The media is baffled by Donald but they created him

To succinctly recap yesterday's blog post ....

The media is largely baffled by Trump's popularity.

What if the media created him?

We are living in an amazing time of progress. So many examples to point to but I'll point to a fairly simple one from yesterday's bea report: wages were up 5.1% in 2014 and 4.6% in 2015.

And yet the media's focus every day is to find the worst in people and events and to sound the alarm (ebola! stock market volatility suggests recession!) at every real or imagined threat.

Everything good gets glossed over. Everything bad - even if it is just imagined - is dwelt on.

The media focuses all day on alarming the polity and then acts shocked when the polity, taking them seriously, decides that they need an alarming candidate.

Clay Shirky and What is Wrong with the Media (why they failed to predict Donald Trump and why they distort reality)

Clay Shirky offered a fairly scathing critique of the mainstream media in a series of tweets last night. You can find his twitter feed here, but here are a few representative tweets.

Essentially he is saying that in spite of the poll numbers that have consistently shown Trump's popularity, pundits have dismissed empirical data in exchange for their own professional opinion about what is likely. "Punditry over statistics."

In another tweet he argues

This "inverse proportion" coverage is the reason that the American people are so angry and this is the reason that the press is getting the election wrong. It is the same cause.

Every day, 7 billion people wake up to go about their day on this planet. The vast majority are engaged in raising children, working, enjoying retirement, nurturing friendships, pursuing hobbies, volunteering, creating things, generally enjoying more options than their parents and paying attention to a media that is designed to focus on the exceptions to these normal, productive, helpful lives. The media model pretends to tell the story of the world but it does nothing of the sort. Instead, it tells about the breakdowns and exceptions. And if you pay close attention to the media, you have no real idea of what is going on in the world.

The media, of course, knows this. They work hard to find the bad guys, the "can you believe it moments," the "isn't this awful?" stories. And because they know that reality is so much better than what they report, they are incredulous that the American people would be so angry that they would vote for someone like Donald Trump. They know that this has to be wrong.

But the American people think that the stories about everything being wrong are the main stories, not the exceptional ones. Bad events are covered in "inverse proportion" to their consistency with reality, to paraphrase Clay Shirky. What media pundits know to be exceptional stories are seen by the American people as the normal stories. This is, of course, how they get their news.

Extreme poverty globally is 10% of what it was in the 1980s. Yet the average American will tell you that the world is getting worse. Crime in the US has steadily dropped since the 1980s. The average American will tell you that it has gotten steadily worse. GOP candidates stand up before voters in debates and report on how terrible the economy is, in spite of data that shows its performance is easily in the top 20% for economic periods.

Politicians and the media collude to tell the world how bad things are. The media does it because alarm raises ratings. The politicians do it because it is good for their poll numbers.

The media is baffled by Donald Trump but the media created Donald Trump. You don't continually focus the attention of voters on all that is awful and then act amazed when someone who says that things are so awful that we need to take drastic action.

Oh, and to be fair, not all media focuses on what's awful. An exception to the rule is James Fallow's latest Atlantic cover article documenting so much of what is good and hopeful at the local level, "How America is Putting Itself Back Together Again."

Why Jeb Bush Dropping Out and Trump's Ascent Shows Hope for the GOP

Jeb's failure and Donald's rise signals real hope for the Republican Party. And this is coming from a guy who thinks that Donald Trump is a nut, so let me explain.

The GOP primary is a contest for 2,470 delegates. Jeb Bush spent more than $150 million to win 4 of those delegates. That is 2/10th of 1% of the total, or about 0.4% of what he needed to win his party's nomination.

Through the end of January, Jeb and his Super Pacs had raised $155.6 million.

How much is that? Well, in 1992 his dad ran against Ross Perot (an outspoken, self-funded billionaire) and Bill Clinton. Between them, the three candidates spent $192 million. Yep. Jeb spent nearly as much to win 0.2% of the GOP primary as was spent in 1992 to win 100% of the general election.

The first bit of hope for the Republican Party lies in this fact: a ton of money from rich old white guys was not enough to win. Not even close. Money is in politics but it is not obviously a factor, at least in races with as much visibility as a presidential race.

The second bit of hope comes from the similarity to the 1992 election.

I think that 2016 could become just like 1992, a race featuring an establishment Republican, an out-spoken billionaire, and a Clinton. George H. Bush, Ross Perot and Bill Clinton in 1992 and Marco Rubio, Donald Trump, and Hillary Clinton this year.

Why is that a source of hope? Ross Perot in the primary forced Bill Clinton to take on the deficit as a serious issue. Before that, Democrats had seemed to become uncaring about spending, unworried about deficits. To counter Perot's threat, Clinton was forced to change this. The result? Democrats went from mindless ideology to great policy. The economy thrived with policy that was at least partly a reaction to Perot.

Donald Trump - in a similar way - may force the Republicans to at least look at their foreign policy. He and Rand Paul are the only Republicans who see fit to point out the lunacy of the Bush / Cheney foreign policy. Trump represents something new. He's not interested in toppling regimes in the Middle East and then having to send in troops to prop up a besieged government. He doesn't pretend to know what is best for the Middle East but he knows that whatever is best, it doesn't involve our troops babysitting entire countries. One of the many ways in which the GOP became irrational under the Bush / Cheney administration is that they believed that US government programs here in the US cannot change people's lives but US government programs in foreign countries can. Trump suffers the boos to challenge this belief.

Trump could be to the Republican orthodoxy what Perot was to the Democrat ideology. As crazy as he sounds, Trump might force the GOP to inject a little reality into their ideology. This started with his taking down Jeb Bush from "sure thing" to mid-February dropout.

