24 September 2016

Just One Glaring Problem with Trump's Approach to Illegal Immigrants

A guy seeing your frustration with a coin that seems to often come up "tails!" offers to get rid of the tails of your coin.
"How," you ask.
"Trust me," he says.
Frustrated and angry, you do.
How does he get rid of the tails portion of your coin? He just takes the coin.
The good news? No more tails.
The bad news? No more coin.

Donald Trump has convinced his supporters that immigrants are a threat to their livelihood and even their lives. (More than once he's trotted out grieved parents whose child has been killed by an illegal immigrant with a gun or a car.) If we build a wall ... If we deport them ... If only it weren't for immigrants, the economy would be so much better.

Well, there is your tail. We don't like losing jobs to the immigrants and Donald promises to get them out.

How? Well, he glosses over the little details of how you'd manage to find and deport 11 million people. (A task that is complicated by so many things - including the fact that families are rarely one thing; how do you deport a 45 year old whose two teenagers are not only citizens in the US but in school here? His answer? Trust me.)

But his plan to remove the tails portion of the coin of course involves taking away the heads portion of the coin.

Every person here in the country is part of our domestic market. They rent or buy houses. They buy food, clothes, cars, and thousands of little and big things that get sold or rented every day. If we were successful at deporting 11 million people, we would lose all that demand for goods and services. Even assuming that their incomes are only half that of the average American, they represent incomes of about a quarter of a trillion - $275 billion - a year. That's a chunk of income lost, enough to throw the country into a recession.

I could make all sorts of mind-numbing calculations based on reasonable assumptions about how much illegal aliens contribute to the economy but bottom line, if they aren't living here, they aren't shopping here. The good news is that they wouldn't be here to take your job in nailing up sheet rock in the construction  industry; the bad is that they wouldn't be here to demand housing and with them gone, it's conceivable that the homes abandoned would be available for folks to buy or rent, meaning that no one would need to build houses for awhile and you still wouldn't have a job nailing up sheet rock in the construction industry. It's tough to imagine that demand for housing would be strong in the aftermath of 11 million lost residents.

Donald Trump is promising to take away the tails you hate getting on your coin. How will he do that? He'll take away your coin.

19 September 2016

The Popularization of Entrepreneurship and Customizing Arrangements with Each "Employee"

Ricardo Semler was the first CEO I'd heard of to have half a dozen folks working side by side on a factory floor, each with different arrangements. One might be working for a monthly salary, another hourly, another doing piece work and another renting equipment from Semco (the company founded by Semler's father and later run by Ricardo) to make the product the employee would sell on their own, outside of Semco. Semler may have helped to pioneer something that will become common.

The next big wave is going to be the popularization of entrepreneurship and one element of this will be to make more employees more entrepreneurial. Having multiple arrangements with "employees" is key to this.

One reason flexible arrangements is key to making employees more entrepreneurial is because it forces both sides - management and the employee - to consider and understand the source of revenue and profit. There is no arrangement that you should make that would be bad for either side. But you can't make an intelligent offer or counter-offer without information about where profits come from. Curiously, the typical employee today has no real sense of whether she's a necessary cost or a source of value that generates 90% profit margin.

If you are going to have real and useful deals made for each employee's arrangement, it means that you have a real and clear sense of how the company creates value. That alone suggests clarity that rarely exists or at least is rarely communicated widely.

Then, once you have clarity about the sources of profit and your employees have clarity about what they would most like now - this one wants to work 10 to 12 hour days in order to make as much as possible at this stage of life, this one wants to work only 6 hours a day because their child is in school only that long, this one wants to work on projects that require 10 hour days for months and then take a month or two sabbatical, this one wants to take the risk that what they're doing will payoff handsomely and wants to be paid half in salary now and half in future profits later - you have the basis for profitable deals and custom arrangements.

