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.

22 January 2016

Vonnegut's Worst Year and Best Novel: His Mother, Dresden, and the Price of Art

Kurt Vonnegut's family had money until the Great Depression. Then they didn't. His mother never seemed to reconcile herself to the depressing reality of living without wealth and was particularly devastated when Kurt dropped out of college to enlist in the army as a private.

In May of 1944 - when Kurt was 21 - he came home to visit his family. When he and and his sister went to wake his mother, they discovered that she'd killed herself. On Mother's Day.

In November of 1944, he turned 22. The next month, he was taken prisoner of war by the Nazis and spent Christmas day jammed into a boxcar, traveling to Dresden.

In February, the allies fire bombed Dresden, killing tens of thousands. When he emerged from underground, this is the city he would have walked into. When he first got there, he called it the fanciest city he had ever seen. Then this.

It is hard to imagine a more traumatic year, or one that could end in a way that would so belittle his own personal tragedies. This experience became the basis for his novel Slaughterhouse-Five. It was an fabulous novel but that seems likes too high a price to pay for art.

Should you ever hear someone talk about paying a high price for art, just reply, "Well, yeah. But you only had to pay with money."

11 January 2016

From Pensions to 401(k)s - One of the Less Reported Reasons For Growing Wealth Inequality

There are two kinds of retirement plans: defined benefit and defined contribution. While not technically correct, you can think of it as the move from pensions to 401(k)s. This move from defined benefits to defined contribution is one of the least reported reasons for growing wealth inequality.

If you have a defined benefits plan, your retirement benefit is defined. "If you work 30 years, your pension will be equal to 60% of the average of your last three years of income," might be one simple formula. With a defined benefits plan, you are guaranteed a monthly income - often adjusted for cost of living - until you die. Nobody gets rich with a defined benefits plan but they are fairly safe and reliable.

By contrast, if you have a defined contributions plan, you can't be sure what amount you'll have in retirement. You define your contribution - say 10% of your pay - and your employer may match this (sometimes they'll match your contribution by 25, 50 or 100%). You know that you're putting $300 a month into your retirement account each month. What you can't know is how that investment will do. By the time you've worked 30 years, your investment may have grown to $3.1 million or be worth only $31,000. It will depend on how your investments have done.  You can get rich with a defined contribution plan but they aren't safe or reliable.

Defined benefits plans minimize differences in wealth and retirement income. Defined contribution plans exacerbate differences. As more people move (or are moved) into defined contribution plans, we would expect to see more disparity in wealth.

This graph from Employee Benefits Research Institute:

Since the late 1970s, there has been a dramatic change in the use of defined contribution and defined benefits plans. Looking just at just employees with retirement plans, the percentage with defined benefits plans has dropped from 62% to 7%. Meanwhile, the percentage with defined contribution plans has gone up from 16% to 69%.

Unsurprisingly, wealth inequality has gone up as defined benefits programs have gone down. The growth in the use of defined contributions plan is by no means the only reason for growing wealth inequality but it is a very real one.

And one of the many ways that it shows up is that even as wealth goes up, a growing number of people feel vulnerable in retirement. If you have a set income every month, you may not feel rich but you'll feel secure. By contrast, even if your investments do well and you are considered "well-to-do," you might still feel vulnerable because you know that one big market move could change your situation.

It's not clear that employees or employers will reverse the trend of the last quarter century. It is clear that the price for this change has included more wealth and income inequality and more feelings of vulnerability.

07 January 2016

Thoughts on Trump, Progress, Congress, the Gap Between Experienced Reality and Global Reality, and Bad News

Donald Trump sometimes says very reasonable things. "We spent $4 trillion in Iraq, lost the lives of thousands of our soldiers and caused those people terrible grief. I'd rather have spent the money here on roads and bridges." That's actually pretty reasonable. The fact that he sometimes makes reasonable points doesn't make him a reasonable candidate, though.

Killers are sometimes nice to the vast majority of the people they meet. That doesn't make them nice people.

Donald doesn't have to say too many unconstitutional and loony things to be unreasonable, just as someone doesn't have to kill too many people to be a killer.


It's called progress. Not perfection.

It's easy to be critical of the economy and it is right to point out what is still missing, unjust, and inadequate. That sort of commentary should never be confused with metrics that show we're getting better. When the economy is creating new jobs, wealth, and products and reducing rates of poverty globally, that's progress. And that's pretty good.


Congress is severely criticized for being ineffective. It doesn't pass many bills.

I don't know that it's ineffective. It might just be representative. If you have to find issues that rural voters in Kentucky agree on with urban voters in San Francisco, it's going to be a short-list of initiatives. It might just be that Congress doesn't do much because there is not that much that Americans agree on.


So many of the really divisive political issues are abstractly experienced. Unemployment is awful at 10% but great at 5%. The difference in whether you have a job or not in those two scenarios is 90% or 95%. "You" probably have a job when unemployment is high and when it is low. The difference is what you hear about in the media, or from friends. Similarly, nobody experiences global warming. If global temps rise 2 degrees, no one person experiences just that. One place might actually be colder, another wetter, another hotter .... but the experience of climate change is something we hear about rather than directly experience.

Given this gap between immediate experiences and reported on experiences, there is room for a variety of worldviews that are - at best - loosely connected to larger realities. Unemployment is up? I don't think so. I've got a job and so do all of my friends who really want a job and aren't afraid to get their hands dirty. Unemployment is down? I don't think so. My spouse has a graduate degree and is only an assistant manager at Olive Garden. Global warming? Oh yeah. So why are we having record colds and a polar vortex? The connection between global realities and local realities can be random enough to let any number of odd theories emerge as credible.

The more that some outside agency has to play intermediary between our experience and what is happening globally, the more that role is subject to hijacking by ideologues.


The news is dominated by systems failures.  A water main breaks, flooding an area. A house bursts into flame. Someone walks into a mall to shoot strangers. It's predominantly bad news. It's not the failure of systems that ultimately defines history, though. It's their evolution.

What if there were sources of news that focused instead on progress, on systems getting better rather than on their moments of failure? People who lived through auto accidents who would have been killed decades earlier before air bags, or procedures or medicines that obsolete certain kinds of death?  Schools that offer new ways to learn for more people. It might actually improve quality of life simply by letting people focus on the positive rather than the negative. And improve it again by inspiring more progress through example and a reminder of how things can get better.