31 December 2020

Are Sports Win-Win or Win-Lose? It Depends. (or, how what we believe changes facts or how Phil Knight and Michael Jordan changed the NBA)

What we believe changes facts.

If we believe that the world is zero-sum (and many people still do), it will be. What I get comes at the expense of you (and vice versa) so I compete rather than cooperate. This belief creates a world of scarcity and competition. It's win-lose.

If we believe that the world is variable-sum (and fortunately a growing portion of people do), it will be. What we get is the product of our cooperation and planning so we spend more time cooperating than competing. This belief creates a world of increasing prosperity and cooperation. It's win-win.

You might point to sports and say, "Well, sports will always be competitive." True. Sort of. But that misses a larger point. Teams have to cooperate even to create schedules, playoff criteria (best of 3, 5, 7?) and an image in the marketplace. More than that, some actions create more revenue for everyone in a sport even if that sport never increases the number of annual championships beyond one.

Phil Knight was looking for endorsements to raise the profile of his fledging Nike in the early 1980s. Basketball was not an obvious choice. It ranked well below baseball and football in popularity but it offered an advantage over those sports: given sneakers don't have cleats, you could wear basketball shoes on the street. Fans could wear the same shoes their sports idols wore. Michael Jordan, too, was not the most obvious choice but Nike built an entire line of shoes around the "Air Jordan" model, paying the rookie Jordan millions. This endorsement was huge money; Jordan's first contract paid $2.8 million over four years and he got $2.5 million from the Nike contract in just the first year.

But the NBA enforced uniformity on NBA uniforms. Even though Knight loved the controversary and promised to pay any fines Jordan would be levied for wearing his Air Jordans, the NBA banned them. Commissioner David Sterns soon realized, though, that Michael and his Air Jordans could feed the popularity of the NBA and allowed Jordan and other stars to begin wearing shoes they'd endorsed on the court. In a world of win-lose, this sort of publicity was a win-win-win, helping the players, the owners, and the folks selling shoes and apparel.

This has worked out well for everyone. Last year, Jordan earned $130 million from his Nike contract. Phil Knight is now worth $50+ billion. And the NBA has surpassed football and baseball (those cleated shoe sports) to become the world's second most popular sport. NBA players benefit from this: Steph Curry was paid $40 million - and 28 player were payed more than $28 million - last year, multiplies of what Jordan's first contract paid.

Is the NBA win-win or win-lose? It depends on whether you're talking about the world on the court or off. And whether scarcity or abundance follows depends on which belief holds.

30 December 2020

Why 21st Century Republican Presidencies Have Ended in Disaster (or, the disastrous ideology that now governs Republicans when they govern)

It is no coincidence that after the last two Republican presidencies, our county has been left in ruin. Incompetent government programs and economic ruin defined the end of both George W. and Donald's presidencies. And for the same reason.

During the Cold War, Republicans and Democrats alike found communism appalling. Communists did not prefer government solutions to private sector solutions; they thought that the private sector should be abolished or made inconsequential.

Even today, people on their iPhones post on Facebook or Twitter about the evils of corporations. This is a decent definition of ideologue: someone advocating for policies in ways that their own advocacy would disable. We know that corporations can abuse their power and should be regulated; we also know that corporations enable us to enjoy a lifestyle unimaginable without them.

But sometime during the Cold War, a group of Republicans began to believe that you could never move too far to the right. That is, they knew corporations were good and they decided that government (beyond the small portion dedicated to protecting their property rights or granting them defense contracts) was evil in the same way that communists had earlier decided that corporations were evil. Those ideologues took over the party in this century.

And this is how we've come to a point where Trump wins a poll for most respected man in America even while regularly showing executive skills that would get him fired after two months of managing a local Walmart. To be a Republican now doesn't just mean that you prefer the private sector to the public sector. (There are very good reasons for such a preference.) To be a Republican now is to believe in the deep state and the inherent incompetence and evil of government. Communists' attitude towards corporations and Republicans' attitude towards government is roughly the same: they have contempt for its mission, don't understand how it works, and only want to see it shrunk down to a size where it can be drowned in a bathtub without regard for any real world implications.

