rather than see a rise in the price of apples, you might see a rise in the price of Apple stock.

(Yes there are other factors. No I'm not going to cover those here.)

Why does this matter? Well, you can't just say that it is good or bad to increase the size of a deficit. If you suffer from high unemployment, increasing deficits is great; if you are enjoying low unemployment, increasing deficits is bad. Atop that, deficits that build the economy's capacity (borrowing to invest in building freeways or high speed rails or basic research or education initiatives) are better than deficits that just create a temporary blip in spending (e.g., tax cuts).

The year before George W. Bush took office, unemployment averaged 4%, its lowest since 1969. It seems safe to say that the economy was at full employment. What did George W. Bush do once he took office? He cut taxes to stimulate the economy. What happened? The price of homes - assets - and the mortgage back securities that financed their purchase went up. Spectacularly. This stimulus created a bubble and bubbles burst. The year before Bush took office unemployment averaged 4% and the year after he was in office it averaged 9.3%. Stimulating an already strong economy turned out to be disastrous.

The first year of Trump's presidency, unemployment will average 4.4%, its lowest since Clinton's last year in office. What does Trump do? He is cutting taxes to stimulate the economy. This could feed a bubble in asset prices ... a bubble that will pop more spectacularly than it otherwise would have. Stimulating a weak economy can create a strong one; stimulating a strong economy can create a bubble.

The Republicans who hollered about deficits during the Great Recession are now creating a deficit in a time of full employment.

It seems as though Republicans like deficits in good times and hate them in bad times.

The question is, why? This is not a difficult concept to grasp and yet Republicans refuse it.

I can only think of a few reasons.

One, they want tax cuts more than they want a healthy economy. They really do think it's possible to live like the rich in banana republics, comfortable even when the larger economy is bad, and as long as they get their tax cuts they don't really care about the larger economy.

Two, they don't believe that macroeconomic policy makes any difference, instead believing that individuals make all the difference. (It is true that individuals make a difference; some do well in bad economies and some do badly in good economies. It is not true that recessions hit because the percentage of lazy people in an economy suddenly doubles, because of changes in individual behavior. The strategies to get near the top of a group are different from the strategies to move a group's median income up.)

Three, they can't distinguish between individuals and a community when it comes to who should get a loan. It is true that you don't want to loan to a guy who is out of work and you'd be happy to loan to a guy with a great job. In that sense they are right that deficits are "safer" when the economy is good. But of course debt is very different for an economy than it is for an individual or household. Even a household engages in deficit spending when times are bad and pays down debt when times are good; if you are unemployed you borrow from your savings or friends; if you are fully employed you save. The banker may rather loan to the guy with a job but it is the guy who is temporarily out of work who most needs the loan. It may seem safe to create more debt in the economy when times are good but that stimulates spending that threatens to create bubbles.

What will be the result of the Trump tax cut? The economy will get worse. Not immediately. Immediately it will get better because the start of bubbles are the best part; it's the busting of bubbles that is miserable.

19 December 2017

Returns Without Risk - The Republicans Vision of Banking Reform And How It Makes Recessions Worse

Matt Yglesias at Vox reports on the extent to which Republicans are changing laws to profit them and their donors. In the midst of this list he reports on something hugely important.

Banks - or more broadly, the financial system that creates credit - are essential to an economy. If credit markets suddenly collapse, they bring down the economy with them.

Once upon a time, a bank would fail and the folks with deposits in that bank would lose all their money. Folks with money in other banks would panic and make a run on their bank to withdraw deposits. That could quickly put that bank under. And then more people would make a run on their bank to withdraw their money. And on it would go until the economy in that region was destroying jobs and wealth. Bank runs led to recessions.

In the first 33 years of the 20th century - from 1900 to 1933 - the US suffered from a recession 48% of the time. There were 10 recessions between 1900 and 1933 and the final one was such a doozy that it got the label of depression; during it GDP dropped by half and unemployment hit 25%.

After the Great Depression, legislators decided that they would protect depositors in banks so that a bank failing wouldn't automatically bankrupt its depositors. This helped to stop the runs on banks after one bank failed so that one bank's failure did not spread like a virus to take down other banks and communities.

