17 May 2022

Zero-sum Thinking, Replacement Theory and How Progress Transformed the World of Our Founding Fathers

When this country began, land was the limit to progress and the simplest definition of our economic policy was to get more land. Land claimed or conquered and then sold (as well as tariffs collected) was how the government generated revenue to operate. The work of getting more land was the work of conquest. Early Americans practiced slavery and genocide; this was brutal but it was how one got ahead in zero-sum world. This was the world of which Jesus would say, "It's as hard for a rich man to enter the kingdom of heaven as it is for a camel to pass through the eye of a needle." Rich meant you were somehow exploiting others.

Land is zero sum. My gain comes at your loss (sorry about taking your old hunting grounds but, you know, I had to clear the forest to carve out a farm). There is only so much acreage or gold or timber and what you get I lose. Zero sum means competition - fierce competition.
Fortunately, something almost magical happened shortly after the US was founded. With the industrial revolution, for the first time since the ancient Greeks, we began to experience gains in per capita GDP. This meant that it was possible for your life to get better without mine getting worse. Simplest illustration of this? Rather than need two slaves to weave the fibers for my new clothes (a task that would make their life worse and mine better), I could use machines. And so could those former slaves.

Lincoln and the Republicans were acutely aware of this and it was one reason why they fought so against slavery. It wasn't just evil. With capital, slavery was unnecessary.

Still, there are a lot of people who still imagine they live in a zero-sum economy. (We don't. In truth, we live in a time of such abundance that we artificially create zero-sum conditions with sports, having strict rules about how only one of thirty NBA teams can be this year's champ no matter how much better most teams are. That ancient impulse for competition has to be sated somehow. Sports does it.)

The folks who believe this is a zero-sum world are the people who still think that immigrants are coming to steal their job.

When the US gained its independence, we had only 3.9 million people. Today we have nearly 100X more people. Or course its nonsense to think that the 330 million newborns and new immigrants since the time of the founding families had to steal jobs from the original Americans. More people mean more economic opportunities, not less. And not only do we now create 3.9 million new jobs EACH MONTH, but the pay for those jobs is multiples of what early Americans would have ever imagined.

In general, conservatives are people who have this curious notion that the past was better. Or, perhaps more accurately, they seem to think that the truths of the past still hold today. Conservatives susceptible to replacement theory still think they're living in a zero-sum economy, one where every gain you make comes at my expense. This - like the anti-vaxx movement - is evidence of a mind still shaped by pre-Enlightenment thinking. (Vaccinations were, like this great country, an invention of Enlightenment thinkers).

You don't live in a zero-sum economy. Value doesn't come at the expense of someone else. It is something we have to create. Maybe we'd have more luck with that if we looked at others as collaborators rather than competitors.

12 May 2022

What Drove Up Stock Prices - And Why Stock Prices Will Rise Again

Between 1980 and 2008, the number of Americans dependent on investments like 401(k)s for retirement tripled. (And I suspect it has continued to rise.)
Compared to its peak about 1998, the number of publicly traded companies has fallen to about a third.
Triple the demand. A third of the supply. I don't know how that does anything other than make prices seem high.


The number of publicly listed companies in the US has steadily declined since its peak in 1996. That has a lot to do with market volatility and crazy stock prices.

In the last few decades, the portion of Americans with pensions has halved and the portion dependent on the stock market for retirement has tripled.[1]

During that same time, the number of publicly listed companies - companies whose stock you can buy and make a part of your retirement account - has fallen to about one-third of its peak. [2]

And here we have one important problem with pricing stocks.

If we just look at supply and demand, the supply of companies whose stock you can buy has fallen to a third of its peak and if we just look at demand for stocks, the portion of Americans dependent on stocks for retirement has tripled. If the supply is a third and the demand has tripled, the price has no where to go but up. From this angle, crazy high stock prices are very reasonable.

