We are All Uprooted Now

Anomie, noun Sociology. a state or condition of individuals or society characterized by a breakdown or absence of social norms and values, as in the case of uprooted people.
from dictionary.com

The new, entrepreneurial economy is disruptive. It is not just entrepreneurship that will be popularized, the emergence and disappearance and transformation of companies and entire industries destroying, creating and relocating jobs, careers and people. Social invention - the emergence of new kinds of marriages, schools, businesses and government - compounds the feeling of dislocation.

"The past is a foreign country: they do things differently there," wrote L.P. Hartley.

Anomie is the sense that what you knew of social order has been reset. It's like what happened to American natives after the European arrived with his devastating diseases, weaponry and culture.

Anomie is what an uprooted people feel. We are all uprooted now.

Income Inequality and Income Growth - Fairness and Progress

There are two dimensions to improving lives. The first has to do with income transfer from rich to poor, the second with raising real median wages. Those initiatives are not at odds with each other but they are separate.

There is so much talk about income inequality and stagnating median income in ways that suggest the speaker thinks they are the same thing. They are not.

Alleviating Poverty
Most people agree that the rich should help the poor. There can be arguments about who is rich, who is poor and how much help they should provide. Those are important arguments.

For instance, I believe it's absurd for someone in the top 49th percentile to help someone who is in the bottom 49th percentile. Someone making $60k shouldn't have to give $500 to someone making $55k. There has to be a middle ground of 30%, 50% or even 80% of people who are neither expected to help others or expect to be helped. (At least formally through income transfer in the form of taxation and welfare. Obviously everyone helps and needs help just to get through the day.)

Should only people making $200k help only those making less than $10k? Or should even households making $100k help households making less than $35k? The first choice would leave about 87% in the middle class who neither got nor gave help. Do you make more than $10k a year? Don't expect any help. Do you make less than $200k? Don't worry about being taxed to help the poor. The second (tax above $100k and subsidize below $35k) would leave about 43% in the middle class who neither got nor gave help.

In the last 100 years, the top marginal tax rate has ranged from a low of 28% to a high of 94%. Even within the same country, the consensus about what constitutes a fair rate of taxation varies over time. To illustrate how unsettling this change is, Starbucks founder Howard Schultz came out this week to say that he was running for president. One reason? He hate this absurd talk of a 90% marginal tax rate. Asked who is favorite Democratic president was, he said FDR. Under FDR, marginal tax rate was 94%.)

[You can find data on median income and what percentage of Americans make more or less than certain amounts here.]

You can argue about the cutoff point for who pays additional tax for the poor and who is poor enough to benefit from that tax. Ultimately, though, voters will decide what is fair. There is no magic formula for that.

By definition, though, you can never raise the average wage through income transfer. In theory you can raise the median wage through income redistribution but that strikes me as funky; it essentially means that you would tax enough people in the top 49th percentile at high enough rates to lift the income of everyone in the 50th percentile on down.

To define someone making the median income as poor is odd. It's like defining a 5'10" man as short. Income transfer is compassionate, practical and yet does nothing to raise median income. For that you need a completely different set of policies.


Raising Median Income
The usual suspects to raise median income? Investments in infrastructure and education, research and development, childcare and healthcare. These all help to raise incomes. These are essential. We're not doing enough of them or even doing them enough. That said, the biggest boost to an economy is moving into a new one.

In the century after the US was founded, median wages rose as we created an industrial economy that gradually supplanted the agricultural economy. Last century, median wages rose as we created an information economy and workers moved from factories into cubicles. This century, median wages will rise as we create an entrepreneurial economy. The median wage in Santa Clara County - home to companies like Google, Intel, HP, and Apple - is $107k, nearly double the $58k for the US. This will become a norm as more regions adopt and adapt the entrepreneurial culture that defines Silicon Valley. And there is so much more we can do to popularize entrepreneurship. Redefining work to become more entrepreneurial will do as much to raise productivity and wages as any previous change.

The question of how to alleviate poverty through income transfer is an important one and needs to be defined in a way that voters think is fair. The question of how we move into a new economy to create more for everyone is even more important. How a community answers the first one defines how they pursue fairness. How a community answers the second one defines how they will pursue progress.