There is no example of any community that has shifted its quality of life upwards without a collusion of entrepreneurial, strong government and entrepreneurial, strong business. None. (And if you think you know of one, tell me. I'd like to check it out.)

Donald Trump - who now represents the Republican ideal in a president - has done everything he can to prove Republican's contention that government is inevitably incompetent. COVID has revealed the cost of this ideology.

The US is one of the worst countries in the world on two counts: tests administered per COVID case and the number of deaths per million. This in spite of having the world's largest GDP and the largest number of scientists and researchers in the world. Republicans cannot admit that their ideology - their belief that governments can never be competent - has been proven disastrously wrong in this pandemic so instead opt for beliefs in conspiracy theories about how these deaths are not real and the pandemic is no worse than the flu. Meanwhile, other, more rational countries actually succeed with government programs to mitigate the damage this pandemic can do to lives and livelihoods.

Ideology lowers IQ like a blow to the head or a bout with a serious addiction. Until they decide that government agencies - like any private sector organization - can be managed well and add value, they will be forced to cling to conspiracy theories and deny that their ideology actually does make their world worse. Confronted with unexpected facts, we have two choices: change our minds or change the facts. Republicans simply deny those facts.

To have two opposing parties that lean in opposite directions towards either public or private sector solutions is healthy and seems almost inevitable. To have even one party that wants to attack either sector and make it inconsequential is disastrous.

Some problems require well run government agencies. Some problems require well run corporations. For all of their flaws, Democrats know this. For all their potential, Republicans do not. Until that changes, each time Republicans gain power we will be left worse off for it. Reality doesn't show much respect for your beliefs; in spite of that, your beliefs ought to show a lot of respect for reality.

29 December 2020

The Past and Future Rise in the Percentage of People Who Have (and will) Become Financially Independent

Before the Civil War, only 1% of households had a flush toilet. By 1989, 100% of households did.
In 1924, 0% of Americans had a refrigerator. By 1962, 99.5% of households had a refrigerator.
In 1994, only 10% of households had a cell phone; by 2019, 96% did.
Flush toilets, refrigerators, and cell phones were invented lifetimes apart and the adoption rates have accelerated over time. It took 130 years to go from elite few to everyone on toilets; it took 40 years for everyone to get a refrigerator; it took only 25 years for "everyone" to get a cell phone. Adoption rates for new products seem to be accelerating. 

[Adoption rates for these and other products found here at Our World in Data.]

All these products were adopted in a similar manner, though. Once upon a time nobody had it, then an elite few, than the average person and then everyone. 

Here's my bold claim: what we saw for product adoption in the 1900s we will see for financial independence in the 2000s. Right now it is few who have financial independence; by century's end, it will be most Americans.

Let's back up.

In 1900, average life expectancy in the US was 47. By 2000 it was 77.

By 1901, average daily shares traded on the New York Stock Exchange was about 3 million. This year, the average daily shares traded was about 4.5 billion.

These two - folks over 47 and shares traded - go together. As people lived longer, we needed a way to cover the expenses of more old people not working. We call it retirement. It is the most popular form of financial independence. In 1860, when an elite few were getting flush toilets, the vast majority of people worked until shortly before they died (well, the ones who made it out of childhood); today, the vast majority of people people don't have to work in the years before they die.

In the 20th century, we essentially popularized retirement, or financial independence. Pension plans and social security generally assume that you'll make this transition sometime between 60 and 70, from having to work to being "financially independent" for the remaining years or decades of your life. In 1880, the US population was 50 million, almost none of whom were retired or financially independent. Today, we have 50 million Americans over the age of 65, the large majority of whom are retired or financially independent. 

I know that not everyone over 65 is financially independent and free from work or reliance on family or friends. I also know that quite a number of folks under 65 are financially independent. (About 5% of Americans live in households with net worth of more than $3 million.)

In 1900, about 5% of the population was over 65 or financially independent. Today, about 20% of the population falls into those categories (and we now have programs like social security and Medicare, which folks in 1900 did not have).

