23 March 2018

How Real Estate Has Made Trump's Economic Policies so Dangerous

Probably the most insidious way that real estate has shaped 
Trump's mind is that it has given him a zero-sum worldview.

An acre next to the Empire State Building would have cost $90 million in 2006, 30,000X what an acre in Kansas costs. New York's real estate market is dominated by corporations and family wealth and if your grandfather didn't have the bravado or wisdom to buy an acre of Manhattan, you probably don't own one now. Jared Kushner and Donald Trump didn't move from Kansas as young men and buy acreage; they come from real estate families.

Trump Tower Chicago, photo from Ron Davison
Real estate is a weird industry and it colors Trump's worldview in a variety of ways. It makes him better understand family dynasties and prefer the certainty of dictators to democracies, think of wealth as something just created "out there," and - worst of all - gives him a zero-sum worldview.

Dynasties and Development

If Angela Merkel loved Trump, it wouldn't noticeably change his odds of getting a Trump Tower Berlin. If Vladimir Putin loved Trump, it enormously changes his odds of a Trump Tower Moscow.

Real estate developers need permits and dictators are better able to provide those than democracies, and this is one of the simple, often overlooked reasons why Trump pays a disproportionate amount of attention to dictators rather than presidents.

Real estate also needs financing.

In 2007, just before the mortgage crisis bust, the Kushner family paid roughly $2 billion for 666 5th Avenue. It has caused them trouble ever since. Mueller is investigating Kushner family finances. (Jared's dad has already served time in prison.) For instance, the Kushner family met with Qatar for financing for their 666 property and later, after Qatar said no, Kushner worked with the Saudi's on a blockade of Qatar. Financing is key to success in real estate and Trump and Kushner have trouble getting loans from American banks, which also explains their fondness for dictators. (For more on these stories and Jared Kushner, listen to Robert Wright's interview with Elizabeth Spiers.)

This entanglement with foreign powers - from Russia to Saudi Arabia - is key to understanding how Trump and Kushner see politics. They aren't going to offend the entities who may be a source of loans or approvals for big developments. Presidents of a democracy cannot make you rich; dictators can.

The Magical Origins of Wealth

Homes in Detroit cost $44,600 and $1.3 million in San Francisco.  For the same price, you could buy one home in San Francisco or 29 in Detroit, where you could sleep in a different home every day of the month.

People who bought an apartment building or couple of rental homes in San Francisco 30 years ago have "done well" in spite of the fact that what they actually did is no different from what people who bought real estate in Detroit did. Real estate is derivative; if it is located in a community that knows how to create jobs and wealth, its price goes up.

William J. Bernstein claims that the simplest predictor of home prices is the mortgage payments folks can afford. What someone buying or selling real estate does isn't the determinant of whether it sells for $50k or $500k; that price is determined by what the local community is doing to either create jobs that pay $15,000 a year or $150,000.

Had the Trump and Kushner families settled in Detroit and owned real estate there, they'd either be small time or even bankrupt as a result of borrowing heavily to buy property that dropped - rather than soared - in price. Given they had the good sense to be born into New York real estate families, they are rich. Or at least have really big mortgages.

If you own or develop real estate in a prosperous area, it's easy to think of wealth as something that just magically happens. Trump never mentions economic development plans that involve investment in R&D or education. In his mind, it is enough to simply deregulate and let economic development happen.


Probably the worst way that real estate has shaped Trump's worldview, though, is this: real estate is probably the most zero-sum industry in the US and success in it can easily drive a win-lose or at best win attitude.

The first economy, an agricultural economy from about 1300 to 1700, was land based and the easiest thing to see about an acre or oil well is that if you get it I won't. One of us wins and another loses. War and the emergence of standing armies, guns, cannons, and artillery defined a great deal of this time and the conquest of land was key to prosperity.

You were likely born in the third economy, an information economy from about 1900 to 2000. If I give you an acre and you give me an acre - assuming they are comparable acres - neither of us comes out ahead. By contrast, if I give you an idea and you give me an idea - assuming they are comparable ideas - we both come out ahead.