Given the size of banks, it became increasingly difficult to bail out depositors and ignore failing banks. So legislators decided to offer what was essentially insurance to banks - bailout money - in return for those banks following certain rules. For instance, a bank would have to keep on hand a certain number of deposits, follow certain lending guidelines, etc. The government would protect the banking system and in return the banks would follow certain rules that lowered returns but also lowered risk.

Before the regulation that came in the wake of the Great Depression, the US was in recession half the time. 48%. After the regulations, it was in recession only 14% of the time. Then the Bush Cheney administration deregulated - lifting the rules that banks complained were too restrictive - and within just a few years the country plunged into the worst recession since the Great Depression. Banks got their higher returns. They also created more risk to the entire economy.

Dodd-Frank put back in place some regulations and quite simply reached the same conclusion the country reached after the Great Depression: a community cannot afford to let the financial system collapse so it will offer a combination of rules that keep banks out of trouble and insurance to keep the larger economy out of trouble. We will bail out banks but they have to follow certain rules that make that bail out less likely.

At the time, some Republicans said that this was ridiculous. Banks should be treated like any other business and simply allowed to fail, arguing that all those rules only inhibit smart bankers from making money. Let banks do what they want and let them fail if that turned out badly, these Republicans said. They were, essentially, asking for a return to how things were regulated before the Great Depression, the world that plunged the country into recessions about half the time.

Now the Republicans have full control of government. What have they chosen? Deregulation that allows banks to act more freely, even if that adds risk. Oh, and they've left in place the bailout money. What does that mean? Banks are more likely to take risks that raise returns and we the taxpayers get to bail them out.

One of the few certainties in finance is the link between risk and returns. The investments that offer the most return offer the most risk (think junk bonds or stock in a startup) and the investments that offer the least risk offer the least return (think bank savings account). The Republicans are now moving us closer to a world in which banks get the returns and we get the risk.

Banks are essential to a modern economy. They can be regulated by market success or failures, although that can plunge an economy into recession half the time. Or they can be regulated by government rules, something that cuts the odds of recession to about one quarter of what they would otherwise be but puts the taxpayer on the hook for bailouts. Or, as the Trump administration has chosen to do, they can be freed of market consequence with the promise of bailout money AND free of the  regulation of government rules. Thanks to the 2017 GOP, banks will be able to operate without the discipline of regulators or markets.

Let's be clear. With these rules, the rational strategy for bankers will be to take excess risk (and the excess returns that - at least temporarily - come with it). This type of legislation is guaranteed to trigger recessions more frequently and more severely. It makes the banking system more vulnerable and taxpayers liable twice: they'll suffer from the layoffs and drop in value of their pensions and 401(k) accounts when recessions hit with more severity and they will pay for the bailout of these banks.

I bet that works out well.

18 December 2017

Ron's Economic Forecast for 2018 - Highest Probability of a Recession in 8 Years

A Chinese recession? A bumbling Fed Chair? A downturn in stocks? Your blogger predicts a 33% chance of bad news for the American economy in 2018.

THE LAST SEVEN YEARS
As we were coming out of the Great Recession, people continued to fixate on threats. When you've been beaten you flinch even when someone raises a hand to wave at you, so this makes sense. The Great Recession was awful and it left people anxious about what might happen next. I've reported it before but it bears repeating: in the decades before and after, the economy created an average of 2 million new jobs each year: in the oughts, from 2000 to 2009, the economy did not create jobs but rather destroyed an average of 100,000 jobs per year. Rather than create 22 million jobs, that decade destroyed a million jobs. Just consider what a shortfall of 23 million jobs in a decade means for a moment.


In light of that, it only makes sense that early in this decade people were so aware of what all could go wrong that they lost track of what all could go right. I was cautiously but unrelentingly optimistic about the economy throughout the recovery and it has gone well; now the unemployment rate could soon fall below 4% and the S and P 500 is up nearly 4X (well, 3.6X) what it was when the market bottomed out in early 2009. Even last year, after the election of Trump, I put aside my disbelief and repugnance in his presidency to predict that he would likely preside over another great year for the economy. 

