Why the Richest States Are Voting for Biden and the Poorest States Are Voting for Trump: A Study in Economic Policy Cause and Effect

Ranked by personal per capita income, 8 of the 10 highest income states will probably go for Biden and 7 or 8 of the 10 lowest income states will probably go for Trump. 

Why are the richest states so very Democratic? It is partly cause and partly effect.

First the cause. Intellectual capital has surpassed industrial capital as the source of wealth and income in this information economy. The communities around the various University of California campuses, for instance, have become host to a lot of exciting companies that have spun off from the staff, students and studies on those campuses. Democratic states invest more in the science and education that create jobs and wealth.

The only two states in the top ten by personal per capita income that Trump will win are Wyoming and Alaska. These are land-based economies, rich with oil, mines, livestock, grains, and forests. And of course, these economies are not the kind that create jobs; Wyoming's total population is 580,000 and Alaska's only slightly more at 730,000.

The economies in states like Connecticut and Massachusetts depend on a heavy public investment in schools and research, classic Democratic policy prescriptions. 42% of Massachusetts has a BA; only 26% of Wyoming does. By contrast, Wyoming and Alaska's economies depend on continued subsidies to oil and gas and lax regulation on greenhouse gases, classic Republican policy prescriptions.

Every year, more people can profit from technology advances in computing and genetics or new materials, the sorts of research and industries that spin off from universities. An oil well is zero-sum, though. If I own it, you don't. Meanwhile, knowledge builds on knowledge. You're going to hear more about AI and genetics in the next decade, the confluence of two research areas that promise products that might analyze patterns in your genetic code that make you more susceptible to Alzheimer's, for instance. This does not come at the expense of genetics or computing research but instead makes both more valuable. Oil wells and mines are zero sum but research and development literally stimulate more research and development; knowledge creates more knowledge.

Folks in places like Wyoming see the world as zero-sum because their economy actually is. The state can't even sustain a population the size of the cities in LA county that you've never heard of. Folks in places like Cambridge, Massachusetts tend to be more win-win because their economies actually lend themselves to that. If you give me an acre and I give you an acre, we leave the transaction unchanged. If you give me an idea and I give you an idea, we may both leave better off. You better understanding my AI technology and me better understanding your genetic analysis might enable us to collaborate to create a new industry with trillions in wealth and millions of jobs.

Zero-sum communities are also more susceptible to conspiracy theories that point them towards threats, that turn complex phenomenon into simple us vs. them narratives, a stark contrast to the pragmatic relationship knowledge workers in the information economy have to reality and theories about it.

So that's the cause. Wealth, income and jobs in the modern economy are increasingly the product of intellectual capital and the communities like New York and California that do the most to invest in it are the ones that will create the most jobs and highest incomes.

What is the effect? Well, richer people are less tolerant of low-quality of life. A poor person in West Virginia who lives near a mine doesn't have the resources to take on a business that endangers their child's health. Meanwhile, some mother in Santa Clara, CA - where per capita income is $106,000 a year - is not about to put up with risks to her child's health ... and she and her neighbors have the resources to fight a business that would put their children's health at risk. It is true that blue states have more regulations. Why? They are democracies and the residents of those states demand more regulations. There is little sense in making twice the national average income and then having to listen to the loud noises of a jack hammer at 4 AM or breathe noxious fumes from a factory.

Weirdly, though, the US rewards states unable to create jobs with more political power. The 21 least populous states have 42 senators and less population than California with its 2 senators. What does that mean in practical terms? If your policies can't create jobs to grow your population, your political policies have more influence. This may be the biggest design flaw in our current political system.

This design flaw is slowing the creation of jobs and wealth and improvements to quality of life. It is a weird thing to give more influence to less advanced communities, as if we were bringing in economic advisers from Afghanistan to decide what to do with Manhattan.

It is a weird election. The 30 states in between the top and bottom 10 are debating whether to follow the lead of the country's richest states - states that include Silicon Valley, Wall Street and the nation's top universities - or rural Mississippi, West Virginia, Kentucky, and Alabama. You might think that such a debate would have an obvious outcome. It does not. And that may be the weirdest thing about this very weird year.

The Home Schooling Lesson that Could Last a Lifetime

This morning an unprecedented number of children are homeschooling. I'm dedicating one entire post to help.

First something fascinating.

Once the swift bird leaves the nest, it takes to flight for two to three years before again landing. It lives in the air like fish live in water, perpetually in the air.

It sleeps, eats, and mates on the wing and some of the sub-species can fly up to 100 mph and even the common swift flies up to 70 mph. Given they are always flying, they can put on two million kilometres in a lifetime, enough to fly to the moon five times.

Now something practical.

That's interesting (actually, I found it mind boggling but my mind may be easily boggled) but even better is to make your at-home students' homework the design of a drone that can stay airborne for 2 to 3 years. So, it's win-win. You tell your students one amazing fact and then give them a homework assignment that could easily keep them busy into their 20s. Just like that, your days are freed up and they are on the way to highly successful careers.

You're welcome.

Kamala Harris: Created by Clark Kerr's Vision of a Knowledge Economy

In the early 1900s, the Democrats began to shift from the party of farmer to the party of labor. In 1800, only 20 percent of the workforce was employed by someone else; by 2000, over 90 percent were. [1] The modern corporation was defined in the mid-1800s. As its employees grew in number, so did their political influence.

When the Democratic Party was first defined by Jefferson, it was the farmer’s party. As farmers fell as a percentage of the workforce, the Republican Party emerged – and dominated – as the capitalists’ party. But those successful capitalists who were creating new factories were hiring labor that often found itself at odds with the owners. As the Democratic Party shifted its identity from the farmers’ party to the labor party, it dominated American politics from 1933 to 1969.

In 1972, labor and politics changed. At the 1972 Democratic National Convention, the party had quotas for women, young people, and minorities but none for union labor. At that point, labor began its split into two camps: the blue-collar labor on factory lines that was both at odds with and dependent on the capitalists who built the factories and made the investments in industrial capital that made them productive; and the white-collar labor in cubicles wearing pocket protectors and increasingly reliant on the novel technology of computers. By appealing to the blue-collar workers reliant on industrial capital, Republicans like Nixon and Reagan won over a group the Democrats had long had. By appealing to the white-collar workers, Democrats were helping to create a new economy but were floundering as a national party.

