Cohen's Testimony On the Penultimate Day of February

I watched parts of the Cohen hearing. The theme with Trump always seems the same: someone who once defended or worked with or was married to Trump suddenly realizes that he's a train wreck of a human being. Only years after normal people had that same realization. Like when someone is surprised that the guy with the "Poor Impulse Control" tattoo on his forehead turns out to make bad decisions. "I was so shocked."  

The other weird thing is that the Republicans didn't seem to realize that Cohen was them in the future. They were attacking the guy who said that his attacking people to defend Trump was the worst thing he ever did. It's like the ex trying to warn the new wife. For now the new wife simply has too much invested in the ex being wrong.

The most telling thing in that opening statement was the claim that Trump never expected to win. He makes clear with every utterance what idiots he thinks we Americans are and yet even he didn't think we'd be stupid enough to vote for him.

My Argument For an Inheritance Tax And Against a Wealth Tax

It’s hardly surprising that in the wake of the first billionaire’s presidency we would have a backlash against billionaires and talk of a wealth tax. 

Trump transforming the White House into a home theater dedicated to Fox News is less indictment of billionaires, though, than an affirmation of the need for a much higher estate tax. 

Trump’s pride in having turned a half a billion from his father into $3 billion in half a century is like a rabbit breeder taking pride in having transformed a herd of two rabbits into a herd of three in a year. He's not good with capital. He's no Warren Buffet. There are three ways be an old rich guy.  The first is luck. The second is to start with little or nothing and earn and invest well. The other is to start rich and then end rich. Trump chose the third door, which as it turns out doesn't so much open onto a path as a lovely room.

One (of many) advantage(s) the US had over the USSR is that it left the allocation of most capital to individuals and institutional investors (like mutual fund managers or private and public corporations). The way that wealth works is this: the better you are at getting a return on capital, the more of it the market gives you. If Warren Buffet gets 13% return on a billion, he has two billion to invest in 6 years. The guy who gets a -2% "return" on his billion will have only $890 million in 6 years.

It is true that variation in the ability to invest leads to wealth inequality. It is also true that the market ruthlessly gives more capital to the folks best able to create more capital and takes capital from those who destroy it through bad investments. It's true that luck plays a role in returns but it is also true that - just as with ability to play basketball or write poems - different people have different levels of ability in investing. A smart community likes the idea of good investors having more capital than bad investors.

I don't think the kind of wealth tax that Elizabeth Warren is proposing is a bad thing, I'm just not real excited about it. I'd much rather see an inheritance tax of 50% (or more) for amounts over $10 million than a wealth tax. Why? I don't believe in aristocracies.

Michael Jordan was an amazing player. His sons also played basketball but did not make it to the NBA. It's rare that a child inherits the gifts of the parent. This is likely true of Warren Buffet's children as well; it is highly unlikely that they have their father's genius for investment. Just as there is no reason to give Michael Jordan's sons the ball to play in the NBA, there is no reason to give Warren Buffet's kids billions to invest. They can't do anything special with it.

Just from a perspective of "How do we create the most wealth," question, we should let great wealth builders keep their wealth and then tax that wealth when it passes from one generation to the next. Obviously the next generation might preserve a fortune if they get it, but it's not obvious that the next generation will get returns any higher than average. There is no argument for accumulating great wealth over generations. That is the definition of an aristocracy, and one of many reasons that aristocracies are associated with stagnant economies is because they are about protecting wealth, not creating it. Entrepreneurs have an impulse to disrupt the status quo; aristocrats have the impulse to protect it. 

Billionaires help to create - and are created by - dynamic economies. As they build companies and invest capital, they add to a communities wealth. Billionaires are a natural companion to dynamic and healthy economies. Aristocrats are not. And that is the reason I think inheritance tax is a good idea and a wealth tax is only a mediocre one.