These custom arrangements do at least two things. One, it gives employees the ability to customize their jobs to fit their lifestyle. Two, it drives every deal towards greater profit, because everyone knows that profit is what funds these deals and gets them approved. If your proposal will generate profit, management can say yes. Timothy Ferris argues for the relentless application of the 80-20 rule, looking for the 20% of your activity that results in 80% of your value. People looking to make arrangements would be continuously looking for ways to add more value in less time, translating the gain into either more time off or more income. This would democratize the drive for profit and would fund autonomy.

It will also do something else that we in the West have done three times before. It will make the institution the tool for the average person.
Between 1300 and 1700 - during the first market economy that we'd call an agricultural economy - the church in the West became a tool for the average person. We got religious freedom and that meant that individuals defined their beliefs and could even found a church to realize that.

Between 1700 and 1900 - during the second, industrial economy - the nation-state became a tool for the average person. Subjects became citizens.

Between 1900 and 2000 - during the third, information economy - the bank became a tool. Average people who could scarcely get a loan in 1900 were regularly throwing away offers for credit by 2000.

Within the next few decades, the corporation will become a tool for employees. And one of the ways that this will play out is through flexible arrangements employees define that give them more autonomy and give them - and the corporation - more profit.

13 September 2016

Where Political Beliefs Come From

I have a co-worker who I quite enjoy. We are in exactly the same position in a very small company, similar in our love of absurd humor and our enjoyment of clients and getting to explore different technologies and corporate cultures. There is a lot about us that is very similar.

Curiously, our politics are very different. Or maybe not at all curious given he grew up in Georgia a decade before I grew up in California.

We like to think that we choose beliefs but maybe they choose us. And perhaps the vehicle through which they do is the thousands of micro-expressions we're exposed to growing up. Let me explain.

Imagine an earlier time in evolution. You are part of a small tribe and you know that you can't survive on your own. You have an idea for an approach that you think would result in more food. It challenges the old ways though and you also know that it will be risky to push too hard with your idea.

 As you propose your idea, you'll be less wed to the idea - which might make things a little better for everyone - than avoiding exile from the tribe - which would make things much worse for you.

So how do you exercise caution when making a proposal that could either make you a hero or an exile? You learn to read expressions, body language, tones ... and you look for early warnings that you might be over-stepping the bounds of convention in ways that will get you kicked out of the group.

To this day, it's probably the case that we learn to read the thousands of clues about "you're in the group," or "you're about to get kicked out of the group" status and we learn to respond to those. That feedback is immediate and important compared to the more abstract feedback about policy tends to make the next generation healthier, wealthier, or wiser.

My co-worker who grew up in Georgia a generation earlier would have been shaped by more conservative feedback than me. It's no surprise that today he is more conservative. And maybe we don't really choose our ideologies so much as learn them as a way to stay within the group we find ourselves in.

Today Census Bureau Announces Surge in Wages in 2015

Regular readers of R World know that I've been arguing that first half of 2010s would bring unemployment to healthy levels and this second half will bring wage growth to healthy levels. It's hard for wages to rise when business can hire from the ranks of the unemployed and those ranks have finally thinned. Today the Census Bureau reported this:

SEPT. 13, 2016 — The U.S. Census Bureau announced today that real median household income increased by 5.2 percent between 2014 and 2015 while the official poverty rate decreased 1.2 percentage points. At the same time, the percentage of people without health insurance coverage decreased.
Median household income in the United States in 2015 was $56,516, an increase in real terms of 5.2 percent from the 2014 median income of $53,718. This is the first annual increase in median household income since 2007, the year before the most recent recession.

More here.
To put that in perspective, last century wages grew 2.1% a year, which made incomes 8X higher by century's end. How big of a deal is 5.2% wage growth? (This is an increase in real terms, so it's inflation adjusted.)

First of all, 5.2% is the "biggest wage increase since the Census started recording this data nearly 50 years ago."

Secondly, if wages kept growing at 5.2% a year through the end of this century, median wage would be $4.2 million. That's pretty cool. (And unlikely. Still, I don't think that $1 or $2 million inflation adjusted is unlikely though. Not that I'll be around to confirm my suspicions.)

Some people worry about the level of debt we're leaving future generations. That's nonsense. The only worry is whether we're leaving them with healthy or sickly wage growth. 