Without understanding how Kamala Harris represents knowledge workers and this new economy, it is hard to understand how she is different from Joe Biden, how she is a different kind of Democrat.

California has led before. Blue jeans, Hollywood, and Silicon Valley began here. So did the Republican resurgence that ended Democrats’ long dominance in DC. Between 1933 and 1969, Democrats had control of the White House and Congress 72% of the time. In 1968, 1972, 1980 and 1984, two Californians – Nixon and Reagan - won the presidency in landslide victories, marking an end to Democratic dominance. What Nixon and Reagan represented was the Republican Party gaining the blue-collar workers who had for so long identified as Democrats.

As blue-collar workers rose in prominence a century ago, they changed politics. White-collar workers are now rising prominence and they, too, are changing politics. Today one of the simplest predictors of whether someone will vote Democratic is the question of whether they have a college degree. A recent – and typical – poll showed that only 39% of whites without a college degree would vote for Biden but 64% of those with a degree would, a stunning shift of 25 points.[2]

Harris represents a very different kind of labor than did her fellow Californians Nixon and Reagan from an earlier generation.

Trump won Joe Biden’s home state of Pennsylvania with 48% of the vote. In the California counties where Harris spent her childhood, he won only 17%. In California, Trump’s campaign promises sounded like threats. Trade wars with China? A wall to keep immigrants out? It is connection to and not protection from the rest of the world that has helped California to thrive. A regional Hollywood is a playhouse. A regional Google search engine is the yellow pages. Silicon Valley is capital of the worldwide – not the nationwide - web.

Harris’s parents met as grad students at UC Berkeley in the 1960s. While the Midwest was enjoying its time of manufacturing dominance, the Bay Area was placing its bets on a new economy, one Harris’s parents were part of. It is not a stretch to say that Harris is a product of Clark Kerr's vision of a knowledge economy that helped to define the UC Berkeley that brought her parents together from such distant places.

In 1960, California governor Pat Brown signed legislation that made California the only state in the nation to offer free education from kindergarten through grad school. Clark Kerr – who headed the committee that drafted the plan Brown turned into law – was head of the University of California and had a theory about economic progress. In the same way that the railroad in the late 1800s and the automobile in the early 1900s had reshaped the economy, he thought that the late 1900s would be transformed by a knowledge economy.

In the decades after it began investing in Kerr’s vision, California became home to Silicon Valley. Intel was founded in 1968, Apple in 1976, and Google in 1998. California’s early investment in education paid off with millions of high-paying jobs and trillions of dollars in new wealth.

Harris’s father was an economics professor at Stanford, her mother a researcher at UC Berkeley. Median household income in the two Bay Area counties where Harris spent her childhood is now about $119,000 a year. Joe Biden was born in Scranton, Pennsylvania where median household income is now about $39,000. Biden comes from a generation of labor that needed protection from capitalists. Harris comes from a generation of labor who are the capitalists. The Bay Area is defined by returns to intellectual – not industrial - capital. On two campuses six miles apart – Google and Facebook – median employee pay is $200, 000 and $240,000. Billionaires get a lot of attention but stock options have made multi-millionaires out of thousands of west coast employees. To not understand how labor changed from the early to late 1900s is to not understand the Democratic Party that now champions the information economy dependent on global markets, immigrants, and big investments in education and research.

In 1969, per capita personal income in Santa Clara County was 24% higher than the national average. By 2018, it was double. Clark Kerr was right about the importance of the knowledge economy and while the Bay Area and Scranton are in the same country, they are in different worlds. In Harris’s two childhood counties[3], 77% of people over 25 have a Bachelors degree. In the county that is home to Scranton, only 22% do. In Harris’s counties, minorities and immigrants make up 45% and 28% of the population; in Biden’s home county they are only 27% and 10%.[4] The Bay Area’s highly-educated, diverse and cosmopolitan population thrives in the global economy while Scranton struggles.

When the US was founded, it was a nation of farmers. 80 to 90% of the workforce was in agriculture. In the late 1800s and early 1900s, the workforce moved from farms to factories and investments in industrial capital made regions prosper. By the late 1900s, it was investments in creating intellectual capital that made regions prosper.

In 2010, Harris won her first state-wide election in California. In 2020, she could share a victory with Biden in the nation’s most defining election. If knowledge workers represent the future of the American economy, Kamala Harris could represent the future of Democratic Party: educated and cosmopolitan.

California was one of the early investors in Kerr’s vision of an economy dependent on knowledge workers but it is not the only one. States that enjoy a return to investments in education lead the nation in income. Biden and Harris will win the eight states with the highest per capita income. Trump will probably win all but one of the eight states with the lowest per capita income. This has nothing to do with the people in these states and everything to do with past decisions about whether to heavily invest in industrial or intellectual capital. It is the states that made relatively heavier investments in the intellectual capital that now lead in incomes.

Biden will likely bring compassion to communities like Scranton that are struggling to transition out of an old economy dependent on industrial capital. Harris will likely bring a vision of what is possible if communities place their bets on the information economy.

Biden’s compassion promises to alleviate poverty; Harris’s Bay Area experience promises to enhance prosperity. It is the latter that could define the Democratic Party for the next generation.

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[1] Charles Perrow, Organizing America: Wealth, Power, and the Origins of Corporate Capitalism (Princeton, NJ: Princeton University Press, 2002), 1.

[2] https://poll.qu.edu/national/release-detail?ReleaseID=3666

[3] Alameda and Santa Clara

[4] https://www.census.gov/quickfacts/fact/table/paloaltocitycalifornia,berkeleycitycalifornia,alamedacountycalifornia,santaclaracountycalifornia,scrantoncitypennsylvania/PST120219

The Middle Class is Shrinking - And That's a Good Thing

The middle-class shrunk between 1967 and 2016. And that's a good thing.

The middle-class, lower middle-class and poor made up 94% of the population in 1967. (Yes. These numbers are adjusted for inflation.) By 2016, they were only 65% of the population.

The upper middle-class and rich rose from only 6% of the population to 35%.