Now, for the first time since the end of the Great Recession, I'm pessimistic about the economy. It seems as though that 8 years of good have distracted people from the fact that bad things, too, can hit. Just as 7 years ago most people seemed skeptical that things can go well, most people now seem skeptical that things can blow up.

PERCEPTION AND POLICY
One thing that I've learned is that people mostly don't distinguish between the state of conditions (e.g., we have high or low unemployment), the rate of change in conditions (e.g., the unemployment rate is dropping) or the rate of change in the rate of change (e.g., the economy is still creating jobs but at a slower rate). Obama took office as the Great Recession was at its worst and to this day many people associate him with that state of terrible unemployment. Trump took office when the economy was mostly recovered and many people now associate him with that state of wonderful employment. I do believe that policy makes a difference but the most obvious complicating factors are simply this: it takes time to get policy passed, it takes even more time for that policy to impact the economy, and easily the clearest instance of when policy makes a difference is during a recession. Simply put, there are a variety of theories about how policy changes long-term economic conditions but the causation lag is long and filled with uncertainty. (For instance, most people would agree that early childhood education and wellness programs are positive but assuming those are targeted at kids under 7, it'll be half a century before those children reach their peak earning years and any number of complicating factors - from wars to the popularization of computers or robots - could exacerbate or mitigate the impact of this early childhood intervention. In any case, it's safe to assume that the president and members of congress who instigated such policy would be dead by then and most people will have forgotten them and their policies.)

And a further complication is that about two-thirds of Republicans and a third of Democrats can't see the good when the other party has the White House. 

WHAT IS POSITIVE
Debt levels in the US are relatively low; as a percentage of GDP, federal debt is up about ten percentage points, corporate debt is up about six percentage points and household debt is actually down about five percentage points in the last 5 years, making for a net change of about 11 percentage points. With less reason to pay down debt in 2018, households, corporations and even the government have reason to continue with - and potentially even increase - current levels of spending. This should have a positive impact on future spending.

Unemployment is 4.1% and has now been below 5% for two years. The impact of sustained low levels of unemployment not only include the fore-mentioned debt pay down but great increases in net worth. One of the most extraordinary statistics from the recovery? The net worth of households is up $42 trillion since the depth of the Great Recession and up $30 trillion from its pre-recession peak in 2Q 2007. When people are collecting regular paychecks they're able to save and invest in homes and stocks. This, too, is promising for 2018.

Further, as unemployment stays low companies have to offer higher wages to attract workers. Wages are growing. As an anecdote, at Thanksgiving we were with three young women all in their early thirties; within the prior four months all three had accepted new positions (two at new employers) for raises ranging from about 15% to 100%. This is the kind of thing that happens when unemployment threatens to drop below 4%.

Further, the Republican tax plan looks to be front-loaded in its impact. Some indications are that it will stimulate the economy the most in 2018 and then slightly less in each of the next few years. It has the potential to add another one percentage point to GDP growth in 2018; that impact is huge.

Finally, the popularization of entrepreneurship - the essence of my book The Fourth Economy - is continuing. Economic policy at the regional level is increasingly focused on entrepreneurship programs within universities and emulating Silicon Valley's success. (None of that will be easy but even mediocre efforts at things that matter a great deal pay off more than extraordinary effort on things that matter little.)

This is all great news and the most likely thing is that it will translate into another great year.

There is about a 67%  chance that the stock market will again rise by double-digits, unemployment will drop below - and stay below - 4%, and wages will rise faster than they have all century. 2018 could be one of the best years since the late 1990s and will likely start out that way. Among other things, this would mean a rise in household income at every level, including median and lower-income and not just those in the top 1 to 20%.


WHAT IS WORRISOME
There is about a 33% chance that the economy turns down in 2018. That turn would probably start some time between May and October.

There are a few reasons that it may turn down: China, a new Federal Reserve Chairman and monetary policy, Trump, and the nature of business cycles.

BUSINESS CYCLES
There are two common measures for these cycles: unemployment rates and the stock market. Sometimes an economy is creating jobs and wealth and sometimes it is destroying them. Since 1900, the US has had 23 recessions, including the Great Depression that began in 1929 and the Great Recession that began in 2008. The length of those downturns has varied from 6 months (the shortest period of downturn that can qualify as a recession) to 43 months (the Great Depression in the early 1930s).

