Trump Hikes Taxes - How Tariffs Really Work and Why They Rarely Do (work, that is)

Here in mid-September, Trump just announced tariffs on $200 billion in goods from China.

This is a tax on American consumers that works out to about $60 per American. Americans will pay that much more for items.

Who gets that money? American companies that have already proven themselves incapable of competing. American companies who need protection in the form of tariffs.

There are times when it makes sense to have trade protection in the form of tariffs. If your national policy is working to move from an agricultural to an industrial economy, or from an industrial to information economy it makes sense that you may want to protect some sectors or companies from foreign competition as they establish themselves against global competition. For awhile.

Companies that benefit from trade protection have a few options about what to do with the added revenue. They can increase the wages of hard-hit employees who have been competing against cheaper foreign labor. They can use the extra revenue to invest in new capacity or technology so that they are more competitive. Or they can payout the profit to stockholders and executives in the form of bonuses, using this subsidy from American consumers as a reward for having the political clout to do what they could not do through the market.

Tariffs are essentially a tax but not a tax that go to the government. Government spending can actually help displaced workers by funding unemployment and retraining. Government spending can finance infrastructure building that makes regions more competitive because of better rails or roads or cheaper energy or water. Government spending can go into the basic research that companies can develop into products.

Apple is now the most valuable company in the world, worth more than a trillion. It's most profitable product is the iPhone. The iPhone represents product development that incorporates research advances like touchscreen, satellite, and small chip technology originally funded by government research. (This is well documented in Mariana Mazzucato's The Entrepreneurial State.) Government research can lead to breakthroughs that not only help citizens but that can be the basis for new products that companies develop into highly profitable markets. A few billion in research spending can help to create trillions in value.

Tariffs don't help to finance basic research, infrastructure, education, or the creation of new industries and companies. Tariffs often subsidize companies that have not kept up, doing more to reward executives who have made campaign contributions than executives who have invested in the future. Within the last year, the GOP passed a tax cut that makes it harder to do any of these things. With Trump's new tariffs, it has just reversed that tax cut for the typical American and will now give that tax or tariff revenue to uncompetitive companies instead. 

The Most Important Development in the Evolution of Humans

First an excerpt from Thinking Big, a book about how our brains evolved to adapt to social realities. A key point here is this matter of thinking in terms of relationships and not just rationally.

Food was certainly of vital importance and obtaining it efficiently and securely must have dominated much of their [early hominins’] lives. The archaeologist Rhys Jones, who lived with Aborigines in Northern Australia, once said to us that these hunters and gatherers were always 24 hours away from hunger.But for us the keys to understanding food lie in the implications for social cooperation. This takes two forms. First are the tactical demands, of getting working parties together to hunt or gather safely and with greater chance of success. This covers defence against predators as well as obtaining those foods that were needed to fuel expanding brains. Second is the strategic matter of planning for bad times. This is achieved by looking for help beyond your immediate community. Instead of restricting access to resources by defending them against all-comers, it is better to allow other people in. By linking individuals and their communities over very large geographical areas a form of ecological insurance is produced. [highlighted added]Archaeologists refer to this as social storage: tokens exchanged for food in bad times, and vice versa in good. In other words, if conditions deteriorate where you happen to be ranging, then we will allow your community to come over to our range and use our resources for a while. Later, the reverse will be the case, and you can pay us back. Such a system works well, but it requires that the community has a territory large enough to cover a wide range of habitats. It won’t work so well if community territories are small and consist of essentially the same kind of habitat.
…..Rather than concentrating on what may be rational explanations of why they hunted bison rather than reindeer or chose not to eat fish, as the isolated Tasmanians famously did 6000 years ago, we need to shift the perspective and see the role of food and other materials in creating relationships rather than simply meeting calorific goals. Archaeological explanations for the human story need to be relational (being social) as well as rational (being economic). Social life is not based on calories alone but on the relationships that emerge when things are made, exchanged, used, and kept.pp. 86-7 of Clive Gamble, John Gowlett, and Robin Dunbar’s Thinking Big: How the Evolution of Social Life Shaped the Human Mind, Thames & Hudson, London, 2014, paperback version 2018.

Put more simply, as humanity evolved it faced two choices.
1. Defend your limited resources from others.
2. Expand your limited resources by sharing with others.

Archaeologists think that Neanderthals adopted the first strategy and early humans adopted the second. Neanderthals went extinct. We've become the dominant species.

As it turns out, the second strategy of strengthening relationships rather than walls has a host of advantages. Not only do you have more insurance against bad times but this strategy requires you to cooperate with larger groups of others, which enables all sorts of advances. This means opportunities for wider array of mates, the exchange of ideas, and the "outsourcing" of or cooperation on explanations, research and development, and cultural and technological innovations that eventually dwarfed the diversification of food sources in importance.

The choice to cooperate to share more rather than compete to protect less may be the single most important choice early humans ever made.

Trade Wars, Immigration and the Invasion of Iraq

I remember feeling so utterly baffled as to why so many of my fellow Americans were eager to invade Iraq. The reasons we were given were so odd. Saddam might have weapons of mass destruction. (Without convincing proof that reason could be used to invade any nation.) This was retaliation for 9-11. (We already knew most of the terrorists of 9-11 were from Saudi Arabia and none were from Iraq and that Osama bin Laden was behind the attack, not Saddam.) We could "liberate" the people of Iraq by dropping bombs on them. Finally, the idea was that at the instant Saddam were taken out, democracy would bloom in its place. (There is no history to suggest that every community is a democracy waiting to bloom with the removal of a despot. The predecessors to democracy are more complicated by far.)