Contrary to what pundits are saying this week, Jeb did not represent the reasonable side of the GOP. He represented the Bush brand and that brand was seriously tarnished. In the eyes of Democrats, George W.'s policies blew up the Middle East and then the economy. It seems as though a number of Republicans agree. 

Here is what I wrote in late October about the fact that Bush was probably going to lose.

So why the big difference? Why is it that Bush - a brand name that has been hugely popular in the Republican Party for decades - has fallen out of favor and Clinton - another brand that has been popular for decades - is going strong?
It might be that the Republican Party is becoming more rational.
During Bill Clinton's time in office, the economy created 22.9 million jobs, the Dow rose 230%, and unemployment averaged 3.9% in his last full year in office. In his 8 years in office, he helped to turn a $290 billion deficit into a $236 billion surplus.Unsurprisingly, he left office with a 66% approval rating. That brand - the Clinton name - is pretty good.
During George W. Bush's time in office, the economy created 2.6 million jobs (around 1/10th the number created during Clinton's administration), the Dow fell 26%, and unemployment averaged 7.3% his last year in office. (It averaged 9.9% the year he left office in January.) In his 8 years in office, he turned a $236 billion surplus into a $458 billion deficit. And this litany of issues doesn't even include the two wars funded with a tax cut that resulted in thousands dead and millions displaced. Unsurprisingly, he left office with a 34% approval rating, a rating about half what Clinton had. That brand - the Bush brand - is pretty tarnished.
Shocked that the country re-elected George W., I just assumed that Republicans were irrational enough to try this Bush brand one more time. Turns out, they deserve more credit than that. It looks like Jeb's sure thing no longer is. And that, it seems to me - for whatever you think of Trump or Rubio, is progress. Jeb's fall is not really his ... it is a natural consequence of his big brother's fall.

Donald, by contrast, is beholden to no one. He doesn't seem to care much about traditional GOP ideology. Or, at least, 21st century GOP ideology. 

His personality and policies are repugnant but in order to blow things up, you can't be a shrinking violet. It might even be that Donald simply has an insatiable appetite for media attention. It's not enough for him to be the front-runner who wins all of the delegates from the South Carolina primary. In that same week he has to hijack Jeb Bush's website and trade barbs with the pope. His candidacy might simply be a symptom of his idiot savant media savvy coupled with a lack of respect for social norms. He deserves all of the criticism he gets and yet who else would be able to shock the Republican Party out of its oddly ungrounded claims ("George W. kept us safe," and "This economy is a disaster and we need to return it to what it was under Republican rule."). If any individual were to so blithely and confidently ignore things like 4.9% unemployment or data showing global warming, they'd be considered dangerous. If a party does that, it's just considered ideology. 

And while Donald has many cognitive flaws, he's not wed to an ideology, particularly the ideology that has handcuffed a generation of GOP candidates. Whatever works to get votes is what he approves of. When he heard that the pope had commented about him, Donald honestly said, "What did he say? If he said something nice about me, I like him. If he said something mean about me, I don't." Donald discards decorum for what works and this is just what the GOP needs right now.

I don't think that Donald will win the general and I rather doubt that he'll even win the GOP primary. (You might reasonably attribute that to hope.) I do think that he'll change the Republican Party. And that is a good thing.

Economic Realities and Why the Fall in Stock Prices May be Over

Here are some numbers that help to tell the story of today's economy and what that suggests about whether the recent fall in stock prices is a warning of a coming recession. The punchline? I think that a recession is still unlikely, and here are some data to explain why.

Quits is an important measure of labor market confidence. You don't quit a job unless you think you've got good opportunities elsewhere and quits are at their highest rate in nearly 15 years. This is not an abstract measure of confidence. It's a practical measure that reflects how real people with real jobs feel about their prospects. It may be one of the most important leading indicators in economics, telling the story of people's optimism about better paying jobs or business ventures that justify striking out on their own.

Home prices are up 6.2% from a year ago, and the number of homes sold is up about 2 to 3%.

Gallup's measure of consumer spending remains stable - not really up or down significantly over the last couple of years.

But people are spending less on gas and energy, so if consumption is staying stable, it means that it is going up for things other than gas. In fact, the percentage of income that people spend on energy is the lowest it has been since the late 1950s and Bill McBride predicts it could hit an all-time low when the February numbers are reported. It is as if people are getting a raise in take-home pay when the price at the pump falls.

Incomes went up 2.5% in the last jobs report. Just as important from the perspective of the economy, total private sector wages are up 5% from a year ago and were up 6.3% the year before that. Total wages are up more than average wages because it measures the average raise everyone is getting AND the growth in the number employed (another year, another 2.7 million jobs created.) Meanwhile, net savings - which was up 30% through the end of 2014 - was actually down by 7% through the third quarter of 2015. This means that people are daring to spend again after years of paying down debt in the wake of the Great Recession. This is further evidence that the influence of the Great Recession is waning and that the economy will pick up.

Of course all of this data has still not spared Americans from an uneasy feeling. Among other things, they are made uneasy by China's apparent slowdown. (These being the same Americans made uneasy by China's economic acceleration.) Gallup's measure of economic confidence is down from a year ago. In spite of continued progress, Americans are worried. It might just be because they've got candidates coming on TV every week telling them how awful this economy is. And of course the stock market's spectacular fall of 10% to start the year has seemed like a harbinger of bad news. But stock prices might have less to do with the economy than with adjustments to fallen oil prices and raised Fed rates.

There are a few interesting theories to explain the fall in stock prices.