My prediction? We will look back at the 2000s as showing an adoption curve for financial independence that looks similar to the adoption curves below for products.

Flush toilets, refrigerators, and cell phones have changed our lives quite a lot and it's wonderful that they are no longer reserved for just the elite few. It'll be fascinating to see what the world is like when we've done a similar thing with financial independence.

27 December 2020

How the Best Selling Non-fiction Book of the 1970s (about the Apocalypse, no less) Defined Policy in the 1980s and 2000s

The nuclear arms race offered the prospect of the annihilation of civilization. This created some stress that showed up in odd ways.

In 1970, Hal Lindsey's The Late Great Planet Earth was published. It had sold 28 million copies by 1990 and was adapted to film and television with an audience of about 18 million.

Lindsey thought that the formation of Israel in 1948 was prelude to major, apocalyptic events foretold in various books of the Bible. One can hardly underestimate the extent to which the USSR and US stockpiles of nuclear weapons made claims that the world was about to plunge into Armageddon credible. He prophesized chaos and war - end times that would include an anti-Christ ruling in Europe and the invasion of Israel by the USSR. Lindsey's sequel was titled The 1980s: Countdown to Armageddon. 1980 was the year Reagan was elected.

Lindsey's ideas were take seriously by many people. Reagan appointed James Watt as Interior Secretary. Like Hal Lindsey, Watt was a Christian millenarian. He thought that conserving resources for future generations was a waste of time because Jesus would probably return before most of those generations would return. This the man in charge of protecting the nation's natural resources.

George W. Bush was trying to enroll French president Jacques Chirac in his effort to oust Saddam Hussein from Iraq. Here is Chirac's account of their conversation as reported by Kurt Eichenwald.
Bush wasn’t listening to him, Chirac thought. Instead, he was jumping all over the rhetorical map in search of the magic words that would win him over. Saddam was lying; the UN had to prove itself; the allies had to work together. Perhaps, but all beside the point if illegal armaments weren’t found. What if, in fact, Saddam was telling the truth? …

Bush veered in another direction.

“Jacques,” he said, “you and I share a common faith. You’re Roman Catholic, I’m Methodist, but we are both Christians committed to the teachings of the Bible. We share one common Lord.”

Chirac said nothing. He didn’t know where Bush was going with this.

“Gog and Magog are at work in the Middle East,” Bush said. “Biblical prophecies are being fulfilled.”

Gog and Magog? What was that?

“This confrontation,” Bush said, “is willed by God, who wants to use this conflict to erase His people’s enemies before a new age begins.”

Lindsey's book The Late Great Planet Earth was the best selling nonfiction book of the 1970s. (Personally I find it odd that it gets categorized as nonfiction.) It was still influencing policy decades later.

26 December 2020

The Shocking, Opening Lines of Obama's New Memoir

I got Obama's new memoir for Christmas and was really surprised at the opening lines.

"Having been born and raised in Kenya, I was bedazzled on my first trip to America. I knew right then that I wanted to preside over this great country and would need a fake birth certificate from some part of the country plausibly distant and yet still acceptably American: Hawaii, I thought, a place even further from DC than the west coast of Africa.

"First, though, I would have to use every argument my five year old mind could concoct to convince my mother and grandparents to enroll me in an American school for kindergarten and raise me as if I were an American. Once I'd cleared that obstacle, my conquest of the Democratic Party and then the White House would be inevitable. I began daydreaming about the musical artists who might perform at my inauguration."

25 December 2020

A Brief Meditation on Christmas

I write about politics and policy a lot because I have to live with your vote and you with mine but write about religion hardly at all because our choices on that matter truly are separable and private. But today is Christmas, so here are some thoughts about Jesus.

The Roman Republic and then Empire spanned nearly 1,000 years, about 4 or 5 times as long as our American experiment, so any general thing one writes about them will be wrong and riddled with exceptions. That said, Roman morality was pretty much an answer to the question, "What can I get away with?" Power gave you license.