Nearly a third of the population (well, 29%) moved from middle-class and below to upper middle-class and above.

Class matters to class. Go to class if you want to move up in the income ladder. Knowledge workers - folks with a BA - have gained the most from advances in information technology in the last generation.

Income gains have slowed in the last generation. Between 1967 and 1981, incomes rose 27%; between 2002 and 2016, incomes rose only 8%. My theory is that by the end of the last century we had effectively broke the code on how to raise the productivity and incomes with the popularization of knowledge work but now at the dawn of this new economy we've yet to figure out how to popularize entrepreneurship to continue that trajectory.

All this suggests some simple policy recommendations. Invest even more in creating knowledge workers and entrepreneurs (investment that includes massive increases in R&D spending as well as policies like proliferating the number of incubators in communities as we did the number of libraries, schools and universities in past generations) and watch the percentage of rich continue to rise. Tax the rich and upper middle-class to both fund all those investments and to subsidize the poor so that they enjoy some of the fruits of this prosperity. So, make more people rich and the poor less poor. That seems like progress to me.

Stephen Rose's study Squeezing the Middle Class: Income trajectories from 1967 to 2016 is here.

Equal Investment for Equal Returns - Creating a More Fair Economy

In the early 1800s, about half of all children went to school. Now, more than half of young adults enroll in college.

The higher your standard of living, the bigger the investment it takes to get you there. If your portfolio is worth a million dollars, it will generate more return in the next decade than if it is worth $1,000. What is true of financial capital is also true of intellectual capital. One of the reasons doctors make more than high school dropouts is because more has been invested in them.

It took us a about a century to normalize the notion that the community should invest unprecedented amounts into launching their children’s careers if we wanted them to enjoy unprecedented levels of affluence. Big returns require big investments.

Our notion of acceptable investment in launching a career, though, is really just focused on preparing knowledge workers for success. This is a great investment but it simply isn’t enough for at least two reasons. One, there are other routes to good paying jobs that we don’t generally support in the same way that we support a kid getting an engineering degree to go on to a great career. Two, if we want our returns – our standard of living – to continue to rise like it did last century, we need to increase and expand our notion of a reasonable investment in the start of a career.

The University of California spends nearly $20,000 per year on students. Assuming five years to complete their bachelor’s, that is an investment of $100,000 per graduate. We accept that, and rightfully so.

I think we should expand that. More investment for more return.

Investment could be expanded in a variety of ways but three occur to me.

One, for kids who would rather do the work of manipulating things than manipulating the symbols of things, we could invest that same $100,000 into launching their careers. That money could be spent on trade school but as importantly, part of it could be spent on capital equipment that would make them more productive. The engineer gets a higher salary in part as a return on a public investment in their intellectual capital; the machinist could get a higher salary in part as a return on a public investment in their industrial capital.

Two, kids who don’t have any immediate academic or hands on career plans, who may - at least for now - pursue service jobs could have that $100,000 put into financial capital, something that might build over their lifetime to become a supplement to their retirement. ($100,000 invested at 20 at 4% will be worth $500,000 when that kid is 60.)

Three, this $100,000 could be pooled with a few other people to fund a startup. Convince others to help to create a successful business and you all could simultaneously create jobs and wealth.

Even better, as we realize that a big rise in investment in entrepreneurship this century is as important to a rise in salaries and standard of living now as the big rise in the investment in education was to its rise in the last century, we may simply create a new category of public investment in entrepreneurship akin to the investment we now make in education. The paltry investments in education that we made in 1830 aren’t enough to sustain our quality of life today; the paltry investments we make in entrepreneurship in 2020 aren’t enough to sustain the quality of life our grandchildren will enjoy in 2050.

In any case, I suspect that this notion of fairness in terms of the investments we make in each young adults’ career will become an important issue. It simply isn’t fair to make vastly different investments in different children and then act as if the big differences in their lifetime earnings have nothing to do with how different was the initial investment in them.

How Our Inequality in Educational Policy Drives Inequality in Income

Our country's most elite are beneficiaries of extraordinary investments. Our poor and middle class, not so much. This huge difference in educational investment makes for huge difference in lifetime earnings.

If you are in the top 1% of households in this country, your annual income would translate into $18 million in lifetime earnings. If you are in the 25th percentile, your lifetime earnings will be about a million dollars. This difference of 18 to 1 in lifetime earnings begins with a difference of about 10 to 1 in early investment.

It starts with public schools.

In K-12, Connecticut invests an average of $18,000 per student whereas Mississippi invests $8,000. Wealthy school districts spend even more than the state average. One wealthy school district in New York invests $27,000 per student.

Private, elite schools will invest about $75,000 a year in students.

It's no wonder that by the eighth grade, students from rich families are four grades ahead of students from poor families. A gap of 4 years by year 8.

The investment gap continues at university. $92,000 per year is invested in students at the most selective universities compared to $12,000 a year at the least selective.

"A 2004 study of the most selective private universities found more freshmen whose fathers were medical doctors alone than whose fathers were hourly workers, teachers, clergy, farmers, and soldiers combined." "More distressingly still, across the Ivy League, the University of Chicago, Stanford, MIT, and Duke, more students come from families in the top 1 percent of the income distribution than from the entire bottom half."

In 1967, the ratio of subsidies at the most selective colleges to the subsidies at the least selective was 3 to 1. By 2007, that ratio had grown to 15 to 1. That is, even among the minority of citizens whose university education we subsidize, the disparity has become 5X greater in the last half century.

[All these stats on education are from Daniel Markovits' The Meritocracy Trap.]

What is the punchline? I think it won't be long before Americans insist on equal investments. For our brightest it may come in the form of education. For our most clever it might come in the form of capital equipment. For our most bold, it might come in the form of startup capital. For others it might simply come in the form of a bond or stock that pays an annual dividend or compounds during their working career. Narrowing the gap in investments could do a great deal to narrow the gap in income and wealth.

In the Long Run We Are All Rich: What Negative Interest Rates Mean for Good Policy

The Dutch have records that go back to the time of Martin Luther - 500 years. In that entire time, including the European settlement of continents, 30-year religious war, the end of knighthood, serfs, industrial revolution, the car, telegraph, telephone, TV, computer, modern medicine, introduction of democracy .... interest rates never went negative. Until about 2 years ago.

