M is for Mother - the letter that predated the alphabet by millennia

Mother's Day is in about a week. The "mmm" sound babies make so naturally lends itself to "ma," or "mom," one of their earliest sounds morphing into one of their earliest words.

I recently read Peter Watson's Great Divide, the story of how human cultures evolved separately in the Americas and Eurasia after the Bering Strait closed about 16,000 years ago, and came across this fascinating tidbit about the letter M.

“The ‘birth-giving Goddess,’ with parted legs and pubic triangle, became a form of shorthand, as the capital letter M as ‘the ideogram of the Great Goddess.’” 

This thousands of years before linear writing. Kind of fascinating to think that the birth of the alphabet was itself a symbol for birth. That seems fitting.

Happy (almost) Mother's Day.

Bad Job Markets Kill People

Everyone knows that bad foreign policy kills. Failure to intervene can essentially sanction genocide and willingness to intervene can mean prolonging or exacerbating a civil war.

Domestic policy kills as well. Business cycles are inevitable but they can be made more severe or more prolonged by bad policy. And when unemployment goes up, so do suicide rates.

Suicide rates rose 24% from 1999 to 2014. The biggest jump was from 2006 to 2014, when so many lives were financially devastated.

Anyone puzzled over Sanders' or Trump's support fails to appreciate the emotional toll of the last decade. This is not something people recover from easily or quickly.

Last decade was devastating in terms of job growth.

In the last three decades of the 20th century, the American economy created roughly 20 million jobs per decade, a rate equal to about 9% of the population. In the first decade of this century, the economy LOST 1.1 million jobs. And now in this second decade, it's on pace to create nearly 23 million jobs, but a number equal to only 7% of the population. We're on track for a good but not great decade. The rate of job creation is decent but the state of the job market is still impacted by this awful decade defined by a dot-com bust, a 9/11 recession, and the Great Recession. It looks like it will take at least a decade to recover from the last decade and of course even that glosses over hundreds of thousands of lives that will never fully recover from lost pensions, homes, and years of employment.

As mentioned, business cycles are inevitable. Still, policies can make the difference between long or short, deep or shallow recessions. And it's not just abstract numbers like unemployment that are impacted when we get these policies wrong. It's actual lives.

Inventions Breed More Inventions - Just Another Reason for Optimism

Invention begets new invention. Patents are steadily going up and even the rate of patents seems to be steadily going up.

Here's a graph of data from the US Patent Office.

As you can see, patent numbers have almost shifted to a new plateau in this decade. Although it has dropped off a bit in the last couple of years, I don't think that it will level off.

When talking about something like economic progress and innovation, the comparison with last year is less important than the comparison with last decade. Within this data set, there are four years - 2012 through 2015 - that can be compared with the previous decade. That is impressive for two reasons. One, this decade is significantly higher than last. Two, the rate at which it is getting higher is getting higher.

2012	2013	2014	2015
39.2%	52.0%	71.6%	88.9%

In 2012, there were 39% more patents than in 2002. In 2013, there were 52% more than in 2003. In 2014, there were 72% more patents than there were in 2004. And last year, there were nearly 90% more (almost double) the number of patents that there were in 2005.

One reason I think that this rate of innovation will continue to accelerate is that innovation is a function of interaction. You see a carriage behind a horse and you see a combustion engine with a certain amount of horse power and you get the idea to combine the carriage and the engine into a horseless carriage. You see a mouth piece and a telegraph cable and you get an idea of sending voices down wires, turning the telegraph infrastructure into a telephone system. 

As we innovate more, there is a bigger foundation for further innovation. Benjamin Franklin once said, "Money makes money and the money money makes makes money too." This remains one of the more whimsically accurate descriptions of compound interest. Your $100 makes $5 by year end. Next year, that $5 also makes money. The money your money makes also makes money.

Innovations work in a similar way. Once you invent a carriage and invent an engine, you have the possibility of innovations that combine those. Once you invent a car and a smart phone, innovations like Uber are possible. And as the number of inventions in the world go up, the number of inventions that can be added to the world goes up. The rate at which inventions are getting higher will get higher as there are more inventions in the world.

And as impressive as US growth is, the rate of growth in foreign patents is even better. This exchange of ideas and innovations across the planet is becoming even more pronounced. 

Here you can see that foreign patents in 2015 are more than double what they were in 2005.