Jean Fouquet Madonna and Child, 1452

Arguably the core of Jesus's teaching was not just "do unto others as you would have them do to you," but "as you have done it to the least, you have done for me." Jesus' morality was not what you could get away with but was a question of how you treated the weakest, those least able - the woman you could overpower, the child you could berate, the poor person whose needs you could dismiss.

No one knows when Jesus was born but we pretend that he was born in the darkest week of the year, the time when the days are shortest.

Christmas. A time to think about how we'd be judged if we were only judged by how we treated the least among us and a time when we find comfort and joy even in the darkest days. That's a good day.
Merry Christmas!

24 December 2020

2020 - SPACs and A Year Defined by an Abundance of Capital and a Shortage of Entrepreneurs and IPOs

2020 was a great year for IPOs. That makes sense. Interest rates are incredibly low (which drives up the value of future profits), savings are incredibly high during the pandemic which has helped to create a relative glut of capital, and the business landscape has changed as rapidly in 2020 as in any previous year and that change means new opportunities that require capital to realize.

For me, the really clear indication that capital is abundant and entrepreneurship is scarce is SPACs: special purpose acquisition companies. What's a SPAC? Essentially it is a mutual fund for companies that haven't yet gone public or perhaps don't yet exist. You put money into a SPAC as an investor and the manager of that fund uses the money to go shopping for private companies, almost like a proactive IPO. The weird thing is, you don't know which companies the SPAC will buy - you're just giving them money to find deserving entrepreneurs.

How popular are SPACs? There were 183 traditional IPOs and 242 SPACs. And these SPACs are not trivial. One was valued at $4 billion, more than any of the 183 IPOs.

Article here.

21 December 2020

Bitcoin is Not an Investment or a Currency (and if you're in the mood for wild speculation, there is a much better way to do that)

Bitcoin has roughly doubled in the last couple of months.
The dollar bill is rather oddly adorned with a pyramid.

Bitcoin, by contrast, is a pyramid scheme.
People dismiss fiat money as "just made up" as if laws, governments, corporations, marriage and markets are not "just made up." Nearly everything that defines our social reality is "just made up." There is no reason that money should be an exception and it would be terribly suspicious if it were not.

Bitcoin is not money. Can you imagine trying to price any products denominated in bitcoin, a "currency" that bounces around so much that prices would surge or fall by tens of percent any given week? No currency does that. 

And bitcoin - unlike a rental property or stock - represents no stream of income.

An algorithm doesn't make bitcoin a real investment or currency and is probably evidence of some sort of neo-techno-theology, the algorithm some modern equivalent of "In God We Trust" inscribed on our currency for minds susceptible to the allure of vaguely understood technology.

Bitcoin serves no purpose other than a vehicle for speculation. It's not an investment. Even Tesla - with its absurd PE ratio of 1,200 - is a real investment in that you're actually buying the right to a future stream of profits for a real company with a real product, no matter how wildly optimistic is the price you're paying for those future profits. All that you are buying with bitcoin is an odd hope that tomorrow someone with slightly more money than you will come along and bid a higher price than you paid yesterday. That is the very definition of a pyramid scheme.

If you want to speculate like that, do it with art instead, buying it with the hope that it'll go up in the future. At least then you'll have something beautiful to look at in the interim.

16 December 2020

Politics, Polygamy and the GOP - a tentative theory about why there is a divide between men and women's voting tendencies

Spinster comes from a term used for a woman who spun wool. By some counts this was an occupation for a woman who couldn't get married. By other counts it was an occupation that freed women from having to get married. In any case, there was a connection between financial independence and being single.

Income changes the relationship between men and women and may explain some of politics in 2020.

Biden won in 2020 because of women. One, women voted for Biden by a margin of 15 points (men voted for Trump by a margin of 8 points). Two, women made up 52% of voters. Counting only the votes of men, Trump won by 6 million votes. Counting only the votes of women, Trump lost by 9 million - a swing of 15 million votes.

Why the huge disparity between men and women when it comes to politics? I'm sure there are lots of reasons but I'll throw out the possibility that it has to do with a big change in women working and how that has tracked with a change in marriage and relationships.

