09 February 2016

In Which Your Blogger Briefly Interrupts Pundits' Regularly Scheduled Cries of Alarm to Remind You that Things Have Been Worse

Perhaps it is just because it is an election season, but it is popular to bemoan the state of the world. ISIS and a flood of refugees from the Middle East and a porous border with Mexico are two popular subjects for people arguing that the world is teetering on the brink.

I do think that we've had decades since the Dark Ages (which ended in roughly 1300 AD) in which civilization has slipped back, when catastrophes have mounted more quickly than gains. I don't think that we've ever had a century pass in which life didn't get better for most people in the West.

How does now compare to 100 years ago? What was going on in 1916?

Starting with the border, Pancho Villa was leading raids from Mexico into New Mexico and killing American soldiers. Imagine what Trump and the 24-hour news cycle would do with that.
Mother and child wearing gas masks,
somewhere in the French countryside along
the Western front, 
1918.

Turmoil in the Middle East pales in comparison to World War One. Or as they called it then, the Great War. Communities in the previous generation had learned how to mass manufacture goods. In the Great War, they turned their new insights into mass manufacturing death. In the Ottoman Empire alone (a swath of peoples that overlaps with the Middle East), 2.5 million civilians were killed in addition to roughly half a million soldiers. What happened to people living in the Ottoman Empire was worse than what is now happening in the Middle East but of course there is no comparison today to what was happening in Europe then. WW1 left 17 million dead and 20 million wounded.

When the Great War ended in 1918, one of the deadliest pandemics of recent history swept across the globe. Between 1918 and 1920, a flu pandemic killed roughly 4% of the world's population, or 75 million people. (The same percentage of the world's population today would be nearly 300 million, a number equal to the entire population of the US.)

At some point in history, the number of pundits and analysts began to outnumber the number of reporters. At that point, reporting seemingly tipped from reporting on what had actually happened to what might happen. At that point, alarm about the future became more newsworthy than a reasoned look at what actually happened.

If you only listen to pundits and and politicians but not reporters and ignore almost all of history, you might just believe that things have never been worse. It's hard to imagine how else one could arrive at such a conclusion.

08 February 2016

Why Americans are Increasingly Frustrated with Democracy

Bernie Sanders and Donald Trump are doing surprisingly well in this presidential campaign. It would have taken some imagination to predict that the winners of the first primary of 2016 would have been a (Democratic) Socialist and a reality TV star.

There is a bigger story in their rise, though. Our two big parties are fracturing because politics can't keep up with markets. Let me explain.

Taylor Pearson shared a fascinating statistic the other day. Timothy Ferris, asked his audience what other podcasts they listened to: the top ranked podcast is listened to by only 1.44% of his audience. As Taylor points out, this is an incredible change from the old days of 3 main TV stations. In this poll, market share of 2% would make you dominant.

Why is this relevant? When it comes to music, ideas shared in podcasts, type of car you drive (or transportation service you use), clothes you wear or books you read, the market provides an incredible array of choices. Chris Anderson published The Long Tail in 2006, pointing out that a site like Amazon could make as much (maybe more) money selling one copy each of a million book titles as the old brick and mortar stores could make selling a million copies of one book. It used to be exotic if you liked reggae. Now you can find an album of heavy metal reggaeton. One of the reasons that I love twitter is because I can choose an array of folks to follow who keep me amused, informed, and outraged about the issues and topics that most fascinate me. My twitter feed is distinct from that of any other user.  If I visit Drudge or Huffington, I see what everyone else sees. When I visit Twitter or Facebook, I see something no one else does. I am unique and so is my experience of the news.

Markets give us what we want. They encourage you to be unique, to feel special and that's an amazing thing.

Democracies, by contrast, are a place where we have to come together. You have to find common ground with at least 51% of your neighbors and it turns out that those neighbors are becoming more unique and different from you every year. (In no small part because markets are helping to nurture what makes them distinct.) Once upon a time, it was enough to feel "sort of" conservative. Now, you have to define whether you are an evangelical or business conservative. And even if you are an evangelical, you have to distinguish between pragmatic or idealistic. On the left, you have to distinguish between pro-$15 an hour minimum wage or not, anti-Wall Street or not. And the more finely you define yourself and your candidate, the more likely you are to be frustrated by politics because the fewer the number of people who agree with you.