Meanwhile, we have traditional measures of stock value. Traditional as in it generates profits. If you pay $100 for a share of stock, ideally that would represent - say - $5 a year in profits. The price of $100 relative to the profits of $5 works out to a Price to Earnings ratio (PE) of 100/5 = 20. What seems reasonable from a perspective of PE is something in the range of 15 to 35. (If you are expecting big growths in profits and interest rates are low - which means you discount those future profits less - PE ratios considerably higher than 15 to 35 are justified. That is to say, a growth stock could reasonably have a very high PE.) Even though Tesla has fallen by about 40% year to date, its PE is still 100. That's really high and a lot of stocks in the last year have had either really high PE ratios - or given they are not yet profitable - no PE ratio.

If we only look at PE, the stock market has been wildly overpriced.

But if you look at the demand for stocks v the supply of stocks (again, the number of publicly traded companies), the stock market has arguably been reasonably priced. People need a way to build wealth for retirement. There are not many companies being traded. The result is that the price of companies - the value of their stock - will go up. (I suspect that this fundamental demand is going to drive stock prices back up.)

There is more going on with asset prices than this but I don't think enough is said about this tension. Stock prices have been quite reasonable given growing demand for a shrinking number of stocks even though from the perspective of PE, stock prices have been silly.

What is the solution? Well, you know me and my mantra about entrepreneurship now being the limit to progress. We need more initiatives - public and private - to make more people more entrepreneurial. One simple reason? We have more capital than good investments right now. The two limits to creating more investments are public policies (for initiatives like reducing child poverty and infrastructure investments) and private initiatives to start more companies that can go public.

One way to meet the demand for publicly listed companies without making stock prices higher than PE would seem justified is to create more companies. That's going to require more entrepreneurs. More effective entrepreneurs can meet the demand for good investments without driving up the price of assets to seemingly unsustainable levels.

[1] https://www.ssa.gov/policy/docs/ssb/v69n3/v69n3p1.html
[2] https://fred.stlouisfed.org/series/DDOM01USA644NWDB

07 May 2022

Freedom of Religion as Bold, Liberating, Irrational and Key to Understanding the Debate About Abortion

TL/DR: Freedom of religion means that in spite of my conviction that you will spend an eternity in hell for not believing what I believe, I will respect your choice about what to believe. This respect for the beliefs of others has made the modern world vastly better than the medieval world. In the same way, respecting a woman's belief about "when it's a pregnancy" vs "when it's a baby" requires a similar restraint among true believers who know its a baby at the moment of conception, a similar awareness of the necessary gap between personal conviction and universal law.
In this modern world we rarely have occasion to think about what a bold, liberating and irrational thing is freedom of religion. Until you appreciate that, it’s hard to understand the modern debate on abortion.

Why is freedom of religion irrational? What is at stake is where souls will spend eternity: heaven or hell. If you know – I mean, really know – that your belief in the right god and way to worship will make the difference as to whether you suffer eternal damnation or eternal paradise, everything else pales in comparison. This life is so brief that no present sufferings are worth comparing. And if you truly loved your fellow man, you would never wish for them eternal damnation.

Odd things happen when you realize the stakes of a mistaken belief.

There is an account of good English Protestants kidnapping Irish Catholic children from their parents. Why? These poor children were to be indoctrinated into a Catholic faith that – because it was wrong – would result in their spending an eternity in hell. As an act of great kindness and compassion, they kidnapped these children to raise them as good Protestants, thus ensuring that they would spend an eternity in paradise. The trauma of mothers and children separated from one another was trivial given the stakes. “No present suffering …”

The 30 years war is another tragic example of the atrocities of war. And the consequences of not even having a concept of freedom of religion. For decades in the early 1600s Protestants and Catholics battled across central Europe, killing about 4 to 8 million people. In some regions, half the residents died. (As in any war, only a portion of the casualties were soldiers killed on a battlefield. And lest you think a few million insignificant, the equivalent portion killed in the US today would be about 70 million.) The aftermath of this madness was one of the catalysts behind our founding fathers determining that a core foundation to this country would be freedom of religion.