One bit of evidence I use to argue that everything is made up but the consequences are very real is this matter of monogamy and polygamy. Can you have only one wife, only one wife at a time or multiple wives? That is totally made up and varies across countries and time but the consequences are very real. All 20 of the 20 least stable countries in the world allow polygamy. As the Economist notes, "Polygamous societies are bloodier, more likely to invade their neighbours and more prone to collapse than others are." Why? "Every time a rich man takes an extra wife, another poor man must remain single. If the richest and most powerful 10% of men have, say, four wives each, the bottom 30% of men cannot marry. Young men will take desperate measures to avoid this state." 

Unmarried men behave differently than married men and societies that sentence a portion of their young men to remaining single suffer more violence because of it. Women have a moderating influence on men's cruder instincts.

In 1948 in the US, men were nearly 3X as likely to have a job as a woman. Today men are only 20% more likely. As women are less dependent on men for income, they also seem less inclined to marry. In 1950, 32% of men were unmarried; in 2020, 47% are.

How does that change politics?

It is possible that women domesticate men. If men - like dolphins - stayed apart from women except during a breeding season, they might still be living in caves and regaling each other with the story of that time poor Gog was trampled to death by a mastodon and had the funniest expression on his face. We talk a lot about bubbles and how folks on the left and right live in such different realities and know so little about each other. It's possible those bubbles increasingly include men in one world and women in another, two very different groups who may be influencing each other less and less.

It is a good thing that increasingly women have financial independence and choice about whether to marry. Progress means increased autonomy. All progress has unintended consequences, though, and perhaps one consequence of fewer women having to marry is fewer men benefitting from their influence.

12 December 2020

How the Republican Party Won the Dixiecrats and Lost Their Soul

In 1968, Republican Richard Nixon beat Democrat Hubert Humphrey by half a million votes. They each got more than 31 million votes. George Wallace - a third party candidate - got 9.9 million and won the electoral votes from Georgia, Alabama, Mississippi, Louisiana and Arkansas. Wallace won what we call the "deep south," or what one might whimsically call "the deep states," the last third-party candidate to win any state.

In 1952, the Republican Eisenhower had won every state except for nine - including these five.
The deep south was solidly Democratic, then went to Wallace and then - in 1968 - went to Nixon and has been solidly Republican since. Trump won by his widest margins in the deep south.

In 1952, the deep south was the only region still Democratic (blue states above).

After Civil Rights, the Deep South went for Wallace and his desegregation policy.

In 1972, the deep south went to Nixon and has been Republican (red state) ever since.

The states in the deep south that were among the only Democratic states when Eisenhower ran are now the most Republican in the nation, giving Trump his largest margins of victory.

It is not too much of a simplification to think of the Civil War of 1860 as a war between the brand new Republican Party (Lincoln was their first president) and the Democratic Party that had dominated American politics from 1800 to 1860. The Confederates were Democrats and the Union were Republicans. After they lost, the former confederates remained Democrats who were no longer slaveholders but were still racists. Blacks were freed from slavery and quickly plunged into a second class, segregated status that left them largely without rights or economic opportunity. The Republican Party dominated politics for a couple of generations after.

When the Democratic party began its reinvention with FDR, it maintained its coalition with the Dixiecrats from the Deep South. The Democratic Party was an odd coalition of progressives from the north and good old boys in the south. Out of this odd coalition came some weird legislation. The GI Bill - which funded college for veterans and did so much to help move the US from an industrial to information economy - largely excluded blacks, for instance, a form of affirmative action for whites.
The Civil War had divided the country. Civil Rights divided the Democratic party. When the Texan Johnson signed the Civil Rights legislation that had been originated by Kennedy from Massachusetts, he said, "We are going to lose the south for a generation." It turns out that Democrats lost it for longer than that.

After Kennedy and Johnson's Civil Rights legislation, the Dixiecrats broke away from the Democratic Party. They did not immediately join the Republicans who had destroyed their way of life a century earlier, though. In 1968, the deep south voted for George Wallace and the Republican Nixon won the presidency with only 43% of the vote. In 1972, those southern states - and segregationists and racists throughout the country - voted for Nixon, who won 61% of the votes and 49 states.