When you tell the market that you really like reggaeton, the market provides more of it. You get more choices, more bands, more albums, more songs and concerts. Of course you and your fellow reggaeton fans might never constitute more than 3% of the music fan market but if that is 3X what it was last decade, you feel like you are part of a happy surge.

But if you and your fellow libertarians grow by 3X to reach 3% of voters, you're  still largely ignored. Given that a democracy is defined by a majority, the small clusters of special fringe groups have power only in special situations, like when they represent the swing vote. People used to the market's rapid and happy response to their desires find this extremely offensive. "Washington doesn't listen to us," is the impression they are left with.

As markets have become more responsive and better able to serve folks in the long tail, they make democracies look bad by contrast.

Why are people increasingly frustrated with politics? Because in a world in which they are continually assured that they are unique and special, politics tells them that they have to focus instead on ways in which they are just like everyone else. Because until you find the common ground you share with at least 51% of your neighbors, you aren't special at all. In fact, you are largely irrelevant to the political process. In the market we can pursue what makes us unique. In politics, we have to pursue what brings us together. And the tension between those two is actually a good thing, as long as you don't carry expectations from the one over to the other.

I'm not sure how people will learn this, though. No politician is likely to face an audience and say, "You're not special."

06 February 2016

Data vs. Myth - Job Creation and Reliance on the Public Sector under Reagan and Obama

Here is some interesting data that shows job creation by administration with public sector (government) jobs broken out in orange from the private sector jobs in blue.



Curiously, no one since Reagan has gotten a bigger boost from big government than Reagan did during his second term. (Well, unless you are counting percentages, in which case George W's first term wins, when the government created 1 job every time the private sector lost 1 job.) And no one has had a bigger drag on job creation numbers because of layoffs in the government sector than Obama. He's on track to preside over the loss of roughly half a million government jobs during his two terms. And note that in Reagan's second term, the government created 7X as many jobs as it did during Obama's second term.

Reagan is the big government beneficiary and Obama is the one who stumbled along with little public sector boost. That's a narrative you won't hear pundits share.

-----------------------------

Here is the data that drives the graph above. (It projects Obama's numbers through a full second term, just assuming that the remaining 11 months will continue at the average of the first 37 months.)

Job Creation
(in millions)
Reagan 1
private sector 5.2
public sector 0.0
govt jobs bonus -0.5%
Reagan 2
private sector 9.4
public sector 1.4
govt jobs bonus 15.4%
H Bush
private sector 1.5
public sector 1.1
govt jobs bonus 77.1%
Clinton 1
private sector 11.0
public sector 0.7
govt jobs bonus 6.3%
Clinton 2
private sector 10.3
public sector 1.2
govt jobs bonus 12.0%
W. Bush 1
private sector -1.0
public sector 0.9
govt jobs bonus -89.6%
W. Bush 2
private sector 1.3
public sector 0.8
govt jobs bonus 64.5%
Obama 1
private sector 1.0
public sector -0.7
govt jobs bonus -69.2%
Obama 2
private sector 10.8
public sector 0.2
govt jobs bonus 2.0%

05 February 2016

Obama's First Ever "Great" Month

For the first time in 95 months, the unemployment rate has dropped below 5%, which is great. In this decade, we've had a lot of misery and very, very little great.

Unemployment rates mostly bounce between 5% to 8%. About 15% of the time the economy is bad enough to drive rates above 8% and about 15% of the time the unemployment rate drops below 5%. I think that it's fair to say that above 8% the economy is miserable and below 5% it is great.

By that definition, Obama has now had 1 month of great and 42 months of miserable.

By contrast, Clinton had 44 months of great and not a single month of miserable.

And George W.? He had 32 months of great and also did not have a single month of miserable. Although the Great Recession had begun months before he left office, the unemployment rate did not go above 8% until the month after George left office, where it stayed for 42 months. Workers in the Midwest and Syrians and Iraqis didn't start streaming into unemployment offices and refugee camps until after he'd gone back to Texas. 

You'd like to think that change in the unemployment rate counts for something, and apparently it does. Reagan had 27 months of miserable and no months of great, but the unemployment rate fell 2.1 percentage points from when he came into office to when he left. He finished with an approval rating over 60%. (Plus, more than any president before or sense, Reagan just looked like a made-for-TV president.)