One is that oil money countries like the Saudis and Russians are having to sell off a chunk of stocks as oil prices fall. 

Two is that as the dollar rises against foreign currencies, it lowers profits measured by dollars. Lets say that an American company has sales of $1 in Canada in early 2014 and those sales stay stable through late 2015. While the sales are stable in Canadian dollars, they've dropped a lot in American dollars. That Canadian dollar is worth about 70 cents, so from the perspective of an American firm, sales have dropped. A lot. Not all currencies have dropped as much relative to the US $ but by some estimates the dollar's rise equates to a drop of about 11% in international sales.

The third theory about why stock prices are falling is because the market is trying to adjust for the fact that interest rates have gone up. When interest rates go up, fixed interest investments are more attractive. A rise in interest rates typically leads to a shift of monies from stocks to bonds, triggering a fall (however small) in stock prices.

Personally, I think that these three theories all have some credibility and could account for a drop of 10% in stock prices to start the year. Once that adjustment is made, I think that economic realities will be reflected in stock prices and we'll see a steady uptick in stock prices (although still characterized by the volatility that is the modern market). After getting it wrong by predicting a rise starting last week, I'm doubling down and betting that stock prices will start rising this week. And whether it is this week or next, the real point I'm trying to make is that there seems like no good reason for an on-going fall in stock prices. Probably sooner than later, economic fundamentals will prevail over current turmoil.

Everybody Likes Me, Says Donald. I'm Not So Sure

"I'm a nice guy," Trumps continually assures us."Everybody likes me," Donald likes to say.
I'm not so sure that anyone likes Donald. I get the sense that people voting for Trump actually just dislike big swaths of their fellow citizens: immigrants, minorities, the poor, elites, pundits, Democrats, establishment Republicans, the media ...

People don't really like Donald. They just share his dislike of special groups of Americans.

In Which Your Blogger Briefly Interrupts Pundits' Regularly Scheduled Cries of Alarm to Remind You that Things Have Been Worse

Perhaps it is just because it is an election season, but it is popular to bemoan the state of the world. ISIS and a flood of refugees from the Middle East and a porous border with Mexico are two popular subjects for people arguing that the world is teetering on the brink.

I do think that we've had decades since the Dark Ages (which ended in roughly 1300 AD) in which civilization has slipped back, when catastrophes have mounted more quickly than gains. I don't think that we've ever had a century pass in which life didn't get better for most people in the West.

How does now compare to 100 years ago? What was going on in 1916?

Starting with the border, Pancho Villa was leading raids from Mexico into New Mexico and killing American soldiers. Imagine what Trump and the 24-hour news cycle would do with that.

Mother and child wearing gas masks,
somewhere in the French countryside along
the Western front, 1918.

Turmoil in the Middle East pales in comparison to World War One. Or as they called it then, the Great War. Communities in the previous generation had learned how to mass manufacture goods. In the Great War, they turned their new insights into mass manufacturing death. In the Ottoman Empire alone (a swath of peoples that overlaps with the Middle East), 2.5 million civilians were killed in addition to roughly half a million soldiers. What happened to people living in the Ottoman Empire was worse than what is now happening in the Middle East but of course there is no comparison today to what was happening in Europe then. WW1 left 17 million dead and 20 million wounded.

When the Great War ended in 1918, one of the deadliest pandemics of recent history swept across the globe. Between 1918 and 1920, a flu pandemic killed roughly 4% of the world's population, or 75 million people. (The same percentage of the world's population today would be nearly 300 million, a number equal to the entire population of the US.)

At some point in history, the number of pundits and analysts began to outnumber the number of reporters. At that point, reporting seemingly tipped from reporting on what had actually happened to what might happen. At that point, alarm about the future became more newsworthy than a reasoned look at what actually happened.

If you only listen to pundits and and politicians but not reporters and ignore almost all of history, you might just believe that things have never been worse. It's hard to imagine how else one could arrive at such a conclusion.

Why Americans are Increasingly Frustrated with Democracy

Bernie Sanders and Donald Trump are doing surprisingly well in this presidential campaign. It would have taken some imagination to predict that the winners of the first primary of 2016 would have been a (Democratic) Socialist and a reality TV star.

There is a bigger story in their rise, though. Our two big parties are fracturing because politics can't keep up with markets. Let me explain.

Taylor Pearson shared a fascinating statistic the other day. Timothy Ferris, asked his audience what other podcasts they listened to: the top ranked podcast is listened to by only 1.44% of his audience. As Taylor points out, this is an incredible change from the old days of 3 main TV stations. In this poll, market share of 2% would make you dominant.

Why is this relevant? When it comes to music, ideas shared in podcasts, type of car you drive (or transportation service you use), clothes you wear or books you read, the market provides an incredible array of choices. Chris Anderson published The Long Tail in 2006, pointing out that a site like Amazon could make as much (maybe more) money selling one copy each of a million book titles as the old brick and mortar stores could make selling a million copies of one book. It used to be exotic if you liked reggae. Now you can find an album of heavy metal reggaeton. One of the reasons that I love twitter is because I can choose an array of folks to follow who keep me amused, informed, and outraged about the issues and topics that most fascinate me. My twitter feed is distinct from that of any other user.  If I visit Drudge or Huffington, I see what everyone else sees. When I visit Twitter or Facebook, I see something no one else does. I am unique and so is my experience of the news.

Markets give us what we want. They encourage you to be unique, to feel special and that's an amazing thing.

