04 December 2020

The Good and the Bad News: We Have an Abundance of Labor and Capital (or, how you can hardly spend enough on the coming recovery)

The American economy created 245,000 jobs in November. That's woefully insufficient.

The economy has destroyed 9.4 million jobs this year. In the 2010s, the economy created about 2.2 million jobs per year. A negative 9.4 million leaves us down 11.6 million from a normal year. What does that mean in practical terms? We are still in worse shape than any recession you've lived through.




There are a couple of things to do.

One, accelerate vaccine deployment to return to normal as quickly as possible. Globally, (per an OECD analysis) the difference between a rapid or slow vaccine rollout is $7 trillion (by the 4Q 2022). Of the 180-some countries in the world, only the US and China have economies larger than $5 trillion.

The risk of global governments - including the US - spending too much to too rapidly vaccinate its population is zero. The risk of them spending too little and moving too slowly to vaccinate their population? Very high. 9 million unemployed is incredibly costly for so many reasons. (And that is just the economic cost and doesn't even acknowledge the emotional devastation of sustained unemployment - which breaks up families and leads to deaths of despair. You don't even need compassion to realize that the economic cost of this many unemployed is unacceptable.)

In 2021, the US economy needs to create nearly 14 million jobs to return to its pre-COVID trendline. Spoiler alert: that will never happen. So why mention the need to create 14 million jobs in 2021? Because the average American and their political representative still has no idea how deep is the hole we're standing in and is terribly timid about deficit spending, even in a time when the price of money - the interest rate - is negative. Money is cheaper than free. They're paying you money to borrow money.

We are at a unique spot in history.

1. Real interest rates are negative. The five-year treasury rate is NEGATIVE 1.3%. Ten-year is NEGATIVE 0.89%. If you borrow $1 today, you will have to pay back less than 99 cents in five years. Even if your investment only breaks even - the dollar you invested today is worth only a dollar in five years - you come out ahead.

2. We need huge investments in transitioning our economy from a reliance on fossil fuels to one reliant on alternative energy. Shifting the economy - from research to development to manufacturing to building these innovations into our infrastructure - is a massive project. It will cost an enormous sum and require that we employ millions of people. That is, these projects require a lot of people and money and right now we have an abundance of both.

The difference between whether we find ourselves on a train ride or in a train wreck is simply a matter of acting boldly rather than timidly. Bold action begins with the realization of how deep is the hole we're standing in and that nothing could be more costly than doing nothing.

What is the cost of doing nothing? If we continue to create only 245 thousand jobs a month, it will take us more than a decade to get out of this hole. That we cannot afford.

30 November 2020

Why Harvard Might Not Be So Great (Or, one reason median wage gains have slowed since 2000)

Imagine that someone had come up with a vaccine or health supplement or drug that they claimed had incredible health benefits. They shared data that showed how people taking this were more fit, higher performing, and far healthier than the average American. Looking at the results, you would have to be impressed.

You ask to take it as well. At that point you're told that you can't just take it. You have to qualify. And when you learn the qualification criteria, you're blown away. They only let Olympic athletes take their product. And you suddenly suspect that their incredible results have more to do with their screening than the product itself.

Higher education does at least two things. One, it educates. Two, it is a signal to potential employers.

Harvard has about 22,000 students, roughly 17,000 from the US. Last year, about 3.6 million American kids graduated from high school. If Harvard's incoming class of freshmen is one-fifth of its total enrollment, slightly less than 0.1% of American high school graduates go to Harvard.

Is Harvard a fabulous place to get an education? I think it must be but we won't ever know how much better it is than other schools because Harvard will never run a randomized trial of simply letting any kids in from any school or neighborhood. It is possible that the list of America's top universities would change if we collected data from a decade of randomized trials rather than data testing the health benefits of a supplement only given to Olympic athletes.