With their new coalition, Republicans held the presidency for all but four of the next 24 years. Carter (D) in 1976 interrupted this run. Clinton (D) in 1992 ended it. Both were from the deep south, states that had supported Wallace. If you were going to win the presidency, you had to at least show some connection to the culture of the deep south.

Segregation and racism is immoral. That gets a lot of attention and rightfully so. What I think gets too little attention is how much misogyny and racism depresses economic development. The four states that voted for Wallace that overwhelmingly went for Trump in 2020 - Arkansas, Louisiana, Alabama, and Mississippi - between them have pathetically low average per capita GDPs.

Average per capita GDP
Wallace's Five states (the deep south): $45k
The United States: $57k
Five States that Voted Most Democratic in 2020: $73k.

The misogyny and racism of the deep south costs about $12,000 to $27,000 per person. For a host of reasons. (The most obvious simply being that you're excluding half your population (the women folk) and about 5 to 25% of your menfolk from opportunities to fully develop and contribute economically.)
After the Civil War, northerners went to the conquered south to dismantle slavery and the various things southerners tried to put in its place. Rather than accept that they and their ugly institution of slavery had lost, southerners hollered about states' rights and an intrusive federal government, something they've been whining about ever since.

Why mention all of this? Because the price Republicans paid to win back the presidency in 1972 was the absorption of the deep south.

Republicans used to be the capitalists and small business people and Democrats represented labor. The problem for the Republicans is that labor became a huge and prosperous group. In 1800 - when the country was founded - only 20 percent of the work force worked for someone else. By 2000, 90 percent did. For most Americans, working meant working for someone else - you were an employee. The Democrats had done the best job of winning and representing that group and in the years from FDR to LBJ, being the representative of labor meant that Democrats were the dominant party.

How did the Republicans win back voters? It's complicated but a big part of it was simply to win over the segregationists angry at the Democratic Party for forcing them to let the blacks sit in their classrooms and at their diner counters. The virus of the deep south's weird beliefs and culture has now infected the whole of the GOP, though.

This week included talk of secession from Texas' attorney general, Rush Limbaugh's claim that conservatives cannot peacefully coexist with liberals and the madness of Trump's insistence that he won an election he lost by 7 million votes. The Republicans who defeated the south in the Civil War have been taken over by the losers of that war.

A virus has infected the Republican Party that once stood for capitalism and small business owners. The party that - at the time of Lincoln - was defining a world that would take generations to unfold now clings to a world that was already obsolete in 1968. It is a sad end to a once grand old party.

09 December 2020

What The Coming Facebook Breakup Could Mean for Your Friend Group

This is quite the headline:
"U.S., states sue Facebook as an illegal monopoly, setting stage for potential breakup"

I wonder how they will break us up. Will it be by region, politics, family, neighborhood, school, church or coworker groups? Will we be broken up into groups that obsess over weird things like economic numbers and everyone else?

Post breakup, you might overhear this conversation from the side of customer support.

"No, Ron."

"No. You were not kicked off of Facebook. Facebook has been broken up. You'll be in a special group with Bill Abendroth where you two can obsess all you want about policy without boring everyone else to tears."

"No. Don't think of it as eviction or deportation from a virtual nation or shunning. Facebook has been broken up and you are in a special group."

"Well, yeah. I guess if you put it like that, it feels like a breakup because it is a breakup. Sure, I can see how you two might see that it's unfair that you are on one platform and everyone else is still on the original platform and still in contact with each other."

"We had to appease the courts and create a break somewhere. I'm sure your friend Bill could explain that to you. Perhaps in a series of posts."

"What do you mean that Abendroth said that for all its flaws the old Facebook never before felt like a prison cell until he got stuck with you? I agree. That does seem unnecessarily hurtful."

"I guess you could unfriend him. Yes."

"Right. It would be weird to be on Facebook without any friends but Bill is your designated friend so, if you can't resolve your differences with him ..."