Religious belief was made a private matter in the US, not something you could impose on another or legislate, no matter how passionately convicted you were of how right you were or the stakes involved.

Again, freedom of religion is both the most wonderful and rational thing and the most awful and irrational thing. If you truly believe that your faith is the only one that will save a soul from eternal damnation, it is the most evil sort of thing to simply leave your neighbor to cling to mistaken beliefs that define Catholics or Jews or Scientologists or – gulp – atheists, or any number of mistaken beliefs. Seriously think about this. Eternity is at stake and you are going to let someone choose a path that means eternal damnation? And yet …

Freedom of religion required a kind of humility that had been lacking for centuries in the West. A humility of realizing that your neighbors’ beliefs were as legitimate as your own. You don’t even have to believe that they are right. You simply have to believe that they are deserving of the choice about what to believe as you are, recognizing that their convictions are as legitimate as your own. Again, you don’t even have to believe that they might be right. You might even believe that their passing on their belief to their children will also mean that those children are lost for eternity. You only have to believe that their belief they are right is as worthy of respect as your own.

Which brings me to abortion. The anti-abortion folks fiercely believe that at the moment of conception sperm and egg – the flotsam and jetsam of life, the regular waste of human existence – are transformed into precious life, into a little being as worthy of protection as a newborn. If you really believe that, it puts a burden on you as serious as the sincere belief that your faith means eternal paradise and their faith means eternal damnation. If you have real love, real care for this new life and its mother, you would never let anything happen to it. You would protect it as fiercely as if it were a child walking around in the world. These present sufferings of pregnancy and raising a child are not to be compared to murder in the same way that any present sufferings of this life pale in comparison to eternal damnation.
Similar to freedom of religion, though, to respect the choice a woman might make to act on her belief that the moment after conception sperm and egg are not instantaneously transformed into a child doesn’t even mean that you have to accept her belief. It simply means that you have to show her belief as much respect as your own. It requires a kind of humility about your own belief. And in this sense – this question of When life begins, we really are encroaching on the territory of freedom of religion. There is no observable fact that tells us the instant when life begins. That is a belief and as tends to happen with beliefs, there are differences in opinion – and conviction – about this.

You might say that given you know abortion kills hundreds of thousands of babies every year you can’t allow it to continue. You know this in the same way that good Catholics and Protestants in the 30 Year War knew that they would go to heaven and the others would suffer eternal damnation; you are utterly convicted of this belief even while knowing that there are people who believe otherwise. I’d remind you of the madness that followed from people in the West’s inability to respect the beliefs of others as just as valid as their own. No one is asking you to change your belief. We are only asking you to respect the beliefs of others just as much as you want your own beliefs respected.

From this freedom of religion, this freedom of thought, this freedom to compose a life of one’s own choosing has come a world that might well strike Europeans alive during the 30 years war as a kind of paradise. This present suffering has been dramatically reduced. The key foundation to building this present, free and comfortable world has been demanding as much respect for the beliefs of others as you would want for your own beliefs. You believe life begins at the moment of conception. Fine. We respect and honor that. No one is asking you to change that belief. We only ask that you show as much respect for another’s belief as you want shown for yours. You – rightfully – believe that it would be a horrific trauma to have an abortion forced upon you. Understand that a woman with different beliefs than your own would believe it a horrific trauma to have a pregnancy forced upon her. Whatever our differences in belief about the instant when life begins, we have the choice to believe that abortions and pregnancies are not something that should be forced upon a woman. Let people act on their beliefs. That respect is a cornerstone of the modern world and abandoning that respect adds to this present suffering in ways that are unnecessary and traumatic.

Dante and Virgil in Hell by Eugene Delacroix, 1822.