31 May 2017

The Simple Solution to the US Trade Deficit with Germany

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

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

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

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

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

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

28 May 2017

Prophets Who Create By Reforming

Well, it’s certainly true that all great religions deal with the same conflicts of politics and violence, and the struggle to reconcile with the realities of a changing, evolving and modern world. I think there’s this misunderstanding, among most people of faith, that prophets sort of grow up in some kind of cultural or religious vacuum. That a prophet is somebody that just plopped down to earth from heaven, and with a ready-made message, in which they found a brand-new religion. But prophets don’t invent religions. Prophets are reformers of the religions that they themselves grow up in. Jesus did not invent Christianity. Jesus was a Jew. He was reforming Judaism. The Buddha did not invent Buddhism. The Buddha was a Hindu. He was reforming Hinduism.
- Reza Aslan,
taken from Krista Tippet's book, Becoming Wise

Magic Math in Trump's Budget: How an Imaginary $2 Trillion Gets Spent Twice

Trump's new budget plan forecast $2 trillion in additional revenues because of economic growth and then simultaneously applied that $2 trillion to a tax cut and to a deficit reduction. This faster economic growth will both increase revenues in the form of higher taxes and fund a tax cut in the form of lower taxes. Wrap your mind around that.  It is as if Trump's Budget Direct Mick Mulvaney (people say he's Irish but it seems clear that he's a goblin) said, "The amount we get in extra taxes will pay down the deficit AND will let us cut taxes by that same amount." It's like someone has won $100,000 in the lottery and excitedly announces their plan to pay down their $100,000 in debt and spend $100,000 on new cars and travel. It's double counting.

It might be that the Trump administration is that sloppy. Or it might be that they trust that they have so undermined the credibility of the press by continually calling it fake news that they will be able to ignore or brush off any reporting that points this out. They are operating in a fact free zone.

If that's not enough, there is more. Where does this extra $2 trillion over 10 years come from? It's existence comes from an assumption that the economy will grow by 3% a year for a decade. How likely is that?

Well, since 1948, the longest stretch during which GDP growth exceeded 3% was 6 years. (From 1961 to 1966, when Johnson's New Deal was increasing government spending, defense spending for Vietnam was just ramping up, and the baby boomers were starting school and driving their parents to buy more housing, clothes, and cars.) It has been eleven years since GDP growth has been as high as 3% (exactly 3% in 2005, and 3.1% the year before that.) In this century - since 2000 - GDP growth has not even averaged 2%, much less 3%.

So is there reason to believe that economic growth will bump up 50%? (3% is 50% more than 2%.)

Curiously, per capita GDP growth has been incredibly stable since after the Civil War. Here it is by decade. (Source data here.)
Note that in only one decade has per capita GDP growth been more than 3%; in the 1940s, when the US was spending a huge amount of money first fighting Nazis and then rebuilding Europe and Japan, per person GDP growth was nearly 4%. World War 2 was the catalyst. Pull out that decade and you can see that per capita GDP growth has never averaged 3% for a decade. 

And here is a phenomenal statistic. Pull out the 1940s and the average per capita GDP growth since the 1870s has been 1.88%. The average GDP growth in this century? 1.88%.

GDP growth bounces over 3% in healthy and normal decades but it does not stay much above 2% for any length of time without a growth in the workforce. A growth in the workforce depends on immigration and birth rate.

So, will GDP bounce up to 3% for a decade? Only if Donald decides to encourage immigration. (Insert laughter here.) Millennials will cause a growth in the workforce during this next decade to offset baby boomer retirements but it won't be enough to cause a noticeable surge. 

Trump's budget plan doesn't just use the same $2 trillion to simultaneously pay down debt and cut taxes. It forecasts this additional $2 trillion by assuming GDP growth we've only experienced in one out of the last fourteen decades. It's not just that he and Mulvaney are spending this money twice; it's imaginary money.

83% of what Trump says ranges from half-true to pants on fire. Only 17% of what he says is mostly true or simply true. It's little wonder that with such disregard for facts he would put out a plan that shows such utter disregard for simple arithmetic or reasonable assumptions. He continues to show his contempt for Americans' ability to reason. So far, assuming that we're all stupid has worked out well for him. It doesn't seem like it'll work out as well for the rest of us.

Thomas More's Utopia - How Poverty Makes for Bad Government

A century ago, Thomas More published Utopia. More was beheaded by Henry VIII when he refused to break with Rome and pledge allegiance to Henry rather than the pope and Erasmus helped him to publish Utopia. 500 years ago the modern nation-state was emerging and it created a thicket of issues that had to do with the question of policies and authority and the very identity of a people. More's Utopia was his way of dealing with this, using a fictional place to model what a country could be. It's an imaginative leap that's not just fanciful but helpful as a way to define what could be but has not yet been experienced. (In Utopia, More argues against private property. Centuries later, the Soviet Union honored him for this early definition of communism.) One of the more fascinating acts of social experimentation since has happened when Utopians have tried to create communities that break with tradition.