In this fourth economy, an entrepreneurial economy from about 2000 to 2050, collaboration is even more important. 20 years ago, a typical product development team I worked with would sub out about 10% of its work to an outside company; now it is more likely to be a third. Specialization and the drive for the best collaborators has made teams even more reliant on outside companies, and folks working on teams who have either moved from another country or now work in another country. Customers will only buy a world-class product, whether that means incredibly cheap or incredibly good or both. To get a world-class product you need to collaborate with team members from all over the world and everyone in the process needs to benefit.

If the third economy was win-win, the fourth economy is win-win-win-win-win; investors, employees, partners, customers, and entrepreneurs all have to win for an enterprise to work. If even one of those groups thinks they'll lose, they can scuttle the whole enterprise.

Trump's zero-sum sensibilities are at odds with modern economic realities. Acreage is zero-sum. If you get that building at 666 5th Avenue, I don't. Deal-making is critical to success and Trump's deals are win-lose. The thought that Canada, Mexico AND the US could all be winning from NAFTA is laughable to Trump; in his mind, someone is either winning or losing in trade relationships. (And apparently his measure of who is winning or losing is the trade deficit, an odd scorecard that distorts so much.)

The real estate industry has to be one of the most zero-sum industries in the US. The fact that this is the industry Trump rose out of makes him far more likely to take a win-lose approach with other nations, whether in trade wars or real ones.

In his book Sapiens, Yuval Noah Harari makes an interesting point about California. If a foreign power conquered it in 1850, during California's gold rush, they would get most of the wealth. If a foreign power conquered California today, it would chase away all the wealth that now is in the form of people and their ideas, networks, companies and industries rather than in the form of gold nuggets that could be seized along with the land. Once upon a time conquest captured wealth; now it destroys it.

In this willingness to go to war to "win," Trump shows a lack of understanding of how modern economies work, a failure to understand that it is networks of trade and idea exchange that spill across borders that need to be protected and not land that neatly fits within borders. Taking a win-lose approach to fourth economy realities threatens the wealth and jobs that make a community prosperous.

14 March 2018

The Libertarian Philosophy - A Truth (often ignored) and a Misconception (largely embraced)

Libertarians advocate one thing that seems to me obviously right (but is often resisted) and another obviously wrong (but nonetheless wins the approval of most Americans).

A general trust in markets seems to me the most important thing they get right. Market solutions don't require consensus or bringing along committees and citizen action groups or the popular vote. An entrepreneur can just try something and assuming they can convince the right mix of investors and employees to go along, they have a chance to change how we live. That's pretty cool and the libertarians' trust in individuals seems to me repeatedly justified by the on-going success of entrepreneurs whose success may never have been predicted by any majority opinion.

The problem with market-driven progress is that it blows in on gales of creative destruction. Solar power can close down coal mines; digital photography can close down picture development kiosks. The status quo has a lot of wealth and power and part of what libertarians get right is that because of this power, government tends towards crony capitalism that protects existing industries in order to protect those investors and employees rather than forcing them to respond to the market. Government can become an obstacle to progress. Look at the coal miners in West Virginia, an industry that began in 1740. If we protect the 44 year old miner today, how much longer do we need to save his job? For two more generations? Two more years? What is society's obligation to protect him? Some politicians will say that for as many generations as he'll vote for you to go to DC to protect him and as long as the coal mining investors will fund your political campaign. Industries that would have a rough time getting thousands from a venture capitalist are sometimes successful at getting billions from governments.

Libertarians' belief that we should let markets disrupt and create new wealth and jobs even while eradicating old jobs and wealth is something I think is right. Still, it seems easy to find programs that protect industries (think of our enormous subsidies to farming and oil). This feel likes a truth often ignored.