"We get that you're upset. We feel your pain. In fact, we're really broke up about it."

08 December 2020

Investing in Rather than Loaning to Startups - What Tesla Can Tell us About the Popularization of Entrepreneurship

People don't need lower taxes once they're successful in order to have proper incentive to create wealth. But they can use help to get started.

In 2010, the Department of Energy gave Tesla a loan of nearly that amount: $465 million. The problem with that is that this was a loan. If Tesla failed (as did Solyndra, which got a loan of $535 million at the same time), we American taxpayers would have lost $465 million. It would have been much smarter to offer the financing for this fledgling company the same way that a venture capitalist would: by taking a share.

Given the rate at which Tesla's stock has gone up since 2010, US equity of $465 million in TSLA would now be worth $61 billion. A portion of that could be recycled into funding for new innovation and entrepreneurship (again, with us taxpayers taking our share in shared equity rather than making loans or grants).

Popularizing entrepreneurship is different from glorifying it. Once upon a time, freeman who farmed their own land were rare. Then it was machinists who worked in factories who were rare. Then knowledge workers who worked with computers who were rare. All were popularized to become more common and normal. If you think we can't do something similar with entrepreneurship, you're probably underestimating human potential.

In related news, the US now has four centa-billionaires (folks worth more than $100 billion).

You may not recognize the name Bernard Arnault but you probably know the name of his company: Louis Vuitton SE, the world's largest luxury goods company. As more people have more money, he gets more money. These are good times for him.

04 December 2020

The Good and the Bad News: We Have an Abundance of Labor and Capital (or, how you can hardly spend enough on the coming recovery)

The American economy created 245,000 jobs in November. That's woefully insufficient.

The economy has destroyed 9.4 million jobs this year. In the 2010s, the economy created about 2.2 million jobs per year. A negative 9.4 million leaves us down 11.6 million from a normal year. What does that mean in practical terms? We are still in worse shape than any recession you've lived through.

There are a couple of things to do.

One, accelerate vaccine deployment to return to normal as quickly as possible. Globally, (per an OECD analysis) the difference between a rapid or slow vaccine rollout is $7 trillion (by the 4Q 2022). Of the 180-some countries in the world, only the US and China have economies larger than $5 trillion.

The risk of global governments - including the US - spending too much to too rapidly vaccinate its population is zero. The risk of them spending too little and moving too slowly to vaccinate their population? Very high. 9 million unemployed is incredibly costly for so many reasons. (And that is just the economic cost and doesn't even acknowledge the emotional devastation of sustained unemployment - which breaks up families and leads to deaths of despair. You don't even need compassion to realize that the economic cost of this many unemployed is unacceptable.)

In 2021, the US economy needs to create nearly 14 million jobs to return to its pre-COVID trendline. Spoiler alert: that will never happen. So why mention the need to create 14 million jobs in 2021? Because the average American and their political representative still has no idea how deep is the hole we're standing in and is terribly timid about deficit spending, even in a time when the price of money - the interest rate - is negative. Money is cheaper than free. They're paying you money to borrow money.

We are at a unique spot in history.

1. Real interest rates are negative. The five-year treasury rate is NEGATIVE 1.3%. Ten-year is NEGATIVE 0.89%. If you borrow $1 today, you will have to pay back less than 99 cents in five years. Even if your investment only breaks even - the dollar you invested today is worth only a dollar in five years - you come out ahead.

2. We need huge investments in transitioning our economy from a reliance on fossil fuels to one reliant on alternative energy. Shifting the economy - from research to development to manufacturing to building these innovations into our infrastructure - is a massive project. It will cost an enormous sum and require that we employ millions of people. That is, these projects require a lot of people and money and right now we have an abundance of both.

The difference between whether we find ourselves on a train ride or in a train wreck is simply a matter of acting boldly rather than timidly. Bold action begins with the realization of how deep is the hole we're standing in and that nothing could be more costly than doing nothing.

What is the cost of doing nothing? If we continue to create only 245 thousand jobs a month, it will take us more than a decade to get out of this hole. That we cannot afford.