Now the Dutch, the EU, Japan and even the US (for the US still only briefly and after adjusting for inflation) have all had and / or have negative interest rates.

This is huge.

One of the things I've not seen anyone talk about is how valuable it makes investments.

Imagine that you start with $100 income. Each year that income grows by 5%. You want to price this income stream for the next 50 years.

If you assume that interest rates are +1%, then you discount next year's income by that amount. $100 next year is worth only $99 this year. You discount the amount by 1%. And of course the further out in time, the more you discount that income stream.

If you assume that interest rates are negative 1%, -1%, you actually increase next year's income. $100 next year is worth $101.

What is the price of a 50 year income stream growing at 5% a year when interest rates ....

are 1%? $1,903.

are -1%? $1,014,861,688

It's the difference between two thousand and one billion.

What does this mean? The lower interest rates are, the bigger the reward for investments now. What kind of investments will pay off long term? R&D. Education. Startups. Infrastructure.

As we come out of this incredibly painful downturn, we should invest money as if we were drunk or billionaires. This will do two things. One, it will employ a lot of people right now in construction of infrastructure, R&D, teaching and working in or managing startups. Two, it will generate future income that is worth more than it ever has before.

Negative interest rates signal a wonderful thing. It means that the future has never been more valuable and with capital so cheap, never a better reason to invest in this future. In a twist on Keynes, in the long run, we are all rich.

Some Policies my Ideal 2020 Candidate Would Pursue

My ideal candidate would take the following positions on these issues.

Economics

• Make it easy for entrepreneurs to succeed.
• incubators in communities the way earlier generations planted libraries and universities as just one of the many support structures to put in place to make more citizens more entrepreneurial. Do all we can to make citizens wildly successful and then tax the ones who achieve success at high rates (say, marginal tax rates double that of middle class) to pay for investing in the next round of new entrepreneurs.
• Make a huge investment in research

• We will spend about $3.5 billion on DARPA - Defense Advanced Research Projects Agency - this year. DARPA has helped to fund amazing technologies that helped birth modern computers, smart phones and satellites. We are still counting the trillions in returns on early investments of millions and billions in DARPA. I would match the DoD's R-and-D spending with similar levels of spending on Department of Education, Department of Energy, etc. to something like the table above. This would not only employ a growing number of doctoral graduates (we could conservatively assume about 140,000 new jobs for staff and leading researchers with the numbers above) but would lead to returns of trillions in the future as we solve problems of energy, commute times, poverty, environment, etc. Entrepreneurs can translate this research into development, creating new wealth and jobs in the process of deploying new processes, services and products that build on this research.
• Make it easy for employees to use corporations as tools for creating wealth
• Laws requiring mechanisms inside of corporations that allow employees to create wealth through innovation and entrepreneurship and dictating that between 0.5% to 2% of that corporation's employees are paid more than the CEO as a result.
• Tax inheritance more than capital gains more than income
• Massive spending on research on alternative energy, upgrading infrastructure to reduce carbon emissions and the introduction of carbon tax. Innovate our way out of a fossil fuel economy.

Social policy

• Make it easy for single moms to succeed
• Make high-quality childcare free
• Sex is one of the most wonderful acts and rape is one of the worst. The main difference is consent. Pregnancy and childbirth is one of the most wonderful acts ... unless it is forced on you by others, in which case it is one of the worst. It should be the choice of individual women about whether and when to have sex or babies, not the choice of the men in their community. 
• Annually - and aggressively - reduce childhood poverty
• Provide universal healthcare
• This would include death panels and other criteria about what level of care we have a right to and what level of care the community should not be billed for.
• Transform K-16 into an education system that creates a common sense of community but a wildly diverse workforce that includes the knowledge workers that are the primary focus of schools today AND trades, entrepreneurs, makers, government and service workers and other emerging career paths

Communications

• Treat investigative reporting like research. That is, it should be funded by the government with oversight of the agenda by citizen boards. (We should more aggressively follow the example of the BBC.)
• People whose data is key to the success of a social platform (e.g., Facebook, Twitter, etc.) should receive a portion of that platform's revenue (idea taken from Andrew Yang).

Bigger is Better

It seems a requirement of modern politics that Democrats criticize big business and Republicans criticize big government.

There is one problem with these shibboleths, these tests of the faithful: they ignore how the interplay between big government and big business has made us prosperous. History suggests that any politician successful at impeding either government or business will effectively slow economic progress.

Some people know the amazing story of Elisha Gray arriving at the patent office just hours after Alexander Graham Bell with his patent application for the phone. Bell went on to fame and fortune and Gray to a life of anonymity. There’s more to it, though. Our founding fathers were intent on creating an accessible, affordable patent system. One might even say it was democratic. Fewer people know that the Italian Antonio Meucci had invented the telephone years – not just hours – before Bell but could not afford to patent it through Italy’s expensive patent system. Had Italy been more visionary about subsidizing the work of its inventors by making it cheaper to file for a patent, it may have hosted the myriad, great inventions that defined the decades around 1900 or had the equivalent of Bell Labs from which communication satellites and transistors emerged as catalyst for huge industries. Our government enabled invention.

In his book The Rise and Fall of American Growth, Robert Gordon shares this story of Bell, Gray and Meucci and gives a host of other examples of government and business interacting to create prosperity.

During the second world war, the federal government led initiatives to increase industrial capacity. The government invested capital equal to half the capital that existed at the start of the war, capital in the form of factories and machine tools (which doubled during the war). Even better was the problem-solving that resulted in better production methods. During the war, Kaiser initially took 8 months to complete a ship; they accelerated that to just a few weeks by the next year. A plane factory of Ford's increased its rate of 75 planes per month in February of 1943 to 432 per month by August of 1944. By D-Day, the Germans could launch only 319 aircraft; the US and its allies launched 12,837. American factories won the war.

After the war, the government turned all this over to private companies. Armed with these investments in capital and knowledge, these companies began making consumer products like cars and TVs. Before the second world war, the economy had lurched in and out of recession. After, it took off. Government regulations helped raise wages and government investment helped raise productivity. Workers both made and bought these new products.