So what do I think they get obviously wrong? This notion that government should then be small. I believe that successful markets depend on robust government programs in at least two ways. People always want protection and security. If you are not going to protect their jobs and industries, you need to offer them some personal protection. This, to me, means healthy unemployment insurance, jobs retraining and really hefty subsidies to kindergarten through grad school education, among other things. I also believe that we can hardly spend too much on research at places like the Center for Disease Control or National Health Institute or the National Science Foundation.

I have worked with hundreds of product development firms within companies, from startups funding only one project to Fortune 50 firms with thousands of projects. They develop new products. They need a product that can launch soon. The pharmaceutical companies have the longest development window - about a decade - but most target product launches within about 2 to 4 years. You've heard of R&D, research and development? This is D, the development. It's important. It's crucial. As cliche as it sounds, it can change the lives of investors and consumers. The iPhone is an example of development. The rightful focus of private companies is the D in R&D.

Research is hugely uncertain, though. It will probably result in nothing. If it does result in something cool it may happen a decade or three later than you expected. Not every cool thing becomes profitable. Because of this, corporations rarely finance research and it needs to be heavily funded by government, by groups like DARPA (the Defense Advanced Research Projects Agency) or the University of California. This research - the R - is crucial to corporations' later development - the D. "The parts of the smart phone that make it smart—GPS, touch screens, the Internet—were advanced by the Defense Department," as Mariana Mazzucato points out in her book The Entrepreneurial State: Debunking Public vs. Private Sector Myths. Corporations try to find a way to translate R that has taken one to two decades into D that takes two to four years. It's a pretty cool system.

The libertarian fantasy that communities work well with lean governments is wrong on two counts: a community that learns to sail the gales of creative destruction makes its people feel secure with change rather than resistant to it (which requires a strong welfare state) and getting the research to the point that companies can make it profitable takes considerable public sector leadership.

James Watt, employee at University
of  Glasgow, the same university that
employed professor Adam Smith
The contest between the public and private sector is not zero sum. A strong public sector can make the private sector healthier, and vice versa. (And obviously by strong I don't mean power over, the power of corporate lobbyists to choke government or for governments agencies to choke corporations. Instead, I mean power to, the way that advances in one lead to advances in the other, each enabling the other.)

When a libertarian talks about how markets are more innovative than government programs and how individuals should be given freedom to pursue what they think will make them happy, nod knowingly and agree with him. (Libertarians are twice as likely to be men, so this is probably a "him" you're talking to.)  Say something like, "Yeah. The pursuit of happiness. It's literally in our founding documents."  

When he tells you that this means governments should be much smaller, laugh at his naivete. (Libertarian men love when you do that because then they chuckle with you and say, "Well, you can't blame me for wanting lower taxes.") 

The formula that has seemed to work for progress is to let entrepreneurs and companies rapidly change our world while funding the cost of their creativity with research and education and then funding the cost of their disruption with welfare, unemployment insurance, universal healthcare and - yep - more education and jobs training. Who pays for those government programs? Everyone, but the ones who pay the most are the ones who succeed the most: those successful entrepreneurs and companies who so benefit from being part of a system that knows how to create and then harness the gales of creative destruction.

08 March 2018

Open vs. Closed Economy

The San Diego Union Tribune was gracious enough to let me make an argument for an open economy here:


07 March 2018

In Defense of Thomas Jefferson

Thomas Jefferson was brilliant and visionary, a man who did as much as anyone to institutionalize the potential of the Enlightenment. Without him it's not clear that our Declaration of Independence, constitution or even Bill of Rights would be the remarkably durable and influential documents they are. He has also lost standing as one of our great presidents because he owned slaves and had a relationship with one.

In the Jefferson Memorial
John Davison Rockefeller became the world's first billionaire in 1916. In today's dollars that would be worth $30 billion and his assets when he died would have been worth 1.5% of GDP, equivalent to about $300 billion today. Why mention this? Because today there are more than 1,500 billionaires on the planet and if we were to simply compare Rockefeller to billionaires, it would fail to really capture who he was. We understand that we need to adjust and that while any adjustments to his wealth a century ago are bound to include some measure of controversy, it is not controversial to suggest that an adjustment be made. Even more important than his money, if we brought him into today's world we'd laugh at the quality of his car, the fact that he didn't own a private jet or TV or any antibiotics. His time was very different and the way to measure his economic or business impact is by measuring how he changed business, how he compared to his peers, and how much wealth he created - not by comparing him to today's wealthy.