2012	2013	2014	2015
64.4%	77.8%	95.0%	127.6%

As the developed world comes online and education levels rise, there is plenty of reason to think that this rate of innovation will continue to rise. The first car might have been invented in one place but cars are now everywhere. Good innovations spread, which means that as more parts of the world are innovating, more cool products will be everywhere. If you want a reason for optimism, this is as solid as any. 

Endorsing Hillary Clinton

In spite of all the criticism it has received, it is possible that the Republican Party is getting better aligned with the American people. Both the American people and the GOP establishment now agree that the GOP presidential candidates are awful.

Oddly, Trump's behavior has been so atrocious that it has distracted from what is most notable about this campaign: there are stark differences between the remaining candidates. Clinton very much represents a continuation of the status quo (her policies are the most like Obama's of any candidate), Sanders represent a serious move to the left, Cruz an even more serious move to the right, and Trump a serious leap into fantasy.

Cruz wants to get rid of the Environmental Protection Agency, for example. And the Education Department, the IRS, the Department of Commerce, and HUD - housing and urban development. In addition, he would eliminate another 25 agencies such as the corporation for public broadcasting, national endowment for the arts, and any agency attempting to regulate greenhouse gases or climate change. (If there were a Galileo of climate change, Cruz would put him under house arrest.)  And then he would cut government spending another trillion dollars a year.  His policies represent an unwinding of a century of change and a return to 1916 policies. Or perhaps 1816.

One simple way to think about Sanders proposals is that he simply wants to make our policies more like Europe's. A client I was talking with from Italy said that Sanders policies, while considered so liberal here, are what European candidates on even the furthest right agree on: universal healthcare, for instance, is not even questioned in Europe. I think that by the time millennials are my age - that is, in roughly a generation - most of what Bernie is proposing will be normal. About a century ago this country made a push to finance public education for K-12. It seems reasonable that university education has become as essential to a career now as high school education had become then and should be funded similarly. Bernie has a protectionist edge, though, that could reverse economic progress in poorer regions of the world. He has mentioned that fair trade probably means avoiding trade with countries where prevailing wages are lower than the US. The percentage of the global population living in absolute poverty (defined as $1 a day) has dropped by roughly 90% since the 1980s. This is a wonderful thing and refusal of the world's biggest economy to trade with any region poorer than ours could be a serious setback to this. Bernie's economic and military isolationism would better match a country the size of, say, Vermont, than the world's biggest economy. Eugene Debs ran as a socialist three or four times roughly a century ago. By one count he was wildly unsuccessful: he never came close to winning the presidency. By another count, he was wildly successful: so many of his policy proposals - like social security and women voting - were adopted. I think that Sanders will have a similar influence over future policies. GOP supporters are very old and Sanders supporters are very young. Many of his policy proposals do seem inevitable. But for now, the fact that Sanders tax plan would raise taxes on median household income by a startling amount (as in, I'm sure the average household would be startled by the fact that their taxes would go up by roughly $500 a month) is enough to doom his campaign.

And Trump's policies are simply incoherent. I've wondered if he's stupid or just hopes that 51% of the American people are but it seems increasingly clear that his mind is a dangerous waste. Unlike Cruz, Clinton, or Sanders, he hasn't really put forward any coherent policies that could be seriously analyzed. For this reason alone, he ought not to be seriously considered.

Hillary Clinton is easily the most sophisticated thinker in the bunch. She's the only candidate who seems able to include "if, then" considerations that include everything from nuanced policy considerations to the personalities of various world leaders. Her model of reality is as complex and rich with nuance as Cruz's model is simplistic and barren of details. Putting aside the fact that she's a centrist similar in many ways to her husband and Obama, one simple fact that is too rarely mentioned is that none of the candidates could begin to compare with her on an understanding of the latest research and policy options on issues as varied as climate change, child development, poverty, terrorism, Russia's geopolitics or China's economy.

For a host of reasons I support Hillary Clinton. I know the sophisticated thing to say is that I do so with reluctance but I do so happily. I think that, like Obama, Hillary is a wonderfully qualified and good person who we are lucky to have competing for our top office. Within the S and P 500, average CEO pay was $13.8 million in 2014.  We pay our presidents $400,000. About what a high-level corporate director can make. We are lucky to get someone of her caliber. Her model of the world is at least twice as sophisticated as that of her opponents. (It's worth remembering that the original IQ tests were developed to cut the population in half at 100. For every person with an IQ of 130, there is one with an IQ of 70. Half of all people are below average. Her intelligence is a definite plus for policy. It's not obviously a plus for politics. I suspect that quite a few people hear "blah, blah, blah" when she talks about the middle east or income inequality.)  Even if Hillary were only as good as the 17 men she has run against in this election, though, I would vote for her. Why? Even if all else were equal, it is time for a woman president. And of course Hillary Clinton is more than their equal.