There were no experts who believed any of these weird claims. None of this made sense. And yet Americans were so excited to go do this and Bush and Cheney and Condoleezza Rice assured us that it would work. (Didn't explain how it would work or even what the risks were but instead just adamantly insisted that it would. As it turns out, this is a big sign that the person talking to us doesn't know what they are talking about.)

I never did understand how it was going to make our lives better here in the US but it did turn out to cost us $4 trillion, kill 4,000 American soldiers and somewhere between 100,000 to 2 million Iraqis, triggered a refugee crisis that still rocks Europe, was the catalyst for forming ISIS, which still terrorizes that region, and Iraq is not only now less stable but now so is its neighbor Syria. It turns out that anger isn't really a great guide to good policy.

Now Trump and his supporters are just as excited about immigration and trade as Bush and the country was about invading Iraq. Like then, this will create huge misery for others, some misery for us, and will cost us a lot.

Like the Iraq invasion, trade wars and cracking down on immigration apparently gives a lot of people a cathartic release but it is costly - like shooting up heroin before driving onto the freeway.


Trump has increased spending on border patrol. He was taken the dramatic and hateful steps of seizing children from asylum seekers coming to this country. He has claimed that trade wars are easy to win. Now he's even looking to rescind citizenship from people who have already been granted citizenship.

There are no experts who agree that trade wars are easy to win. Even the Trump administration's cost-benefit analysis of immigration saw it as net positive, and besides the rate of illegal immigration has been seriously lowered in this century. 

Illegal immigration is the weapons of mass destruction of this administration, the weird policy fixation that no expert understands but nonetheless seems to trigger every tribal instinct that drives GOP voters. 

I know that some voters are hopelessly enamored of the power to take lives, whether it be through actual killing in an invasion or in the form of seizing children from their parents as they cross the border. Obviously you people are beyond reaching. But there are some folks who don't get excited about creating misery for others who have nonetheless continued to be Republican. If this is you, if you are excited about the crack down on unfair trade and immigration, ask some important questions.

How much is this anti-trade, anti-immigration effort going to cost? 
How is this going to make your life better? 
Which experts defend this and how do they explain it? 
At least importantly, how does Trump himself explain how this is going to make life better? Is there data to support any of these claims?

As an American voter, you can increase or decrease the level of misery on the planet, including your own. Take that responsibility seriously.

Macron May Have Just Emerged as the New Leader of the West

Given that Trump has retreated into fear and nationalism, Macron may emerge as the new leader of the West.

In April of 2016, Macron founded his En Marche party.

In April of 2017, Macron won the election that put him against Marine Le Pen in the May runoff election to become president of France.

In April of 2018, Macron addressed US Congress in the most articulate defense of post-WWII West since Trump was sworn in.

The guy just hit 40 in December.

To appreciate what a surprising character he is, consider this:
The American Macron is 37 and still 18 months away from starting her new political party before winning the 2020 presidential election.

Macron spent a fair bit of the speech articulating his beliefs which should have made most audiences say, "Yeah, well obviously" just 5 years ago but today smack of controversy because of what Trump has forced on us. Here are a couple of passages that deserve consideration.

I believe in democracy....To protect our democracies, we have to fight against the ever-growing virus of fake news, which exposes our people to irrational fear and imaginary risks. ...Without reason, without truth, there is no real democracy -- because democracy is about true choices and rational decisions. The corruption of information is an attempt to corrode the very spirit of our democracies.

I believe in concrete action. I believe the solutions are in our hands.I believe in the liberation of the individual, and in the freedom and responsibility of everyone to build their own lives and pursue happiness.
I believe in the power of intelligently-regulated market economies. We are experiencing the positive impact of our current economic globalization, with innovation, with job creation. We see, however, the abuses of globalized capitalism, and digital disruptions, which jeopardize the stability of our economies and democracies.I believe facing these challenges requires the opposite of massive deregulation and extreme nationalism.Commercial [Trade] war is not the proper answer to these evolutions. We need free and fair trade, for sure. A commercial war opposing allies is not consistent with our mission, with our history, with our current commitments to global security. At the end of the day, it would destroy jobs, increase prices, and the middle class will have to pay for it.I believe we can build the right answers to legitimate concerns regarding trade imbalances, excesses and overcapacities, by negotiating through the World Trade Organization and building cooperative solutions.We wrote these rules; we should follow them....
I believe in building a better future for our children, which requires offering them a planet that is still habitable in 25 years.

The full transcript is here:

http://www.elysee.fr/declarations/article/transcription-du-discours-du-president-de-la-republique-emmanuel-macron-devant-le-congres-des-etats-unis-d-amerique/ 

Clinton, Dubya, and Trump were all born within months of each other. It seems that we're past the expiration date on that "boomers as leader" model and I'm getting excited about the prospect of turning things over to the younger generation.

Vive la France!

Open vs. Closed Economy

The San Diego Union Tribune was gracious enough to let me make an argument for an open economy here:

http://www.sandiegouniontribune.com/opinion/commentary/sd-utbg-economy-trade-war-20180308-story.html

Unemployment Rate: What is Next After the Longest Drop in History?