We don't measure Jefferson by whether he owned slaves. We measure his greatness by how much he changed the world and how that change has rippled into future generations. Before Jefferson, aristocracy and power was something inherited; after Jefferson "all men were created equal." It's true that he apparently didn't stop to think that not only could a land surveyor like Washington be equal to a king like George but that a black person could his equal just much as a white person. It is also true that as future generations tried to honor the spirit of "all men are created equal" it helped to fuel racial equality. His vision of democracy helped to change hundreds of countries and democracies almost invariably result in the creation of wealth and longer lives, enabling people more freedom to think, live according to their conscience, and choose a life of their own making. We measure Jefferson's life by how many lives are better because of what he wrote and created, not by the fact that he fails to measure up to all our modern day standards.

You don't need many people as impactful as Jefferson. The measure of how great a person is is not whether they had as nice a car in 1800 as everyone seems to have today or whether they were as "woke" about racial or feminists issues as many are today. The measure of how great a person is how much they were able to move the people of their time forward.

We are not better people than Jefferson because we don't own slaves. That's like thinking we're richer than Rockefeller because we have access to antibiotics or smart phones. The equivalent of Jefferson today would be the person able to end childhood poverty, making sure that every child had a safe place to sleep each night and there would be no difference in the quality of educational opportunities because of the difference in parents' income. The equivalent of Jefferson today would be someone who restructured democratic procedures and institutions so that people felt as delighted by their government as they are by their favorite restaurant. You aren't better than Jefferson unless you move the world forward as much as he did and I rather doubt that anyone reading this silly blog post is that person. But if you are, congratulations and let me tell you something I have never been able to tell Jefferson: thank you for making this a better world and while I'm not thrilled about whatever obvious flaws you have (perhaps you eat meat from factory animals or spend $200 on shoes, $200 you could send to refugee children or ... well who knows what all), I'm game to overlook them in you even if my great grandchildren (rightfully, I think) don't overlook those flaws in your great grandchildren. Progress means that we're appalled at how past generations lived and thought. Someday progress may even mean that how we live and think isn't largely defined by our own times (although my imagination fails me in understanding how that might be possible).

The measure of progress is not where we are but how far we have come. The measure of greatness is not how we compare to the standards of people living two centuries after us but instead how much we changed the standards from when we were born. By that measure, it's not clear to me that we have anyone today who can compare to Jefferson.

How Apps, Entrepreneurship and a Steady Boom Have Brought Unemployment Claims to an All-Time Low

The Facts

The 4-week moving average of initial unemployment claims is at an all-time low.

In raw numbers, it was actually lower in 1969 but at that point the labor force was exactly half (well, okay, 50.7%) what it is now. So as a percentage, it has never been lower in recorded history.

This statistic is a measure of how many people walk into an unemployment office to say, "I've lost my job and don't have another one to go to."

In April of 2009, 658,000 people filed for unemployment each week. That was the worst of the Great Recession. October of 1982 was even worse, with 671,750 walking into unemployment offices around the country during a single week.

But the American economy is always shedding and creating jobs, at a rate of about 2 million per month. It's remarkable that such a small number of folks laid off or quitting one job don't end up in an unemployment office before they get their next job.

The week of 24 February, only 220,500 people filed initial unemployment claims. The last time it was lower was 27 December 1969 - nearly 50 years ago - when it hit 219,750. As a percentage of the labor force, though, that 1969 number equated to about 1.1% of the labor force showing up in an unemployment office during the month whereas this latest number suggests only 0.5% of the labor force filed for unemployment in the month. It's a stunning number.