One of the arguments that apparently prevailed at the time was over this notion of wealth and poverty. Here, More attacks the notion that it is better to rule a poor people. This is one section of his book that still seems relevant.

19th Century Dancing Utopians
And they think it is the prince's interest, ... as if it were his advantage that his people should have neither riches nor liberty; since these things make them less easy and less willing to submit to a cruel and unjust government; whereas necessity and poverty blunt them, make them patient, beat them down, and break that height of spirit, that might otherwise dispose them to rebel. Now what if after all these propositions were made, I should rise up and assert, that such councils were both unbecoming a king, and mischievous to him: and that not only his honor but his safety consisted more in his people's wealth, than in his own; if I should show that they choose a king for their own sake, and not for his; that by his care and endeavors they may be both easy and safe; and that therefore a prince ought to take more care of his people's happiness than of his own, as a shepherd is to take more care of his flock than of himself."It is also certain that they are much mistaken that think the poverty of a nation is a means of the public safety. Who quarrel more than beggars? Who does more earnestly long for a change, than he that is uneasy in his present circumstances? And who run to create confusions with so desperate a boldness, as those who have nothing to lose hope to gain by them? If a king should fall under such contempt or envy, that he could not keep his subjects in their duty, but by oppression and ill usage, and by rendering them poor and miserable, it were certainly better for him to quit his kingdom, than to retain it by such methods, as makes him while he keeps the name of authority, lose the majesty due to it. Nor is it so becoming the dignity of a king to reign over beggars, as over rich and happy subjects. And therefore Fabricius, a man of a noble and exalted temper, said, he would rather govern rich men than be rich himself; since for one man to abound in wealth and pleasure, when all about him are mourning and groaning, is to be a jailer and not a king.

27 May 2017

How Real Estate Has Distorted Trump's View of Economics

There is never just one economy. One person experiences the pain of a shrinking industry and another the exhilaration of a rapidly expanding one. "The economy" is an abstraction that no one person experiences and affects us each differently. One person can be happily working and getting rich and literally walk by another person on his way to work, a person who is homeless and miserable. We could probably use a million categories to describe the many and varied experiences individuals have of the global economy. We all piece together our picture of how the economy works with incomplete data. If you're Donald Trump - a man who eschews abstractions, models and data - that individual experience becomes the basis for a worldview, his single data point becoming the source of his confidence that he understands the economy.  He does not.

The guy who makes his money in real estate lives in a different economy from the guy who makes his money creating new technology or building a company. Here's the trick, though. Real estate is only worth more today than it was 50 years ago because there are more people bidding for it and those people make more money. Why do they make more money? Because folks have figured out how to create new technologies and new industries. If technologies and businesses hadn't evolved in the last half century, real estate wouldn't have gone up much in value. The value of real estate depends on the value of work in that area that produces new technologies, products, and companies. Real estate far away from where people are working to create value is worth far less. In Menlo Park - the heart of Silicon Valley - the median home price is nearly $2 million; the median home price in Kansas is $125,000, about 1/15th of the price in Silicon Valley. The real estate in Menlo Park is worth more because that community is more adept at wealth creation not because the land is better for crops.

How do you make money in real estate? You bid more for the property at the corner of 5th and Broadway than the other guy. And then you hold onto it. If you own that property, no one else does. And to be fair, you add value by developing the right kind of property. You create apartments or offices that command a premium - or at least a competitive - price. Negotiations matter at every turn. If you pay 6% interest on the loan to finance this property you might make no profit; if you can negotiate a deal for a loan at 3%, you might make millions in profit. Getting tenants to pay $3,500 in rent instead of $3,000 could make the difference between having enough capital in five years to buy more real estate, to expand your empire, and just paying down debt on the property you own. In real estate, you face a series of win-lose negotiations that result in either you or the other guy getting the property, you or the tenant pocketing an extra $500 a month or the banker taking all your profit or just half.  Posturing, bluffing, negotiating and cajoling are keys to success in this world.

How do you make money in the creation of companies, technologies, and products? (What I'll just call the entrepreneurial economy.) You humble yourself before reality. People don't bluff their way into interfaces that users find addictive, that compel them to spend hours with your app. You can't bluff a chip fresh from fab into revealing its bugs. You have to problem-solve, test, challenge beliefs and collect data. And how do you create a new market? You reach out to customers to listen and to potential partners who have some special skill set or knowledge you need. This entrepreneurial world is full of win-win negotiations. If you capture the market, your suppliers and partners win; if you lose the market, your suppliers and partners lose. Nobody creates something new alone. Menlo Park is full of immigrants who have been drawn from all around the world in the search for the best employees, partners, and entrepreneurs able to create what is next. You need to collaborate with the best regardless of their eye color or accent.