Democracies, by contrast, are a place where we have to come together. You have to find common ground with at least 51% of your neighbors and it turns out that those neighbors are becoming more unique and different from you every year. (In no small part because markets are helping to nurture what makes them distinct.) Once upon a time, it was enough to feel "sort of" conservative. Now, you have to define whether you are an evangelical or business conservative. And even if you are an evangelical, you have to distinguish between pragmatic or idealistic. On the left, you have to distinguish between pro-$15 an hour minimum wage or not, anti-Wall Street or not. And the more finely you define yourself and your candidate, the more likely you are to be frustrated by politics because the fewer the number of people who agree with you.

When you tell the market that you really like reggaeton, the market provides more of it. You get more choices, more bands, more albums, more songs and concerts. Of course you and your fellow reggaeton fans might never constitute more than 3% of the music fan market but if that is 3X what it was last decade, you feel like you are part of a happy surge.

But if you and your fellow libertarians grow by 3X to reach 3% of voters, you're  still largely ignored. Given that a democracy is defined by a majority, the small clusters of special fringe groups have power only in special situations, like when they represent the swing vote. People used to the market's rapid and happy response to their desires find this extremely offensive. "Washington doesn't listen to us," is the impression they are left with.

As markets have become more responsive and better able to serve folks in the long tail, they make democracies look bad by contrast.

Why are people increasingly frustrated with politics? Because in a world in which they are continually assured that they are unique and special, politics tells them that they have to focus instead on ways in which they are just like everyone else. Because until you find the common ground you share with at least 51% of your neighbors, you aren't special at all. In fact, you are largely irrelevant to the political process. In the market we can pursue what makes us unique. In politics, we have to pursue what brings us together. And the tension between those two is actually a good thing, as long as you don't carry expectations from the one over to the other.

I'm not sure how people will learn this, though. No politician is likely to face an audience and say, "You're not special."

Data vs. Myth - Job Creation and Reliance on the Public Sector under Reagan and Obama

Here is some interesting data that shows job creation by administration with public sector (government) jobs broken out in orange from the private sector jobs in blue.

Curiously, no one since Reagan has gotten a bigger boost from big government than Reagan did during his second term. (Well, unless you are counting percentages, in which case George W's first term wins, when the government created 1 job every time the private sector lost 1 job.) And no one has had a bigger drag on job creation numbers because of layoffs in the government sector than Obama. He's on track to preside over the loss of roughly half a million government jobs during his two terms. And note that in Reagan's second term, the government created 7X as many jobs as it did during Obama's second term.

Reagan is the big government beneficiary and Obama is the one who stumbled along with little public sector boost. That's a narrative you won't hear pundits share.

-----------------------------

Here is the data that drives the graph above. (It projects Obama's numbers through a full second term, just assuming that the remaining 11 months will continue at the average of the first 37 months.)

Job Creation (in millions)
Reagan 1
private sector	5.2
public sector	0.0
govt jobs bonus	-0.5%
Reagan 2
private sector	9.4
public sector	1.4
govt jobs bonus	15.4%
H Bush
private sector	1.5
public sector	1.1
govt jobs bonus	77.1%
Clinton 1
private sector	11.0
public sector	0.7
govt jobs bonus	6.3%
Clinton 2
private sector	10.3
public sector	1.2
govt jobs bonus	12.0%
W. Bush 1
private sector	-1.0
public sector	0.9
govt jobs bonus	-89.6%
W. Bush 2
private sector	1.3
public sector	0.8
govt jobs bonus	64.5%
Obama 1
private sector	1.0
public sector	-0.7
govt jobs bonus	-69.2%
Obama 2
private sector	10.8
public sector	0.2
govt jobs bonus	2.0%

Obama's First Ever "Great" Month

For the first time in 95 months, the unemployment rate has dropped below 5%, which is great. In this decade, we've had a lot of misery and very, very little great.

Unemployment rates mostly bounce between 5% to 8%. About 15% of the time the economy is bad enough to drive rates above 8% and about 15% of the time the unemployment rate drops below 5%. I think that it's fair to say that above 8% the economy is miserable and below 5% it is great.

By that definition, Obama has now had 1 month of great and 42 months of miserable.

By contrast, Clinton had 44 months of great and not a single month of miserable.

And George W.? He had 32 months of great and also did not have a single month of miserable. Although the Great Recession had begun months before he left office, the unemployment rate did not go above 8% until the month after George left office, where it stayed for 42 months. Workers in the Midwest and Syrians and Iraqis didn't start streaming into unemployment offices and refugee camps until after he'd gone back to Texas. 

You'd like to think that change in the unemployment rate counts for something, and apparently it does. Reagan had 27 months of miserable and no months of great, but the unemployment rate fell 2.1 percentage points from when he came into office to when he left. He finished with an approval rating over 60%. (Plus, more than any president before or sense, Reagan just looked like a made-for-TV president.)

George H. Bush had a tepid presidency that didn't include a single miserable or great month, and he finished with an approval rate over 50% in spite of presiding over a 1.9 percentage point uptick in the unemployment rate. The economy got worse during his presidency but not that much worse.

Not only did Clinton preside over 44 months of great, but the unemployment rate fell 3.1 percentage points during his time in office. Bill finished with the an approval rating of about 65%, the highest of any president in generations. Hard not to love a guy who presided over unemployment rates under 5% for nearly half his presidency. (And all the months during which unemployment dropped below 4%.)

Where does this leave Obama? It's hard to tell. Reagan had zero months of great and 27 months of miserable and is beloved by all Republicans and many Democrats and George W. had 32 months of great and no months of miserable and is hated by all Democrats and many Republicans. It's hard to tell how this will affect Obama's legacy but it does set up something that could drive the GOP crazy.