Eisenhower had been a solider during the first world war and was part of a group transporting vehicles across the US. It took them 62 days to go from coast to coast. Head of the Allies’ conquering army, he experienced first-hand the German autobahn and was amazed at the contrast. The interstate highway legislation Eisenhower signed increased American productivity by tens of percent.  Like the railroads the government subsidized a century earlier, the highway system gave customers and producers easier, more affordable access to products and markets. Decades earlier, life expectancy had gone up as a result of similar, local efforts to build out the infrastructure that brought safe water into homes and piped sewage out, another initiative dependent on the cooperation of government and business.

Another outcome of the second world war was increased investment in research and education. In WWII we didn't just pump unprecedented amounts of money into research but FDR asked Vannevar Bush to institutionalize that, which he did with what become the NSF (National Science Foundation) and DARPA (the Defense Advanced Research Projects Agency). From DARPA we got the Internet which has enabled the creation of trillions in new wealth and millions of new jobs. The GI Bill was another product of the second world war and it led to a huge increase in college enrollment, creating a new generation of better educated, more productive workers.

Possibly the most important interplay between big government and big corporations comes in R&D. Research is hugely uncertain and most of it results in nothing. If it does result in something cool it may happen a decade or three later than expected. Also, not every cool thing becomes profitable. Because of this, corporations rarely finance basic research and it needs to be heavily funded by institutions like DARPA or the University of California. This research is crucial to corporations' later developments. "The parts of the smart phone that make it smart—GPS, touch screens, the Internet—were advanced by the Defense Department," as Mariana Mazzucato points out in her book The Entrepreneurial State. Corporations try to find a way to translate research that has taken one to two decades into development that takes two to four years. It's a great system and at its best we tax successful corporations to fund the next round of research which could be transformed into new products by corporations. Symantec and Qualcomm were among the new companies funded by The Small Business Innovation Research program - a program started by Ronald Reagan. Google's basic algorithm was funded with a NSF grant.

Of late, our policies seem less reflective of this interdependence. As corporations pay less in taxes the government has less money for initiatives that could help the next generation of companies and workers to prosper. Our productivity, wages and GDP were growing faster during a time when corporate tax rates were maxed out at about 50% and personal income tax rates maxed out at about 70%. The trick is to tax what is successful now to fund what will become successful next.

Government has an important job as a referee, a role Elizabeth Warren articulates well. Government has an important job of moderating wealth and income inequality. (Trump looked at the world with the biggest gap between rich and poor in history and concluded that the rich were not rich enough and the poor were not poor enough, giving the first a tax break and cutting assistance to the second. Few people would reach such a conclusion.) Those jobs of referee and moderator are important but over the long term, they are not as important as the job of collaborating with business and labor to create the next generation of technologies, products, industries and companies. It is in that direction that lies the kind of progress we had from 1900 to 2000 that increased real incomes by 8X and let us buy myriad objects like airplane tickets, personal computers and antibiotics that did not even exist at the start of the century.

The world is full of communities who would love our problem of big government and big business. Big projects are not done by small organizations. It should be a cliché to say what is too rarely said: progress is not a product of markets or democracies but rather their interaction. Strong companies and strong government go together in vibrant economies. Even within the US, the states that keep taxes and investment lower and have few big companies have lower household income and create fewer jobs. Big businesses and government agencies are not a sign that we’re off the rails. They are, instead, the way we got both the rails and the trains.

Overeducated Workers in a Post-Information Economy

The simplest statement of effective economic policy is to create, get, or get more from whatever limits progress. As a community shifts from one economy to another (from, say, an agricultural to industrial economy), the limit shifts and so does effective policy.

All that as prelude to summarizing a report recently released by the UK's Office for National Statistics (ONS). 

Here are some excerpts of note:

Overeducation is a form of mismatch where a person can be overeducated if they possess more education than required for the job.

Levels of overeducation: completed  

before 1992: 21.7%; 

1992-1999: 23.4%;  

2000-2006: 24.8%;  

2007 or after: 34.2%

The wage of an overeducated worker is between 3.3% and 8.1% lower compared to the wage of a worker with a similar level of education who is matched to the right occupation. 

We find that overeducated graduates experience negative returns to overeducation.

Overeducation is becoming more prevalent and overeducated graduates actually get negative returns on their education.

I have not seen a similar report on American workers but have little doubt that it would tell a similar story.

We still imagine we're living in a world in which capital and knowledge workers limit progress and we put trillions into capital gains tax cuts and education funding .... even as those no longer limit. 

The Random Ten Percent

Universities have standards they use to judge whether applicants deserve to join.
We have elections to decide who should serve on city council or in state legislatures.
Venture capitalists and banks have criteria for deciding whether or not to fund a startup or business.

Given that all of those processes can be gamed and all of those processes depend on judgement against a set of criteria that may turn out to be a really poor predictor of success, we should set aside 10 percent of all slots for a randomly chosen group.

This would have a host of benefits.

One, given these people would be randomly chosen from the population, they would be more representative. Right now, more than 90% of money venture capitalists give is given to men. Blacks and Hispanics are under-represented at universities. The folks who win elections tend to be good looking. The processes we use are skewed and a random process would help to partially offset that.

Two, it would be a chance to test the null hypothesis. All of these institutions have theories about what predicts success. Inevitably those theories have flaws. One way to discover those flaws is to compare the success rates of those randomly chosen with those intentionally chosen. To the extent that unpredictable things happen, it will be a chance to update the choice algorithm, throwing out criteria that turn out to be unrelated to success and adding criteria that - surprisingly - turns out to be very predictive.

Three, it would be an experiment to test the notion that access to these institutions will improve anyone's life, and not just the lives of those carefully chosen. Perhaps 4 years of Harvard will improve the life of a kid with a 2.4 GPA at least as much as it will a kid with a 4.2 GPA. Perhaps the community will be improved as much by the startled bartender or civil engineer who learns she or he has been chosen to serve in the state legislature by lottery as any politician capable of getting big financial donations. Institutions are powerful and it is important to better understand how much of the benefit they yield comes from their careful selection of who gets access to them vs. who those people are. That is to say, we need to understand when the goal should be to widen access to these institutions as a means to improve everyone's life or when we should narrow access to make sure that only people with a certain potential should be given access.

