14 January 2019

Growing Income Inequality and the Real Policy Solution of Popularizing Entrepreneurship

The effects of automation are accelerating as algorithms grow more sophisticated and a global market means more people who might come up with that one killer app or manufacturing process or delivery trick that quickly obsoletes 2 or 3 people or even 2 or 3 industries steadily grows by millions every month.

How does one counter that? Income vulnerability seems inevitable in a world of growing disruption. The good news is that the team who creates the new solution to obsolete the old one(s) will get rich; the bad news is that there is a whole swath of people will lose income and wealth as they become obsolete. If we want to ride this wild horse of automation to higher productivity, we need to acknowledge that our safety nets need to be good. How this happens will ultimately involve a mix of unemployment insurance, universal healthcare, affordable or free education and retraining for any age, and perhaps a variant of guaranteed income. But those are mere bandages on the body politic, merely a way to mitigate the pain of disruption. The solution that is essential to couple with more rapid automation is more rapid entrepreneurship and innovation.

When we no longer need 90% of our people to grow our food on the farm, we can use them for other things. Some can get into food preparation and serving, letting us enjoy a wider variety of foods that people in 1790 America (when 90% of the population was in agriculture) would have never imagined: foods like sushi, adoboda tacos, spaghetti, and liquid nitrogen ice cream. Others can design and make cars, legos, barbie dolls, and new drugs. If there is nothing else to do but grow food, reducing the percentage of our workforce needed to grow food from 90% to 1% (which is roughly where it is today) is a catastrophe. 1% of the population would be incredibly rich and the other 99% would literally need credit just to buy food. But we innovate and those 99% come back with cool stuff that entices the farmer to give up his food. (Or, more precisely, he sells his crop for money he can use for the cool stuff.)

The problem with wealth and income inequality today is not that people are getting rich automating jobs. The problem is that we have not learned how to balance that rate of automation with an equal or even better rate of innovation and entrepreneurship.  What this means will involve everything from even more money poured into R and D to more funding even within Fortune 500 companies for entrepreneurial efforts that simultaneously allow employees and the company to create new wealth.

As mentioned, programs to mitigate income and wealth inequality seem both necessary and inevitable. But to stop there is not enough. The real question of economic progress should be: how do we create the new so rapidly that it feels like the old industries are not automating jobs fast enough to free up workers to enter the new industries and companies? 

Economics makes a big deal of supply and demand and equilibrium between them. It's a beautiful and powerful concept. But just as important to prosperity is understanding the balance between automation and innovation, destroying the old while creating the new. What is the solution for automation obsoleting jobs? Popularizing entrepreneurship: making it easier for more people to be more entrepreneurial and even changing the definition of work as much as the information economy has or the industrial economy before that.

11 January 2019

Ayn Rand

I am done with the monster of "we," the word of serfdom, of plunder, of misery, falsehood and shame.
And now I see the face of god, and I raise this god over the earth, this god whom men have sought since men came into being, this god who will grant them joy and peace and pride.
This god, this one word:
- Ayn Rand  [quote from intro to Will Storr's Selfie]

Ayn Rand.
Rand Paul is named after her.
Paul Ryan named her as his most influential philosopher.
My two cents? She didn't write philosophy. She wrote fiction. And you'd do much better basing policy on JK Rowling's fiction - even with its heavy reliance on magic - than hers. Soulless and selfish and apparently a big inspiration for more than a few of the libertarian persuasion. 

06 January 2019

Two Lies to Support the Border Wall

In the late 1990s, illegal border crossings peaked. It was a crisis of near-apocalyptic proportions as immigrants streamed into the US in record numbers.

Wait. Wait. No. That did not happen.

In the late 1990s, illegal border crossing peaked. That's true. It's also true that from 1997 to 1999, the American economy created 3.2 million jobs per year (that's 824k more jobs a year than the economy has created in the last three years). Violent crime had fallen by a third from early in the decade. It was no crisis. No apocalypse. 

And illegal border crossings were 5X what they are now. 5X.

So, two lies in the claim that our current situation is a crisis for which we should close the government. The first lie is that illegal immigration is now high. It's not. The second lie is that illegal immigration drives a spike in unemployment and crime. It does not. 

04 January 2019

Job Creation and Market Returns for the Last 49 Years

This uses the compound annual growth rate (CAGR) calculation from the first to last day of the decade for the S&P 500 and simply averages annual job creation during each decade (using the first 9 years for this decade).

