An Attitude of Progress and Embrace of the Unsettling

One of the many mini-obsessions I have among the larger obsession of how we make progress is this question of how we deal with the fact that given that progress so often looks and feels like disruption and threat, we resist the very forces that might move us forward.

Some delightful quotes on this theme are to be found in this piece by Maria Popova.

“Cut short of the floundering and you’ve cut short the possible creative outcomes”
- Denise Shekerjian

And from Ralph Waldo Emerson:

“People wish to be settled; only as far as they are unsettled is there any hope for them.”

"The one thing which we seek with insatiable desire is to forget ourselves, to be surprised out of our propriety, to lose our sempiternal memory, and to do something without knowing how or why; in short, to draw a new circle. Nothing great was ever achieved without enthusiasm. The way of life is wonderful: it is by abandonment."

Find the post here.

Gales of Creative Destruction and the Stress of Progress

Since Oct-2010, the US economy has destroyed 475.6 million jobs (layoffs, retirements, firings, quits) and created 494.2 million jobs for net of 18.5 million jobs.

As of June, the labor force was 162.1 million.

So during the 8-year recovery the American economy has created 3X more jobs than there are people in the workforce and destroyed 3X more jobs than there are people in the workforce. 

244,000 jobs were created in May. More precisely, 5.8 million jobs were created and 5.5 million jobs were destroyed for a net of 244,000. It is not true that everyone kept his or her job except for 244,000 people who were newly hired. Every month people are laid off, fired, quit or retire; in May, 5.5 million people had such experiences. That's a lot of elation (those who retire), relief (those who quit), frustration and panic (those laid off and fired). We talk a lot about taxes but an economy this dynamic is emotionally taxing.

One of the challenges of the modern economy seems to be that given progress comes in the form of gales of creative destruction we have a high level of stress. Personally I think that just reinforces the necessity of things like universal healthcare, investments in job retraining and generous unemployment, etc. But regardless of the solution you'd advocate, you have to realize that anyone whose idea of the good life is a stable, predictable career is going to feel a continual level of stress and unease by progress.

Two things can be simultaneously true: we are creating better jobs and a lot of people end up with worse jobs. There are probably as many people laid off from manufacturing jobs paying $45,000 a year now working at Wal-Mart for $25,000 as there are people with new programming jobs making $75,000. (And of course that very dynamic is part of why median wages move upwards so slowly and why income inequality is increasing.)

This economy is wonderfully creative but it is increasingly disruptive. Entrepreneurship and social invention creates the new and obsoletes the old just as innovation does with products. We used to have marriage between one man and one woman and now we have same-sex marriage and polyamory. We used to have jobs with pensions and 40 hour workweeks and now we have 401(k)s and a gig-economy that offers us Uber-like jobs with both more freedom and uncertainty. We used to have an American economy and now we have NAFTA. If you find comfort in continuity you will actually find progress threatening because so often it forces us to act or be different. 

Innovation changes products while entrepreneurship and social invention changes people. That's unsettling.

It seems to me like the divide that doesn't get talked to enough is the divide between those who embrace progress and all its novelty and those who embrace tradition and all its familiarity. To the latter group, progress can actually feel like a threat.

The Economic Effects of the Republican Tax Plan - Punishing Work and Rewarding Luck

Although the Republican tax plan has been - and still is - evolving it has recently included changes that would tax innovation in two forms. One, grad students who receive a scholarship will be required to pay income tax on it's value. If you get a $45,000 a year scholarship to Stanford, you would have to report that as income. Two, any stock options granted to employees would be taxed at the point they are granted, not - as they are now - taxed at the point when they are exercised. As it is, this tax will make it harder for people to get PhDs and to launch startups. What do these two things have in common? They threaten the status quo and can unleash gales of creative destruction.

The bad news about new ideas, technologies and businesses that come out of grad school and startups is that they can overturn existing industries. Your hotels could be undermined by Airbnb. Your oil well can be undermined by affordable solar panels. 

There are two groups who are threatened by the gales of creative destruction. One group is the elites who own existing hotel chains, oil wells and other assets whose value can be eroded by the new. The other group are the folks who work for these elites and share their concern that innovation could disrupt their livelihood, people who may lose their coal mining jobs.

So startups and grad students are being taxed more but the Republican plan is advertised as a tax cut. So, who pays less? The folks who will get the most dramatic tax cut are the folks who inherit. Current law is already ridiculously generous to folks who inherit: if the value of the estate you inherit is $5.45 million, you don't have to pay a dime in inheritance tax. This new plan will double that. 