The Fundamental Reason Politics Will Become Kinder to the Poor

One reason that rich may be more willing to support the poor is because they are more able. I think this will change politics.

Between 2009 and 2017 the ratio of households making more than $200k a year to those making less than $10k a year rose from .54 to .94. Put differently, in 2009 each rich family would have to adopt nearly 2 poor families (1.85) whereas by 2017 they would only have to adopt 1 (1.06). (And by 2018 that was probably less than 1.0.)

In San Diego - and likely most big cities - the ratio is even better. In 2009, each poor family could get 1.18 rich families to help. By 2017, the ratio was 1.94 to one, meaning that each poor family could get 2 sponsors. It's obviously easier for two rich families to help one poor family than it is for one rich family to help two poor families. 

What does this mean? Not only are programs to help the poor more financially viable than ever, they're probably more politically viable. 

Wage Growth After the Great Recession

In numerous posts I've argued that the first half of the teens (the years from 2010 to 2019) would repair the unemployment rate and the second half would repair wage growth. Stats on wage growth 2009 to 2017 help to illustrate that. First we have to get unemployment down and then wages start to grow.

From the end of 2009 and 2015, unemployment fell by half, from 9.9% to 5.0%. Since then it has continued to drop but 5.0% gets unemployment within fairly normal boundaries. (This century, unemployment has been over 5.5% about as often as it is below 5.5%, so 5.0% is pretty good.) At that point the labor market has tightened enough that employers have to offer higher wages and can't simply hire folks from among the unemployed.

You can see the sharp rise in the rate at which incomes began to rise since 2015 here.

Last week with a client in Orange County, I was with an executive team. The head of HR told me that two big changes in the last year are passive recruitment and a new California law that bars employers from asking what you made in your last job.

Demand is high enough for employees that companies increasingly recruit people who are not looking, a process they call "passive recruitment." A lot of this recruitment happens within LinkedIn.

Also, last year California made it illegal for employers about to offer you a job to ask what you made in your last job.

The consequence of these two phenomenon are that there are a chunk of people who are getting very cool raises by changing jobs. Across the country, household incomes are rising at their fastest rate since the Great Recession.

More broadly, though, low unemployment rate simply means more upward pressure on wages. And wages are now rising at a healthy rate and will continue to rise as long as the economy continues to create new jobs at this rate.

That's very cool.

Take note, though, that politicians trying to make the case for change will point to older data and argue that wage growth is not keeping pace with inflation. Senator Kamala Harris argued this week that wages are not keeping up with the cost of living. That was true early in the decade when the unemployment rate was higher than average but is no longer true.

We're going to hear a lot of nonsense about what policy changes we need but we need to be clear about why wage growth was so sluggish. We had a Great Recession. What are the implications? Regulate financial institutions so that they do not blow up the economy. The problem is not the economy the problem is its vulnerability to financial mischief. Just like sports competition is enhanced by good officiating, so is business and finance competition. The American economy is still a great game; it's just that we can't expect good results when we've put blindfolds on all the refs. 

How Trump Won (yes won) the Shutdown and What We Can Conclude About Immigration, Income and Crime

The general consensus is that Trump lost the government shutdown. I think he won it. Before I explain why, let's look at some data.

There is nothing like data to undermine certainty.

Donald Trump and Ann Coulter believe that more immigrants means more crime and higher unemployment and / or lower wages. Let's take a look.

First, let's look at a smattering of cities with a population between 200,000 and 300,000. 

Median household income varies greatly, from about $34k a year in Buffalo, NY to $96k in Irvine, CA. Irvine's population is about 40% foreign-born, 10X Buffalo's 4%. Irvine's income is nearly 3X as high.

The correlation between these two variables - income and immigration -  is not perfect but is positive through most of the cities. Immigration and incomes rise and fall together.

What about violent crime? Surely it will rise as the percentage of immigrants goes up, no?

Well, in the above table we can again look at the two cities with the highest and lowest percentage of immigrants to see how crime and immigration are correlated. In Buffalo, violent crime is 179% higher than the national average. That is nearly 3X higher. By contrast, in Irvine violent crime is 86% lower than the national average. (It could only be 100% lower for the simple reason that once violent crime drops to zero it cannot go any lower. 86% lower than the national average is kind of amazing.) We can, again, look at a graph to see a line that is the best fit through all those points.