The American economy has made the transition from an industrial to an information economy. (Which simply means that new jobs and wealth are not being created by folks standing at factory lines manipulating things but instead by folks sitting at computers manipulating the symbols of things.) Once upon a time, white collar workers were a subset of our workforce. They were the managers and analysts who constituted only a small portion of the many factory workers, the men (it was always men) who could wear a tie without worrying about it getting caught in machinery. Now, knowledge workers outnumber factory workers about 4 to 1. What this means is that an education system designed to signal to the market, "These graduates are the best and brightest and you should hire them for your key management and analyst positions" is less helpful. The point of education is not to identify the top 5%. 
The point is to make the median graduate more valuable. 

How have we done at improving the productivity of folks at the median since the turn of the century? Not as well. Between 2000 and 2015, real median personal income was unchanged. In the previous 15 years, it rose 28%. In the last 15 years of the 20th century, we could raise median wages by making factory workers more productive and moving a higher percentage of new workers from factories to cubicles. Productivity gains in factories continued as they had for nearly a century; the shift from lower productivity in factories to higher productivity behind a computer accounted for the rest of the gains. 

Now, though, gains in productivity have to come from making the median knowledge worker more productive. We still don't know as much about that.

As knowledge work becomes more common - that is, as a greater portion of our workforce moves into the information economy - signaling to markets which graduates are our best and brightest will be less important and our ability to make all of these graduates more productive becomes far more important. The latter will rely on a different set of strategies.

[to be continued]

28 November 2020

The Future Has Never Been More Affordable: Why a Record Low Discount Rate Means We Should Be Investing at Unprecedented Levels

The discount rate answers the question, "How much should we discount future cash flows or profits?"

In 1981, the discount rate was 14%.
In May of last year, it was 3%.
It is now 0.25%.



Why does this matter?

The discount rate tells you how much to discount future revenue. It tells you how much a million dollars you get a decade from now is worth today. 

If your discount rate is 26%, it is worth only $100,000. You wouldn't want to invest more than $100k for the one million in a decade.

But if your discount rate is only 0.25%, that million dollars in a decade is worth $975,000.

The discount rate answers the question, "How much should I discount the future?" Or, put differently, "How much should I invest now in the future?" 

The discount rate essentially tells you whether the future is expensive or cheap. Do you have to pay a million dollars now for $100,000 in a decade? That's an expensive future. Do you have to pay a million dollars now for nearly a million dollars in the future? That's an affordable future.

We should invest a huge amount because of this low discount rate. This means making a few changes to our current deficit.

We now have an outrageously high deficit. This is for two reasons. The massive tax cut Trump passed in his first year gave us a trillion dollar deficit. Then COVID added $3 trillion more to that deficit. 

So what should we do next year? 

First, we lower the deficit in two ways. The first cut will occur naturally. Subsidies for COVID will be paltry by yearend compared to this year. That will automatically lower the deficit from 2020.

Second, we reverse the Trump tax cuts for the rich. Trump's tax cuts created an absurd situation in which the folks in the top 2% are actually paying less than folks in the bottom 20%. At no previous point in history have the bottom 20% and the top 2% paid the same tax rate, much less have the top 2% paid a LOWER tax rate than the bottom 20%. That has to change for so many reasons not the least because it is just so stupid.

So, these first two steps will lower the deficit. Then we invest heavily in the future, raising the deficit back up again. Why? Because of our very, very low discount rate, those investments promise record returns. Never have future investment returns been worth so much.

What kind of investments should we make?