Real estate rewards bluffing. Tech development punishes it. If you lie your way into financing or a partnership in developing something new and can't deliver, what you've talked your way into is worthless. Do that more than once and your reputation will also be worthless. By contrast, if you lie your way into a great deal on a loan or a property, you win. It's still yours at the end of the negotiation. Generally speaking, negotiations around the creation of something new just give you permission to collaborate in creating something valuable. Negotiations around the purchase of real estate gives you what is valuable.

The entrepreneurial economy requires that you loosely hold beliefs, continually willing to challenge them with new ideas, possibilities and data. To discover what is newly true before anyone else could mean creating a new industry and billions in wealth. In this world, you're rewarded for challenging your beliefs.

Of course your employees realize this; you don't hire the best employees in Silicon Valley without offering them equity in your company. Again, to win means embracing a win-win mindset. You either bring along others or you don't move forward; billionaire Mark Cuban claims to have created more than 300 millionaires in the process of creating his wealth. It's rare that you hear the story of a successful entrepreneur who has not made others rich in the process.

Trump has made his wealth through real estate, which rewards zero-sum thinking and behavior in ways that the entrepreneurial economy does not. One of the many problems with this is that it is the entrepreneurial economy that is going to create jobs and wealth for the next generation. The zero-sum portion of the economy is just going to follow the success of the entrepreneurial portion of our economy.

Trump wants to put up walls because he believes that value is something you protect, like a moat around a castle. It's not. At least not in the entrepreneurial economy. Value comes out of creating connections and expanding networks of suppliers, customers, and technologies. (Think of the millions of technologies, apps, and supplier and retail networks that have built up around the iPhone, for instance.) Walls that isolate sections of this network destroy value rather than create it in the same way that sectioning off portions of your brain would destroy it. Breaking down walls - not erecting them - creates value.

Had Trump made his billions in tech rather than real estate, his beliefs about the economy would be much different. (Or even if he read books or listened to others who had been in this other economy.)  One of the many problems with his economy is that only one person (or organization) can own the property at the corner of Fifth and Broadway. It inherently accepts scarcity and the notion that there are elites and then the rest. By contrast, the entrepreneur realizes there are always more problems to solve, more value to create; his making billions from the creation and sale of a smart phone actually means that you can now make billions from creating and selling an app. The entrepreneur sees opportunities for progress in every direction.

One of the most important concepts behind the entrepreneurial economy is the concept of variable sum, the notion that how we cooperate or compete will change the total value we have to share. In a zero-sum economy, the land has value regardless of our actions. If I get that land or you get it, that land's value is the same. What differs is how much of that value I got. In a variable-sum economy, the product I'm creating might sell hundreds of units a year or hundreds of millions of units; how we work together can make the difference between whether that market is worth billions or thousands. Your behavior and approach will be wildly different depending on whether you see the economy or market as variable sum or zero-sum.

All indications are that Trump sees the economy as zero-sum. He is going to stop Germans from selling so many cars and the Chinese from making so many of our products and he's going to make sure that jobs stay in America. He says nothing that indicates an awareness of how China and Germany and Africa and the US can jointly become more prosperous through trade, through a blend of competition and cooperation, mutual investment and development. He's determined to be the guy who owns the skyscraper at the corner of Broadway and Fifth once the negotiations are over.  (And this is just one reason that despots like Putin, Erdogan and the Saudis so appeal to him. This is their world and worldview.) He's not trying to create; he's trying to conquer.  His is a medieval mind in a modern world. The more success he has in walling off this economy and treating it like a zero-sum game, the less prosperous this economy will be.

04 May 2017

The Curious Solipsism of Donald Trump

From Wikipedia
Solipsism (Listeni/ˈsɒlpsɪzəm/; from Latin solus, meaning 'alone', and ipse, meaning 'self')[1] is the philosophical idea that only one's own mind is sure to exist. As an epistemological position, solipsism holds that knowledge of anything outside one's own mind is unsure; the external world and other minds cannot be known and might not exist outside the mind. As a metaphysical position, solipsism goes further to the conclusion that the world and other minds do not exist.

If Donald Trump didn't know it before, nobody knew it before.

"Nobody knew that [ ....] was so difficult." (Where the brackets are filled, alternatively, by healthcare, China and North Korea, NAFTA, etc.)

If it hasn't happened to Donald Trump before, it hasn't happened to anyone before.

The Fake News media is officially out of control. They will do or say anything in order to get attention - never been a time like this!