Randomly Fascinating Economic Numbers on 2 19 2019 (a number that looks like a repeating series, which is kind of randomly fascinating)

Looking for numbers to help inform a few arguments, I've run into or created the following recently. I know I obsess over these kinds of things more than most but you might find these useful as more data points for painting a picture of this continually evolving, messy, massive economy.

In December the US economy created 5.9 million jobs and destroyed 5.5 million. Protecting jobs isn't really an option but as long as the entrepreneurship and innovation that creates jobs runs at a faster pace than the automation that destroys them, we're good.

In 2018, the American economy passed two big milestones.
Annual GDP is now over $20 trillion.
Federal Spending is now over $4 trillion (although with current tax laws and projections, it won't be until 2022, when spending passes $5 trillion, that govt receipts will pass $4 trillion).

If you're interested in median incomes rising, you should do what you can to attract immigrants and create billionaires. Median household income and the percentage of immigrants and billionaires seem to move together. I think one reason people are threatened by immigrants and billionaires is because they represent a threat to the status quo. And that's true, of course, but the same thing can be said about progress.

And finally, this interesting and (I think) important quote.

“Capitalism has hundreds of parameters that you can change like the estate tax [and] the capital gains tax and it is still capitalism as long as you have market-based pricing, let people create new companies very easily and intervene where you don't see competition."
- Bill Gates

Two Questions That Drive Economic Progress

Creative answers to these two questions drives progress.
1. How do we automate jobs in order to obsolete lower-paying jobs and increase productivity and profits?
2. How do we create new, higher-paying jobs through entrepreneurship and innovation?

The answers to this question include money spent on research and development, education, healthcare, and incubators, policies that enhance financial markets and private property rights and encourage investment and savings, and a culture of win-win rather than win-lose. There are layers to the creative answers to these questions pursuing such answers would drive a great deal of progress.

We are All Uprooted Now

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

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

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

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

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

Income Inequality and Income Growth - Fairness and Progress

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

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

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

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

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

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

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

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

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

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


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

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

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

The Fundamental Reason Politics Will Become Kinder to the Poor

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

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

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

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

Wage Growth After the Great Recession

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

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

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

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

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

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

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

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

That's very cool.

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

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

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

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

There is nothing like data to undermine certainty.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Ideal 2020 Candidate

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

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

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

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

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

Growing Income Inequality and the Real Policy Solution of Popularizing Entrepreneurship

The effects of automation are accelerating as algorithms grow more sophisticated and a global market means more people who might come up with that one killer app or manufacturing process or delivery trick that quickly obsoletes 2 or 3 people or even 2 or 3 industries steadily grows by millions every month.

How does one counter that? Income vulnerability seems inevitable in a world of growing disruption. The good news is that the team who creates the new solution to obsolete the old one(s) will get rich; the bad news is that there is a whole swath of people will lose income and wealth as they become obsolete. If we want to ride this wild horse of automation to higher productivity, we need to acknowledge that our safety nets need to be good. How this happens will ultimately involve a mix of unemployment insurance, universal healthcare, affordable or free education and retraining for any age, and perhaps a variant of guaranteed income. But those are mere bandages on the body politic, merely a way to mitigate the pain of disruption. The solution that is essential to couple with more rapid automation is more rapid entrepreneurship and innovation.

When we no longer need 90% of our people to grow our food on the farm, we can use them for other things. Some can get into food preparation and serving, letting us enjoy a wider variety of foods that people in 1790 America (when 90% of the population was in agriculture) would have never imagined: foods like sushi, adoboda tacos, spaghetti, and liquid nitrogen ice cream. Others can design and make cars, legos, barbie dolls, and new drugs. If there is nothing else to do but grow food, reducing the percentage of our workforce needed to grow food from 90% to 1% (which is roughly where it is today) is a catastrophe. 1% of the population would be incredibly rich and the other 99% would literally need credit just to buy food. But we innovate and those 99% come back with cool stuff that entices the farmer to give up his food. (Or, more precisely, he sells his crop for money he can use for the cool stuff.)