Childcare. Invest heavily in the development of the kids who - as adults - will be the ones working while us old codgers collect social security.
Infrastructure. Freeways (our investment in freeways as a percentage of GDP was twice as high between 1950 and 1979 as it has been since), airports, trains, sewage and electrical grids that have a smaller carbon footprint.
Alternative energy. Nuclear fusion. Solar grids. Windmills.
Healthcare. Not only money spent to keep everyone healthy but money spent to improve our level of care through research, development and money spent to increase the productivity of our healthcare workers.
Education. In the early 1900s, we made high school normal and free. Time to do the same with university. Additionally, we need to invest comparable sums in every 18 to 23 year old, whether in the form of an education at something like a state university, trade schools, capital equipment they could use for work, or even simple investments that began paying a dividend to supplement income for low-wage workers.
R&D. It's time to invest about $3.5 billion into each cabinet level department within the federal government. Why $3.5 billion? That's about what we invest in DARPA, which accounts for a big amount of DoD's R&D. Time to match those investments for the Departments of Energy, Education, Interior, Agriculture, etc.

We've never had more cheap capital or more great opportunities for investment. Running up a deficit to make these investments will not only be a great boon short-term (imagine how many jobs we'd create by upgrading our infrastructure or hiring childcare workers or employing researchers in a variety of fields) but would give us record returns in the future.

Because the discount rate is so low, the future has never been worth more. With a future that cheap, we should buy as much of it as we can afford. It's a great time to stock up on future possibilities. 

22 November 2020

Protesting COVID and Other Realities

I saw a headline this morning, "Crowd gathers in Huntington Beach in protest of COVID" and wondered how many crowds gathered in 1906 to protest the San Francisco earthquake.

So many possibilities down that path.

"Old people gather downtown to protest ageing!"
"6 year olds gather downtown to protest bedtimes!"
"People in t-shirts and sandals gather at the base of snowy mountain to protest the onset of winter!"
"Couple who've newly met and fallen in love gather at sunset to protest the end of a perfect day!"

There's a pandemic. Things have changed. You want people to know that you find this upsetting. Fine. Go do that and then once you're done protesting reality, perhaps you could join the rest of us who are over here adapting to it

21 November 2020

How the Republican Teddy Roosevelt Helped to Define the 20th Century Democratic Party

In 1860, the US elected its first Republican president. Abraham Lincoln and the presidents through the end of that century helped to make the US an industrial economy that created a proliferation of amazing products (from telephone and radio to lightbulbs and automobiles to … well hundreds of products) and wealth. Nothing like it had happened in the history of the world.

Then in 1901, Teddy Roosevelt became president by accident. Or more precisely, by assassination. He actually adopted policies that might have helped the Republican Party to evolve to keep pace with the economy they’d helped to create but his changes were ultimately rejected.

As governor of New York, Roosevelt made a change really popular with voters but less popular with other politicians. Rather than give out government jobs as a reward for political support, he awarded government jobs based on merit. The Republicans knew they had to give this man a position but they didn’t want to give him power. So, they made him Vice-President to McKinley. The people loved him but as VP he could do no harm.

Unfortunately for those Republican party elders, the anarchist Czolgosz assassinated McKinley and suddenly the man they were trying to control was president. Roosevelt’s policies – including his efforts to regulate business, help labor and to conserve nature - put him at odds with the Republican party elders but they made him popular with regular Americans.

At the close of his presidency, Roosevelt endorsed Taft as his successor and then left. He first went on a safari in Africa where he and his group killed 11,000 animals before heading north to Sweden to collect a Noble Peace Prize, as one does after that much shooting.

It took him a while to get back to the US and by the time he did, he was appalled with what Taft was doing. Rather than build on Roosevelt’s policies, Taft was returning to Republican policies from the 1800s, reversing many of Roosevelt’s hard-earned gains for labor.

So, even though he’d already served two terms, Roosevelt ran against Taft in the Republican primary. And he won. Sort of. Back then the party candidate really was chosen in smoke-filled backrooms and deciding that they couldn’t afford another four years of Teddy’s policies, the party elders chose Taft to again run for president as the Republican nominee.

So, Roosevelt formed his own party, defined by causes that meant so much to him. My favorite political story is about how passionately Roosevelt believed in these causes. Imagine how much coverage the following would have gotten in today’s media landscape.