If you were plunked down into a random month between January 1900 and December of 2017, the odds that you'd land in a month in which the economy is suffering from a recession is roughly 24%. Of course Keynesian economics made great advances in the aftermath of the Great Depression and since then the odds of any given month being in recession are 14%. (In the 33 years leading up to the end of the Great Depression, the odds of you landing in a recession plagued month were 48%.)

Curiously, the odds that you would have a month since 1948 in which the unemployment rate is as low - or lower - than it is now is 15%, nearly identical to the odds that you'd be in a recession. The odds that the unemployment rate is 4.1% or lower is the same as the odds that it is 7.4% or higher. (Which is to say that most - about 70% - of the time the unemployment rate bounces around between it's current rate of 4.1% and 7.4%.)

Why does the economy rise and fall? It's because good optimism eventually becomes bad optimism. The economy is bad and someone is optimistic enough to start a business that depends on rising sales. Their optimistic bet pays off, they get rich, and that optimism fuels more optimism. More businesses are started, more stocks bought, more employees hired ... and the economy expands. There comes a day, though, when the optimism is unfounded. New businesses fail at a little faster rate, old businesses expand more slowly or even contract, and the economy begins to destroy jobs and wealth. Now, pessimism is the wise bet and companies layoff and investors hold onto their money. In a bust the pessimists become the leaders. Until the cycle starts anew, as it has a dozen times since the end of the Great Depression in 1933. The booms help to create new things and the busts help to destroy the old; between them job and product markets transform over time, and what we buy and what we do for a living radically changes over a lifetime.

Why mention this? Well, if we're just betting on probabilities - putting aside reasons for optimism mentioned above - there is an 85% chance that unemployment goes up from 4.1% and only a 15% chance that it goes down from there. This claim is less scientific than simply based on data since 1948. Again, the unemployment rate of 4.1% or lower occurs only about 15% of the time. The next month we draw out of the hat is more likely to be higher than lower. Let me be clear: many of the fundamentals suggest that the economy will continue to do well in 2018; that said, economies do not expand without interruption and the odds that it will falter, that unemployment will tick up, are never zero.

Similar for stock prices. Since 2000, stock prices have fallen in five years, or 29% of the time.

ANOTHER REASON TO WORRY? TRUMP
Worst case, his stupid ideas become bad policy. It's not clear that anyone in the Republican Party will resist him and he has at least another year to run with a Republican led House and Senate. If he signs legislation that leads to the deportation of millions of illegal aliens, we'll have a recession. If he manages to jettison NAFTA, we'll have a recession. If he cuts funding for research, per capita GDP growth will slow and the steady increase in life expectancy that we've enjoyed for more than a century could stall. 

And of course the Mueller investigation could result in a number of Trump's administration - even Trump himself - facing charges that could force his resignation or even imprisonment. While the final resolution - him in jail or remaining in the White House with Mueller's investigation finally concluded - could stabilize or even rally markets, it's hard to imagine that in the space between when Mueller makes his big reveal and when there is a resolution won't be a time that rocks markets.

In the 10 months before Nixon resigned in the aftermath of the Watergate scandal, the S and P 500 fell 43%.


NEW FEDERAL RESERVE CHAIRMAN JEROME POWELL
Janet Yellen's replacement as head of the Fed (he'll take over in February) is Jerome Powell. I have two big concerns with him: he has no degree in economics and he will be responsible for tightening monetary policy, a delicate operation that can frighten markets.

Work experience - Powell has served in the Fed for years - helps a great deal when it is business as usual. Theory, though, is essential when things change and unlike Yellen and Bernanke who had studied, researched and published on the topics of recessions and recoveries, Powell has never published anything that would suggest he has thought deeply about these topics. The last Fed Chairman to lack an economics degree served in the 1970s but this disregard for expertise is, of course, characteristic of Trump.