If Hillary Clinton wins the presidency, she might just come into office with the unemployment rate under 5%. In other words, when she gets into the Oval Office, the economy might already be great. If it stays there and Hillary is able to post numbers as impressive as Bill's... the Clinton legacy might be golden enough that Chelsea could win elections she doesn't even campaign for.

	Months of Unemployment
Administration	Above 8% (Miserable)	Below 5% (Great)	months in office	bad	great
Reagan	27	0	96	28.1%	0.0%
H. Bush	0	0	48	0.0%	0.0%
Clinton		44	96	0.0%	45.8%
W. Bush		32	96	0.0%	33.3%
Obama	42	1	85	49.4%	1.2%

The Most Curious Thing About the Labor Market

While the stock market continues to worsen, the labor market continues to improve. But that is not the most curious thing about it.

Unemployment is down to 4.9% from 5.7% last January. Since 2011, the Jan-Jan drop has averaged 0.8%, so the recovery continues at exactly the same rate it has averaged over the last six years.

Wages are up more than 2.5%, a rate of gain that's higher than what it averaged throughout the 1900s when steady wage growth of roughly 2.+% made wages about 6 to 8X higher in 2000 than they were in 1900. 

The number of employed is up 2.44 million from a year ago. Where did these people come from? 1.3 million came from a growth in the labor force (millennials and others entering the workforce) and 1.1 million came off of the list of the unemployed. 

The number of discouraged workers is down 8.7% and the number working part-time for economic reasons (that is, they are working part-time simply because they can't find full-time employment) is down 11.7%.

The average number of jobs created in the last 5 years was 2.5 million. By comparison, during the best five-year streaks in the late 1990s and mid-1980s, job creation averaged 2.9 million jobs a year. Job creation is not as strong as during the best five years of those recoveries, but it is more steady. No job creation streak has gone this long without a temporary dip. We now have 64 months of uninterrupted job creation, a period during which 13.1 million jobs have been created. The streak could end this year but there's at least as much reason to believe it will continue as finally stumble. 

Curiously, as the stock market becomes more volatile, the labor market has become more stable. The stock market rarely goes three months without an alarming downturn, whereas the labor market has ticked up every month for more than five years. And to highlight that contrast, the NASDAQ is down about 3% the same day that unemployment falls below 5% for the first time in 8 years.

 Curious indeed.

Confessions of a Political Guy Who is Made Wildly Uneasy by Political Rallies

I'm sure that most people would think me political and religious. And yet ....

Watching the candidates tonight give their speeches (I saw Rubio, Trump, Cruz, Clinton and Sanders), I realize once again that political and religious people in large groups make me really uneasy. This matter of wildly cheering for a candidate just strikes me as so odd. To get people all fired up about their beliefs, to hoot and holler about abstract ideas and policies, strikes me as something as awkward as having sex in public. Actually, I think it might be more awkward.

These are just people with ideas, some more promising than others. It seems required, though, that their supporters have to hail them like they're the Messiah. That's just weird.

Susan B. Anthony and What History Reminds Us

Here's a picture of Susan B. Anthony from History in Pictures. After they beat her, they arrested and fined her for trying to vote in 1872.

 It seems to me this sort of thing should instill optimism and humility. Optimism about the future to know that we've come this far. Humility to realize that there are a number of things we're doing now that people in 150 years will likely find odd and horrifying.  We've come a long ways and we're not there yet.

What if the Real Question is not Why Are Oil Prices Falling? but instead, Why Did They Start Rising in 2003?

It's an open question as to why oil prices have fallen so much so quickly. In June of 2014, oil prices were $111. They are now about $30.

Some of the explanations for the fall sound conspiratorial. Countries like Russia and Iran that the West has reason to weaken, are hurt by low oil prices. It might be that Western countries are engineering oil price manipulations to weaken Putin but of course this glosses over the fact that Western countries have trouble even managing their own currencies, much less the global price of oil.

Another, very interesting theory, is that solar and alternative energy sources are becoming cheaper. Some people believe that solar panels may follow the path of computer chips, becoming cheaper and more effective at a rate that mirrors chips doubling in capability every 18 months. Couple that with continued advances in fusion power and it may be that oil prices would have to drop to stay competitive with alternative energy. If oil producers believe this might happen, it would make sense that oil producers would work to sell off inventory before it becomes obsolete, driving down prices now before the great collapse in oil prices later. In this scenario, oil producers are like FAX salesmen scrambling to sell machines before email marginalizes their product.

It's also true that more incremental advances have brought down oil prices. Fracking, shale oil, and new methods of extracting oil from previously unattainable places has increased the global supply of oil and driven down prices.

But maybe the question, "Why are oil prices falling," is the wrong question. Perhaps a better question is, "Why did oil prices jump?" Because while oil prices are as low as they have been since the end of 2003, they aren't much different than what they were before 2003.

From 1987 to about May of 2003, oil prices averaged just under $20. From May of 2003 through the middle of 2014, oil prices averaged $79, 4X higher than what they'd been before 2003. So far this year, oil prices have averaged a little over $30, closer to the pre-May 2003 period than after.

What happened in 2003? The US invaded Iraq. And it didn't take the market long to realize that rather than stabilize the Middle East, ensuring a steady supply of oil, this was likely to destabilize markets by threatening oil supplies. When retreating Iraqi forces set fire to 40-some oil fields, it made for fairly spectacular footage. 

When the US invaded Iraq, oil prices were about $23 to $34. After that, they began to steadily rise until peaking at nearly $140 in June of 2008, when the Great Recession had begun. (Everyone points to mortgage markets as cause of the Great Recession, and for good reason. Oddly, no one points to incredibly high oil prices in spite of the fact that high oil prices have started recessions before.) From the month the US invaded Iraq to June of 2008, oil prices rose $115.