The Theories

The most obvious explanation is an uninterrupted rise in jobs created that has now gone on for 88 months (and counting). Every month that results in more jobs created than destroyed means that many fewer people unemployed or unable to find a job. I think there is more to even than that, though.

Simply put, the economy has never been more efficient at creating new jobs and then matching unemployed people to those new jobs. I don't know why but I have a theory that it is because of apps and entrepreneurship.

Uber, Lyft, Mechanical Turk, PostMates, and other apps quickly match people to tasks they can do. Even the websites like Monster, and Indeed have accelerated the time it takes for employers to find qualified employees to hire. Some apps quickly find someone to perform a task; other sites accelerate the time it takes to find a new employee.

Once upon a time, in small communities, you knew that Todd could help carry heavy loads and Melissa could repair fragile things. You could easily find help and they could find work. As the world got bigger and more advanced, it became harder to know who could program in Java vs. C, or who could design period-furniture and who could repair modern furniture. It took a long time for the unemployed to find jobs and for employers to find help. It would take months to find the right person for a job and for tasks that might take only minutes or days, you might never find a match. There was a lot of friction in job markets even a decade ago.

Now software lets a person who wants to drive you to the airport find the person who wants a ride to the airport within about 15 minutes. It's easier than ever to find a match and this makes for nearly friction-less labor markets. This means that more people are downloading an app to make money (I know, to qualify as an Uber driver is not as easy as downloading an app) rather than waiting for a person to hire them. One result is a lower number of folks who file for unemployment.

Another element is increased levels of entrepreneurship. It is easier than ever to start or expand a business. Once upon a time you had to get loans to buy a store or build a factory to start a business; now you can fund a software startup with six laptops. More than half of American employees now work at least part of the week at home. This suggests that the overhead for office space per person is dropping, one less barrier to starting or expanding a business. (I know. It's not THAT cheap or simple. Still, even renting a cubicle is cheaper than setting up a factory.) A great number of employees are hired as contractors; some because that is now how corporations are engaging employees and some because that is an increasingly common way to put someone through the equivalent of a probationary period. There is less commitment and expense in "hiring" an employee and thus less hesitancy to do so. Employees still face a great deal of uncertainty about particular contracts or income levels but less likely to go long stretches without some kind of income.

In this way it's a bit like the move from a bank account that offers 3% annual rate vs. a stock that could rise or fall 30% in a year. Income will fluctuate more but employment will not. People are less likely to turn to unemployment insurance than to another job or task that could mean a temporary rise or fall in pay. If not already, I suspect that fewer people will look back at the last ten years of employment as a steady rise of 4% in annual pay and will instead see rise and falls more akin to the performance of a 401(k).

What It Means

One thing that no one would suggest, though, is that the Uber drivers are fine with just their cars and Uber app. Among other things, they need roads to drive on. Why mention this obvious thing? As the economy and information systems become more adept at matching supply and demand, it's important to support the infrastructure that makes it work. In this case, it's not just roads. People who are more likely to be getting their income from contract jobs and apps need things like universal healthcare to replace the standard benefits once provided by corporate employers and job training programs to make them steadily more productive. The good news is that these more efficient markets will mean less reliance on government unemployment insurance; the bad news is that more tenuous income streams suggests a greater need for things like government health insurance and education.

Another implication of more efficient labor markets is the very real possibility that the natural rate of unemployment has dropped. The ideal rate of unemployment would not be zero for the simple fact that finding a great fit between employee and job is not an instantaneous process. Given it takes a little while to find a great match, it makes sense that somewhere between 2 to 5% of the labor force would be unemployed at any given time. If it is true that it's easier for people to find work, it makes sense that this rate has gone down. What that means is that if string of uninterrupted job creation continues another 6 to 24 months, the unemployment rate could approach 3%. [I've already forecast about a 33% chance of a recession but if that doesn't hit this year, unemployment could steadily trend downwards.]

In all, more efficient labor markets is yet another great sign of progress. It doesn't mean that business cycles are over but it does mean that in any given month fewer people face the prospect of unemployment. That's pretty cool.