The problem with wealth and income inequality today is not that people are getting rich automating jobs. The problem is that we have not learned how to balance that rate of automation with an equal or even better rate of innovation and entrepreneurship.  What this means will involve everything from even more money poured into R and D to more funding even within Fortune 500 companies for entrepreneurial efforts that simultaneously allow employees and the company to create new wealth.

As mentioned, programs to mitigate income and wealth inequality seem both necessary and inevitable. But to stop there is not enough. The real question of economic progress should be: how do we create the new so rapidly that it feels like the old industries are not automating jobs fast enough to free up workers to enter the new industries and companies? 

Economics makes a big deal of supply and demand and equilibrium between them. It's a beautiful and powerful concept. But just as important to prosperity is understanding the balance between automation and innovation, destroying the old while creating the new. What is the solution for automation obsoleting jobs? Popularizing entrepreneurship: making it easier for more people to be more entrepreneurial and even changing the definition of work as much as the information economy has or the industrial economy before that.

Ayn Rand

I am done with the monster of "we," the word of serfdom, of plunder, of misery, falsehood and shame.
And now I see the face of god, and I raise this god over the earth, this god whom men have sought since men came into being, this god who will grant them joy and peace and pride.
This god, this one word:
"I."
- Ayn Rand  [quote from intro to Will Storr's Selfie]

Ayn Rand.

Rand Paul is named after her.

Paul Ryan named her as his most influential philosopher.

My two cents? She didn't write philosophy. She wrote fiction. And you'd do much better basing policy on JK Rowling's fiction - even with its heavy reliance on magic - than hers. Soulless and selfish and apparently a big inspiration for more than a few of the libertarian persuasion. 

Two Lies to Support the Border Wall

In the late 1990s, illegal border crossings peaked. It was a crisis of near-apocalyptic proportions as immigrants streamed into the US in record numbers.

Wait. Wait. No. That did not happen.

In the late 1990s, illegal border crossing peaked. That's true. It's also true that from 1997 to 1999, the American economy created 3.2 million jobs per year (that's 824k more jobs a year than the economy has created in the last three years). Violent crime had fallen by a third from early in the decade. It was no crisis. No apocalypse. 

And illegal border crossings were 5X what they are now. 5X.

So, two lies in the claim that our current situation is a crisis for which we should close the government. The first lie is that illegal immigration is now high. It's not. The second lie is that illegal immigration drives a spike in unemployment and crime. It does not. 

#factsnotfear

Job Creation and Market Returns for the Last 49 Years

This uses the compound annual growth rate (CAGR) calculation from the first to last day of the decade for the S&P 500 and simply averages annual job creation during each decade (using the first 9 years for this decade).

During the last half of the 20th century - 1950 to 2000 - CAGR was 9.4% a year. That's almost exactly what it's been this decade. But with the train wreck of the oughts, so far this century CAGR works out to 5.6%. So I guess one question is whether we'll ever make up for the last decade or whether the job and stock market just continue at the rate they were before it. Is that potential lost or still waiting to be realized?

My Report Card on the 2018 Economic Forecast

In December of 2017, I wrote an economic forecast for 2018. I got the stock market prediction right and the job creation forecast wrong.

2017 was a great year for stocks, the SnP 500 up 19.3%. Simply put, I thought that stocks would not do as well for two reasons: Trump's first year, nearly trillion dollar stimulus would not be repeated and after 8 years of recovery it seemed to me that folks had forgotten that the Dow is always just one keystroke away from down. That said, it seemed unlikely that anything catastrophic would hit before year end so I estimated a downturn of only 5% to 10%. It would be tough to land more precisely in the middle of that range, so I'll give myself an A+ on that metric.

I forecast that the job market would slow this year. I'm delighted to be wrong on this score and the economy created a stunning (particularly for 99 months into a recovery) 2,638,000 jobs. Mostly I was bitten by the wrong assumption about labor force participation rate.