We have data on monthly unemployment rates in the US from January 1948 - shortly after World War 2 - through September of 2017. During that time it has never been lower than 2.5% (which it was in May and June of 1953 at the peak of the post war recovery) and never been higher than 10.8% (which it was in November and December of 1982 in the depth of the Volcker-induced recession during Reagan's first term).

Half the time it is below 5.7% and half the time it is above 5.7%.

Unemployment rates of 3.8% or lower put you in the top 10%; rates of 7.9% or higher put you in the bottom 10%. 80% of the time, unemployment rates have bounced between 3.9% to 7.8%; that range defines normal. Outside of that range things are great or awful.

At the depth of the Great Recession - in October of 2009 - unemployment hit 10%. That's among the worst 1% of all months. (Well, in the worst 1.2%.) Since then it has steadily come down during the longest uninterrupted streak of job creation on record. Last month - the end of the streak - unemployment hit 4.2%, a value in the best 17%. We're in the top 20% but not yet top 10%, really good but still not great.

One simple answer as to whether unemployment will drop further is to say that it's only been lower than its current rate of 4.2% 15% of the time. Again, unemployment rates bounce between 4% to 8% most of the time; it doesn't seem to last long outside of that range. That alone suggests that the unemployment rate will soon stabilize or even rise.

Another interesting thing to note is that this is an exceptionally long recovery. Unemployment peaked 8 years ago this month - in October of 2009. A steady drop in unemployment has never lasted longer. The next longest improvement, the drop from the 10.8% high in December of 1982 to its low of 5% in March of 1989, took just over 6 years before beginning to rise again. Unemployment rates steadily drop for a time and then steadily rise, and steady improvements usually last just a few years, not 8 yerars.

At the start of a recovery people are well aware of all the reasons things can go badly. After all, they are just coming out of a period in which things did, indeed, go badly. Remember how early in the recovery people were anxious about Greece, China's stock market, deficit spending, the mortgage market, Greece, etc. People were looking for reasons that things could go wrong. Now? Now they're looking for reasons that the recovery could continue and less aware of reasons it might not; this makes economies more vulnerable.

There are reasons the unemployment rate could drop further and reasons it won't. 

Among the reasons it could drop further is that our labor force is growing more slowly than it did a decade ago. From 1955 to 2005, US labor force (folks aged about 25 to 65) grew 1.7 percent a year. Since then it has grown about 0.5%. As companies seek to hire, they'll have fewer options; all else being equal, this would translate into lower unemployment.

Another reason it could drop further is because of a drop in immigration. Again, this lowers the number of available workers and could mean that employers will draw from the unemployed rather than the newly available. If immigration rates drop enough, the labor force might even stop growing.

Curiously, the reasons that the unemployment rate could start to rise again include a drop in immigration. Immigrants don't just find work here. They buy houses, clothes, meals and all the things that drive demand for goods and services that, in turn, drives demand for employees here. If Trump's policies are successful at slowing down the flow of immigrants, he'll actually succeed at destroying jobs.

Trade, of course, could still provide jobs for American workers. Assuming, of course that Trump does not ignite trade wars. Simply put, he wants trade wars with our biggest trading partners - threatening to blow up Nafta and trade deals with China - and if he gets his way we'll see a drop in trade with our three biggest trading partners. That will destroy American jobs.

The third reason that the unemployment rate could rise is because Trump is planning to cut spending and taxes. Tax cuts will disproportionately go to the rich. If you give a poor guy a $1,000 in tax cuts, he's likely to spend $900 of it. When you're making only $30,000 a year, you could use that extra $1,000. If, by contrast, you give a rich guy $1,000 in tax cuts, he's likely to save $900 of it. When you're already making $500,000 a year, an extra $1,000 isn't going to change your vacation plans. Government spending ripples throughout the economy in ways simple (the employees of the State Department buy coffee at that little coffee shop across the street) and complex (the Medicare recipient pays a medical bill which enables the hospital to make a down payment on a new imaging technology and the young doctor to make a down payment on a new car). If you cut $1,000 in government spending and then give a $1,000 tax cut to someone rich, you'll reduce spending, reducing demand for the goods and services that drives demand for employees.

What is the punchline? It depends on whether Trump ends trade deals. In either case, unemployment rates are likely to start rising again within 3 to 9 months. If he ends trade deals, they'll begin to rise sharply.

If Trump fails to end trade deals:
Unemployment will fall to no lower than 3.8% within the next six months, after which time it'll start to rise again. Given drops in the growth of the labor force, job creation could turn negative at least one or two more months within the next year even as the unemployment rate remains relatively stable.

If Trump succeeds in ending trade deals like Nafta:
Unemployment will - at best - hit 4% near term but may have already bottomed out at the current 4.2%. We'll have a recession and the unemployment rate will rise to 6% to 8% within a year or two.

Why Even the Experts Vastly Underestimate the Impact of Trade Wars with Developed Countries

I harp on the prospect of a trade war for a host of reasons. For one thing, like the invasion of Iraq or the deregulation of financial markets that helped to set us up for the Great Recession, few people appreciate just how devastating this can be. A trade war has the potential to be as devastating as the Great Recession.

Expert economists worry about the magnitude of this. As someone who regularly works with product development teams in this and other countries, I think even they underestimate it.