What if she lived in a world where a girl
 could grow up to become president?
Who knew that about the 1950s?

Maybe the next time we elect a woman it could be someone just as smart - rather than twice as smart - as the men she is running against. It would be nice for girls growing up to think that they don't have to be twice as good to compete.

Finally, the big reason to do something dramatic - like vote for candidates who represent a huge departure from the status quo - is because things are terrible. After a record 66 months of uninterrupted job creation that has halved the unemployment rate and a tripling of the S and P 500 since March of Obama's first year, it's hard to make the argument that we're on the wrong path. Wages are rising now, as happens once the labor market tightens. We're on the right track even though we had to dig ourselves out of a huge hole left by the Great Recession. After the great economy we'd enjoyed under Bill Clinton, voters thought it was time for a real change in direction. Maybe this time it's worth staying with the policies that made things better, not worse. Progress moves more slowly than disaster but it's got a happier destination.

Donald Trump's Delusional Economics (Warning - This Post Contains Highly Technical Math: Arithmetic)

Yesterday Trump had an interview with Bob Woodward of Watergate fame. I used to wonder whether Trump was an idiot or just hoped that 51% of voters were. This interview made it clear that Trump's chief obstacle to understanding the economy is a tenuous grasp of arithmetic.

Donald plans to cut the top tax rate on individuals from nearly 40% to 25% and to cut corporate income tax from 35% to 15%. Credible analysis of his plans suggest that it would cut federal revenues by about $1 trillion per year, reducing federal taxes as a percentage of GDP from 19% to 14%.

Donald has revealed no plans to cut government spending, so the best estimate is that his plan will increase the annual deficit about $1 trillion per year. Without offsetting cuts, every dollar of lost tax revenue is one more dollar of new debt.

In yesterday's interview, Donald claimed that he would eliminate the $19 trillion government debt within 8 years.

Let's take him at his word for a moment and assume that because he's president the economy will magically grow enough to offset not just the $1 trillion in lost taxes but pay down another $2.375 trillion of debt each year. (That's what it takes to reduce a $19 trillion debt to zero in 8 years.)

Here are the numbers:
Donald drops federal taxes from average of 19% of GDP to 14%.
Donald keeps government spending stable.
Donald reduces the national debt by $19 trillion in 8 years.

The current projections look like this:

What is Trump promising? What sort of GDP would allow him to cut taxes as a percentage of GDP AND reduce the debt? This:

To make his promises add up would mean GDP leaping from close to $20 trillion to roughly $50 trillion, which is about what total global GDP is right now.

Where does Donald get his information? It's hard to tell if it is from Marvel or DC but it's certainly a comic book and not a text book.

Why Profits Are Not Too High and Are Not Done Rising

Even the Economist has joined the chorus claiming that corporate "Profits are too high." It's time to challenge a popular delusion about profits so that my seven readers can know what the Economist's seven million readers apparently don't.

Profits should get progressively higher with economic progress. Why? Profits allow you to make money without having to commit your time to the enterprise. (Doing time is something employees and prisoners do.) The problem is not that profits are too high. The problem is that they are not yet high enough and are not shared widely enough. To make profits even higher and share them more broadly will be one of the outcomes of the popularization of entrepreneurship. But first, just a simple reminder of what profits are.

When you start a business, it’s like trying to create a box that brings money in one end (those are your costs) and generates money out the other end (those are your revenues). If your revenues are more than your cost, you have a profit. If your revenues are less than your cost, you have a loss. It’s kind of odd to say that American businesses getting better at designing boxes to create profits is a bad thing.

Such a claim comes from the belief that profits are a return to capital. They are not. Profits are a return to creativity and entrepreneurship. You could borrow capital and pay it back interest. That's separate from profits you may or may not generate.

Andy Warhol went to the store and bought cans of Campbell’s soup, paying pennies per can. He also went to the artist supply store and bought canvases and paints and paint brushes, paying dollars for these inputs. He turned these cans of soup into a series of 32 small paintings he then sold for $1,000. That was a good return for grocery shopping in 1964. Were his profits too high? Should he have paid more for the soup or sold his paintings for less? The market didn’t think so. The art dealer who bought the 32 canvases eventually sold them for $15 million. In any case, he wasn't paid some reasonable markup for his soup can costs. He was paid for the value he created.