Labor force participation rate (LFPR) rose 0.4% during 2018. In the last decade it has fallen closer to an average of 0.4% and had only once in the last decade risen more during the prior twelve months. If LFPR had been flat, the economy would have created 2 million jobs; if it had fallen by 0.4% as it has during the last eight plus years of the recovery, the economy would have created only 1.3 million jobs rather than 2.6 million. That's pretty close to my forecast of 1 million. (No, I don't recall why I failed to provide a range for the job creation as I did for the other two forecasts.)

And of course my assuming that the unemployment rate would rise by a couple of tenths of a point rather than fall by a couple of tenths compounded by forecasting error as well. Had the unemployment rate finished the year at 4.1% instead of 3.9%, job creation would have been lower by about 300k, which - combined with a typical fall in labor force participation rate - would have meant that I'd had hit my one million jobs created as precisely as I'd hit the SnP 500 forecast. But I didn't. 

This job market is amazing and I'm not embarrassed to have assumed that it would become more normal in 2018. That seemed reasonable. Again, given what it means for household incomes and wealth creation, I'm delighted that job creation continues to be so strong. 99 months of uninterrupted job creation is more than double the old record of 46 months set in the late 1980s (and triple the late 90s dot-com boom of 33 months). This is a fabulous way to miss a jobs forecast. Creating 2.6 million jobs with the unemployment rate under 3% is a wonderful kind of madness.

My forecast was good for the economic metric that was bad (the stock market) and was bad for the metric that was good (the job market). I'm sure that means something but I'm not sure what.

In Which Your Blog Author Vents About Stupid Political Beliefs

Since Donald Trump's political ascension I've grown less tolerant of stupid ideas. Which stupid political ideas? Here are a few.

Belief that ...

•  you can raise median wages by raising minimum wages
•  illegal immigration raises crime or lowers our quality of life
• (bonus stupidity points if you believe this about legal immigration)
• Keynesian economics is unnecessary to a smoothly functioning financial system
• Keynesian-inspired policy is fair or cheap without personal - very expensive - penalties for bankers who force bailouts
• simple decency, also known as being polite, puts too much emphasis on being politically correct and should be blown up
• inheritance tax should be lower than income tax
• we should spend taxpayer money imprisoning guys who smoke pot
• people choose poverty 
• we can end poverty
• Ayn Rand's fiction is a better guide to government policy than J.K. Rowling's fiction
• cryptocurrency serves a purpose
• global warming is a problem that will only impact future generations or is too expensive to address now
• it's a bad idea to invest in alternative energy
• evolution (after working for billions of years) and economic progress (after working for centuries) will suddenly halt in our lifetimes and the future will only be worse
• government spending to close the gap between rich and poor kids when it comes to opportunities for health, learning, safety and engagement won't pay off for generations
• economic progress follows from a win-lose philosophy
• it's a good idea to protect jobs, companies and industries from gales of creative destruction
• it's a good idea to leave people vulnerable to gales of creative destruction
• we can make economic progress through trade protection
• healthcare is not a right
• government should not spend huge amounts investing in infrastructure, education and R&D
• teachers can be credible role models for kids while struggling financially because of low-wages or hourly pay that is subject to change every school term
• school bonds that give money to building contractors rather than teachers make education more effective

Scotland and How Identity and Economics Move in Opposite Directions

Scotland is weird. Scotland's First Minister Nicola Sturgeon has two goals that seem at odds with one another. She has already led one - failed - effort to break Scotland off from the UK. Now that the UK has voted to leave the EU, she has renewed that call for separation in order to ... [wait for it] ... be a part of the EU. Leave the UK but remain in the EU? If you are wondering how that makes sense and whether she's mad, stay tuned for an explanation of how it not only makes sense but helps to illuminate an important distinction (and no, Nicola is not mad but is instead delightfully wise).

The EU was formed as a means to create the largest economy in the world. People and goods can easily move across national borders within the EU, giving every employee in the EU access to more employers, every employer access to more employees and everyone access to more goods and services that can originate anywhere and be sold and consumed anywhere (else). 

