29 June 2017

This is What a Virtual Coup Looks

The GOP has taken over the federal government and could keep it through 2032.

In 2010, the GOP targeted and won key elections in order to be able to shape national elections through 2020. Now, for instance, while Republicans make up about half of Wisconsin's polity they have about two thirds of its elected offices courtesy of gerrymandering. By refusing Obama's Supreme Court appointment, the GOP now has a majority on the Supreme Court. With the help of Putin, they now have the White House and probably one or two more Supreme Court appointments than they would otherwise have. And, finally, now that they have power over all three branches - courts, legislature, and executive branch - they are able to stop any investigation of Russia, enabling it to continue its meddling with our elections (something 17 national security agencies all agreed they had done and would continue to do) while also continuing with voter suppression efforts that arguably stole hundreds of thousands of votes in swing states. (One of the many things overlooked in the question of collusion is the certainty that Trump - and the GOP more generally - will do nothing to stop Russia from interfering once again. Why would they if it helps them to win?) The head of the Census recently resigned out of protest for not having budget enough to properly conduct the 2020 poll; the results of not having a valid 2020 poll will likely give Republicans cover for not updating any demographic or census data from 2010, effectively extending their gerrymandering victory of 2010 to cover 20 years rather than just 10. In this they are ignoring a constitutional mandate necessary for democracy. (No census, no information on which states and regions should have more or less representatives.) They won't loosen their grip on national offices until 2032.

What are they doing with this power? They're instituting policies for which they don't have popular support.

The Republicans will get their tax cuts and will make their donors happy. And given they'll keep these tax cuts in place for at least a decade, they will become the new normal against which even moderates will be judged in any future quest to change things. It's also worth remembering that the most powerful Republicans and their donors will be dead soon. The Koch Brothers are 77 and 83 and will be dead by 2032. So will Robert Mercer, Mitch McConnell, John McCain, and Donald Trump. What happens after is speculative and, frankly, won't involve them. Trump, who is as immoral as any president since possibly Andrew Jackson (Trump's favorite past president), is the conscience of this party; it is not a party burdened with morals or any consideration of fair play. This is about power and profit.

The Republicans will pass a healthcare bill that Americans oppose and then follow that up with tax and budget cuts that lack popular support. Analysts and pundits will fret about how this will create problems for Republicans but of course it won't. Republicans represent the donors who can now spend unlimited money rather than the voters who can cast only one vote. Their gerrymandering has given them power disproportionate to their numbers: Republicans won less than half of the votes cast for House members in 2016 but won 55.2% of the House seats. With further help from Russia and voter suppression, they can leverage this vote into an even bigger gain in future elections. They've seized control and while there might be legitimate uncertainty about what they'll do with that power, we can be certain they won't give it back willingly.

The five most valuable companies today are Apple, Alphabet (nee Google), Microsoft, Amazon, and Facebook. American businesses have led in the creation of a new virtual world. American government, however, has yet to move into this new world. The result? The country so able to defend itself against any real world attacks has been virtually attacked. Putin has attacked us virtually, where we have little or no defenses; the GOP apparently sees no reason to defend itself against what benefits them. We've been the victim of a coup. Because it was virtual, most people still don't think it's real. The Republicans - intent on passing legislation that Americans would never vote for - know that it is.

26 June 2017

Minimum Wage

I believe in a minimum wage. Companies adapt to regulation in the same way that they adapt to market competition. If a community insists that companies have to pay at $7.50, a company has two choices: figure out how to create a profitable business even while paying this much or go out of business. A community has no obligation to keep in business a management team that can't figure out how to design a business to be profitable while paying people something approximating a living wage.

That said, there are at least two things that need to be considered in setting a minimum wage.

The first is the current distribution of wages. A third of Americans make an annual salary that equates to less than $10 an hour. Half make less than $15 an hour. If you - as Seattle has recently done - decide that the minimum wage should be $15 an hour, you have to explain yourself. I completely agree that laggards who can't, say, pay at least $7 an hour should be forced to change their business model or close shop. I like the idea of a legislative sheep dog nipping at the heels of the businesses that are in the bottom 10 to 30%, forcing them to move faster. It's a different thing, though, to suggest - as a $15 an hour wage does - that all the jobs should be above average. They won't be.

And that takes us to the next problem with the minimum wage. Whether it is set to $1 an hour or $25 an hour, there will be some people who aren't productive enough to cover that wage. It makes sense to tell businesses that they have to pay a certain minimum; regardless of what it is, though, some people are not productive enough to merit hiring. Those people need subsidies of some kind; not all needs will be addressed with a living wage.

The deeper need is for study of how jobs are evolving and a search for ways to move median productivity and wages. Individual success moves you from the bottom of a bell curve to the top; community success recognizes that there will always be one person at the bottom and one at the top of the distribution and will focus instead on moving the whole curve.

23 June 2017

Out of the Multitude

Do I contradict myself? Very well, then I contradict myself, I am large, I contain multitudes.
- Walt Whitman

Everyone is a multitude. When you address them, talk to their best self. See if you can get that self's attention first. They'll be better to deal with and that is the self you want a relationship with. At any given moment you might wake up their low self-esteem self, their angry at the injustice of it all self, their benevolent self, their irritated at you self ... To raise the odds of missing these sorts of characters, directly address their best self.