A chip maker I worked with this year at a facility in Scotland represents the sort of trade reality that  a simple number like "China represents 4.4% of our trade" does not capture.

This chip company makes chips for cars - everything from the chips that help to control your air conditioner to chips used in self-driving cars. Chips in cars have become ubiquitous and every new car uses more than 100 chips. So what I'm about to describe could be multiplied by 100.

First, a single chip is designed with inputs from design and marketing people from Austin, TX, Germany, Scotland, China, India and Malaysia. Perhaps other sites I was not aware of.

Second, when the chip is physically made it literally travels around the globe in its production process. Value is added in Singapore, Austin, Tianjin, and then Kuala Lumpur.

Third, once the chip is made it still isn't a final product. For that it has to be integrated into a car. The cars it will be incorporated into are assembled in places like Bavaria, Detroit, Seoul, and Puebla.

Fourth, the cars these chips are incorporated into are not made at just one place. A tiny chip that is put into a car comes from half a dozen places. The same is true of the fuel injector, the axle, the pistons, the seat belts, etc. Final assembly just represents a final step in a series of complicated assembly steps for raw materials, intermediate products and final units that are then assembled into a car. Some variation of what I described for the single chip has occurred with most every discrete component in that car.

If you say that 4% of our trade is with China, that may naively refer to the fact that 4% of our products come from there. And that might accurately capture it but I suspect that reality is more like 8% of the value in 60% of our products have some input from China. What I believe the average person wildly underestimates and even expert economists probably somewhat underestimate is the massive complexity in product development and manufacturing and the extent to which any one finished product sitting in your garage, hand or kitchen has design inputs or parts that come from dozens of countries. One of the simplest examples of surprising complexity often used in introductory economics classes is the No. 2 pencil: at one point the lead for the graphite, the rubber for the erasure, and the wood for the pencil came from three different continents.

A trade war would disrupt millions or billions of complex product and design flows that result in the thousands or millions of products that we can buy here in the US. Even disrupting 4% of our GDP would be devastating but a ban on trade from China is likely to impact more than 4% of our GDP. (And of course China is not the only country that trades with North Korea.) If we ban trade with, say, a less developed nation like Cuba an estimate of our trade with them would probably be roughly accurate. Cuba is exporting cigars rather than complex technology made with inputs from knowledge workers scattered all around the globe. But if we ban trade with a country like China that has a complex trading pattern, the ripple effect is incredibly difficult to calculate and could quickly grow beyond casual, initial estimates.

We can only hope that Trump will be less effectual at implementing trade disruption than he was with the Repeal and Replace of Trumpcare. And given that most of Congress is less deluded about how independent we can be of other countries than Trump is, it is unlikely that a trade war will break out. That said, the probability is not zero and the probability is higher than it should be simply because so few people realize how complex are the trading patterns that define even some of our simplest products. It's good that people were outraged at Trump's comments after Charlottesville, but his ignorance there isn't going to cost millions of jobs. A trade war easily could.

Job Growth During the Trump Administration and Beyond

In the last year, the number employed has gone up 1.8 million but the number in the labor force has gone up only 1.1 million. Because the number employed has gone up faster than the number in the labor force, the unemployment rate has dropped (from 4.7% to 4.3%).

Since 1983, the unemployment rate has been lower than its current 4.3% just 5% of the time - and all of that between 1999 and 2001. Outside of that period, it's never been lower than it is now.

So what does that mean when it comes to forecasting job growth? It means that at some point between now and the end of 2018, the unemployment rate will be as low as it can go. At that point the rate of job growth will be limited by the rate of labor force growth.

Labor force growth in the last year has been nearly 100,000 a month. (And shrank by more than 400,000 people in May as baby boomers retired and fewer Americans looked for work.)  During the recovery from 2011 to 2016, job growth averaged 203,000. That gap is not sustainable at full employment.

This makes a couple of things predictable for the Trump term.
1. Job growth in the first four years of Trump's administration will be about half what it was in the last four years of Obama's administration. (Closer to 100,000 jobs a month than 214,000).
2. We will have our first month of negative job growth within the next 18 months. (Simply put, given normal variation, a median value of 100k is far more vulnerable to slipping below zero than is a median value of 200k. For instance, in March the economy created only 50,000 jobs.)

There are other factors.

On a positive note, the labor force participation rate could rise, prolonging the time when job growth exceeds labor force growth.

On a negative note, Trump's policies will discourage immigration of all kinds. Tourism has already dropped. Universities are reporting fewer applicants from abroad. This sort of things takes time to show up in numbers but as foreigners are less willing to live in an xenophobic America, we lose twice. Once because those immigrants don't come here to join our workforce and a second time because as they choose to live and work in places like Eindhoven, Netherlands or Vancouver, British Columbia, they create more jobs in those communities rather than ours. An Iranian who works on robotic sensors will help to make a team successful in some other country and all of the jobs that ripple out from that effort - the project managers and administrators within his company or the restaurateur or furniture salesperson outside of his company -  will be in a different country as well.

Pew forecasts 18 million fewer potential workers without immigration. In such a scenario, the number employed would shrink for decades, shrinking the economy with it.

You might easily dismiss this prospect of a sharp decline in immigration as unthinkable. Of course just a year ago, the thought that Republicans would be arguing that we should ally with Russia rather than NATO would have been unthinkable, as would have cuts of 21% to National Health Institute (NIH) or slashing Medicare by half. Trump is disruptive and prides himself on that. It would be silly to bet on him reversing his position on immigration.