It might be that oil prices that range from $20 to $40 is not the exception but instead, oil prices that ranged from $100 to $140 were the exception. As the market realizes that even radicals as ideological as ISIS are willing to sell oil, perhaps the market is now seeing less risk to oil supplies and thus, is pricing oil at less of a premium.

Oil prices peaked at nearly $140 in June of 2008, about $115 higher than they had been when the US invaded Iraq in 2003.

The question is not, Why are oil prices falling. The question is, Why did oil prices rise? The answer to that question may well be complex and debatable. It might also be that the answer is as simple as this was just one more price paid for bad US foreign policy. It was a policy based on the simplistic notion that the bright shining light created by this invasion would radiate from democracy in the Middle East rather than burning oil fields.

What if this new economy drives less investment and consumption? Would we still call it progress?

Last year, "investment in mining exploration, wells, and shafts fell 35 percent." With oil prices down, there is less reason to invest in finding and tapping new sources of oil. Unless oil prices fall another 50%, this represents a one-time drop. It is also a reminder that we might be moving into a less capital intensive period of economic development.

If you are starting an oil drilling or mining company, you have to spend a lot of money on capital. A mining company client I worked with in the Upper Peninsula of Michigan had trucks the size of two-story houses, trucks able to move 320 tons of ore in a single trip. Not only do these trucks costs millions to purchase but they burn 1,000 gallons of diesel fuel a day. Replacing a tire costs $52,000. The custom built shovels that fill these trucks scoop 70 tons of rock at a time and cost $20 million. This sort of industry is capital intensive. You have to invest big in order to compete. And this sort of capital-intensive industry defined the economy of 50 years ago.

The investments of the new economy firms are different, more public. It's not unusual to see a group of employees in tight work areas all on computers. It's rare that those computers would cost more than $4,000, often considerably less. The investment in that room was likely made in their education, money spent out of private household investments in tuition or private endowments of prestigious schools or public funding of state universities. The capital equipment spending is often low. (That's obviously not true of all knowledge workers. Folks working at the Hadron Collider, for instance, are working with a billion dollar a year expense.)

And on the consumption side, there are two trends that might keep spending down.

One is that millennials are less prone to go to the mall to buy things. They seem to be more deliberate about how they spend and they see conspicuous consumption as a moral failing, reliant as it often is on sweat shops, waste, and unsustainable production techniques. If 50 years ago having a closet bulging with clothes was a sign of affluence, it is now a sign of poor judgment, in the same way that in a time of frequent famine a belly is a sign of affluence and in a time of abundance, a belly is just a sign that one lacks self-restraint. While such lifestyle choices could still result in comparable levels of spending (one hand-crafted, quality sweater might cost as much as half a dozen cheap sweatshirts), it isn't likely. This sort of lifestyle may well bring down consumption levels.

Related, the sharing economy could result in less spending  as well. Uber and Airbnb are cheaper than traditional taxis and hotels. Operating these businesses doesn't require explicit capital outlays (back to the notion that the new economy is less capital-intensive), using information to identify slack in capacity of cars and homes and people's schedules. Not only does this mean less investment (it's unclear that someone who lets out their home to Airbnb guests 6 times a month can expense their personal home construction as investment in the same way that the Marriott could expense hotel construction as an investment), it means less consumption. People spend less to get from one place to the next or to sleep overnight.

The economy is changing in a variety of ways and it is worth remembering that only in the wake of the Great Depression in the 1930s did Simon Kuznets develop GDP as a measure of economic activity. GDP is a measure that we didn't have in the 1800s and is a measure of economic progress and well being that we may radically change by the 2100s.

The economy is still evolving. To capture reality, so must our measures of it.

Venture Capital Spending Up 16% in 2015 - And That's Great News for Wages

In 2015, $58 billion of venture capital was invested in the US. [All of these numbers come from the Price Waterhouse Coopers / National Venture Capital Association found here.] This is the highest dollar amount since 2000, and up about $8 billion or 16% from 2014. 2015 VC investments ran nearly double the rate they had run from 2002 to 2013.

Early stage financing rose at a similar rate, suggesting that the pipeline of new businesses is strong. (The companies in this early or seed stage are rarely expanding quickly. Yet. The flurry of hiring and wealth creation - if it happens at all - will typically happen one to four years later.)

Silicon Valley - home of Sand Hill Road, which is to VCs what Wall Street is to brokerage firms - still dominates as a recipient of venture capital. In 2015, Silicon Valley attracted $27.3 billion in VC, far more than LA / Orange County's $5.1 billion and San Diego's $1.2 billion, and nearly half the nation's total VC investment.

Wages nationally in the fourth quarter of 2015 were up 3.3% (inflation was 0.5%), a healthy gain compared to early in the decade. What does this have to do with venture capital? You could argue that the more VC invested, the more upwards pressure there is on wages.

Here, we can look at the latest data by county (which is through the second quarter of 2015), to see if there is any link between the amount of VC investment and wage growth. 

Silicon Valley includes San Francisco, Santa Clara, San Mateo, Marin, and Alameda counties. Among the 343 largest counties in the US, wage growth for these counties was ranked as follows:

Santa Clara, ranked 2nd w/ wage growth of 11.3%,

San Francisco, ranked  5th, w/ 8.6% wage growth,

Marin ranked 9th, w/ 6.6%,

San Mateo, ranked 10th, w/ 6.5%, and

Alameda ranked 19th, w/ 5% wage growth

Silicon Valley, the place where nearly half of VC money was invested, had 4 counties in the nation's top 10 and 5 in the top 20. Again, this is out of 343 counties.