George H. Bush had a tepid presidency that didn't include a single miserable or great month, and he finished with an approval rate over 50% in spite of presiding over a 1.9 percentage point uptick in the unemployment rate. The economy got worse during his presidency but not that much worse.

Not only did Clinton preside over 44 months of great, but the unemployment rate fell 3.1 percentage points during his time in office. Bill finished with the an approval rating of about 65%, the highest of any president in generations. Hard not to love a guy who presided over unemployment rates under 5% for nearly half his presidency. (And all the months during which unemployment dropped below 4%.)

Where does this leave Obama? It's hard to tell. Reagan had zero months of great and 27 months of miserable and is beloved by all Republicans and many Democrats and George W. had 32 months of great and no months of miserable and is hated by all Democrats and many Republicans. It's hard to tell how this will affect Obama's legacy but it does set up something that could drive the GOP crazy.

If Hillary Clinton wins the presidency, she might just come into office with the unemployment rate under 5%. In other words, when she gets into the Oval Office, the economy might already be great. If it stays there and Hillary is able to post numbers as impressive as Bill's... the Clinton legacy might be golden enough that Chelsea could win elections she doesn't even campaign for.


Months of Unemployment
Administration Above 8% (Miserable) Below 5% (Great) months in office bad great
Reagan 27 0 96 28.1% 0.0%
H. Bush 0 0 48 0.0% 0.0%
Clinton 44 96 0.0% 45.8%
W. Bush 32 96 0.0% 33.3%
Obama 42 1 85 49.4% 1.2%


The Most Curious Thing About the Labor Market

While the stock market continues to worsen, the labor market continues to improve. But that is not the most curious thing about it.

Unemployment is down to 4.9% from 5.7% last January. Since 2011, the Jan-Jan drop has averaged 0.8%, so the recovery continues at exactly the same rate it has averaged over the last six years.

Wages are up more than 2.5%, a rate of gain that's higher than what it averaged throughout the 1900s when steady wage growth of roughly 2.+% made wages about 6 to 8X higher in 2000 than they were in 1900. 

The number of employed is up 2.44 million from a year ago. Where did these people come from? 1.3 million came from a growth in the labor force (millennials and others entering the workforce) and 1.1 million came off of the list of the unemployed. 

The number of discouraged workers is down 8.7% and the number working part-time for economic reasons (that is, they are working part-time simply because they can't find full-time employment) is down 11.7%.

The average number of jobs created in the last 5 years was 2.5 million. By comparison, during the best five-year streaks in the late 1990s and mid-1980s, job creation averaged 2.9 million jobs a year. Job creation is not as strong as during the best five years of those recoveries, but it is more steady. No job creation streak has gone this long without a temporary dip. We now have 64 months of uninterrupted job creation, a period during which 13.1 million jobs have been created. The streak could end this year but there's at least as much reason to believe it will continue as finally stumble. 

Curiously, as the stock market becomes more volatile, the labor market has become more stable. The stock market rarely goes three months without an alarming downturn, whereas the labor market has ticked up every month for more than five years. And to highlight that contrast, the NASDAQ is down about 3% the same day that unemployment falls below 5% for the first time in 8 years.

 Curious indeed.

01 February 2016

Confessions of a Political Guy Who is Made Wildly Uneasy by Political Rallies

I'm sure that most people would think me political and religious. And yet ....

Watching the candidates tonight give their speeches (I saw Rubio, Trump, Cruz, Clinton and Sanders), I realize once again that political and religious people in large groups make me really uneasy. This matter of wildly cheering for a candidate just strikes me as so odd. To get people all fired up about their beliefs, to hoot and holler about abstract ideas and policies, strikes me as something as awkward as having sex in public. Actually, I think it might be more awkward.

These are just people with ideas, some more promising than others. It seems required, though, that their supporters have to hail them like they're the Messiah. That's just weird.

31 January 2016

Susan B. Anthony and What History Reminds Us

Here's a picture of Susan B. Anthony from History in Pictures. After they beat her, they arrested and fined her for trying to vote in 1872.


 It seems to me this sort of thing should instill optimism and humility. Optimism about the future to know that we've come this far. Humility to realize that there are a number of things we're doing now that people in 150 years will likely find odd and horrifying.  We've come a long ways and we're not there yet.