Very Good News About What Happened to Household Finances From 2013 to 2016

Great things happened to the finances of American households between 2013 and 2016. Given it is great news, it didn't get reported. So, you've come to a lowly blog to learn what happened.

In the 3 years from 2013 to 2016

Average monthly income for American families rose by $1,000 a month from the start to the end of this period. Think about what new options that gives families. 

Median income rose nearly $400 a month. A family making $48,000 in 2013 was making nearly $5,000 a year more by 2016. $5,000 a year is half the median global family income. Half. That's how much household income rose.

Breaking it down, though, we find some wonderful gains for groups who make less. This might be the coolest thing about this cool news.

Households headed by someone without a high school diploma make the least (compared to households with high school diplomas, some college, and college degrees). They make the least but their incomes rose the most. Median income for households without a high school diploma rose 15% and average income rose 25%!. (Households with college degrees saw median income rise just 2% and average income go up 15%.) That's a big - and needed - boost to the working poor.

Minority families make less than white families but their gains narrowed those gaps too. (There is still plenty of gap to close but at this rate it will close.) Average income for white families rose 14%. Average incomes for Hispanics rose 26%, for blacks they rose 22% and for other / mixed race families average incomes were up 20%. As with different levels of education, everybody gained but the gaps between groups narrowed. 

Finally, the rich did get richer. Families whose wealth put them in the top 10 percent had average income gains of 23% whereas families in the bottom half of net worth experienced gains of only 5 to 6%. I don't know how one would change that. If I have a million in wealth, my money is going to make money for me. Someone without wealth is not going to compete with that - particularly in a bull market for stocks and housing as it was from 2013 to 2016.

Net worth also rose spectacularly in this time.

Net worth fell for families from 2007 to 2010 (thanks to the Great Recession) and changed little from 2010 to 2013. From 2013 to 2016, though, average net worth rose $140,800. That's nearly $4,000 a month through this 36 month period. Median net worth rose only a tenth of that but still works out to a gain of nearly $400 a month for this period. 

To summarize, in the period between 2013 and 2016, at least half of households experienced a gain in net worth and income of $1,500 a year or more. The average of all households was an income gain of  more than $4,000 a year and a gain in net worth of nearly $50,000 a year.

I don't know how you turn that into bad economic news but somehow, sigh, we have. 

All the data for this post comes from this Bulletin from the Federal Reserve.

The Real Failing of Modern Politics

Yesterday's UK election brought home what is for me the major failing of modern politics. There was little question that the biggest winner would be either Jeremy Corbyn's Labour Party or Theresa May's Conservative Party. Simply put, Corbyn wants more government spending and May wants more government austerity. These positions are distasteful to most voters because on the one hand it means more taxes and on the other it means fewer government services.

What is the biggest failing of modern politics within the West? Politicians have largely given up on promising prosperity. They've run out of tricks. W. Bush pushed capital gains tax reduction to stimulate more investment and investors pumped money into weird things like mortgage backed securities, thus setting us up for the Great Recession. Democrats push for investing more money into education but already we have more graduates than new jobs. (In 2013, the American educational system created 3.7 million college graduates (from AA and BA degrees to PhD and professional degrees) but only 2.4 million net new jobs.) What worked brilliantly in the 18th and 19th centuries (encouraging the creation and deployment of capital) and what worked fabulously in the 20th century (creating an extensive public school system to make K-12, even K-BA education the new normal) simply is not enough in this new century.

We will need capital in today's economy. More than ever. We will need well educated workers in this new economy. Again, more than ever. The difference? Capital and knowledge workers no longer lead the parade of progress. Entrepreneurship does. Any policy makers intent on creating prosperity need to focus on creating an entrepreneurial system.

One of the most spectacular inventions of the two centuries from 1700 to 1900 was the development of a financial system. Through a combination of private and public sector efforts, the West created an incredible ability to finance projects as vast as interstate highways or as small as the purchase of a coffee with a credit card. And policy makers can influence that system with changes in interest rates and other policies to stimulate or cool an economy, helping to promote the creation of jobs or to lower the rate of inflation. Our financial system is vast, complex, and rightfully the focus of policy makers throughout the economy.

One of the most incredible inventions of last century was the development of an education system that changed the experience of children from that of entering the work force at the age of 8 or 10 to that of entering university at 18 or 20. Again, this is a vast system with many moving parts but it is possible - through policy initiatives and cultural norms - to change and influence education and thus the economy through this system.

By contrast, we still have not developed a comparable entrepreneurial system. That is the work of our generation. We can lower interest rates and increase borrowing, change educational standards and increase the number of students who get a high school diploma or a graduate degree in business or education. Meanwhile, our relationship to entrepreneurs is about what it was to education in the 1800s. In 1800 most communities supported freedom of speech and thought but they largely left education to autodidacts and elites, self-taught gentlemen who could afford libraries, trips abroad or time at a university. The masses were not expected to get much of an education. In 2000, most communities support the ideas of entrepreneurship and grant a measure of freedom to private citizens to try their hand at starting a business. Entrepreneurship is left to those who are strong enough to push against the system or financially supported enough to fund a venture that might take years to become profitable. (The children of the affluent are far more likely to become entrepreneurs.) We don't expect the masses to consider - or even know how to approach - entrepreneurship. Unlike education, we have yet to popularize entrepreneurship.

Rather than force communities to choose between cutting services or cutting taxes, really effective politicians will engage in a conversation about how to create prosperity. During the 20th century, not only did families end up with vastly more income but they were able to fund a vastly larger government. There wasn't a trade off. The private AND public sector got enormously better. Prosperity gives you that option.

My own sense is that until communities throughout the West get as serious about the work of popularizing entrepreneurship, they'll continue to pursue a politics of divisiveness that forces communities to choose between the lesser of two lessers rather than the greater of two mores.

Stunning Election Results from San Diego

Today I went into my wife's class and held an election for 23 second graders. 7 year olds, most of them. Everyone at this San Diego city school qualifies for free lunch. The class isn't all Hispanic. There are two African-Americans.