Input costs should be incidental to the value of what you generate. If you can create a million dollars of value from 39 cents worth of soup and $4 worth of art supplies, hallelujah to ya. Profits are a reward for creativity.

So what is the real problem?

The real problem is that we don’t create enough profits and don’t spread them around more evenly. Those two problems are related. First a quick digression on companies.

Imagine that you have designed a box with four of your friends and you agree to share ownership of the box equally. You agree to all make salaries of, say, $30,000 a year. Given your education and experience, you could get jobs making 3 to 6X that much in the roles of software programmers or marketing guys or whatever but for now you are going to live on this $30,000 while you build a great box. You don't need to hire anyone else. It's just you five doing this.

Now, imagine that you are successful. You've created a box that regularly turns $100 into $400. 

Because it's such a great money maker, you can sell it for $105 million.

So, the employees in this startup of yours made just a fraction of what it could have in other companies but the entrepreneurs in your startup walked away with $21 million each for three years of work. You and your partners were paid only $90,000 in wages over 3 years but you "made" an average of $7,030,000 a year. (At this point it's worth pointing out that Steve Jobs worked as CEO for a dollar a year. And billions in equity. He liked to quip that he got 50 cents a year just for showing up and the other 50 cents was for actual work. The idea that the employee part of you would be paid a small amount and the entrepreneur part of you would be paid more is not novel. It already happens.)

In this example you feel no outrage because employees and entrepreneurs are the same people. And in this scenario you would likely agree that it makes sense to make the box as efficient at generating profit as possible. It makes no more sense to regulate these boxes to be inefficient at generating profit than it does to regulate cars to get low gas mileage. So back to the problems.

First of all, we still have a dated notion of investment. Once upon a time, investment referred to the money needed to buy capital that would produce goods. Labor would work with the capital (the classic example being a factory that hired workers to work on its assembly lines) and it would get its wage while the capitalists who put up the money would get their profits. It is this old model that The Economist is referring to when it says that too much profit is a bad thing. In this model, whatever capitalists get, labor doesn’t.

But business is more complex than that now. There are so many things dated about this model, but I’ll just focus on one of them for now: intellectual capital is now the real investment. It’s intellectual capital that will be the biggest driver of profits (even if it is not currently getting the biggest returns.)

A software programmer can create code on a laptop that he owned even before joining a company. To pretend that the revenue from the code he writes should mostly go the “capitalist” who bought his new, $1,000 laptop is silly. The real capital is his knowledge of coding. In this model of the world, it only makes sense that the programmer be treated partly like an employee (that's how he earns his wage for work) and partly like a capitalist (that should show up as a return on his investment for knowledge). That is, the model for the modern work has to include treating knowledge work as an investment.

What’s obvious with programmers or designers is also true even of fast-food and factory workers. To stay competitive, such jobs have to be infused with steady improvements and occasional breakthroughs in process and product. This doesn't just come from headquarters. In fact, properly done it's more likely to come from the minds of the of the folks who are hands on with the product or service. (From variants on the sort of quality improvement initiatives that W. Edwards Deming advocated.) This, too, is a form of investment and deserves recognition. Someone who is steadily improving the process for building kitchen counters or making tastier sandwiches is also creating value through experimentation, discovery, and knowledge. A person making pickles could be adding more value through creativity than a person making posters.

Profits will increase as we popularize entrepreneurship, making more employees more entrepreneurial. One of the ways the popularization of entrepreneurship would show up is through employees taking ownership of process and product evolution and – as befits ownership – gaining a return for such work. If higher productivity roughly tracks with higher wages, higher creativity should track with higher equity shares.

Business is a black box that brings money in one end and spits money out the other end. We are getting better at designing and redesigning businesses to create larger gaps between the costs of inputs and the value of outputs. The problem isn’t that profits are going up. The problem is that we have a model that inaccurately assumes that the investment easiest to measure is the investment that is doing the most to create these profits. It's not just the $100 an investor puts into the firm that deserves a return; it's also the knowledge that an employee brings in and even more importantly, the creativity they apply. A more realistic assessment of the source of profits would mean a more equitable spread of the profits. Wages will drop as a percentage of total revenues but more equity will be created and more broadly spread.

Your Guide to the Yuge Differences In the Candidates' Tax Plans (with Mortgage and Housing as Metaphor)

Vox has a fascinating tool to assess what the four major candidates' tax plans will mean for your household. You can find it here. The differences are huge.