Three other huge variables are trade deals, climate change technology, and cuts to science funding. If Trump slaps tariffs onto trading partners and sets off a trade war, our economy will slump. If his policies continue to focus on protecting coal mining jobs that originated in 1740 rather than creating new technologies and jobs in alternative energy, our economy will fail to thrive. If he slashes funding for science and research (like his proposed 21% cut to NIH), he will undermine the creation of new products and technologies that would create jobs in two to twenty years.

Job growth will be less vibrant under Trump. (And to be fair, it would have been with anyone, from Sanders to Clinton to Bush to Trump.) If he gets his way with policy proposals on immigration, trade, and defunding the development of alternative energy and other technologies (new medicines that could have emerged from NIH research, for instance), we will be measuring the net loss of jobs each year, not their creation, tracking a steady decline of 100,000 jobs each month rather than bemoaning a gain of only 200,000 a month as anemic.

The Simple Solution to the US Trade Deficit with Germany

If you spend more each month than you make, you will run a personal deficit.

If a country buys more than it sells, it will run a trade deficit.

One of the simplest determinants of whether or not a country is spending more than it makes is determined by its government accounts. If a government has a surplus, the country will tend to have a trade surplus; if a government runs a deficit, the country will tend to have a trade deficit. Generally - but not always - the government is big enough that it will cast the swing vote, if you will, as to whether the country as a whole spends more than it saves and, thus, runs a trade deficit or trade surplus.

Trump has called the Germans very bad because the US runs a trade deficit with Germany. Germany's government ran a government surplus of about $27 billion last year. The US federal government is projected run a deficit of about $400 billion and Trump's proposed budget would probably increase the debt by about $1.7 trillion over the next decade. Our government deficit loosely translates into a trade deficit.

Assuming that Trump has more influence over the US federal budget than he does over German consumers and companies, if he were sincere about reducing the trade deficit he would reduce the federal deficit.

Or he could send angry tweets that insist the real problem is Germans who save too much rather than a US government that can't agree on how to finance its spending.

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. 

Trump's Wildly Impractical Immigration Ban and Why 120 Companies Are Suing Him Over It

Trump's ban on immigrants shows a disrespect for our constitution and an ignorance of modern economic realities. 

Let's start with Syria, a country on the banned list. Put aside for a moment the motivation of simple human compassion to help people who've been bombed out of their homes. Among the other reasons to challenge this ban is one ancient and one modern.

First the ancient. Jesus healed people in Syria and Paul preached there, which suggests a connection to a predominantly Christian nation.

Then the modern. Steve Jobs' father came to the US from Homs, Syria. This is what it looks like now.

This is what the Apple campus looks like, headquarters to the world's most valuable publicly traded company, a company currently worth nearly $700 billion (about 9X Syria's GDP), a company co-founded and reinvented by Steve Jobs, son of Syrian immigrant.

And that brings us to the heart of this argument: modern business is international business. This is bigger than Syria. Immigrants are an integral part of the American economy. Friday I was with a client in Orange County and met with 3 project managers and their core technical teams of four. As so often is the case in those situations, the teams were dominated by immigrants. One team of four had two people from the Middle East (Orange County has a very large Iranian community and they may have been part of that) but each of the three four-person teams had at least two foreign born team members. One team member, Peter, I just thought was American until he spoke in an impeccable British accent. The project managers were all from California but their team members were from China, Philippines, Iran, the UK, and India. Oh, and a couple were from California.

I once sat in a conference room with a technical team making a next generation computer chip for a Fortune 100 company. There were about 12 of us in the room. The conversation at lunch time went to green cards and visas and every single person had a story. (Mine was about my Canadian wife.Theirs was about their own experience of migrating to the US for school or work.) 

About a week ago, one of the team leads I had worked with last year at a startup on Google's campus posted something about giving a demonstration of the surgical robot he'd helped to create to Sergei Brin, the co-founder of Google who is now worth nearly $40 billion. He was delighted by that but almost more delighted that Brin had gone to the protest against Trump's ban at the San Francisco airport. Why was he so delighted? He's from Iran. Brin's show of solidarity not only was affirming but raises the probability that as he pursues his career in the US his own parents will be able to come to visit him. 

The teams within our leading companies are so intertwined with other countries. Monday of last week, the second person I spoke to at my new client's campus was a man from Iran whose mother is on her deathbed. He had to cancel his trip to see her, losing thousands of dollars in nonrefundable fares and - more poignantly - the chance to see his mother one last time. 

What Trump supporters don't realize is that banning travel between countries is - to the modern corporation - as impractical as banning travel between states for American families. Imagine not being able to visit your mother in Oregon because you'd taken a job in and married a fellow from California. It's inane and it's no wonder that leading tech companies like Alphabet (nee Google), Apple, Airbnb, Facebook, Microsoft, Tesla, Intel, Lyft, Netflix, Snap and Uber are among the technology companies that participated" in the legal brief to oppose Trump's ban. 