They were intrigued with the process. I let them choose between four candidates: Jill Stein, Gary Johnson, Hillary Clinton, and Donald Trump. We discussed each candidate. I made the argument for each one. (Jill Stein wants to protect the environment, air and water, etc.) We talked about voting and hard choices (broccoli vs. candy), etc. They had some good questions (What's the difference between government and the president?) And opinions. (Trump just wants to make the rich richer.) They certainly know who Trump and Clinton are.

They voted in private at their desk, checking a box next to the candidate and his / her picture and name before folding up their ballot and handing it in.

Johnson, Stein, and Trump had a three-way tie.
Clinton got every single vote.

Nate Silver might dismiss this as both irrelevant and statistically insignificant. I think it's an indication of the trouble Trump faces with Hispanics.

Alabama, Race and Education

This is Section 256 in Alabama's state constitution:

Duty of legislature to establish and maintain public school system; apportionment of public school fund; separate schools for white and colored children.

The legislature shall establish, organize, and maintain a liberal system of public schools throughout the state for the benefit of the children thereof between the ages of seven and twenty-one years. The public school fund shall be apportioned to the several counties in proportion to the number of school children of school age therein, and shall be so apportioned to the schools in the districts or townships in the counties as to provide, as nearly as practicable, school terms of equal duration in such school districts or townships. Separate schools shall be provided for white and colored children, and no child of either race shall be permitted to attend a school of the other race. 

In 2004, the state legislature defeated a constitutional amendment that would have struck down Section 256 from Alabama's constitution.

For those of you trying to process what seems unbelievable, I'll spell it out. Federal law prohibits segregation in American schools; Alabama's state constitution still mandates it.

Across the nation, Alabama's school system is 2nd worst and Trump's odds of winning are 2nd best. That might be just a coincidence.

Biden: Why is America Able to Reinvent Itself? An Inherent Skepticism for Orthodoxy

I love Joe Biden. Today Biden addressed a group of entrepreneurs in Morocco. He spoke about the importance of entrepreneurship and the path towards it. 

So what is required to prosper in the 21st century?  What does it take? 

It takes an education system, but one that is universal, open to all, including girls and women, that trains people to be skeptical.  I was meeting with a man many of you know, a wise man from Singapore named Lee Kuan Yew.  He was asking me why did I think America was able to reinvent itself so often.  I said, because stamped into the DNA of every naturalized American, as well as native born, is an inherent skepticism for orthodoxy.  You cannot fundamentally change the world without breaking the old.  It takes a value system that gives people the freedom to try and to fail, or as they say in the fabled Silicon Valley, fail forward, without being criticized.

Why We Have No Experience with Policy

The biggest problem with modern politics is that people never experience good policy. Or bad for that matter.

If you go out to eat this evening, you’ll have a clear experience. You might love your dinner and think it’s reasonably priced. You’ll decide to go back the next day or next month but you will act on what you’ve learned. In theory, politics is similar but in practice it’s not.  When it comes to policy, you don’t actually experience it.

To take an obvious example, let’s say that you fund development and education in a poor neighborhood. Let’s say that you sustain this investment long enough – at least a decade or two – that it actually impacts the kids growing up in that neighborhood. So much, in fact, that those kids end up making double what their parents made – even adjusted for inflation. This policy is a raging success.

But what does it really mean to say that you’ve increased the earnings of a 7 year old? Their peak earning years will probably be about 40 years away. Worse, if you just look, say, 15 years out you might actually see lower earnings because these kids – unlike their parents – are still in school in their early 20s and not making any money. Even worse (yes, it gets worse) given they’ve followed jobs for young professionals, there is a very good chance that they won’t be living in that same neighborhood when they do hit their peak earning years. How would voters in an area ever “experience” that return on investment?

And of course it gets even more complicated. Education initiatives can change a dozen times in the dozen years that kids are in K-12. It’s tough to see the impact of programs that are discontinued before teachers have even adapted their curriculum to the initiative. The introduction of new technology like personal computers or nanotech can cause productivity and wages to rise regardless of education policy and the proliferation of outsourcing can cause wages to fall. There’s never just one thing going on and that makes it difficult for the average person to know what difference policies made.

It's only policy wonks who've teased through the data to isolate causes who can - with lots of caveats and uncertainty - say that - all else being equal - this policy is likely to raise wages and this one to depress them, etc. Again, your average voter won't experience that. Meanwhile, your average American is distrustful of experts so they won't listen to these experts and even if they did, the experts who express lots of honest uncertainty will seem less convincing than the politician who speaks with great confidence.

There’s an old quip about the guy who didn’t have 20 years of experience but instead had one year experience 20 times. In politics, it is worse. Whether the policy is economic development, education, environmental, or urban or family planning, the long-term effects of policy rarely are clearly experienced. 

For me, that's just one more reason that systems thinking and systems simulation has to be popularized and taught. It's not enough to let the experts benefit from running models that simulate reality. We could "experience" policy but it would take far better and easier to navigate simulations than anything we have now. Perhaps in a generation people play policy simulations the way that  simulate policies the way that Millennials played video games. 

From Lean Startup to Lean Schooling - What if Students Were "Graduated" Every 10 Weeks?

One of the central ideas of the Lean Startup by Eric Ries is the idea of Minimum Viable Product, or MVP. The purpose of a MVP is to release a product as quickly as possible in order to begin gaining market feedback. The biggest waste is making a "great" product for which there is no market, so the more rapidly a startup learns whether it should persevere or pivot (change key features, target a different market segment, etc.) the more likely its success. Product release and re-direction that might take traditional product development teams a year or two could be happen in weeks or months instead. A company practicing Ries' (and Steve Blank's) method could have made dozens or hundreds of release iterations in the time a traditional company might take to make its first release.

Think about that concept applied to education. Even just the education after high school. Our current university system - largely invented by Wilhelm Humboldt nearly 200 years ago - wastes billions in budget and costs graduates trillions in lost income. The waste is enormous.