To illustrate, here is what it generates for a household with a married couple and one child making $50,000 a year. (Not arbitrarily chosen, roughly $50,000 is the median household income in the US.) Under current tax laws, this would mean taxes of about $10,000 a year. (This $10,000 includes federal taxes and payroll taxes like social security, medicare, and unemployment.)

Donald Trump's plan will let you keep an extra $3,210 (or $268 a month) and Ted Cruz will let you keep another $1,800 a year (or $150 a month).
Hillary Clinton will ask you to pay $30 more (or $3 a month) and Bernie Sanders will ask you to pay another $6,820 a year (or $568 a month).

What do you give up or get under these plans? Well, Donald doesn't have a plan to change government programs much, so the government you get will be about the same (even if more xenophobic and misogynic). Cruz will give you less government with his plan to cut programs (but not enough to completely offset the loss in tax revenue). Hillary won't change total spending much and Bernie will - of course - make government programs considerably more generous.

If we were talking housing, here is what the candidates would be proposing.

Trump: Let me slash your monthly mortgage payments! You can stay in the same house, with the same number of bedrooms and maybe even a few new cool appliances and pay $268 less each month. And it'll be a gated community. We won't let them in.
You: How does that work?
Trump: Well, there will be a little balloon payment of about $30,000 to $40,000 in 8 years but I won't be president then. Plus I can get you a deal. I mean, such a deal on the interest rates. It'll be like you're paying nothing. You are going to wish you had such a deal before. Just save a little each month to prepare for the balloon payment.
You: You mean I should save each month as much as you are lowering my mortgage payment?
Trump: That wouldn't be a bad idea.
You: Oh, and this gated community. Will my old college roommate still be able to visit?
Trump: Not if he's Muslim.

Cruz: I can cut your monthly mortgage payments. By $150 a month. Now, you will have to move from your 3-bedroom house to a 2-bedroom condo, and you'll have to take on more debt but only if that second job doesn't work out.
You: Is the place nice?
Cruz: The new place is adequate. It's not as nice but you've been kidding yourself. You can't afford your current place.
You: But where will my mother sleep when she comes to visit?
Cruz: Your child can sleep on the couch. Or get her own place. It's good to teach self-reliance.
You: She's only 13.

Clinton: You can stay here but you'll have to pay a little more each month to finance your new appliances.
You: Well, that old fridge is making a strange noise. We won't have to move?
Clinton: It turns out, given your salary, this is a pretty good neighborhood.
You: How much more will it cost?
Clinton: About the same as a cup of coffee: $3 a month.
You: So you are saying that not much will change?
Clinton: It will be a huge change. You will have a woman president.

Sanders: Your new place is going to be wonderful! You'll finally have a walk-in pantry like you've always wanted, a home office  with a great computer that will make you more productive, and a home entertainment center. With really great speakers.
You: Is this going to cost me?
Sanders: Yeah. It'll be $500 to $600 a month extra. But this is the great place that you deserve to live in.
You: It sounds wonderful but given I won't be making any more, won't that cut into my budget for things like dining out or vacation?
Sanders: You eat junk when you dine out. Not eating out so much will save you in the long run, make you healthier and thinner. Plus, with this new home office you might just generate more income. But even so, why would you want to go anywhere else? This house is going to be so great that you'll be happy just to stay at home.
You: So, it's a great place but I'll be riding the bus because I'm not going to have money for a car payment, will I?
Sanders: Didn't I mention? We will have new buses. Great buses. Finally, mass transit that works! Or you could walk to work. That will also help with your waistline.

Metaphorically, this is what the candidates are offering:

• Smaller payments and much more debt for the same place in a gated community (Trump)
• Smaller payments and more debt for a smaller place (Cruz)
• The same payments and same place (Clinton)
• A nicer, bigger place with much bigger monthly payments (Sanders)

So what will you have?

Terrorism as a Sign of Progress

Terrorism in Europe represents progress.

Before you accuse me of insanity or a lack of empathy, give me a few sentences to make my argument.

Today in Europe was tragic. Roughly 30 people were killed by a fringe group with no political power in Brussels.

100 years ago in Europe was much worse. Roughly 2 million were killed in just the first half of 1916. By its end, World War 1 had killed 17 million and wounded another 20 million.Not 30 casualties. 37 million. (And a comparable portion of today's global population would be over a 100 million.)

100 years ago, widespread, destructive violence was national policy across Europe. It was on-going for years and was institutionalized by groups who held power and had hopes of seizing even more territory and power.