07 September 2016

What Trump's Love of Putin Reveals

Trump affirmed tonight that he really, really likes Putin. Putin has invaded countries and killed reporters and political opponents ("Well do you want me to tell you what Obama's done," Trump asks in rebuttal) and yet, as Trump says in support of the man, Putin has an 82% approval rating. This gets to the essence of what is most troubling about Trump.

Trump doesn't necessarily aspire to a traditional kind of dictatorship. He seems more interested in a dictatorship of the majority. This is the difference between a democracy and a liberal democracy.

In a liberal democracy, the majority gets to rule but even minorities have rights like freedom of speech, independent press, a judiciary that answers to its own conscience rather than a president or prime minister's. The majority doesn't rule. The majority merely chooses the people who will define policy (to the extent that this policy doesn't take away the rights of minorities).

Trump has threatened to sue reporters that criticize him, banned selective news organizations from his events, presided over rallies in which crowds have called for the execution of his political opponent Hillary Clinton, and has himself called for a ban that would end freedom of religion.

Donald Trump does not just show a lack of support for rights and freedoms of everyone - including minorities. He shows a lack of interest.

Given this, it's no wonder that he admires Putin who shows no respect for rights and hates Obama who not only shows an interest in the rights of minorities but is one. The only reason that Trump is just a bully is because he hasn't yet won office.

Inflation Adjusted, Our 7 Good Years Followed by 7 Lean Years Is Now 8

After Joseph was sold into Egypt, Pharaoh had a dream he wanted interpreted. The catch? He was bothered by the dream but couldn't remember it. His wise men couldn't interpret a dream he couldn't tell him about but Joseph could. 

"You saw 7 fat and healthy cows grazing who were suddenly devoured by 7 lean and mean looking cows," Joseph told Pharaoh. "What this means is that Egypt will have 7 years of prosperity and good harvests followed by 7 years of famine. You'll want to tax everyone enough each year in the good years to have surplus on hand for the bad years."

The Pharaoh liked what he heard, Joseph was made Prime Minister, and Egypt was saved from ruin. Everyone lived happily ever after (until, of course, Moses came along generations later and unleashed plagues on Egypt). 

Sadly, the 7 good and 7 lean years still seems to be a thing. It's just that with inflation, it's now 8.

In the last 8 years of the 20th century, from 1993 to 2000, the land was prosperous. Jobs were created at record rates, poverty dropped throughout the land, and wealth increased. 

Then, bored with prosperity, the people chose a new path, a candidate they'd like to have a beer with. (To be fair, in the 2000 election more Americans voted for a continuation down the old path but sometimes a candidate can win a majority of the popular vote without winning a majority of the electoral college.)

In the first 8 years of the 20th century, the land was attacked, and jobs and wealth were destroyed. The people didn't realize that good people could have bad policies, policies that could result in bad times. Shocked and dismayed, they turned back after the 8 lean years.

The hole they dug was so deep that it took years just to recover the lost jobs and wealth. But eventually, the jobs came back, wealth was recovered (although both were redistributed), and the economy returned to normal. Sort of. A little less vibrant but still growing steadily and people felt like they could once again buy new cars and houses, splurge for vacations and lattes. 

But again they grew bored with prosperity and their gaze turned fondly to a candidate who they liked simply because all the folks who claimed to be experts didn't like him. He promised change. They liked that. Good times are boring. Tragedy gives you a sense of purpose, challenges to overcome.

So, they turned again to this path that alarmed experts  but excited something primal within them. And again the country had 8 lean years ....

Once upon a time, nature's cycles of drought and rain, cold and warm drove prosperity and poverty. Now we're still on an apparent cycle but this one appears to be driven by boredom with the pedestrian pace of progress as compared to the bold strokes of tragedy, something primitive within us that longs for a challenge more interesting than showing up for work every Monday at 8 AM. The old cycles are driven by nature; this new cycle is driven by human nature.

8 prosperous years followed by 8 lean years. It might be the new rhythm America. Or a really old rhythm. Embrace it. 