As it now stands, an 18 year old chooses a major, a direction in which to take her life, based on some vague notions of joy in work, income, and their own interests and strengths. But for far too many students, they invest four to six years of their lives, pay tens of thousands in tuition and forego perhaps a hundred thousand in income in order to get a degree that ends up peripheral to their career. The first real feedback they get about whether this major is going to create opportunities to work with the sorts of people they enjoy, doing the sorts of tasks that engage them, creating value for markets able to reward them is after graduation. Some - many - go back to school for graduate or professional degrees after getting feedback on their bachelors degree but these, too, often result in unhappy careers. I recently had a lawyer tell me that, based on her experience, about 80% of lawyers hate their career but can't go into anything else because they are burdened with student loans that preclude a change.

What if, instead, universities practiced a variant of Minimum Viable Product? Instead of rapidly releasing products for feedback - products that are continually revised based on real market response rather than speculation - universities could rapidly "graduate" students to enter the market? What if students were put into the work place within weeks of when they started university? Say at the end of a 10-week quarter? And then returned to university 2 to 10 weeks later with real data they could use to steer their education.

One huge difference is the difference between students and products. Products don't care about what market they land in or whether they enjoy their customers or not. Students do care and deserve real-world experience in a work place to learn whether the sorts of people they'd work with (and customers they would serve) are people they'd enjoy working with or for. They'd begin to collect data based on their own experiences, from the nature of the work to the experience of the paycheck. They begin to learn whether this work was more conducive to the experience of flow or frustration.

In the world of products, the releases never stop. Ries cites examples of companies that make dozens of software releases a day, A product is continually evolving, continually changing and (hopefully) improving. Students could do something similar, going through this continual process of "graduating" into the market every 10 weeks for 2 to 10 years, depending on the nature of their study and the direction their interests, passions, and market demand take them. Just as in today's world, some would walk away with the equivalent of an AA and some a Ph.D. But the difference - and it would be a huge difference - is that their degree would be the product of continual contact with actual work experience. The possibility of disenchantment with that career would be lower - or at least would be informed by actual experience of it rather than speculation about it.

It would be easy - and reasonable - to suggest that this is impractical or that internships already exist or that students can already work part-time jobs to get such experience. But the school system is not set up to ensure such on-going contact with the experience of work. Only a few students are able to create or find such experiences. A society willing to invest billions in education and expecting young people to invest years of their life should be able to systematically create such experiences. (And if there are not enough opportunities for working in a particular field, that could work as a brake on new students entering that major. Why invest another 2 to 10 years in a career for which you can't even get a few weeks worth of work now?)

Education matters too much to defer feedback on it to the very end. By whatever means, universities need to take more responsibility for letting students learn from the market and their own experiences and not just learn from professors and textbooks.

Using Charter Schools as Tools for Progress by Letting Them Patent New Approaches

Pedro Noguera writes a great piece in The Nation about charter schools titled, "Why Don't We Have Real Data on Charter Schools? Charters were supposed to be laboratories for innovation. Instead, they are stunningly opaque." 

He makes a variety of important points but one statistic he mentions almost in passing is to me the defining one: 

"According to a 2013 study by the Center for Research on Educational Outcomes at Stanford University, only 29 percent of charter schools outperformed public schools with similar students in math, while 31 percent performed worse. Most charter schools, in fact, obtained results that were no better than traditional public schools."

Let's round this instead of using 29% or 31%. Essentially, what this Stanford study revealed is that 33% - one-third - of charter schools did better than public schools, one-third did worse and one-third did the same. Depending on just how you measure it, this exact same claim could be made of public schools themselves: about a third are noticeably better than average, about a third are worse and about a third are average - give or take. In other words, charters schools - on average - are no better and no different than public schools. 

Noguera reminds us that charter schools were supposed to be a way for specific schools to be free of traditional regulations in order to allow experimentation. What they have become instead is a means to compete with public schools without real transparency or accountability. 

I have an idea for making education more innovative, for giving incentive to every teacher and educational entrepreneur to make education better. Let organizations and individuals patent new ideas. Let them get a monopoly profit on the good idea of - say - using business startups in high school as a means to fund extracurricular activities for kids while teaching them about business, marketing, product development, using art for ads, math for balance sheets and profit and loss, etc. You might patent this as an organization ("The Wanna-be Jobs School of Business") or as an individual inside of  a public school. If other schools adopt your curriculum, they pay you. And for 7 years you might make millions on the spread of your idea. After that, your patent expires and every school anywhere can use the materials or approach for free. Education gets better and there is money available to incentive people to develop new materials, methods, and philosophies. 

As it now stands, there is no incentive for any charter school to share anything that would actually make other schools better. That would simply mean giving away their competitive advantage, which is nuts. Instead, give them incentive to develop approaches that would benefit everyone.

In the 1620s, Edward Coke (pronounced Cook) led the creation of patent law, essentially granting monopoly rights for a short-period before making knowledge of new technology public. This gave people incentive to invest time and money into inventions that previously only gentlemen of leisure might dabble with. By 1699, England had its first steam engine and during the next century the Industrial Revolution was underway. 

If the US is serious about promoting education, maybe the right model isn't letting private schools compete by using methods that appear to be - on average - no different from those of the average public school. Maybe the right model is letting any individual or organization patent educational approaches that every school would find enticing to adopt.

California Cuts Back on Investments in the Future

Pat Brown - current governor Jerry Brown's dad - was governor of California from 1959 to 1967. In 1960, he made California the first state in the nation with a college system designed for all high school graduates. The University of California (UC) system that included Berkeley and UCLA was designed for the top 25% of high school graduates. The State system that included San Diego State University and Fresno State was designed for the top 50%. The community college system was designed for all high school graduates. At the time, it was an incredibly visionary - seemingly excessive - investment in the future.

I'm not alone in believing that it is no coincidence that California is the state that later became home to two of the great advances in human history: Silicon Valley and Bio-tech. But there was real lag between Pat Brown laying the foundation in 1960 and the founding of Apple and Genentech in 1976, much less the tech boom of the 1990s.

All that to say that it's worth paying attention to the fact that the golden state is now cutting back on its investments in education. Not only is it becoming more expensive for college students but even in K-12, the state is failing to invest. California has the worst pupil-to-student ratio in the country.

It's hard to imagine this is going to mean anything good for the state in 2030. Jerry Brown has helped to balance California's budget, showing himself a more able accountant than Arnold. Now we can hope that he shows himself to be as savvy an investor as his dad and reverses California's fall into educational mediocrity.