30 January 2016

What if the Real Question is not Why Are Oil Prices Falling? but instead, Why Did They Start Rising in 2003?

It's an open question as to why oil prices have fallen so much so quickly. In June of 2014, oil prices were $111. They are now about $30.

Some of the explanations for the fall sound conspiratorial. Countries like Russia and Iran that the West has reason to weaken, are hurt by low oil prices. It might be that Western countries are engineering oil price manipulations to weaken Putin but of course this glosses over the fact that Western countries have trouble even managing their own currencies, much less the global price of oil.

Another, very interesting theory, is that solar and alternative energy sources are becoming cheaper. Some people believe that solar panels may follow the path of computer chips, becoming cheaper and more effective at a rate that mirrors chips doubling in capability every 18 months. Couple that with continued advances in fusion power and it may be that oil prices would have to drop to stay competitive with alternative energy. If oil producers believe this might happen, it would make sense that oil producers would work to sell off inventory before it becomes obsolete, driving down prices now before the great collapse in oil prices later. In this scenario, oil producers are like FAX salesmen scrambling to sell machines before email marginalizes their product.

It's also true that more incremental advances have brought down oil prices. Fracking, shale oil, and new methods of extracting oil from previously unattainable places has increased the global supply of oil and driven down prices.

But maybe the question, "Why are oil prices falling," is the wrong question. Perhaps a better question is, "Why did oil prices jump?" Because while oil prices are as low as they have been since the end of 2003, they aren't much different than what they were before 2003.

From 1987 to about May of 2003, oil prices averaged just under $20. From May of 2003 through the middle of 2014, oil prices averaged $79, 4X higher than what they'd been before 2003. So far this year, oil prices have averaged a little over $30, closer to the pre-May 2003 period than after.

What happened in 2003? The US invaded Iraq. And it didn't take the market long to realize that rather than stabilize the Middle East, ensuring a steady supply of oil, this was likely to destabilize markets by threatening oil supplies. When retreating Iraqi forces set fire to 40-some oil fields, it made for fairly spectacular footage. 

When the US invaded Iraq, oil prices were about $23 to $34. After that, they began to steadily rise until peaking at nearly $140 in June of 2008, when the Great Recession had begun. (Everyone points to mortgage markets as cause of the Great Recession, and for good reason. Oddly, no one points to incredibly high oil prices in spite of the fact that high oil prices have started recessions before.) From the month the US invaded Iraq to June of 2008, oil prices rose $115.

It might be that oil prices that range from $20 to $40 is not the exception but instead, oil prices that ranged from $100 to $140 were the exception. As the market realizes that even radicals as ideological as ISIS are willing to sell oil, perhaps the market is now seeing less risk to oil supplies and thus, is pricing oil at less of a premium.

Oil prices peaked at nearly $140 in June of 2008, about $115 higher than they had been when the US invaded Iraq in 2003.
The question is not, Why are oil prices falling. The question is, Why did oil prices rise? The answer to that question may well be complex and debatable. It might also be that the answer is as simple as this was just one more price paid for bad US foreign policy. It was a policy based on the simplistic notion that the bright shining light created by this invasion would radiate from democracy in the Middle East rather than burning oil fields.

29 January 2016

What if this new economy drives less investment and consumption? Would we still call it progress?

Last year, "investment in mining exploration, wells, and shafts fell 35 percent." With oil prices down, there is less reason to invest in finding and tapping new sources of oil. Unless oil prices fall another 50%, this represents a one-time drop. It is also a reminder that we might be moving into a less capital intensive period of economic development.

If you are starting an oil drilling or mining company, you have to spend a lot of money on capital. A mining company client I worked with in the Upper Peninsula of Michigan had trucks the size of two-story houses, trucks able to move 320 tons of ore in a single trip. Not only do these trucks costs millions to purchase but they burn 1,000 gallons of diesel fuel a day. Replacing a tire costs $52,000. The custom built shovels that fill these trucks scoop 70 tons of rock at a time and cost $20 million. This sort of industry is capital intensive. You have to invest big in order to compete. And this sort of capital-intensive industry defined the economy of 50 years ago.