Of course sometimes that's like trying to get the attention of someone at a loud party.

12 June 2017

How Gaming Is Shaping a New Worldview

Mary Meeker delivered her annual Internet report Sunday. One of the points she made was about gaming.

  • Entrepreneurs are often fans of gaming, Meeker said, quoting Elon Musk, Reid Hoffman and Mark Zuckerberg. Global interactive gaming is becoming mainstream, with 2.6 billion gamers in 2017 versus 100 million in 1995. Global gaming revenue is estimated to be around $100 billion in 2016, and China is now the top market for interactive gaming.
One question she and the team at Kleiner Perkins asked was what does gaming prepare us for? I think it is teaching simulation to a generation who will need to become more adept at systems thinking.

The more one can play with the variables of a system, the better one understands it. To use a simple example, our company has software that lets a business unit forecast project completion dates based on shared resources and project priority. As you change the number of resources, project priorities, and how you model the use of resources within projects, the projected launch dates for these product development projects changes. One of the senior managers I once set up with this capability drove from Philadelphia down to Delaware each day for work. He told me that on his commute he would think about variables to change in order to explore what was possible to accelerate product launches. "I always sort of understood my business unit," he says, "but doing these simulations I came to understand it far better than I ever had. I learned what happened when I changed this variable or that one, what made a surprisingly big difference and what made hardly any difference and in what conditions. I understood the dynamics of the system in ways I never had before."

A great deal of what we see today shows graphs and numbers. "India is growing at 8% a year." "Smart phone sales are growing by 10% a year." What we have less experience with is simulations that allow us to change recent trends. "What might happen to its growth if India's move away from paper currency results in more theft from hackers?" "What happens to smart phone sales if they become a replacement for credit cards?" 

A simulation lets us do a few things. One, it lets us play with policy ideas. Two, it lets us explore the implications of entrepreneurial initiatives. Three, it helps us to better understand the way variables might interact to create emergent behavior that is the result of a the interaction of the variables in the system rather than the actions of any one variable in the system. Simulations will never be accurate. They can, however, be informative.

We are at the infancy of systems thinking in the same way that Europeans in 1700 were in the infancy of Enlightenment thinking. We will get better at simulating and thus understanding systems, systems as varied as ecosystems, financial systems, and educational systems - the variety of systems on which we're so dependent for our quality of life.

What is gaming prepare us for? It gives people practice with countless simulations, learning how changing one thing can change another, how this strategy results in an early death and this one lets you conquer the kingdom. Gaming teaches us that systems never depend on just one variable and that outcomes can never be determined even though probabilities can be changed. Gaming will make systems thinking and systems simulation intuitive to a new generation. That's pretty cool.

10 June 2017

The Biggest Danger of the GOP - Or What The Comey Hearing Drowned Out

Thursday, the House GOP passed a bill to repeal Dodd-Frank. Friday, the NASDAQ fell nearly 2%. Meanwhile, the world fixated on a UK election essentially won by the party already in power and a Comey testimony in which we learned that Trump lies. The news of the day was good cover for bad legislation. Really, really bad legislation.

A little story

A little town is divided among three groups. One group is pro-football, the other is anti-football and the third group is mostly neutral.

The anti-football group got that way because a couple of kids were seriously injured. One will be in a wheelchair for life. The anti- group simply argues that no sport is worth this risk.

The pro-football group are simply fans. They love the sport, point to the tradition, the way it gives the kids something to come together on and cheer for, the way it builds a sense of community, and how it calls young men to excellence. 

The problem is, the pro-football group has been hijacked by a sub-group so repulsed by the idea of rules to make the game safer that they've gone in the opposite direction. Call this group the football fanatics. They think that kids shouldn't even have to wear helmets if they don't want to - or can at least wear the old leather helmets that were good enough for players in the 1920s.

Here's the problem. The pro- group is only one or two spectacular injuries away from losing football altogether. And given the way the fanatics are approaching this - eliminating "silly rules that just slow down the game" like flags on late hits or tackles that involve helmet to helmet contact, etc., they have greatly raised the risk of serious injury.

The people who should be most grieved by the fanatics are the fans who care less about any specific rules of football than they do about just having the game in town. Because what the fanatics are doing is making it probable that the anti-football group will get their spectacular injuries that lead to cancelling the program.

The real story

Which brings us to capital markets.

Thursday, buried beneath the tsunami of coverage of the Comey hearing and UK election - the House passed a bill to repeal Dodd-Frank. Two major provisions of this bill set us up for another Great Recession: one provision exempts financial institutions from capital and liquidity requirements to allow them to take on more risk and another provision puts in place bankruptcy provisions in lieu of "orderly liquidation." So, financial institutions are free to take on more risk and when that risk leads to bank failure it won't be treated systematically. That is, it sets up the conditions for a run on the banks like the one that lead to the Great Depression. People will need to withdraw capital to protect themselves at the exact moment that the banking system would need more liquidity. 