It is obvious that factors other than immigration change crime rates but as the percentage of immigrants in a community rises, crime falls. 

What about the ten biggest cities in America, you ask. Immigration might be good for mid-size cities but what about cities of millions? (And as it turns out, only the country's ten biggest cities have populations of more than a million.) Well, I have a table for that as well.

Of America's ten biggest cities, Philadelphia has the lowest income and San Jose has the highest. And as it turns out, Philadelphia also has the lowest percentage of immigrants and San Jose has the highest. Immigrants make up only 13% of Philadelphia's population and 39% of San Jose's. Median household income in San Jose is nearly $100k and in Philadelphia is just over $40k. San Jose has 3X the immigrants and double the income.

Above is the graph plotting the relationship between these two variables for the cities over a million. 

Finally, we take a look at the relationship between the percentage of foreign born and violent crime rate in America's biggest cities. Chicago is the most violent of America's biggest cities and 21% of its population was born outside the US. San Jose is the least violent (its violent crime runs 6% lower than the national average) and has 39% immigrants.  The graph looks like this.

Now there are a few arguments you could make when faced with this data. One, you could say that immigrants move into more affluent or peaceful cities but don't help to create affluence or safety. Perhaps the best cities would be even better if not for the percentage of immigrants who move there. The data moves together but immigration doesn't cause higher incomes or lower crime, you say. Perhaps. The fact that the median home price in San Jose is over one million dollars and in Philadelphia is only $158k suggests that it is harder - not easier - to move into these safer, more prosperous areas. 

Or you could argue that immigration has a fairly weak correlation to income and crime, even if it is in the right direction for pro-immigration arguments. The R-squared measure is a simple measure of how well a line fits through the data; at best (median income and foreign-born % in cities of ~250,000) these move together about 40% and at worst (the relationship between violent crime and immigration in America's ten biggest cities) about 24%. So you might say, "Well sure, it seems positive but obviously other factors are a bigger determinant than immigration." And you are right. Education, infrastructure, research and development investments, culture, and social connections are all factors that matter. Immigration is just one dimension of what makes a city great. But the data nonetheless suggest that it IS one dimension of what makes a city great.

Those are valid - but fairly weak - arguments that you could make to discount the relationship between immigration and incomes or crime.

What is not valid to conclude from this data? Higher rates of immigration lower household income or raises crime. That simply does not fit the data. Given the data you could (sort of) challenge the claim that immigration makes a city better but you could not argue that it makes cities worse.

What does this mean? It means that Congress should ignore Trump's demands that they take immigration more seriously. Why? Because immigration is - at the least - a non-issue and - at most - is actually a huge positive that we should encourage rather than discourage. And in spite of that, Trump has forced House and Senate members to treat immigration as if it is an important issue to address. (They have three weeks to "resolve" the issue before another shutdown could hit.) It simply is not. And this is an argument that I've made recently here. Trump has won the shutdown because he has forced Congress to take a non-issue seriously. He has won because he has managed to change the focus of DC onto what he imagines is real, like getting your parents to lose sleep in order to fight the monster under your bed. It is such a waste of leadership potential to solve imaginary problems rather than real ones. (And more generally, a waste of leadership potential to fix old problems rather than create something new. Every successful company puts more money into new product development than it does product repair.)

In the minds of Ann Coulter and Donald Trump, you could predict unemployment rates based on immigration rates. Immigrants steal jobs, they tell us. So, if one city of two million had no immigrants its unemployment rate would be zero and if another city of two million had a million immigrants, its unemployment rate would be 50%. And of course this is an inane way to think about an urban economy, almost as if you thought that brown bodies and white bodies were affected differently by gravity. When a person buys gas or groceries, the market hasn't a clue whether they were born within a block of that place or half a world away. 

There are any number of issues that congress should consider if they are intent on raising income, lowering crime and making life better. Immigration is not one of them. If anything, the data suggests that Congress should do what it can to increase immigration, not decrease it.