Not only has it never happened before, there has never even been a time like this in the history of the world.

This solipsism of Trump is partly intellectual - showing a lack of curiosity in history or ideas - and partly emotional. It's not obvious that he cares about the experiences of anyone but him. When he talks, he talks about his ideas and shows little or no interest in the perspective or values of anyone else. Everywhere he goes, he looks around and confirms that he's the center of the universe.

Curiously, his reality has become ours. In terms of media coverage, he has become the center of the world. If he manages to control Congress, his conviction that he's the center of the universe will actually be substantiated by actual events. Once upon a time, you had to be king to have your personal solipsism confirmed by everyone around you.

03 May 2017

Where Economic and Psychological Progress are at Odds (a partial explanation of how obviously bad policies can make for good politics)

Trump listens to his gut. While he may not be self-made man, his facts are, and he shows a disinterest in sustained thinking or nuanced thoughts.

His reliance on instinct and disdain for theory has taken him past what we know of how economies work to what he feels about how individuals feel about psychology of work. Freud could better explain Trump's economic policies than could Keynes.

Over the last couple of centuries, the economy has obviously made us more prosperous. Our prosperity from our work has increased more obviously than our contentment, though. What has obviously worked economically has less obviously worked psychologically. This is partly because of division of labor.

Adam Smith's Wealth of Nations, the book that was arguably the first to define capitalism, opens with the account of division of labor as a force that had multiplied productivity.

THE greatest improvement in the productive powers of labour … seem to have been the effects of the division of labour. ,,,, To take an example ... the trade of the pin-maker. One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving, the head; to make the head requires two or three distinct operations; to put it on is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands ... Each person... might be considered as making four thousand eight hundred pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day …

By Smith’s calculation, division of labor bumped up productivity somewhere between 240 to 4,800 times. As Smith’s Wealth of Nations was published in 1776, for the first time since the ancient Greeks, productivity began to rise in the West.

If anything, this process has accelerated and deepened. This month I'm working with a client's product development team intent on rolling out a next generation computer chip that can be used in self-driving cars. The team involved in planning includes a couple of folks from Scotland, a couple from India, one from Malaysia, a couple from China and one from Austin, TX. The team working on project tasks includes an even larger swath of countries. 

We don’t just divide labor to focus on different tasks within a factory. We now divide labor across continents.

But this comes with a price. What makes us more affluent makes it more difficult to be engaged. Division of labor makes it harder for employees to see – or experience – how their tasks feed into finished products. And when a product is dependent on the efforts of so many people, it becomes harder to feel as though your own efforts make a difference.

Obviously gales of creative destruction that obsolete jobs, companies and even whole industries are the most visible element fueling the support for Trump’s promise of a national economy that won’t lose jobs to overseas competition. I suspect, though, that this curious alienation that comes from the steady division of labor that has started with pins and extended to transistors so small that their state can be changed by subatomic particles (true story), is a big part of why we don’t feel more certain of the gains that have come through this process that has made us part of a global economy.

Trump's protectionist policies will stymie this force for progress. His economic policies are awful. To me, the fact that policies which reverse the increased specialization and global trade take us backwards is hardly worth arguing. (Although I have argued it here.) The bigger question is why Trump's anti-trade policies won so many converts. I think the answer is, in part, psychological. Progress has made us more affluent; it has also made it harder for us to be engaged in our work.

Csizkzentmihalyi reported on a studies of where people find flow. People doing more traditional work like farming are more likely to find flow - or engagement - work. People doing more modern work are more likely to find flow in leisure. Tasks that we can see the whole of - building a cabinet or sheering sheep or cooking a meal - are tasks that are easier to find flow in than tasks that are merely some small part of a larger process. 

What does this mean? Economic progress is at odds with psychological well being. As our work becomes more specialized and we're more productive, we run the risk of becoming less engaged in our work and less happy. 

I do think there is a fix for this and it goes back to Csikszentmihayli's work on flow. For the last 100 years - well, at least the last 50 years or so -  we've focused on the quality of the product, what we experience as consumers. At its current peak of evolution, this focus on what customers experience with your product is called UX, or user experience. It's a big deal and rightfully so. It's a big part of how we've made the post-Adam Smith rise in productivity translate into more happiness as a consumer. What's next? We focus on our work as producers. We can create video games that engage and delight; we can also design work - just as we design products - to engage and delight.

I won't pretend that the only problem with globalization is that specialization can lead to stronger feelings of alienation than more traditional work. I will say, though, that as we become better at designing work to engage us when we are wearing our producer hat, jobs and work will become less a matter of angst and anger than it has in recent decades and will make it easier to sustain support for a process that has not only made us more affluent than our ancestors but more affluent than they could even imagine.