08 August 2016

Post-Capitalist Economics: What It Means for Policy When Investors Buy Negative Interest Rate Bonds

$10 trillion around the globe is now invested in negative interest rate bonds. Investors are actually paying countries to keep their money, the way that you might pay a bank for a safety deposit box. The Netherlands has records that go back 499 years - back to the year that Martin Luther started the Protestant Revolution - and for the first time in half a millennia, the Dutch are paying negative interest rates on bonds. Japan, the European Central Bank, Sweden, Switzerland, and Denmark are all paying negative interest rates on some bonds. The price of capital is really, really low.

Prices fall when there is a glut. All together, there is more than a quadrillion in money, precious metals, stocks, bonds, and financial derivatives. As the global population grows and - more importantly - the number of people earning enough to save grows - the supply of capital continues to grow. The US alone has more than 10 million millionaires and now has more billionaires than members of congress.

The supply of capital is at an all time record high. That's reason enough that capital's price (interest rates) is low but there is more. The demand for capital is low.

What options do investors have? There is real estate, which continues to rise in major cities. And obviously you can buy bonds - an increasing percentage of which offer a negative interest rate. Or you invest in existing businesses, buying stock. Stock might look like a decent investment compared to bonds, but stocks are priced pretty high already. And companies have enough capital that they are buying back their own stock at record rates. They don't really need your money and don't even know what to do with their own cash. Another option is to fund a startup rather than buy stock in an existing company. You can help to create a business rather than just buy a share of an existing one.

So, what is the demand like for startups? How much capital do they need? Not much. It now takes less capital to start a business and that is one more reason the price of capital has fallen.

The Global Entrepreneurship Monitor (GEM) tracks various entrepreneurial measures around the globe (which I guess is implied by its name). One fascinating tidbit came out of new data they released 8/8/2016. In their 2006 report, entrepreneurs needed an average of $65,000 to get a business off the ground. For the 2015 GEM report, the median was $13,000. Now median is typically lower than average and it is possible that the difference between $65,000 and $13,000 could all be explained by that difference in measure. It's also possible that the capital needs for startups has dropped considerably in the last decade.

To exaggerate the differences, think back to a startup in 1960 when you might be setting up a factory or even a brick and mortar store. That requires a serious outlay of capital. Now think about a startup today. It might be focused on app development. They might need a half dozen laptops for the programmers.

Consider Uber. Its valuation is around $60 billion. It is essentially a taxi service. It has at least a quarter of a million drivers in the US but it didn't have to purchase any of their cars. 10 or 20 years ago, it might have taken $5 billion to create a fleet of 250,000 taxis. Today they are able to "create" a new car simply by having another driver download an app. The capital it took to start Uber is so much less than what it would have taken to create comparable capacity in 1995 or even 2005 before smart phones became ubiquitous. Uber was able to create a lot of wealth but they didn't need a glut of capital to do it.

In 2006, it took $65,000 to start a company. By 2015, it took maybe 1/4 that. Demand for capital is dropping even as the supply of capital is going up. No wonder the price of capital is so low.

There are a couple of implications of this.

One implication is that capital is no longer a limit. To have low capital gains tax might make sense in terms of competing for global capital but it doesn't make sense in terms of trying to attract capital as if it were still the scarce input that it was in the late 1800s - or even late 1900s.

The other implication is that we have to think about strategies that treat capital as plentiful rather than scarce. What does this mean? Among other things, it means that we should more aggressively fund startups, recognizing that it is the entrepreneurial opportunities that are scarce rather than the capital to fund them. And of course if we go further upstream, we will realize that the entrepreneurial opportunities worth investing in are more scarce than we would need to fully employ capital because we don't do enough to create entrepreneurs. We have an education system designed to create knowledge workers but not to create entrepreneurs. And entrepreneurs - rather than capital - are the real limit to today's economy. We have to popularize entrepreneurship.