The investments of the new economy firms are different, more public. It's not unusual to see a group of employees in tight work areas all on computers. It's rare that those computers would cost more than $4,000, often considerably less. The investment in that room was likely made in their education, money spent out of private household investments in tuition or private endowments of prestigious schools or public funding of state universities. The capital equipment spending is often low. (That's obviously not true of all knowledge workers. Folks working at the Hadron Collider, for instance, are working with a billion dollar a year expense.)

And on the consumption side, there are two trends that might keep spending down.

One is that millennials are less prone to go to the mall to buy things. They seem to be more deliberate about how they spend and they see conspicuous consumption as a moral failing, reliant as it often is on sweat shops, waste, and unsustainable production techniques. If 50 years ago having a closet bulging with clothes was a sign of affluence, it is now a sign of poor judgment, in the same way that in a time of frequent famine a belly is a sign of affluence and in a time of abundance, a belly is just a sign that one lacks self-restraint. While such lifestyle choices could still result in comparable levels of spending (one hand-crafted, quality sweater might cost as much as half a dozen cheap sweatshirts), it isn't likely. This sort of lifestyle may well bring down consumption levels.

Related, the sharing economy could result in less spending  as well. Uber and Airbnb are cheaper than traditional taxis and hotels. Operating these businesses doesn't require explicit capital outlays (back to the notion that the new economy is less capital-intensive), using information to identify slack in capacity of cars and homes and people's schedules. Not only does this mean less investment (it's unclear that someone who lets out their home to Airbnb guests 6 times a month can expense their personal home construction as investment in the same way that the Marriott could expense hotel construction as an investment), it means less consumption. People spend less to get from one place to the next or to sleep overnight.

The economy is changing in a variety of ways and it is worth remembering that only in the wake of the Great Depression in the 1930s did Simon Kuznets develop GDP as a measure of economic activity. GDP is a measure that we didn't have in the 1800s and is a measure of economic progress and well being that we may radically change by the 2100s.

The economy is still evolving. To capture reality, so must our measures of it.

26 January 2016

Venture Capital Spending Up 16% in 2015 - And That's Great News for Wages

In 2015, $58 billion of venture capital was invested in the US. [All of these numbers come from the Price Waterhouse Coopers / National Venture Capital Association found here.] This is the highest dollar amount since 2000, and up about $8 billion or 16% from 2014. 2015 VC investments ran nearly double the rate they had run from 2002 to 2013.


Early stage financing rose at a similar rate, suggesting that the pipeline of new businesses is strong. (The companies in this early or seed stage are rarely expanding quickly. Yet. The flurry of hiring and wealth creation - if it happens at all - will typically happen one to four years later.)



Silicon Valley - home of Sand Hill Road, which is to VCs what Wall Street is to brokerage firms - still dominates as a recipient of venture capital. In 2015, Silicon Valley attracted $27.3 billion in VC, far more than LA / Orange County's $5.1 billion and San Diego's $1.2 billion, and nearly half the nation's total VC investment.

Wages nationally in the fourth quarter of 2015 were up 3.3% (inflation was 0.5%), a healthy gain compared to early in the decade. What does this have to do with venture capital? You could argue that the more VC invested, the more upwards pressure there is on wages.

Here, we can look at the latest data by county (which is through the second quarter of 2015), to see if there is any link between the amount of VC investment and wage growth. 

Silicon Valley includes San Francisco, Santa Clara, San Mateo, Marin, and Alameda counties. Among the 343 largest counties in the US, wage growth for these counties was ranked as follows:

Santa Clara, ranked 2nd w/ wage growth of 11.3%,
San Francisco, ranked  5th, w/ 8.6% wage growth,
Marin ranked 9th, w/ 6.6%,
San Mateo, ranked 10th, w/ 6.5%, and
Alameda ranked 19th, w/ 5% wage growth

Silicon Valley, the place where nearly half of VC money was invested, had 4 counties in the nation's top 10 and 5 in the top 20. Again, this is out of 343 counties.

By contrast, 
Orange County was ranked 21st w/ 4.9% wage growth and
LA was ranked 69th w/ 3.6%.

San Diego, a place with considerably less VC money than Silicon Valley and LA / Orange County, was ranked only 105th w/ wage growth of 3.1%. (Although it's worth noting that 105th still puts even laggard San Diego County in the top 30% nationwide for year over year wage growth in that 2nd quarter of 2015.)