On October 14, 1912, Roosevelt, en route to the Milwaukee auditorium to speak, rose to wave at the crowd and was shot in the chest. As you might imagine, this created some commotion. His assistants insisted that he go to the hospital. He spit into a handkerchief and, seeing no blood, concluded that he would live long enough to deliver his speech and ordered them to take him to the auditorium instead.
The audience - this was 1912, a time before cell phones, TVs, or even radio - had no idea that Roosevelt had just been shot until he dramatically opened his suit jacket to show the spread of blood. When his aides saw this, they panicked at the sight and again insisted that he rush to the hospital. He again shook them off. (Aspiring public speakers who see in this great potential for gaining audience attention are advised to stay with the more traditional opening joke.)

Roosevelt explained to his audience that his speech was more important than his safety. (And, fortunately, it was a long speech. The sheaf of papers, fifty pages folded over, in his breast pocket was so thick that it slowed the bullet. Had he been delivering a speech as succinct as the Gettysburg Address, he may have died. Fortunately for him, he had a lot to get off his chest.) He stood up for those who could not defend themselves— women, children, minorities, and even nature. Roosevelt’s platform continued his defense of natural beauty (as president, Roosevelt had protected huge swaths of land like Yellowstone and Yosemite from development) and argued for progressive taxation, old-age insurance, regulations on business, an end to racist practices, the abolition of child labor, and woman’s suffrage. There were probably no issues that better defined the difference between 1900 and 2000 then the ones that he championed. No third-party candidate before or since got more of the vote and perhaps no candidate better defined politics for the coming century. He lost his bid for a third term, but his issues - his ideas about how the world should be - eventually won.

But he split the Republican vote and lost to Woodrow Wilson – a man regarded as the father of public administration. The reforms that Roosevelt initiated as governor of New York that would turn government officials into professionals rather than political cronies were reforms that Wilson pursued as an academic, defining the modern state in the process. Wilson was regarded as the father of American public administration, but he was only the first Democratic president who would be so defined by causes dear to Teddy Roosevelt.

As it turned out, all of the things that Roosevelt advocated were to become political realities … but under Democratic presidents, not Republican presidents.

Roosevelt was trying to evolve the Republican Party to adapt to the new realities it had helped to create. The next President Roosevelt (FDR) was a Democrat and he was the one who continued his fifth cousin’s initiatives. The Republican Party resisted the changes that Teddy championed while presidents like FDR, Truman, Kennedy, and Johnson made them reality.

In November of 1859, Darwin published Origin of Species. In November of 1860, Lincoln was elected as our first Republican president. Sadly, it seems as though no Republican other than Teddy Roosevelt ever took Darwin's idea of evolution seriously. It could have been a wonderful party if only they'd evolved as much as the realities they had helped to create.

19 November 2020

How Culture and Not Policy Might Explain the Vast Difference Between the US and East Asian Nations COVID Outcomes

East Asia has done really well with COVID. We’ve done horribly. This might stem from who our culture has trained us to be.

An Asian friend had shared about the importance of respect in her culture. She was expressing dismay at an American friend who she felt had repeatedly been disrespectful. Asian culture leans towards respect and American culture towards the notion of freedom or individuality. There is a tension between these two. 

One of the first signs that a child is maturing is that they become aware of situations and adapt. At church? Be quiet. At a playground? Run and yell. In theory, we adults are also able to adapt to situations and change but in practice we often either end up being the patient one or the funny one or the one who wants to solve a problem rather than take up a fight. We have a particular way of being that we default to even when it isn’t appropriate. We end up as the kind of guy who laughs at a funeral or cries on the playground.

As a group, culture becomes a default that we turn to even when it’s not appropriate.

After World War II, Japanese policy makers scoured the world for examples of constitutions they might adapt to their country. In that process, Western advisors learned the most remarkable thing. Per Francis Fukuyama
"the Japanese language had no word equivalent to the French droit, German Recht, or English right. There was no concept, so basic to European and American law, that rights inhered in individuals prior to their coming together in society, and that part of the role of government was to protect those individual rights.”