Republicans are rewarding people who resist change by simply inheriting and punishing people who are encouraging change. This is not particularly surprising for social conservatives, people who see as a threat most change from the world they learned.

I recently put out a survey to ask this question: 

Put aside for a moment whether you think that the highest marginal tax rate should be 5% or 95%. This question is about something else. Which of the following do you think should be taxed at the highest marginal rate?
- Income tax: I think money you make from your job, your labor, should be taxed at the highest rate
- Capital gains tax: I think that money you make from your investments should be taxed at the highest  rate
- Inheritance tax: I think the money you get from inheritance should be taxed at the highest rate
- Consumption tax: I think the money you spend (on groceries, transportation, housing, clothes, entertainment and other consumption goods) should be taxed at the highest rate

The responses were as follows:

My respondents clearly thought that the highest marginal tax rate should be applied to the income that came with the least personal effort: inheritance tax. This is the opposite of what Republican leaders believe, proposing a plan that levies the highest tax on the people who apply the most effort: the people who are out earning an income rather than leaving that job to their investments or grandparents.

Taxing inheritance the highest isn't just about fairness. If we want a society where everyone has an incentive to work, we would want a society where work is taxed less than inheritance and one person isn't free of tax on the first $10 million they inherit while another person has to pay income tax as soon as she makes more than $10,000. That is partly about fairness but it is also just common sense: we want everyone to help with the work.

The older I get the more confident I am about what makes for good policy and the less confident I am about what makes for good politics. On the face of it, a Republican tax plan that hikes up the deficit by an additional $2 trillion, gives tax breaks to rich grandkids, and discourages entrepreneurship and education would seem like taping a sign to your back that says, "Vote for the other guy." Who knows, though. It might just be that the American people will fall in love with a plan that helps to discourage the progress that so many find disruptive.

The Odd Collusion of the Rich and Poor to Block Progress for Security

There is a curious collusion between elites and the working class that can actually arrest progress and stop wage growth. 

You wouldn't think that the working class - people in the lower middle part of the income distribution - would willing collude with the wealthy to perpetuate what might strike others as a fairly basic income. And yet ...

There are a few concepts that come into play in this attempted explanation: extractive institutions, insecurity, and gales of creative destruction. 

Schumpeter immortalized the term, "gales of creative destruction" as a means to define how markets simultaneously create the new - "look! a horseless carriage!" -  and destroy the old - "look! Clem's closed up his horse dependent carriage shop!" By most every measure, these gales of creative destruction are the source of progress but they also threaten the folks who are currently making a perfectly good living selling the old, soon to be obsoleted product. 

When you are working class, you're not in poverty but you are not secure. Over half of Americans don't have enough savings to cover an unexpected expense of $500. For these Americans losing a job and then getting retraining for a new career are simply not a practical choice. (It might be a necessary one but it's not a practical one.)

Finally, there are extractive institutions (I first encountered this concept in Acemoglu and Robinson's book Why Nations Fail) that leave workers within them at a subsistence wage. The owners or rulers of these institutions - whether the Spaniards who ruled the encomiendas or Robert Mugabe over Zimbabwe - extract all the profit from the institutions. Among the many problems with extractive institutions is this: no one has incentive to conjure up the gales of creative destruction to create the next, best thing. Any breakthroughs in process that workers could adopt to raise profits will just flow to the pockets of the owners. People within the system won't make any more whether they work harder to smarter so they tend not to. People who control the institution aren't really interested in any progress that could create the gales of creative destruction that suddenly obsolete their system so they tend to resist progress or improvement. There is a huge difference between the poor people within the system and the rich who rule it but they do share this: they feel threatened by change and will resist it.

Progress steadily makes life better for everyone. It also tends to abruptly make life worse for at least a few: the unfortunate stockholders in Kodak when Instagram comes along, or worse, their unfortunate employees.

Politically, this is tough. The folks who lost their jobs to automation or outsourcing are acutely aware of this. The folks who are buying 1" extra of TV for 90% less are less aware of this and less passionate about it. Progress's creative gales are more evenly - and imperceptibly - spread across a population than are its destructive gales.

An aversion to change that might bring in the gales of creative destruction is shared between the insecure working class and the owners of extractive institutions who profit from the status quo. They make for odd bedfellows but both share an incentive to resist free trade and new technologies.