This suggests that the more venture capital pouring into a region, the more likely wages are to be pushed up. If so, it's great news for the country that VC spending is on the rise. As this continues, it suggests that - as previously forecast here at R World - the first half of this decade will be known for a big reduction in unemployment rate and the second half of this decade will be known for strong wage growth. This seems further proof that we've entered a Fourth Economy in which the new limit to progress is entrepreneurship. It's not enough to nurture education or capital markets (although that is certainly critical): communities have to nurture entrepreneurship in order to move into the next economy.

Addendum 1:. I think the news is even better than this. I'm currently working with a startup funded by - not traditional VCs but - a couple of Fortune 10 companies. As far as I know, the money they're investing into this particular venture is not actually counted as part of this PWC/NVCA report. In other words, there is more going on than reflected here and as more companies become more entrepreneurial, we'll see even more job and wealth creation.

Addendum 2: While I argue here that venture capital helps to drive wage growth, it's worth noting that the number one ranked county for the most recent quarter is Ventura County, on the California coast just north of LA and south of Santa Barbara. So, maybe I should revise my claim from "venture capital funding drives wage growth" to "venture capital funding - or the name Ventura - drives wage growth." Presumably, if you were really serious about wage growth you'd just name your county Venture Capital County.

23 January 2016

Trump as Loki: How He Might Save the GOP

Sometimes progress doesn't look like progress at the time. Getting fit is an ugly business that involves panting and profuse sweating. Throughout the course of human history, disruptive events as cataclysmic as rising sea levels and barbarian raids have actually prompted changes that - over the long run - made life better, forcing as they did innovations as varied as irrigation and compassionate religions.

In various cultures, they have gods of mischief who disrupt the status quo. Thanks to Marvel comics, the Scandinavian god Loki is the most popular of these. The gods of mischief show a lack of respect for the existing order and disrupt it in ways that can either leave in its wake destruction (like a tornado going through a neighborhood) or creation (like snow melting into streams and rivers, feeding plants and animals downstream). Loki sweeps the table clean and lets you rebuild without undue concern for what was before. He's the graffiti artist who gives you reason for a fresh coat of paint, perhaps even a new design.

Donald Trump might just be the GOP Loki, purging the GOP of some really dangerous ideas.

For instance, he's the first mainstream candidate to point out that the Bush / Cheney notion of building a democracy in Iraq was a bad idea. After Donald, it's hard to imagine that any GOP candidate will be as able to blithely dismiss criticism of this policy. That will make the GOP better.

Donald's New York sensibility that so alarms Ted Cruz, Donald's loose hold on social norms that are waning even in the Bible belt, is something that also offers hope for the relevance of the GOP. Legalizing same-sex marriage, for instance, is a form of religious freedom in that it allows that people might engage in practices that you disapprove of. Donald realizes that he has to win over evangelicals but when he tries, the effect is comical. (My favorite so far came when he addressed the students at Liberty, where evangelicals send their young adults. He read one verse and managed to reveal his ignorance of Biblical norms by referring to Second Corinthians (II Corinthians) as "Two Corinthians." That distinction only seems subtle to people who don't read the Bible. If you hear someone say "Second Corinthians" you expect to hear a verse. When you hear "Two Corinthians" you expect to hear a joke. "Two Corinthians walk into a bar ..." Religion is a beautiful thing ... as long as it isn't something imposed on others. And the segment of the GOP that continues to confuse what they believe with what everyone else should do need to be marginalized in order for the GOP to remain relevant. Donald offers a route towards that.

Donald's foreign and domestic policy is at turns vague and incoherent. He's racist and feeds the fears of GOP voters. But for all that, he is disrupting the GOP right now. He's playing the role of Loki and whether he leaves in his wake a GOP that never again has a chance at the White House or a GOP that is forced to remake itself into something better and more modern - like a town rebuilding from an earthquake - is uncertain. What is certain is that the GOP will be very different in the post-Trump era. And given its direction over the last couple of decades, it needs that.

This country needs a clear choice each election: do we rely more on markets and less on regulations or more on social safety nets and government programs? There are ideologues who believe there is always just one answer to that question but in fact history rewards the communities able to alternate between those two broad directions. A healthy country needs parties on the left and right who are reasonable and safe choices in spite of ideological differences. The GOP of Bush and Cheney was not and in order to get better, it had to be disrupted and re-made. Trump might just be the catalyst for that change.