During the last half of the 20th century - 1950 to 2000 - CAGR was 9.4% a year. That's almost exactly what it's been this decade. But with the train wreck of the oughts, so far this century CAGR works out to 5.6%. So I guess one question is whether we'll ever make up for the last decade or whether the job and stock market just continue at the rate they were before it. Is that potential lost or still waiting to be realized?

My Report Card on the 2018 Economic Forecast

In December of 2017, I wrote an economic forecast for 2018. I got the stock market prediction right and the job creation forecast wrong.

2017 was a great year for stocks, the SnP 500 up 19.3%. Simply put, I thought that stocks would not do as well for two reasons: Trump's first year, nearly trillion dollar stimulus would not be repeated and after 8 years of recovery it seemed to me that folks had forgotten that the Dow is always just one keystroke away from down. That said, it seemed unlikely that anything catastrophic would hit before year end so I estimated a downturn of only 5% to 10%. It would be tough to land more precisely in the middle of that range, so I'll give myself an A+ on that metric.

I forecast that the job market would slow this year. I'm delighted to be wrong on this score and the economy created a stunning (particularly for 99 months into a recovery) 2,638,000 jobs. Mostly I was bitten by the wrong assumption about labor force participation rate.

Labor force participation rate (LFPR) rose 0.4% during 2018. In the last decade it has fallen closer to an average of 0.4% and had only once in the last decade risen more during the prior twelve months. If LFPR had been flat, the economy would have created 2 million jobs; if it had fallen by 0.4% as it has during the last eight plus years of the recovery, the economy would have created only 1.3 million jobs rather than 2.6 million. That's pretty close to my forecast of 1 million. (No, I don't recall why I failed to provide a range for the job creation as I did for the other two forecasts.)

And of course my assuming that the unemployment rate would rise by a couple of tenths of a point rather than fall by a couple of tenths compounded by forecasting error as well. Had the unemployment rate finished the year at 4.1% instead of 3.9%, job creation would have been lower by about 300k, which - combined with a typical fall in labor force participation rate - would have meant that I'd had hit my one million jobs created as precisely as I'd hit the SnP 500 forecast. But I didn't. 

This job market is amazing and I'm not embarrassed to have assumed that it would become more normal in 2018. That seemed reasonable. Again, given what it means for household incomes and wealth creation, I'm delighted that job creation continues to be so strong. 99 months of uninterrupted job creation is more than double the old record of 46 months set in the late 1980s (and triple the late 90s dot-com boom of 33 months). This is a fabulous way to miss a jobs forecast. Creating 2.6 million jobs with the unemployment rate under 3% is a wonderful kind of madness.

My forecast was good for the economic metric that was bad (the stock market) and was bad for the metric that was good (the job market). I'm sure that means something but I'm not sure what.

03 January 2019

In Which Your Blog Author Vents About Stupid Political Beliefs

Since Donald Trump's political ascension I've grown less tolerant of stupid ideas. Which stupid political ideas? Here are a few.

Belief that ...
  •  you can raise median wages by raising minimum wages
  •  illegal immigration raises crime or lowers our quality of life
  • (bonus stupidity points if you believe this about legal immigration)
  • Keynesian economics is unnecessary to a smoothly functioning financial system
  • Keynesian-inspired policy is fair or cheap without personal - very expensive - penalties for bankers who force bailouts
  • simple decency, also known as being polite, puts too much emphasis on being politically correct and should be blown up
  • inheritance tax should be lower than income tax
  • we should spend taxpayer money imprisoning guys who smoke pot
  • people choose poverty 
  • we can end poverty
  • Ayn Rand's fiction is a better guide to government policy than J.K. Rowling's fiction
  • cryptocurrency serves a purpose
  • global warming is a problem that will only impact future generations or is too expensive to address now
  • it's a bad idea to invest in alternative energy
  • evolution (after working for billions of years) and economic progress (after working for centuries) will suddenly halt in our lifetimes and the future will only be worse
  • government spending to close the gap between rich and poor kids when it comes to opportunities for health, learning, safety and engagement won't pay off for generations
  • economic progress follows from a win-lose philosophy
  • it's a good idea to protect jobs, companies and industries from gales of creative destruction
  • it's a good idea to leave people vulnerable to gales of creative destruction
  • we can make economic progress through trade protection
  • healthcare is not a right
  • government should not spend huge amounts investing in infrastructure, education and R&D
  • teachers can be credible role models for kids while struggling financially because of low-wages or hourly pay that is subject to change every school term
  • school bonds that give money to building contractors rather than teachers make education more effective