We're suffering from the worst recorded case ever of an old man talking back to his TV. Terrifyingly, making his narcissism seem justified rather than delusional, his TV then talks back to him. Trump is on a closed-circuit loop with Fox news. Facts have little influence on his thinking. He gets his talking points from Fox and then they report on what he has talked about. Like Hendrix's guitar, the feedback just increases the volume and the distortion as Trump talks to FOX (Frightened Old Xenophobes) and FOX talks back to him and Trump's story escalates from a campaign to a presidency to a Monty-Pythonesque tragedy.

My two cents? Congress should ignore his insistence that they treat immigration as a real problem and instead either insist on studies as prelude to policy or even celebrate immigration as a positive. It's time to de-escalate the feedback with facts before we are all made as crazy as Trump or waste anymore time chasing his hallucinations.

-----------------
Quick note: this data is for foreign born. It makes no distinction between legal and illegal immigration; the two move together.
https://cis.org/Report/Connection-Between-Legal-and-Illegal-Immigration

The Ideal 2020 Candidate

Ideal candidates are genius at politics (they know how to get elected) and policy (they can make the world better once they are elected) and are focused more on what they can do than what flaws they now have or have had in the past.

 So who am I looking for in 2020? My ideal candidate would 

• Promote disruption in the form of entrepreneurship and social invention and help to mitigate the trauma of disruption in the form of social safety nets. Entrepreneurship should be taught and set up as expectation for a segment of the population in the same way that college education now is and governments and communities should do what they can to make it easier for entrepreneurs to be successful and less painful for individuals impacted by their success.
• Move to change laws so that employees are better able to use corporations as tools for creating wealth, to work towards the popularization of entrepreneurship as a way to transform work.
• Invest record amounts in research in every field.
• Create research funding for major agencies like the Environmental Protection Agency Housing and Urban Development, Department of Energy, Department of Education, Department of Transportation and Justice Department that rivals the research funding for the Department of Defense.
• Create a new cabinet position: the Secretary of Happiness (and the pursuit thereof).
• Will support an independent Fed and Keynesian policy
• Keep us highly engaged in international organizations like NATO, the UN, WTO and even lead initiatives to create new institutions to deal with the myriad realities that spill across borders
• Move towards subsidizing university education the same way we do high school education, leaving students without debt.
• Be a strong advocate for immigration
• Move towards more comprehensive job training and retraining programs that make groups other than knowledge workers more productive. 
• Help promote connection. Not only at the individual level as a route to richer communities (and lower suicide rates) but at an institutional level as a route to making corporations, schools, NGOs, and government agencies more robust.
• Work towards universal healthcare by whatever means is politically practical (see social safety nets). 
• Take climate change seriously,
• Police poor neighborhoods and financial institutions with equal vigor and respect.
• Not be a fan of universal basic income.
• Think it is normal rather than evil for a country to have billionaires and poor people.
• Think it makes sense to tax inheritance more than returns on capital more than income (rather than the reverse as it is now).
• Think that it makes sense to increase the marginal tax rate but never to higher than 50%.
• Ask a little more of everyone in the top 50% and ask everyone in the top 70% to pay taxes to contribute to the quality of our common good.
• Believe that life will be better in 100 years and is choose to act in a way that enhances life in a century rather than ignores it.
• Experiments their way into the future
• And perhaps most importantly, knows that mistakes are inevitable and given that chooses to err on the side of kindness when uncertain about a policy or judgement. People critical of this candidate would alternate between criticizing them for being so wonkish (loving policy and numbers) and being soft-hearted.

I don't expect any one candidate who checks all these boxes to emerge, so I will vote for the candidate who comes closest to this. Perhaps.

There is even one scenario in which I might be persuaded to vote for a candidate who checks only a few of the items on this list. That would be to vote for a candidate who promises me that Donald Trump will die in jail. We have an entire generation who could watch Donald Trump and believe that it is a good idea to lie, cheat, and to approach every encounter as a win-lose engagement. Parents need to be able to tell their sons, "Sure you can choose to be selfish and combative your whole life, ignoring every law and social norm. You can be just like Trump. And you might die in jail."  If we have millions of people believing that Trump's parasitic behavior is a good strategy, our country will become like every other dysfunctional country where bribery and corruption are the norms and people with good hearts and a sense of fair play are considered dupes. Failure to implement my policy ideas would pale in comparison to the damage wrought by Trump becoming a norm for behavior. 

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.

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:
"I."
- 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. 

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. 

#factsnotfear

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.

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