Today, destructive violence is the policy of terrorist groups who have no hope of seizing power anywhere in Europe.

Violence is being marginalized.

If we look at today's events in light of the months immediately prior, it is obvious that things are getting worse. Last week, no one was killed in a bomb blast in public places in Europe. Today was a terrible day.

If we look at today's events in light of decades prior, it is obvious that things are getting better. A century ago the first world war was creating casualties at an unprecedented rate. 70 years ago, the second world war was killing and wounding people in even larger numbers. 30 dead would have been a relatively great day (or, more precisely, a relatively less awful day). During the six years of World War 2, there were an average of nearly 30,000 casualties per day. Not 30. 30,000. Every day. For years.

People like Donald Trump seize on our lack of perspective and ignorance of history to claim that things are bad and getting worse. Because of deteriorating events we have to radically change and give up power to leaders who will keep us safe in return for that power, they tell us. That narrative is nonsense. Don't listen to aspiring leaders who tell you that things are getting worse and that the only route to safety is to become more violent ourselves and to give these aspiring leaders more power. That's the sort of story that starts with a lie and ends with bad policy.

What Mitch McConnell is Really Thinking

It's hard to imagine what more Obama could have done to win over social conservatives than to have chosen a Supreme Court nominee from the 19th century. (In what other century would a couple name their newborn Merrick?)

And yet, Mitch McConnell has announced that Congress will take no action on Obama's Supreme Court appointment. This means that the Supreme Court will have only 8 members until after the next president is sworn into office.

From this simple fact we can conclude one of two things.Either the GOP Congress has had enough of democracy giving power to Americans they disagree with (that is, the Americans who decided that Obama ought to serve 8 years) or McConnell has a bet with someone that Trump will appoint Judge Judy to the Supreme Court.

Another Little Step to Changing the Corporation

I rode home from San Francisco last week beside a guy who had been at a web developer conference. He told me that one thing that has changed since he started in the field nearly twenty years ago is the approach to projects.

Twenty years ago, he would get hired to execute on a defined project. "We need you to do ..."

Now, increasingly, they ask him, "What project would you like to work on?" He gets to define the project he'll work on.

In the Fourth Economy, I argue that employees will gain more autonomy within the corporation, a dispersal of power patterned after the change made within the Western church between 1300 and 1700 and the nation-state between 1700 to 1900. This "What project would you like to work on?" is just another step in that direction. And because it's a "revolution" that will play out over decades and involve no bloodshed, it might escape notice. But it's changes like this that will change the experience of work, something that does so much to define our quality of life, our options and even who we are.

What to Do About Working Class Resentment of Government Programs

What should we do about working class resentment of government programs? Be fair. We should invest as much in the careers of the working class as we do the careers of knowledge workers.

Knowledge workers are doing pretty well in the US. The unemployment rate for engineers and programmers is close to zero and corporations compete for Science, Technology, Engineering, Maths (STEM) graduates with things like valet parking (seen here at Google's Mountain View campus).

Big data is now a thing and by some reports, the leaders in this field are commanding NFL quarterback range salary packages.

It's not just that knowledge workers have it pretty good in 2016. The community around them has invested heavily in their success. From kindergarten to the world's most reputable public universities, knowledge workers are beneficiaries of extensive public support. Additionally, many of the great breakthroughs that have created the fields they work in are the product of government initiatives. Aviation, satellites, computing, the internet, genomes, and particle physics are all areas that have been heavily funded by government programs. Industries and their employees are beneficiaries of government programs that have helped to develop these fields.

By contrast, the working class have not much benefited from government programs. For them, government first forced them into schools that didn't much seem accommodating to their way of thinking, then taxed them in their jobs in order to fund programs that would benefit the above mentioned knowledge workers and then signed trade agreements that shipped their jobs overseas, leaving them to stock shelves at a Walmart that sold products made overseas for half the pay they'd made before.

It's good and proper that we've invested in knowledge workers. The world is better when we have apps that make it easy to find a new address or a medical procedure that lets us heal more quickly. That's not the problem. The problem is that making these investments in fields that benefit only knowledge workers is unfair.

It is not just that we need a more developed career development track for folks whose talents and interests won't take them into STEM careers. There should be parity. It doesn't matter if you are in retail or robotics, there are certain things that will make you more productive. Those things can be taught. And given those things will make employees more profitable and lead to higher wages, it is irresponsible to ignore those investment opportunities.