A culture that didn’t even have a word for rights is less likely to protest simple things like wearing masks or test and trace programs that allow officials to quickly isolate a small number of people who might spread COVID. Respect for the lives and health of others is obviously more important than someone’s right to have their nose out and in other people’s business in the midst of a pandemic. That culture is a gift in the midst of a pandemic, their economies doing better than ours and their death and hospitalization rates a fraction of ours.

There are huge benefits to American cultures’ disregard for offending others in order to create something new or be someone different. The early rappers weren’t worried about offending popular sensibility any more than the early rockers or jazz musicians before them. A startup doesn’t wait for permission from vested interests in the community and may even put them out of business. The American tilt towards freedom has its moments of genius and utility, helping to create the next thing. 

But like a kid who only knows how to behave on the playground, we Americans have now found ourselves in a situation for which our default cultural setting is inappropriate.

Thomas Jefferson wrote, “The mass of mankind has not been born with saddles on their back nor a favored few ready to ride them legitimately by the grace of God.” We love the notion that we are our own person and no one will tell us what to do. We are not sheeple. Our default setting is the guy in Die Hard who is simultaneously fighting bad guys and bureaucracy and beats them both. Our culture has led us to become the country of the "You can't make me wear a mask," masses. And yet now may not be the appropriate moment for that.

Is it better to make respect for others a priority or freedom to be an individual a priority? Well, it depends. In our current situation, respect seems like a distinct advantage.

I wonder if there is such a thing as situational culture. It could be handy.

18 November 2020

How Pent-Up Savings Could Fuel an Economic Boom in 2021

You look like you could use some good news.

We're poised for a strong recovery next year.

It will get worse before it gets better. Unemployment benefits are unnecessarily running out soon and the most vulnerable will be hurt the most. Hopefully a divided congress can still act to protect these households from unnecessary grief but if not you'll hear me decry the obstinate politicians who think those folks should suffer more.

But there are reasons to feel optimistic about 2021.

One, we could have multiple vaccine options by Spring. This would shift the bottleneck from the supply of vaccine to administering it. (If only one vaccine was approved, supply would be the constraint. If three or five are approved, it is conceivable that the supply of vaccines will ramp up quickly and the logistics of getting people vaccinated becomes the challenge.) April - June of 2021 could look more like 2019 than 2020. 




Two, households will have money to spend once things do open up. Paul Krugman shared these graphs showing the surge in savings rates during this pandemic. People generally save about 7%. In April, savings rates spiked up to 33% and at 14% it is still running at about double its normal level. As a result, liquid wealth is up about $3.5 trillion from a year ago, accumulating at about double its normal rate.




Consumer spending is about 70% of GDP. Given GDP is about $20 trillion a year, even if households spend $1 trillion more of the (by then) $4 trillion in extra liquid wealth they've accumulated, that alone would mean GDP growth of 5%. I don't think there has been a year in recent decades in which so much liquid wealth has so quickly built up.

Households came out of the 2008-9 recession with debt and GDP growth was slow to recover. Post-vaccine 2021 might be more like the recovery after WWII when households were done with war rationing and ready to buy new products. In 1950 and 1951, real GDP growth was 8%. It would be spectacular if our GDP grew at even half that rate. And given the numbers and the situation, that's perfectly conceivable.

17 November 2020

How Trump's Plan to Send a Slate of Faithless Electors Could End the Electoral College

The official count of the 2016 election: Trump won 304 electoral votes and Clinton won 227, for a total of 531.

This is not what they won on election night, though. Trump actually won 306 and Clinton won 232, for a total of 538.

What happened to the missing 7? They were stolen by faithless electors.