The modern corporation is a multinational institution. It's customers and suppliers come from around the world and even its development teams are scattered across continents.  For American based companies, 10 PM meetings with teams in India are normal, as are 6 AM meetings with teams in Europe. So many of the essential specialists who know how to design a computer circuit or heart valve or nanotechnology scope or the machinery on which such intricate and advanced equipment can be made are rare. It is normal - not unusual - for the technical teams I work with who are creating the next generation product to come from half a dozen different countries. I don't remember a single instance of working with a product development team made up only of Americans but I can remember multiple instances of working with teams who were completely from foreign countries.

What Americans don't realize is that if those team members aren't here, they will still get hired to create next generation products. They will just work in Mumbai or Shanghai or Eindhoven, Netherlands. And when that happens, the restaurants, dry cleaners, carpenters, car repair crew, hundreds of other service people who work with and for them will be in Mumbai, Shanghai and Eindhoven. They won't be here in San Jose or Austin or Boston. The result will be fewer, not more jobs. We're not protecting jobs by barring immigrants; we're shifting them to other places where multi-national teams are free to assemble. The teams of experts will assemble, the only question is where. Given how open we've been here in the US, the natural answer to the question of where best to assemble those teams has been the US. That could change.

It would be enough if Trump's ban was simply unconstitutional. It would be enough if it simply banned immigrants from countries who have never once killed an American on our soil, a policy based on irrational fear. But even if all that doesn't matter - and it should, it should matter greatly - this ban is based on such a wildly naive and ignorant model of how modern corporations actually work, how dependent we are on a vast web of specialists, technologies, and knowledge that respects borders about as much as the flow of air currents. The ban is ignorant. The global economy is a vast, evolving, and interdependent thing that has lifted billions out of poverty and given us a quality of life the description of which generations 100 to 150 ago would find fantastical, nonsensical and about as believable as teams made up of men and women from every continent working together on next generation products. I'm sure that there were elements of Stalin's Five Year plans that were more firmly planted in economic reality than Trump's immigrant ban. 

The companies who oppose his ban aren't trying to be cute or politically correct or compassionate. They're simply trying to run a business and when borders become walls that becomes incredibly difficult. Difficult enough that some of our best jobs might just go outside of the US. 

California vs. West Virginia: A Question About Which Direction the Country is Heading

Even some of my California friends had posted things like, "If you subtract California from the national vote, Trump won the popular vote." My counter to this is, "If you subtract the former confederacy from the national vote, Clinton won by 6.5 million votes."

Apparently there are folks threatening to boycott California because the state is out of sync with Trump nation. Such sentiments inspired this tweet:

Trump won by his biggest margin in West Virginia, by 42.2%. Clinton won by her biggest margin in California, by 30.4%. Let's compare those states and consider what it means to dismiss California as a place that is out of touch with the rest of the country.

California ranks third for median household income.

West Virginia ranks 49th.

California is the most populous state in the union. In 1950 it had 10.7 million and now it has about 40 million, nearly 4X as many. The simple fact that California has grown so rapidly is testament to its ability to create jobs.

West Virginia had 2 million people in 1950. Today it has 1.8 million, a drop of 10%. West Virginia has not been able to create jobs or even a net gain in population.

If you believe that people just are who people are, you might think that it makes sense that West Virginia would register a protest vote against the status quo. It's had trouble in this new economy and of course those poor people will vote for change. But if you believe that people are who their institutions are - if you believe that we're defined by our culture, schools, media, government, policies, and prevailing norms - then it is a terrible thing to follow the lead of a place like West Virginia. Why? Because the policies and norms it has chosen has made its people less able to thrive in the modern economy. History shows us that it's not how hard people work or who they are genetically that determines how prosperous they are. It is, instead, the systems they work with and within. Incomes were 6 to 8X higher in 2000 than they were in 1900 in spite of the average workweek dropping from 60 hours to 40. Incomes weren't higher because people were "better." They were higher because people learned, worked in, and were able to use better systems. If you believe that people can't change, than West Virginia was right to vote for different policies and leaders than California; if you believe that people can change and there is no intrinsic reason that West Virginia can't be as prosperous as California than it's a terrible thing that the nation is now going to follow after policies West Virginia voters think sound great rather than the ones that Californian voters think would be great. West Virginia's thinking doesn't make its people as prosperous as California's.

Here are just a few fundamental issues that Californians would find alarming in Trump's policies that apparently comfort West Virginians: immigration, free trade, and free religion.

California has the largest share of foreign-
born people, West Virginia the lowest. 

Trump wants to limit immigration, both legal and illegal. California is a land of immigrants. About 40% of Silicon Valley startups have at least one foreign founder. On a personal note, I was working with a startup on Google's campus this year and one of the departments (robotic sensors) had five people from five countries: the US, Iran, Italy, Poland, and South Korea. It's a global economy and California doesn't just sell to customers from all over the world, it hires and partners with people from all over the world.

Trump has chastised Apple for manufacturing its iPhone in China. He doesn't really like free trade and has threatened to levy a 35% tariff against Mexico and a 45% tariff against China. This could easily start a trade war. (Does anyone believe that other countries will merely pay huge tariffs and allow the US to continue to sell into their markets without levying an offsetting tariff? How naive do you have to be to believe that?) But it also misses the point. 75% of iPhones are sold outside of the US. Apple is headquartered in the US but it is an international company with an international product, customers, suppliers and partners. This is true of most of the products coming out of Silicon Valley, from Intel's chips to Uber's app.