Scotland was first made a part of the UK to unite kingdoms that shared a monarch. A nation-state is not just an economy. It lends an identity to the people within it. We can talk about the British or French or Americans and believe that we instantly know something about them. And more importantly, a child who grows up singing La Marseillaise or saying Pledge of Allegiance to the Stars and Stripes will believe something about who he or she is. "I'm an American," is a statement that is rich with meaning in spite of how very different Americans are from one another.

The EU is about economics and the UK is about identity. 

When our focus is on identity, we move towards something smaller. Identity distinguishes us from others. "You're tall but I'm short." "You're Canadian but I'm French." "You're straight but I'm gay." "You're a Lord of the Rings fan but I'm a Harry Potter fan." Identity does not stop until we reach the point of the individual. The fewer people with whom we share an identity, the better.

By contrast, when our focus is on economics, we move towards something bigger. What we can do as an individual is paltry compared to what we can do as community. If we have the specialization and knowledge and skills that come along with a set of 7 people, we live a life of poverty. If we have the specialization and knowledge and skills that come along with a set of 7 million - or even 7 billion - people, we have the potential to live a life of abundance. The more people with whom we can exchange goods and ideas, the better. 

Your Californian blog author meets
Scotland's First Minister in 2017.

It is dangerous to confuse identity and economics. Smaller worlds economically make us poorer and bigger worlds in terms of identity make us invisible. (To be one of a billion Muslims or Christians with no further distinction is to disappear.)

And now we return to Nicola Sturgeon who wants for her Scotland an identity more precise than UK and for her Scotland an economy bigger than the UK. Why? She's intent on giving her people a distinct identity in which they are more likely to make themselves visible and a broad set of economic opportunities in which they can find jobs, create businesses, and buy products from a broad menu of options. Why the abundance of choices that come from a bigger economy? In no small part because it gives the distinct individual a better chance of finding a distinct job or product that matches their unique history and aspiration, skills and passions. 

We're going to see more communities that look like Scotland in that they will - at first glance - seem to be moving in two, opposing directions. Look more deeply at this, though. What we will see is a process of identity creation that won't end until we are all individuals and a process of economic integration that won't end until this is a global economy.

The Good that Could Come from Trump

Every month Trump seems to find a new way to turn the volume up to 11. He's such a cluster of cruel and stupid, confident and confused, bad instincts and indigestion.

As I write this on Christmas day, the country has
- No Secretary of Defense - No Attorney General - No Secretary of the Interior - No Chief of Staff - The S&P 500 is down 24.4% since 1 October - The federal government is shut down

And yet there is one thing good thing that could come out of his presidency.

Trump is Loki. He's the trickster god whose role is to disrupt the status quo. Trump is intent on blowing things up.

Given his continual assault on everything from notions of what it means to be polite to the basics of markets and democracy, he is leaving us with one gift. Once he is gone, no proposal that defies tradition will be immediately dismissed. His legacy could include an openness to new proposals that probably wasn't there before he came.

If I'm right that we are transitioning into a new economy as different from the information economy as it was from the industrial economy before it, then we will need to challenge some things from the status quo. I think that Trump will have made it easier for us to do that.

Prosperity, Genetics, and Social Invention (And Over What Horizon Progress Lies)

I'd like you to predict which of these three people is fastest.

We have a middle-aged woman, a young man and a young woman.

You might speculate about whether the young man is an athlete. You know the young woman is. Some of you will recognize her as Allyson Felix, 3-time world champion short-distance runner (100, 200, and 400 meters) and Olympic medalist. You will likely predict that Allyson is the fastest, then the young man and then the middle-aged woman. Some people might suggest that saying that out loud makes you biased or prejudiced and some might say that it's just common sense. And if you had to choose between other groups you'd judge based on apparent fitness, sex and age. Data might be on your side and there would be all sorts of things we could say about whether you're unfairly excluding one person over another in spite of not really knowing them as individuals. And there might even be a debate about how silly it is to debate this when we have data to inform us who is faster and who is slower. 