A faithless elector is someone who is supposed to cast votes for the presidential candidate who won their states' electoral votes but chooses instead to cast votes for someone else. The official number of electoral votes Trump and Clinton received was diminished by 2 faithless electors who chose not to vote for Trump and 5 who chose not to vote for Clinton. Curiously, this didn't change the outcome and thus got little attention.

One of the strategies Trump has explored in his desperate desire not to be a loser is to have Republican legislative bodies in states he lost send a slate of faithless electors to vote for him rather than Biden. He's exploring that option, essentially a veto of the state's voters.

We've had weird electoral vote outcomes before.

The 1800 election came down to a tie between Thomas Jefferson and Aaron Burr. Each won 73 electoral votes. Over the course of seven days the House cast 35 ballots but each failed to break the tie. Before the 36th vote, Alexander Hamilton intervened on Jefferson's behalf (Hamilton disliked Jefferson but despised Burr), tipping the House ballot towards Jefferson who then became the nation's third president. Burr, who took this personally, challenged Hamilton to a duel and (spoiler alert) killed him.

If faithless electors did vote for Trump after a majority of the voters in their state voted for Biden, it could trigger a crisis.

But it could be a crisis that triggers change. (Or effectively ends democracy. One takes one's chances in times of momentous change.) Once people realize that it is not their vote but the electors' that determines who becomes president, once they're shown so clearly that the electoral college is only by tradition - and not by law - expected to vote for the candidate their state has voted for, it could be just the catalyst needed to amend the constitution again to change how we vote for president.
After the 1800 election in which Jefferson beat Burr, the US passed the 12th amendment. This changed how presidents were elected so that a fiasco like the one that led to Jefferson and Burr's perpetual tie would not happen again. The kind of crisis that Trump is trying to trigger could be yet another catalyst for a change, this time to change the rules so that voters directly elect the president without electoral college intermediaries who - as it turns out - are bound by faith and not by law to vote for the candidate they were sent to vote for.

Is this a far-fetched scenario? Most definitely.

Could it nonetheless happen? 2020 is nothing if not a reminder that reality is unbounded by our expectations of normal.

15 November 2020

Globalization and Self Actualization: Economic Development is Not Done Until We Have a Truly Global Economy and Personal Development Is Not Done Until You are Unique in All the World

I take exception with much of what falls under the umbrellas of nationalism or identity politics. I know that puts me at odds with the hardcore Republicans and Democrats but here's why their positions baffle me.

I don't think economic development is done until we have a truly global economy and I don't think that personal development is done until you are unique in all the world. Thus, I don't see how either nationalism or identity politics could ever be the basis for communities, economies and people who realize their full potential. I believe that your personal development gets retarded by conforming to the group rather than pursuing self actualization and your economic development gets retarded by clinging to national (or any regional) interests rather than global economic possibilities.

Serious question: are the parties just playing on people's ignorance or am I the ignorant one here? What am I missing?

14 November 2020

What Lay Behind Freud's Obsession with Sex

"Sometimes a cigar is just a cigar."
- Freud, the guy who smoked about 20 of them a day.

A waitress probably has a distorted notion of how important food is to us. People talk to her a lot about food.

I loved visiting Freud's first office (and apartment) in Vienna. It turns out that most of his theories were wrong but his notion that our motivations are subject to scientific inquiry turns out to be valid. In the office (now sort of museum) you get a sense of the exciting possibility of better understanding what haunts us and what makes us happy. I felt tickled in the same way that I was when I got to be at Stanford Research Institute where the first node of the first internet connection was. To be at the origin of something that momentous was very cool.

I was surprised to learn, though, that Freud's famous "couch" was actually a bed. Freud wanted his patients to have a comfortable place to lie as they engaged in free association or responded to questions. So, he heard a lot about sex from people lying in bed. And then concluded that sex is behind so much that motivates us. Perhaps in the same way that a waiter or waitress could tell you how obsessed people sitting at a dining table are about food.




But I'm no analyst.