Finally, Trump wants to limit the immigration of Muslims. This is a special kind of exclusion that is not only anti-constitutional (read the first amendment to be reminded that Congress shall pass no law regarding religion) but shows a complete confusion about where creativity comes from. Trump knows which religion is right and which is not. Really creative people don't even know which process is best or which theory will hold up for a century or will be dis-proven tomorrow. Freedom of thought - freedom to question or challenge established "truths" is fundamental to creativity. It's no accident that the free speech movement began in Berkeley just as the computer revolution was beginning. Freedom of religion is elementary compared to the freedom of thought needed to create new scientific theories, new social paradigms, new technologies, new businesses and new business models.

California has given birth to blue jeans, the Hollywood that generates TV shows and blockbuster movies, and a music industry that gave us acts like the Grateful Dead and the Eagles. It's been the source of so many cultural and business trends.  The most defining "industry" in California is Silicon Valley, a place that gave us Apple, Facebook, Intel, HP, Twitter, the internet, and venture capitalism. The most defining business in West Virginia is coal mining.

To this day we revere the ancient Greeks yet their golden age was only a century or two. Socrates died in 399 BC and Aristotle died in 322 BC. It was during the century or so around their lives that so much of what we know of their inventions - from philosophy to math to theater and democracy - emerged. It was an incredible time that the Greeks experienced only for awhile even though the world has felt its impact for the thousands of years since.

If this move towards West Virginia and away from California proves defining of the country's future, the US will go the way of other great and defining communities in history. We will have had our time and so much of what has come out of the US in the last century in particular is likely to continue to define the world in the way that the Athens of 4th century BC continues to define the world to this day. Civilization continues to carry forward the great inventions like money and democracy, even if it fumbles and drops them from time to time. It builds on what came before. Evolution - biological and social - doesn't throw away so much as build on. In that sense, the US of the 20th century will likely be with civilization for millennia to come. What isn't certain, though, is whether it will - like modern Greece - become just another also-ran as some other community becomes the innovators who we all follow with some odd mix of envy, reluctance, and excited mimicry.

For now, swing voters in the US have decided to follow the lead of a state that hasn't invented a new industry since coal mining in the 1740s rather than a state that is even now incubating industries as different as self-driving cars and genetic engineering. It's chosen to try going back to an earlier time when jobs were being created for coal miners rather than for entrepreneurs. If Trump is successful at creating such jobs it means that we'll be going in the direction of the 1700s rather than the late 2100s. That should be a sobering thought.

Sold The Horse and Bought a Car - Tijuana to San Diego Wait Times Plummet from 2 to 3 Hrs to 10 to 20 minutes

This is huge news. It could affect San Diego and Tijuana's economies in ways that only bio-tech and Maquiladoras have.

From my house to Mexico is about 10 miles but the return trip would take 2 to 3 hours just last month. In that same time, I could be in Los Angeles, 130 miles away.

Now, times have been cut from hours to minutes. A two-hour wait might now be 20 minutes. Or less.

That's like the difference between going into town on a horse or driving. It will be a huge boon to the region, increasing the flow of traffic in both directions.

The Importance of Pepper

To find a good reason why the waiter might think it would impress your date to offer her freshly ground pepper from what appears to be a small table leg, you’d have to go back centuries to Medieval Europe. (Of course, Freud might have as much to say about what this conveys as any historian. Lasting rituals rarely make sense at only one level.) In medieval times, pepper and other spices were status symbols, highly coveted, exotic, and expensive. So much so that its special place in our diet has carried over into today’s fine restaurants.

Spices were ideal for trade. They didn’t spoil and were light in weight. Essentially, foreign trade meant spice trade and the foreign lands from which the spices came were so remote as to be shrouded in mystery. By at least one estimate the average European never traveled more than 5 miles from home during his entire life (although given the lack of pedometers this would have to be considered a very rough estimate) and places as remote as Asia were idealized. To medieval Europeans, America was unknown but Atlantis was real, as was Paradise. And yes, by Paradise they meant the Garden of Eden. Spices were so aromatic, so rare, and so special that they were thought to come from there. (It seems reasonable to assume that trader who were happy to enhance demand for their product would make little effort to clarify that pepper actually came from India and the Maluku Islands in Indonesia.) Medieval Europeans believed that “pepper … grew on a plain near Paradise [and that] ginger and cinnamon” had been carried by the Nile straight from Paradise.

European food had yet to be infused with so many of the exotics to come from later stages of world trade, and spices were coveted for the simple fact that they enhanced the taste of food. Given the trade route was so long, spice prices were high and the products were essentially reserved for the elites. “In fact, pepper frequently took the place of gold as a means of payment.” And as with any highly priced item, spices conveyed status, a literal display of good taste.

But in the 1400s, the long trade routes were getting hit with tariffs by new rulers, and growing wealth among Europeans meant increased demand. As a result, spice prices went up 30x. If a person could find better trade routes to India, a way to avoid the tariffs levied in the Middle East, he would be rich. A taste for spices drove explorers to find a new continent. Columbus, who ventured out into unknown seas in search of it, would have known that America was truly a land of great wealth if he knew that it was a place where waiters came to your table and offered you as much fresh ground pepper as you wanted.