It may not sound as exciting to fund research and development for retail as it does to fund R&D for robotics, but retail sales will continue to be a huge part of our economy. It's not just fair to invest in every level of worker in this economy. It's good policy. Median wages don't go up until the person who makes less than half of workers - and more than the other half - sees her income rise. Right now, the median worker is not a STEM graduate and is unlikely to be for a long time.

Free Trade - a Simple Thought Experiment

Economists argue a lot but rarely about the benefits of free trade.
Here's a poll result that is typical of economists' opinions about free trade (from here.)

No economist disagreed with the claim that Americans have benefited from major trade deals.

Of course Bernie Sanders and Donald Trump don't have economic degrees. Bernie talks derisively about American workers having to compete with low-paid Mexicans and Chinese. Donald warns that when he is president, Apple will be made to manufacture their iPhones in the US instead of China.

If anyone actually took them seriously, this would be dangerous talk. Fortunately, their worldviews are unlikely to be translated into policy.

There is so much that could be said about this but do this thought experiment.

Imagine that you live in a block of 100 people in a town of 10,000 people in a metropolitan area of a million people in a state of 10 million people in a country of 100 million in a world of 10 billion.

At one extreme, you can only trade with people on your block. The best food will be something someone on your block can raise, harvest or slaughter, and cook. If you can't raise cilantro in your neighborhood, you can't include it. No trading for spice like pepper or cinnamon. Or vegetables that won't grow on your block. Oh, and that's just the food. Clothes are the same thing. Keep in mind, it's not just that you can't trade for clothes. You can't trade for looms or sewing machines. And if we're going to be really strict, you can't even trade ideas because those, too, are a form of intellectual property. You have to figure this all out.

The homes on your block? Well, they are made of whatever materials you have in the vicinity. You might live in a mud hut. Or under branches. Or just out in the open. You can't put up a tarp unless you have the technology to make it.

And on it goes. The odds are infinitesimal that you have enough geniuses on your block to be able to make all the components needed for a radio, much less a TV or computer. Your quality of life is going to be terrible.

At the other extreme, you would have access to the best across the whole world, all ten billion people and their unique talents. The team that came up with the great high-definition googles that let you "walk" through virtual reality spaces real or imagined. And by the way, those googles depend on software from another part of the globe, another team. And the many, many, many pieces of the puzzle that go into such a complex product as the virtual reality experience come from dozens of nations and hundreds of companies and thousands - possibly millions - of people.

With free trade, you have access to the best across the whole world. The music. The food. The ideas, The technology.

At the one extreme, you live a life little different from cave men. At the other extreme, you live a life that offers you the best the world has to offer.

And as the circle enlarges, from your neighborhood block to your town to your country and so on, there are more benefits to enjoy.

Free trade takes you from an isolated, Robinson Crusoe existence to the wonder of the modern world.

Calling the Market

Through the 12th of February, NASDAQ had fallen roughly 13%. It was a miserable start to the year.

On the 15th of February, after the market's 12 Feb close, I wrote a blog post arguing that fundamentals all pointed to a strong economy and that reality was going to register and stock prices would start rising. (Yellow highlight below shows the close before the blog post.)

Since then, the NASDAQ is up 7.3%.

Could Be Serious - But How Would Anyone Know? The Collapse of the Absurd and Serious in American Politics

This week at the client site, I met a guy who works remotely from the UK. We chatted a little.

Later, I was waiting for him to move so I could get by him in a tight space and finally cleared my throat. He quickly apologized and quipped, "Sorry. Those immigrants just come over and get in the way."

"Yes," I replied. "But we are trying to figure out how to build a wall along the Atlantic Ocean."
One of the other Americans said, "And you know who will pay for it."
I nodded. "The good news, Steve, is that you'll have the French to help you to pay for it."

A number of guys laughed but Steve looked genuinely disoriented. As I walked away it hit me, "How would a foreigner know any longer what we consider to be absurd humor and what we genuinely think of as good policy?" In the politics of the right, those two have collapsed.

Donald Doing Worse Than a Loser - comparing Trump's Super Tuesday w/ Romney's Primary Wins

Donald claimed that he did great in Super Tuesday. "Record turnouts," he claimed. "It's a movement," he assured us. He also called Romney a lightweight this week, adding the party's last presidential candidate to his list of people he's insulted.

So is Trump doing so much better than Romney did four years ago? Based on Super Tuesday, the answer would seem to be, "No." If there is a lightweight in the fight between Romney and Trump, it would seem to be Trump.