But I'm not done with this question. I did not mention the distance they'd travel. I also did not tell you what inventions they have access to.

Now that you know the distance is 500 miles and you know what inventions they have access to - the young man has a bike, the young woman a car and the middle-aged woman a plane - you have absolutely no trouble predicting who is fastest. And in fact, there is no difference in their speeds running that even begins to compare with the difference in the speed they can reach in these different inventions. 

Usain Bolt was this phenomenon of speed last decade. It was mind blowing what he did. He broke the world  record for the 100 meter run in 2009 in the fastest recorded time. He ran roughly 23 mph, probably humanity's fastest time for that distant. 

He was not, though, the fastest person when he was running his race. That honor goes to Nicole Stott who was traveling at 17,150 mph while Bolt was setting his world record. Nicole and her crew mates on the Space Station were moving 745x faster than Bolt.

We're still fascinated by human potential and raw speed. But we don't depend on it as we go about our day. We use technology to get from place to place because it is so much faster. The incremental gains in speed from evolutionary advances are so tiny and slow in comparison to the incremental gains in speed from technology advances that they're not worth mentioning. The tiny and highly variable differences in genetics in determining speed are noise compared to the differences in technology in determining speed.

Now we move to part two of this pop quiz. Let's look at the same three folks and ask the question, Who is most affluent?

Again, you'd have your ideas. You may realize how subject your generalizations are to variation within groups. If you know Allyson is a star you'd likely think she was most affluent. If you didn't and thought she might just be a high school athlete it would be easy to assume that a young, black woman would be worth less than a middle-aged white woman. Probabilities support that guess. 

Let's now throw inventions back into the mix. This time, though, we're talking about which social inventions our three have access to rather than which technological inventions they have access to. 

If affluence is measured by how much one can spend, the young guy is now most affluent. Our young woman has only cash, the middle-aged woman has a credit card and the young guy has access to venture capital. The first can spend hundreds, the next ten thousand and the young guy millions. People with access to consumer credit have more money than people who have only cash, and so on. 

One of the best social inventions is a stable and prosperous country. If you have access to that you will live better than someone who does not. (I know. I know. There is variation in all things and there are people in poor countries who live better than people who live in affluent countries. Still, if you were talking probabilities you would want to bet on the Norwegian rather than the Syrian, At this point in history anyway; it would have been dramatically different a thousand years ago and could reverse again in a century or two.)

The differences in genes as a determinant of speed are noise in comparison to the differences in what technology we have access to. Similarly, differences in self-sufficiency as a determinant of affluence are noise in comparison to differences in what social inventions we have access to. Groups who have access to a peaceful, prosperous country and great education and dynamic companies to work for will be far more affluent than groups who have access to none of these things. That is as clear as the fact that a group in a plane is faster than a group with sneakers.

And once more, a nod to variation. When we get into a plane we all move at 600 mph. When we get into schools or markets or corporations we don't all move at $60,000 a year. There will always be variation in outcomes from systems like factories, schools, and markets. If you want to understand how to better manage such variation, you may want to search for "deming" on this blog or W. Edwards Deming more generally. The claim is not that all individuals benefit equally from these social inventions: the claim is that communities with different social inventions at different stages of development have very different outcomes. Take two populations of 100 or 100 million and put one in a society where social inventions like universities or financial markets are nonexistent or reserved for just the elite and put another in a society where such social inventions are accessible to a wide swath of people, and it is the latter that will be more affluent. Every time.