For roughly the quarter century leading up to the Great Recession, excess reserves bounced around between one to two billion dollars. Excess reserves are money that banks keep rather than loan out. Then starting in September of 2008, excess reserves began to swell. From August to September, they rose from %1.9 billion to $59 billion. In October they hit $267B and then $767B by the end of 2008. In August of 2014 excess reserves peaked at $2.7 trillion, roughly 200X what they’d averaged before the Great Recession.
You have to appreciate the fact that the Federal Reserve was trying to pump capital into the economy. The fact that it did so much more for excess reserves than actual investments suggests that capital wasn’t the limit to progress. (An important caveat here. At the height of the financial crisis in 2008 and early 2009, credit and capital was a limit and it was a beautiful thing to have the Fed intervene with a flood of cheap capital and guarantees. By 2014, though, things were a little different.)
Policy makers continue to act as though capital is what we need more of and we use everything from tax policy to monetary policy to address that apparent scarcity.

The question is no longer, How do we get more capital? We've got a glut. The question is, How do we get more entrepreneurs and make more employees more entrepreneurial? We've got plenty of capital to fund them. So much capital, in fact, that we're putting it into negative interest bonds. That might be a signal that we need to start treating capital differently. This is a post-capitalist market economy and requires a different set of policies.

One reason that markets are great is because of price signals. Things that are cheap you should use a lot of and things that are expensive you should use less of. Capital? Capital is cheap and we should take the market's advice on how to use it. What really is scarce? The entrepreneurial ability to transform that capital into jobs and wealth. That’s the limit that policy should focus on overcoming.

05 August 2016

What About Gender?

More than once conservative friends have told me that there is no real difference between Trump and Clinton. To test that hypothesis, consider this little thought experiment.

Imagine that a woman who came to fame as a reality TV star was running for president without any previous experience in office. Much of what she says terrifies the experts and reveals layers of ignorance. (What sort of statements? How about something like “[Putin’s] not going into Ukraine, okay? Just so you understand. He’s not going to go into Ukraine, all right? You can mark it down and you can put it down, you can take it anywhere you want.” The sort of statements that would make a former CIA Director warn that she's become an unwitting agent of the Russian Federation.) More than once her emotions have led her to lash out at people in her own party.

Her opponent is a man who has been senator and secretary of state and has worked closely with a president on special projects. His policies have even been endorsed by members of the opposition party. 

Tell me that race would be close or that anyone would seriously think the two candidates were just the same.

02 August 2016

What if Trump is on the Most Amazing Betting Streak in History?

Couldn't a lot of this casino owner's campaign behavior be explained by a series of drunken double or nothing bets with other billionaires?

Trump: Ok. How about this? I get an argument with the pope about what it means to be a Christian and I go up in the polls.
Cuban (or Bloomberg or some other billionaire who will eventually have to come out against him): No way!
Trump: Double or nothing on the last bet I won when you said I'd be the first of 17 GOP candidates to drop out.
Ok. I got another. I say McCain isn't a war hero because he was captured.

I insult a gold star family and then remind the nation that I've made comparable sacrifices.

I ask the Russians to hack into and then release classified emails from the secretary of state.

Instead of kissing a baby on the campaign trail, I order it out of the room.

I insult the NY Times because they don't write good.

There may be more than a few billionaires who are already into negative territory from betting against the Donald.

01 August 2016

Conservatives and Liberals Would Get Along if Only They Could Time Travel

Trump is against free trade, big corporations, and military intervention. He's even contemptuous of the military, both the judgment of generals and the sacrifice of warriors. He questions authority. He revels in moral relativism and shocking language and statements.

If all of this seems familiar, it's because it is. Today's conservatives are 1960s liberals. Who says the GOP doesn't believe in recycling?

31 July 2016

The 2 Kind of Statements Trump Makes

Trump makes two kinds of statements, both with great confidence. The one kind can immediately be proven false (this from ABC):

The other statements can't yet be proven false.

It's also worth noting that Trump's inability to stay quiet during the Democratic National Convention - his compulsion to have the spotlight shifted to him - is what we will look back on as his fatal flaw. Tired of being ignored, he has made a series of outrageous statements this week, statements that likely mean his steady drop in the polls to his huge loss in November.