By contrast, 

Orange County was ranked 21st w/ 4.9% wage growth and

LA was ranked 69th w/ 3.6%.

San Diego, a place with considerably less VC money than Silicon Valley and LA / Orange County, was ranked only 105th w/ wage growth of 3.1%. (Although it's worth noting that 105th still puts even laggard San Diego County in the top 30% nationwide for year over year wage growth in that 2nd quarter of 2015.)

This suggests that the more venture capital pouring into a region, the more likely wages are to be pushed up. If so, it's great news for the country that VC spending is on the rise. As this continues, it suggests that - as previously forecast here at R World - the first half of this decade will be known for a big reduction in unemployment rate and the second half of this decade will be known for strong wage growth. This seems further proof that we've entered a Fourth Economy in which the new limit to progress is entrepreneurship. It's not enough to nurture education or capital markets (although that is certainly critical): communities have to nurture entrepreneurship in order to move into the next economy.

Addendum 1:. I think the news is even better than this. I'm currently working with a startup funded by - not traditional VCs but - a couple of Fortune 10 companies. As far as I know, the money they're investing into this particular venture is not actually counted as part of this PWC/NVCA report. In other words, there is more going on than reflected here and as more companies become more entrepreneurial, we'll see even more job and wealth creation.

Addendum 2: While I argue here that venture capital helps to drive wage growth, it's worth noting that the number one ranked county for the most recent quarter is Ventura County, on the California coast just north of LA and south of Santa Barbara. So, maybe I should revise my claim from "venture capital funding drives wage growth" to "venture capital funding - or the name Ventura - drives wage growth." Presumably, if you were really serious about wage growth you'd just name your county Venture Capital County.

Trump as Loki: How He Might Save the GOP

Sometimes progress doesn't look like progress at the time. Getting fit is an ugly business that involves panting and profuse sweating. Throughout the course of human history, disruptive events as cataclysmic as rising sea levels and barbarian raids have actually prompted changes that - over the long run - made life better, forcing as they did innovations as varied as irrigation and compassionate religions.

In various cultures, they have gods of mischief who disrupt the status quo. Thanks to Marvel comics, the Scandinavian god Loki is the most popular of these. The gods of mischief show a lack of respect for the existing order and disrupt it in ways that can either leave in its wake destruction (like a tornado going through a neighborhood) or creation (like snow melting into streams and rivers, feeding plants and animals downstream). Loki sweeps the table clean and lets you rebuild without undue concern for what was before. He's the graffiti artist who gives you reason for a fresh coat of paint, perhaps even a new design.

Donald Trump might just be the GOP Loki, purging the GOP of some really dangerous ideas.

For instance, he's the first mainstream candidate to point out that the Bush / Cheney notion of building a democracy in Iraq was a bad idea. After Donald, it's hard to imagine that any GOP candidate will be as able to blithely dismiss criticism of this policy. That will make the GOP better.

Donald's New York sensibility that so alarms Ted Cruz, Donald's loose hold on social norms that are waning even in the Bible belt, is something that also offers hope for the relevance of the GOP. Legalizing same-sex marriage, for instance, is a form of religious freedom in that it allows that people might engage in practices that you disapprove of. Donald realizes that he has to win over evangelicals but when he tries, the effect is comical. (My favorite so far came when he addressed the students at Liberty, where evangelicals send their young adults. He read one verse and managed to reveal his ignorance of Biblical norms by referring to Second Corinthians (II Corinthians) as "Two Corinthians." That distinction only seems subtle to people who don't read the Bible. If you hear someone say "Second Corinthians" you expect to hear a verse. When you hear "Two Corinthians" you expect to hear a joke. "Two Corinthians walk into a bar ..." Religion is a beautiful thing ... as long as it isn't something imposed on others. And the segment of the GOP that continues to confuse what they believe with what everyone else should do need to be marginalized in order for the GOP to remain relevant. Donald offers a route towards that.

Donald's foreign and domestic policy is at turns vague and incoherent. He's racist and feeds the fears of GOP voters. But for all that, he is disrupting the GOP right now. He's playing the role of Loki and whether he leaves in his wake a GOP that never again has a chance at the White House or a GOP that is forced to remake itself into something better and more modern - like a town rebuilding from an earthquake - is uncertain. What is certain is that the GOP will be very different in the post-Trump era. And given its direction over the last couple of decades, it needs that.

This country needs a clear choice each election: do we rely more on markets and less on regulations or more on social safety nets and government programs? There are ideologues who believe there is always just one answer to that question but in fact history rewards the communities able to alternate between those two broad directions. A healthy country needs parties on the left and right who are reasonable and safe choices in spite of ideological differences. The GOP of Bush and Cheney was not and in order to get better, it had to be disrupted and re-made. Trump might just be the catalyst for that change.

Vonnegut's Worst Year and Best Novel: His Mother, Dresden, and the Price of Art

Kurt Vonnegut's family had money until the Great Depression. Then they didn't. His mother never seemed to reconcile herself to the depressing reality of living without wealth and was particularly devastated when Kurt dropped out of college to enlist in the army as a private.

In May of 1944 - when Kurt was 21 - he came home to visit his family. When he and and his sister went to wake his mother, they discovered that she'd killed herself. On Mother's Day.

In November of 1944, he turned 22. The next month, he was taken prisoner of war by the Nazis and spent Christmas day jammed into a boxcar, traveling to Dresden.

In February, the allies fire bombed Dresden, killing tens of thousands. When he emerged from underground, this is the city he would have walked into. When he first got there, he called it the fanciest city he had ever seen. Then this.