For at least the last 10,000 years - maybe the last 100,000 years - social evolution has done more to determine our quality of life than has genetic evolution. There is no conceivable genetic advance that will ever make us capable of running 17,150 mph. Nor is there any genetic advance that will ever enable us to live as well from self-sufficiency as we do in today's modern world. The point is to worry less about differences in individual ability within our current systems than to worry about how to make those social inventions and systems more useful for groups and the distinct individuals within them. Significant progress is never about pushing people harder within current systems; it is about the continual act of invention and reinvention - sometimes tiny and incremental and sometimes sweeping and grand - of those systems to result in longer lives and more autonomy, more choice about how to live a life. We don't live better than our ancestors from 1900 because we work harder or make bigger sacrifices. We live better because the systems we depend on and use - the social technology that makes us more or less affluent - are better. Focusing on the performance of our systems rather than the performance of individuals within them is the direction in which progress lies.

A More Civil War Between Two Economies

The American Civil War was fought between two economies: the South’s agricultural economy and the North’s industrial economy. Today's more civil war is also a clash of two economies: industrial and information. In the industrial economy are factory workers threatened by globalization and traditional capitalists who want lower taxes and smaller government; in the information economy are knowledge workers and new entrepreneurs who depend on globalization and public investment in education and research. They live in different economies. They want different policies.

In a country as big and complex as the US, people don't vote for or against candidates for just one reason. Still, these two economies explain a lot.

People in congressional districts that voted Democratic in 2018 are more likely to have college degrees, twice as likely to work in digital services and almost half as likely to work in manufacturing.[1] In the 50 counties with the most college grads, Hillary Clinton won by 26 percentage points; in the 50 counties with the least, she lost by 31 points.[2] College grads are the simplest proxy for knowledge workers and have become one of the simplest predictors of how communities vote.

The classic knowledge worker – whether biologists and chemists developing new drugs, engineers designing new products or programmers creating apps – is working towards disruption. Their new product displaces an old one.

By contrast, factory workers and traditional capitalists dislike disruption.

If we define traditional capitalists as people who invest in physical factories or private businesses, it becomes clear that they are more threatened by disruption. They can’t quickly buy and sell their assets like day traders and two things will enhance their investment: lower taxes and protection from sudden obsolescence.

If factory workers are laid-off they could be forced to leave manufacturing – or even town - for lower paying jobs. A new product or technology – the very goal of information workers - could make an entire factory obsolete and that could mean a wave of layoffs that might devastate a small community.

Disruption threatens factory workers and traditional capitalists in the industrial economy but is a goal of the new entrepreneurs and knowledge workers in the information economy.  This drives conflict.

People in the two economies also experience the outside world differently.

Knowledge workers inevitably have immigrant coworkers and foreign customers and suppliers. (As the name suggests, the world wide web isn’t a local service.) About half of Silicon Valley’s startups are co-founded by first or second-generation immigrants. Information shows about as much respect for borders as do clouds and this information economy is a global economy. NAFTA, WTO, and the EU were defined in the 1990s along with the internet. Also, knowledge workers generally live in cities among neighbors, coworkers and family from around the world.

By contrast, factory workers are more likely to see the outside world as a threat. Imagine competing with factory workers from foreign countries who might make as little in a day as you make in an hour. If you live in a rural area you know fewer foreigners. (Foreigners are 27% of California’s population but only 1.6% of West Virginia’s.) West Virginia has 5.6X as many veterans as immigrants; California has 5.3X as many immigrants as veterans. People in rural areas are more likely to meet foreigners through war and occupation than work and dating. To folks in the industrial economy, foreigners are people who take your job or even your life. To folks in the information economy, foreigners are coworkers, neighbors and family.

Everyone wants security. People in the industrial economy want it in the form of protection from the rest of the world and people in the information economy want it in the form of social programs. Factory workers want walls for immigrants and tariffs for trade. Knowledge workers want good social safety nets like generous unemployment insurance, universal healthcare and great education and retraining programs to help them through what they see as inevitable disruption. Knowledge workers want strong government. Factory workers want strong borders.