Capital markets are one of the great inventions of mankind. Credit can finance the construction of high-speed trains or a cup of coffee, finance your education that launches your career or your house that becomes your home. Credit can finance research that cures an old cancer or a new product. The capital markets that have emerged since about 1700 have transformed our world, giving us longer lives, and making us more productive and happy. The joy football has brought into Americans lives is microscopic in comparison to what capital markets have brought. 

The Republicans are philosophically opposed to regulations. They are the pro-football fanatics who believe that the game of capitalism would be made better if only we removed all those troublesome rules that just get in the way of a good game. And while it's true that the game goes slower with rules and regulations, it also saves people from serious injury that comes from the failure of one or two big institutions becoming catalyst for a Great Recession. 

Real fans of football would shut out the fanatics who try to eliminate rules. Real fans of capital markets would do the same to the anti-regulation fanatics who - just years after the worst recession in nearly a century - are working to eliminate the regulations that save us from serious injury. Anyone who wants to see capital markets survive, evolve and prosper to continue to enable prosperity, will come out against this deregulation inspired by ideology. 

The biggest danger of the GOP's approach to repealing Dodd-Frank is that it will enable anti-capital market forces to make more coherent arguments against them. We now have a president who supports dictators; we can easily have a president in a decade who supports communists. If you love football, you would shut down the fanatics arguing against making it safer; if you love capital markets, you would shut down the fanatics working against making them safer. 

09 June 2017

The Real Failing of Modern Politics

Yesterday's UK election brought home what is for me the major failing of modern politics. There was little question that the biggest winner would be either Jeremy Corbyn's Labour Party or Theresa May's Conservative Party. Simply put, Corbyn wants more government spending and May wants more government austerity. These positions are distasteful to most voters because on the one hand it means more taxes and on the other it means fewer government services.

What is the biggest failing of modern politics within the West? Politicians have largely given up on promising prosperity. They've run out of tricks. W. Bush pushed capital gains tax reduction to stimulate more investment and investors pumped money into weird things like mortgage backed securities, thus setting us up for the Great Recession. Democrats push for investing more money into education but already we have more graduates than new jobs. (In 2013, the American educational system created 3.7 million college graduates (from AA and BA degrees to PhD and professional degrees) but only 2.4 million net new jobs.) What worked brilliantly in the 18th and 19th centuries (encouraging the creation and deployment of capital) and what worked fabulously in the 20th century (creating an extensive public school system to make K-12, even K-BA education the new normal) simply is not enough in this new century.

We will need capital in today's economy. More than ever. We will need well educated workers in this new economy. Again, more than ever. The difference? Capital and knowledge workers no longer lead the parade of progress. Entrepreneurship does. Any policy makers intent on creating prosperity need to focus on creating an entrepreneurial system.

One of the most spectacular inventions of the two centuries from 1700 to 1900 was the development of a financial system. Through a combination of private and public sector efforts, the West created an incredible ability to finance projects as vast as interstate highways or as small as the purchase of a coffee with a credit card. And policy makers can influence that system with changes in interest rates and other policies to stimulate or cool an economy, helping to promote the creation of jobs or to lower the rate of inflation. Our financial system is vast, complex, and rightfully the focus of policy makers throughout the economy.

One of the most incredible inventions of last century was the development of an education system that changed the experience of children from that of entering the work force at the age of 8 or 10 to that of entering university at 18 or 20. Again, this is a vast system with many moving parts but it is possible - through policy initiatives and cultural norms - to change and influence education and thus the economy through this system.

By contrast, we still have not developed a comparable entrepreneurial system. That is the work of our generation. We can lower interest rates and increase borrowing, change educational standards and increase the number of students who get a high school diploma or a graduate degree in business or education. Meanwhile, our relationship to entrepreneurs is about what it was to education in the 1800s. In 1800 most communities supported freedom of speech and thought but they largely left education to autodidacts and elites, self-taught gentlemen who could afford libraries, trips abroad or time at a university. The masses were not expected to get much of an education. In 2000, most communities support the ideas of entrepreneurship and grant a measure of freedom to private citizens to try their hand at starting a business. Entrepreneurship is left to those who are strong enough to push against the system or financially supported enough to fund a venture that might take years to become profitable. (The children of the affluent are far more likely to become entrepreneurs.) We don't expect the masses to consider - or even know how to approach - entrepreneurship. Unlike education, we have yet to popularize entrepreneurship.

Rather than force communities to choose between cutting services or cutting taxes, really effective politicians will engage in a conversation about how to create prosperity. During the 20th century, not only did families end up with vastly more income but they were able to fund a vastly larger government. There wasn't a trade off. The private AND public sector got enormously better. Prosperity gives you that option.

My own sense is that until communities throughout the West get as serious about the work of popularizing entrepreneurship, they'll continue to pursue a politics of divisiveness that forces communities to choose between the lesser of two lessers rather than the greater of two mores.

02 June 2017

Job Growth During the Trump Administration and Beyond

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

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

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

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

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

There are other factors.

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

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

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

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

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

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