Simply put, Trump got 16% fewer votes than Clinton in the Super Tuesday states.
4 years ago, Romney won 40% more primary votes than Obama in these same states.

Although Trump and Clinton did not run against each other, they were each competing for votes in the same states. It's easy enough to compare their vote totals from Tuesday night.

Unsurprisingly, Trump won more primary votes in Tennessee and Alabama than Clinton. He won 36% more votes than Clinton in TN and 20% more in Alabama. While Romney got only 8% more votes than Obama in Ala, he got 75% more votes than Obama in TN. Here you could say that a slight edge goes to Romney.

But Romney also won more votes than Obama in Massachusetts, Arkansas, and Georgia. These were all states where Clinton won more votes than Trump on Tuesday. Here, the edge clearly goes to Romney.

Even though Sanders beat Clinton in Oklahoma, Clinton still won more votes there than Trump did. By contrast, Romney won more primary votes than Obama in OK in 2012.

Counting up the states from 2016's Super Tuesday (excluding Virginia, which wasn't a part of Super Tuesday in 2012) Romney won 32% more votes than Obama in 2012. By contrast, Clinton won 16% more than Trump. That's a big swing for states that show such strong Republican support.

Trump is doing considerably worse in 2016 than Romney did in 2012.

Will Trump win the general election? Maybe. But if he does, he'll win it in spite of performing more poorly than did the GOP's 2012 front-runner, a man who never did move into the White House.

Super Tuesday Primary Results - Why the Fractured GOP so Misses Reagan

Donald and Hillary have emerged as the clear front-runners.

It's curious that the GOP establishment has had such a visceral reaction to Donald, the only Republican candidate voters refer to by first name. The GOP might actually split if he arrives at the convention just short of the delegate count he needs to outright claim the party's nomination. But give him credit for his: who else could make the GOP establishment actually feel relieved to see Hillary win in November?

Given the two are likely to face each other in the general, it is curious to compare how well they did in the same states.

In Super Tuesday's primary elections, Clinton consistently edged out Trump.  Each lost two states (Clinton lost Vermont and Oklahoma and Trump lost Texas and Oklahoma), but Clinton got more votes than Donald in 6 states and Donald got more votes than her in just 3. He barely edged out Hillary in Vermont even though in Vermont Bernie Sanders got about 6 votes for every 1 that Clinton got.

	Clinton	Trump	Clinton edge
VA	504	356	148
Vermont	18	19	-2
Texas	931	757	174
Tennessee	245	333	-87
Oklahoma	139	130	9
Massachusetts	589	299	290
Georgia	536	501	36
Arkansas	143	130	13
Alabama	310	372	-62
total	3415	2897	518
Where Donald Won
	573	724	-151
Where Hillary Won
	2842	2173	669

If we're just looking at the ability to collect votes, Clinton seems to have a distinct edge. For all the talk of record turnouts on the Republican said, she got 18% more votes than Trump Tuesday night. In all, Clinton won half a million more votes than Trump on Super Tuesday.

As it now stands, Donald is likely to win the GOP nomination but lose the party's support. And that could make for a dream scenario for Hillary Clinton in the general election. Who wouldn't want to run against a candidate promising to bring the country together while breaking his own party apart?

But tonight is another reminder of why Ronald Reagan is so idolized in the party. Reagan was a celebrity and a professional politician. He'd been a famous actor and a popular governor of California. He was an ideological icon and pragmatist. He spoke out against communism and big government but he also raised taxes more than once and presided over the creation of more government jobs (1.4 million) in his second term than any president since.

Now, the GOP seems to be choosing between those identities. It can go with celebrities like Trump or Arnold Schwarzenegger. Or it can go with professional politicians like George Bush or George Bush or even Jeb Bush. Or it can go with ideological purists like Ted Cruz or Paul (Rand or Ron). Or it can go with pragmatists like governors Kasich or Christie. The inability to find one candidate who deftly combines all of the impulses found in Reagan (and indeed, in the party) is either fracturing the party or making those fissures more obvious.

The GOP remains an odd assemblage of religious, fiscal, and social conservatives who will likely cobble together lots of successful candidates to win state elections and swaths of Congress for decades more. It's not obvious that they any longer have a clear enough sense of identity or complex enough candidates to be able to put forward a national candidate ever likely to win the White House.

[Having made this big claim, your blogger feels obliged to point out that he dismissed Donald's chances of winning the GOP primary. He seems to have been wrong about that. Just so you know.]

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.