Traditional capitalists want low taxes and small government. They are trying to maximize their return on investment and aren’t interested in high-taxes to create a strong government. By contrast, the new entrepreneur relies on healthy government investment. The quality of his employees depends on the quality of education. And the knowledge workers the new entrepreneur employs often develop products that depend on government research. Mariana Mazzucato argues that companies like Apple could develop products like the iPhone because of earlier government research into technologies like touch screens and satellites. Government funds the uncertain R (research) and companies invest in the shorter-term D (development). In the information economy, R&D is a collaborative affair between the public and private sectors.

The conflict between knowledge workers and factory workers does not come out of irrational thinking or tribal impulses. They are protecting the economy that defines them.

There is precedent for such a divide.

The American Civil War was fought in the 1860s. Between 1840 and 1890, agriculture’s share of economic output and employment fell by half while manufacturing’s share doubled.[3]

The industrial economy – and Republicans - emerged from the north. Lincoln was the first Republican president, elected just six years after the party was founded. Between 1861 and 1933, a Republican sat in the White House 72% of the time. In 1861 daily life would have been mostly familiar to someone from 1776; by 1933, the nation had automobiles, electricity, telephones, airplanes and radio. Republicans were presidents and capital was king. The industrial economy emerged in gales of creative destruction and the South’s agricultural economy and way of life – both dependent on slavery - were two of the things that it destroyed.

The agricultural economy employed 90% of the workforce at our country’s founding; it now employs 1%. The industrial economy is following its trajectory. From 1910 to 2015, manufacturing as a percentage of employment fell from 33% to 9%.[4] Meanwhile, between 1940 and 2016, the percentage of Americans with four or more years of college rose from 5% to 33%. The industrial economy, like the agricultural economy before it, has proven to be just another phase of economic development rather than its culmination. The industrial economy eclipsed the agricultural economy as a source of wealth and jobs in the late 1800s; about a century later, the information economy has eclipsed the industrial economy. If you define yourself as a farmer or factory worker, such disruptions are a personal threat and not just an economic phenomenon.

People in the industrial economy feel under attack. For that reason alone they rally behind the warrior chief Trump and care little about whether others see him as crude or combative; he’s protecting them from an attack on their lifestyle and livelihood.

But if a transition from an industrial economy is as inevitable as the transition from an agricultural economy, the question becomes, What policies help with the transition? Policies designed to protect jobs, industries or even economies are expensive and defer the inevitable. Policies that protect people rather than jobs, helping them to make transitions rather than resist them, are less expensive and yield a better return. The transition won’t be – has not been – trivial but here are just a couple of suggestions.

Treat career investment more like a common right than a special privilege. States invest about $40,000[5] in knowledge workers who spend five years at a public university. Factory workers (or anyone who doesn’t go to university) deserve a similar investment. The money could be spent on education (vocational or trades schooling, for instance), venture capital for startups or housing allowance to move them into more dynamic communities with better jobs.

Another policy initiative could better integrate rural workers into the information economy. People in cities are 40 to 50% more productive for host of reasons, most stemming from the fact that they are part of richer and more varied communities. It is worth exploring options for better connecting folks in less populous communities with folks in nearby cities or rural hubs so they, too, enjoy more of the economic benefits of living in cities where ease of connection and specialization makes people more productive. 

One step to ending the more civil war between factory workers and knowledge workers is to treat them the same: invest in both and make them part of the same, continually evolving economy. Because as it turns out, the economy is not any one thing: it is an evolving market that will change even more rapidly as it becomes more clearly an entrepreneurial economy rather than the agriculture, industrial or information economies that preceded it.

---

[1] https://www.cnbc.com/2018/11/15/charts-democrats-represent-modern-economy-republicans-left-behind.html

[2] http://fivethirtyeight.com/features/education-not-income-predicted-who-would-vote-for-trump/

[3] https://www.cambridge.org/core/journals/journal-of-economic-history/article/americas-first-great-moderation/E3217E2FA4B9D3CAD4AA23A67CDCDC62

[4] https://www.bls.gov/opub/ted/2016/employment-by-industry-1910-and-2015.htm

[5] https://www.usnews.com/news/best-states/slideshows/states-investing-most-in-higher-education-per-person