It is hard to imagine a more traumatic year, or one that could end in a way that would so belittle his own personal tragedies. This experience became the basis for his novel Slaughterhouse-Five. It was an fabulous novel but that seems likes too high a price to pay for art.

Should you ever hear someone talk about paying a high price for art, just reply, "Well, yeah. But you only had to pay with money."

From Pensions to 401(k)s - One of the Less Reported Reasons For Growing Wealth Inequality

There are two kinds of retirement plans: defined benefit and defined contribution. While not technically correct, you can think of it as the move from pensions to 401(k)s. This move from defined benefits to defined contribution is one of the least reported reasons for growing wealth inequality.

If you have a defined benefits plan, your retirement benefit is defined. "If you work 30 years, your pension will be equal to 60% of the average of your last three years of income," might be one simple formula. With a defined benefits plan, you are guaranteed a monthly income - often adjusted for cost of living - until you die. Nobody gets rich with a defined benefits plan but they are fairly safe and reliable.

By contrast, if you have a defined contributions plan, you can't be sure what amount you'll have in retirement. You define your contribution - say 10% of your pay - and your employer may match this (sometimes they'll match your contribution by 25, 50 or 100%). You know that you're putting $300 a month into your retirement account each month. What you can't know is how that investment will do. By the time you've worked 30 years, your investment may have grown to $3.1 million or be worth only $31,000. It will depend on how your investments have done.  You can get rich with a defined contribution plan but they aren't safe or reliable.

Defined benefits plans minimize differences in wealth and retirement income. Defined contribution plans exacerbate differences. As more people move (or are moved) into defined contribution plans, we would expect to see more disparity in wealth.

This graph from Employee Benefits Research Institute:

Since the late 1970s, there has been a dramatic change in the use of defined contribution and defined benefits plans. Looking just at just employees with retirement plans, the percentage with defined benefits plans has dropped from 62% to 7%. Meanwhile, the percentage with defined contribution plans has gone up from 16% to 69%.

Unsurprisingly, wealth inequality has gone up as defined benefits programs have gone down. The growth in the use of defined contributions plan is by no means the only reason for growing wealth inequality but it is a very real one.

And one of the many ways that it shows up is that even as wealth goes up, a growing number of people feel vulnerable in retirement. If you have a set income every month, you may not feel rich but you'll feel secure. By contrast, even if your investments do well and you are considered "well-to-do," you might still feel vulnerable because you know that one big market move could change your situation.

It's not clear that employees or employers will reverse the trend of the last quarter century. It is clear that the price for this change has included more wealth and income inequality and more feelings of vulnerability.

Thoughts on Trump, Progress, Congress, the Gap Between Experienced Reality and Global Reality, and Bad News

Donald Trump sometimes says very reasonable things. "We spent $4 trillion in Iraq, lost the lives of thousands of our soldiers and caused those people terrible grief. I'd rather have spent the money here on roads and bridges." That's actually pretty reasonable. The fact that he sometimes makes reasonable points doesn't make him a reasonable candidate, though.

Killers are sometimes nice to the vast majority of the people they meet. That doesn't make them nice people.

Donald doesn't have to say too many unconstitutional and loony things to be unreasonable, just as someone doesn't have to kill too many people to be a killer.

******************

It's called progress. Not perfection.

It's easy to be critical of the economy and it is right to point out what is still missing, unjust, and inadequate. That sort of commentary should never be confused with metrics that show we're getting better. When the economy is creating new jobs, wealth, and products and reducing rates of poverty globally, that's progress. And that's pretty good.

*********************

Congress is severely criticized for being ineffective. It doesn't pass many bills.

I don't know that it's ineffective. It might just be representative. If you have to find issues that rural voters in Kentucky agree on with urban voters in San Francisco, it's going to be a short-list of initiatives. It might just be that Congress doesn't do much because there is not that much that Americans agree on.

********************

So many of the really divisive political issues are abstractly experienced. Unemployment is awful at 10% but great at 5%. The difference in whether you have a job or not in those two scenarios is 90% or 95%. "You" probably have a job when unemployment is high and when it is low. The difference is what you hear about in the media, or from friends. Similarly, nobody experiences global warming. If global temps rise 2 degrees, no one person experiences just that. One place might actually be colder, another wetter, another hotter .... but the experience of climate change is something we hear about rather than directly experience.

Given this gap between immediate experiences and reported on experiences, there is room for a variety of worldviews that are - at best - loosely connected to larger realities. Unemployment is up? I don't think so. I've got a job and so do all of my friends who really want a job and aren't afraid to get their hands dirty. Unemployment is down? I don't think so. My spouse has a graduate degree and is only an assistant manager at Olive Garden. Global warming? Oh yeah. So why are we having record colds and a polar vortex? The connection between global realities and local realities can be random enough to let any number of odd theories emerge as credible.

The more that some outside agency has to play intermediary between our experience and what is happening globally, the more that role is subject to hijacking by ideologues.

*********************

The news is dominated by systems failures.  A water main breaks, flooding an area. A house bursts into flame. Someone walks into a mall to shoot strangers. It's predominantly bad news. It's not the failure of systems that ultimately defines history, though. It's their evolution.

What if there were sources of news that focused instead on progress, on systems getting better rather than on their moments of failure? People who lived through auto accidents who would have been killed decades earlier before air bags, or procedures or medicines that obsolete certain kinds of death?  Schools that offer new ways to learn for more people. It might actually improve quality of life simply by letting people focus on the positive rather than the negative. And improve it again by inspiring more progress through example and a reminder of how things can get better.