-------
Mostly drawn from Wolfgang Schivelbusch, translated from German by David Jacobson, Tastes of Paradise: A social history of stimulants, and intoxicants [Vintage Books, New York, NY, 1993]

Oil Prices Aren't Up - The Dollar's Value is Down

As oil approaches $100 a barrel, a great number of explanations emerge that focus on oil. Demand for oil worldwide is increasing, led by growth in India and China. Oil supplies are reaching a limit and new supplies are becoming harder to reach. Instability in the Middle East has resulted in an additional risk premium. Explanations like these that focus on oil may miss the most important variable - the falling value of the dollar.

Since early '06, oil prices have gone up from the about $60 a barrel to nearly $100. By contrast, oil priced by euros has gone up from about 50 euro to over 60 euro. Oil prices have increased by about 66% in the US, but only about 20% in Europe.

The good news is that the country consuming the most oil per capita is going to be forced to become creative in its use of oil. The bad news is that just as our goods are becoming more competitive, courtesy of a devalued dollar, our input costs are going up. Unless we can find ways to produce as much with less oil, becoming more productive, or energy-efficient, this opportunity to lower our trade deficit by exporting more could be lost.

The reasons for launching a national energy policy initiative that would lessen our dependence on oil are stacking up. At some point, even people as unimaginative and cautious as politicians will have to wake up to this fact and act.

Foreigners Will Fund Your Retirement

Our attitude towards immigration and trade could cost us our retirement.

In a great column on American exceptionalism, Fareed Zakaria explains that Americans rank dead last among countries surveyed on their belief that trade between countries is a good thing. Americans acceptance of immigration has also precipitously dropped in recent years. This new anxiety comes at a bad time.

This month, the first baby boomer began to collect social security payments. She's merely the first of a very large parade. During the next twenty years, 46 million college-educated baby boomers will retire. There will not be enough American-born workers to replace them. By 2015, the United States and Europe will face shortages in workers. In 1950, the ratio of working age to elderly was 7 to 1; by 2030, it is projected to be 3 to 1.* No matter how we structure retirement, it ultimately rests on this: the people who are working have to make enough to pay for their own lives and the lives of those who aren't.

There are four things that will either make this coming demographic shift a non-issue or make it a huge issue.

One is productivity gains. If a person in 2030 is 3X as productive as a person in 1950, he can more easily take on the task of funding more retired people. To the extent that these productivity gains come from capital investments, returns to capital can help to fund retirements.

Two is the total ratio of non-working to working people. It is true that there will be more retired people for every working person in 2030, but at the same time there will be fewer school-age children for every working person. Non-working = in school + retired. As the retired number goes up, the in school number will go down. Factoring in school-aged children makes the ratio of working to non-working look less worrisome. Plus, real advances in medical and psychological treatments could make it possible for a higher percentage of the working age population to be productive.

Three is the number of immigrants. Just as we're projecting a drop in working age population, Africa, Asia, and South America is projecting an increase. Inviting immigrants to maintain our population of window washers and brain surgeons will help them and help us.

Fourth is trade and investment across borders. If my retirement fund pays me from returns to capital invested in a foreign company, I've helped to create jobs for foreigners and they've helped to fund my retirement.

The truth is, we need a combination of these four factors in order to smoothly sail past this jarring and unprecedented shift in demographics. No one factor listed above would be enough, on its own, to ensure retirement funding.

I've written before about how oddly inflated is the concern about immigration in this country. The truth is, we have only two choices: take a step back in prosperity or step further into this age of globalization. Insulating ourselves from the outside world is not an appealing option. The politicians who feed Americans' fear of immigrants or trade are doing worse than pandering to phobias - they're setting us up for failure.

The facts from the * paragraph are taken from James Canton's The Top Trends That Will Reshape The World in the Next 20 Years.

Fortress America - the Bi-Partisan Fantasy of Globalization Deniers

Globalization is a reality that activists on the right and left deny. Globalization deniers on the left fear shadowy groups of corporate elites who conspire to suppress wages and destroy jobs. Globalization deniers on the right fear shadowy groups of radical Muslims who conspire to suppress freedoms and destroy lives.

Globalization is a reality. Today, a guy in the Ukraine and a gal in Fresno can collaborate via the web to create a new product and then subcontract to a company in India to manufacture it. If this new product is better or cheaper than what is currently designed in Germany and made in Mexico, Germans and Mexicans will lose their jobs. It’s not clear that anyone is going to reverse the technological advances that have led to this reality.

Globalization is a reality. Every year, there are about 172 million people coming into the United States across our borders. Nearly 6,000,000 visas are granted each year. Our economy depends on the tourism revenues and the cross-pollinating of business and academic professionals. It's not clear that anyone is going to shut down our borders in order to eliminate illegal immigration.

Any policies that pretend to reverse globalization ought not to be taken seriously. The bad news? We can’t isolate ourselves from the rest of the world. The good news? We can’t isolate ourselves from the rest of the world.

Representative Keith Ellison and His 1 Billion Informal Constituents

It seems as though we have a few choices in dealing with the Muslims who share the planet with us:
1. Send Sam Harris, author of The End of Faith, around the world to convince them all to become atheists.
2. Send Pat Robertson around the world to convert them to Christianity (in which case Sam Harris may feel compelled to follow him around to convert them to ... well you get the point).
3. Try to convert the Islam-a-phobics in the West into becoming warm and friendly neighbors with their fellow Muslims.
4. Stop with the conversion fantasies and continue to focus on creating a further web of interdependency and familiarity through increased levels of trade.