The Fed has announced that it will raise interest rates. If it does this too quickly, it slows down the recovery. If it does this too slowly it fuels an asset bubble and / or inflation. Simply put, money pumped into the system helps encourage "real" economic activity (actual investment, consumer borrowing, and hiring) but also drives up prices. People have argued that since the emergence of the World Trade Organization, it is harder for that money to drive up the price of goods that can be imported but instead drives up the prices of assets like stocks and homes. They argue that loose monetary policy is less likely to drive up the price of apples than it is to drive up the price of Apple stock. 

Before the Great Recession, excess reserves in American banks ranged from about $1.5 to $3 billion. As the Fed pumped more money into the economy to counter the credit crash, excess reserves rose to $2.9 trillion, roughly 1,000X more. Yellen has quietly lowered that to $2.3 trillion but there is still a lot of money to pull out of the system. Related, the Fed is finally moving interest rates back up, something that will have a ripple effect on lending and all the hiring, expansion, and spending that accompanies low interest rates.

Unwinding loose monetary policy is somewhat like the game of operation, an attempt to remove something without setting off buzzers that suddenly send markets down or - worst case - cause a contraction in credit and a stutter in hiring or consumer spending. I simply trust a lawyer less than I do academics who have studied these matters extensively. I'd be much more comfortable with Yellen serving another term (as the men have for decades back) than I am with Powell learning this new position during a sensitive time in the transition of monetary policy. He's a risk.

AND FINALLY, CHINA
Ruchir Sharma has been worried about a global recession emanating from China for a year or two. He has a couple of plausible concerns, chief among them the amount of debt China has  recently created. 

Sharma cites thirty instances in which private debt over a 5-year period grew faster than GDP by at least 40 points. (Imagine in year 0 that a country's private debt is equal to 100% of of GDP and in year 5 it is equal to 140%.) In each of these cases, GDP growth fell by more than half over the next five years, occasionally slipping into recession. [See page 300-1 of Sharma's The Rise and Fall of Nations] Sharma is worried about China because over the last five years private sector debt as a percentage of GDP has gone up 56.5 points. It could be that China will escape a downturn as it pays down debt but, again, 30 of 30 countries have been caught in the consequences of rapidly growing debt.

His other concern has to do with a belief in the way business cycles purge the old and create the new. As mentioned, since the US has become the major economy in roughly 1900, it has had 23 recessions. By contrast, in the quarter century since China has begun its great ascent it has had 0 recessions. None. This is a long time to go without market correction.

My own concern with China has to do with my belief in the progress that communities make through four economies: agricultural, industrial, information and entrepreneurial. China - in my opinion - has successfully made the transition from agricultural to industrial economy. Its per capita GDP is now about $10,000, which is one mark for the transition to a new economy. Curiously, President Xi has recently assumed more power than any leader since Mao and is making sounds of a crackdown on dissent. It seems plausible to create an industrial economy coincident with tight government controls; it does not seem plausible to do that with the emergence of an information economy. Simply put, I'm dubious about the compatibility of government control and the emergence of an information economy reliant on knowledge workers who have easy access to information technology and - obviously - information.  I don't know how you create an information economy while limiting access to information. 

China has not only emerged as the second biggest economy in the globe but it has accounted for a huge portion of global GDP growth over the last quarter of a century. If it falters, it will have a ripple effect.

Finally, things happen that haven't been predicted. The price of mortgage backed securities suddenly falls. Terrorists fly planes into the World Trade Center. I've listed a variety of triggers for a recession but it could easily be something completely unforeseen that is the trigger.

THE FORECAST
For now I'm keeping my money in stocks until the end of the first quarter of 2018. I think the market will rise another 3% to 8% by May and the unemployment rate will go as low as 3.8%. Home construction will rise, as will business investment.

I'm worried, though, that the the market will turn down about mid-year, as will job creation. The market could finish the year down about 5% to 10% and while unemployment will still be decent (4%? 4.5%?) job creation will turn negative for the first time in 8 years. The total number of jobs created in 2018 will be about 1 million, give or take, about half what it has averaged during the recovery.

For the year:
S and P 500: down 5 to 10%
Jobs: up 1 million
Unemployment: Roughly unchanged or up slightly to somewhere between 4.0 to 4.5%

Finally, where we are as of when this was published:
S and P 500 is at 2,692.71
Unemployment is at 4.1%