What Race and Astrology Tell Us About Our True Inner Selves

From Datacalysm by Christian Rudder:
On OkCupid, one of the easiest ways to compare a black person and a white person (or any two people of any race) is to look at their "match percentage." That's the site's term for compatibility. It asks users a bunch of questions, they give answers, and an algorithm predicts how well any two of them would get along over, say, a beer or dinner. Unlike other features on OkCupid, there is no visual component to match percentage. The number between two people only reflects what you might call their inner selves - everything about what they believe, need, and want, even what they think is funny, but nothing about what they look like. Judging by just this compatibility measure, the four largest racial groups on OkCupid - Asian, black, Latino, and white - all get along about the same. In fact, race has less effect on match percentage than religion, politics, or education. Among the details that users believe are important, the closest comparison to race is Zodiac sign, which has no effect at all. To a computer not acculturated to the categories, "Asian" and "black" and "white" could just as easily be "Aries" and "Virgo" and "Capricorn."
So, how do race and astrology define us? About as much as we or other people believe they do. Which could be a lot .... or not at all.

28 July 2016

Legitimizing Desire: Why We Needed a Religious Revolution to get Our 1st Market Economy

During the first market economy of roughly 1300 to 1700, desire had to be made legitimate. This was one important reason that church reform was central to the emergence of the first economy, shifting the regulation of desire from the church to the individual.

Martin Luther helped to ignite the Protestant Revolution by translating the Bible into the German language that could be understood by the average German and not just the elite who'd been educated in Latin. But literacy rates were not that high and art still had a huge role in transmitting ideas.

Martin Luther challenged the Church in so many ways that it's easy to forget that one of his most startling challenges was around the issue of celibacy. He was in favor of emptying out the convents and marrying off the nuns. On the left is a painting of Martin Luther with his wife, the former nun Katharina von Bora. It was made by Lucas Cranach the Elder, probably the most famous German painter of his time and Martin Luther's friend. It was circulated to illustrate this notion that individual freedom included even the right of priests and nuns to marry. Martin Luther realized how important this message was for religious change and his friend Lucas helped him with this mission.

Lucas Cranach the Elder also did this painting of the Silver Age on the right. Like other Renaissance artists, he went back to the classical myths and art of the Greeks and Romans to find inspiration in depicting a less cloistered world. The Italian Donatello, who died in 1466, six years before Lucas the Elder was born, had carved the first nude since classical times. By the time of Martin Luther, art had become more openly erotic, the human body a legitimate theme for artists throughout Europe.

It might be easy to dismiss this new theme in art as tangential to the bigger changes sweeping throughout Europe but it seems as though it was, instead, fundamental.

At the dawn of the first economy, in about 1300, the church controlled about 70 percent of the money in circulation. Desire of every kind - whether in the form of covetousness, curiosity, or lust - was controlled by - or least condemned by - the church. Individual desire was something to be repressed rather than allowed. One of the overlooked reasons for the darkness of the Dark Ages, the incredible poverty and brevity of life, was because desire was illegitimate.

Desire is the engine of any market economy. In a traditional or even centrally-controlled economy, you can tell the consumer what they want or what is good for them. Their desires are incidental to what society produces and distributes. One definition of a market economy is that it caters to the individual. People want a quarter pounder with cheese even though experts agree it's not healthy? The market makes quarter pounders by the billions. The market lets the individual define what goods and services are offered. In a world in which the church controls 70% of the currency, the individual has almost no control.

Martin Luther did more than undermine the Church's exclusive control over proper thinking by translating the Bible into German and giving each literate German the chance to reach his or her own conclusions about God's word. When he married Katharina von Bora, he helped to legitimate desire.

As it turns out, the first market economy had to make desire of every kind legitimate. Covetousness, the desire for goods that make us happy but aren't essential to survival, had to be legitimate in order for economic progress to kick in. And covetousness, lust, and curiosity - the desire to have, to possess, and to know - are so closely linked that it's simply not possible to allow one without allowing them all. The story of our first market economy was a story about deciding that individual desire is legitimate and best left to the individual to regulate or channel.

More of Lucas Cranach the Elder's amazing paintings here.