How Compound Interest Made the Industrial Economy Obsolete

We don't have good intuition for compound interest over time.

Imagine that two families each started with $100 in 1900.
One family enjoys a 4% return every year.
The other family enjoys a 12% return every year.

After a decade, the 12% family has $311 compared to the 4% family's $148. They have twice as much.

After a century, the family getting 4% has $5,050.
The family getting 12% has $8,281,797,452.

12% is only three times 4% but over a century it is the difference between having thousands or billions of dollars.

This return doesn't come from magic. The returns on financial capital come from the same dynamic of compound returns on industrial capital. And it explains why there have been fewer factory jobs every decade since about WWII.

I was working with a management team for a mine in Michigan. When those guys - most in their 50s and 60s - had started their career, the trucks pulling ore out of the mines could carry about 25 tons of ore. Now those trucks carry more than 350 tons.

Assume that when they began their careers, that mine employed 100 truck drivers. Today, to carry the same amount of ore, they would need only 7 drivers.

The productivity of industrial capital - like financial capital - compounds over time. The original $100 you invested in 1900 will be making more money in 2000. The original factory or mine you setup in 1900 will be producing more product in 2000 with fewer workers.

Given our intuition for compound interest is so poor, it is little wonder that we fail to understand how a growing economy might actually need fewer and fewer factory workers even as it makes more and more stuff.

Meanwhile, a country like China that began industrializing decades - probably close to a century - after we did is still at the stage of compound interest that it needs 100 workers in the mine or factory rather than the 7 we in the US need.

People who don't understand how compound interest works could look at this and think that "our factory jobs are going to China." China's per capita GDP is one-sixth ours and one horribly crude way to think about that is to assume that their level of industrialization means that they need about 6 factory workers (or truck drivers) for every one we need. Our jobs are not going there; they simply need more workers given how much less capital they have.

Returns to capital eventually give a country such an abundance of capital that capital no longer limits. At that point, a community has transitioned from an industrial economy into an information economy. New jobs and wealth will not be created in factories or industrial companies but instead in cubicles and information economies. US Steel and General Motors fall in value and the number of employees and Microsoft and Google rise.

To fight to get back all those factory jobs from 1950 is to fight to get back to a time of less capital, less wealth, less productivity. It is like fighting to return to a time when 90% of the population still farmed just to feed us all. Progress leaves behind earlier stages of development as it takes us into new stages. The miracle of compound interest is one big reason why.

Beyond Win-Win or Win-Lose into the Strange Mind of Donald Trump

Stephen Covey's 4th habit is the building block to relationships. It also gives us a way to better understand the danger of Trump.

Think Win-Win is how we approach others. It's a belief that relationships make things better for us and them, for you and me, whether the you is a romantic or business partner or simply a friend.

Covey's 5th habit is Seek first to understand and then to be understood. You have to understand their perspective and their win and then communicate your own. His 6th habit is Synergize which could be stated more clumsily as, Create a solution that will not just give you your win and them theirs but might actually result in something extra that neither of you could have anticipated, a solution that encompasses both of your wins in a manner that might actually create wins you hadn't anticipated - whether for you or people outside the relationship.

Back to the 4th habit of Think win-win, the approach to take into a relationship or even a quick encounter.

To get to win-win, one needs both courage and consideration. You need courage enough to articulate and fight for your own win. You need consideration enough to listen and fight for the other's win. 

If you have only courage but no consideration, you'll likely become either a win-lose person who must beat the other while getting your own win or simply a win person who doesn't care at all whether the other person gets a win or a loss as long as you get your win.

If you have only consideration but no courage, you'll likely become a lose-win person who takes on the role of martyr, simply swallowing your own needs and dreams and deferring to the needs and dreams of others.

I think one obstacle to win-win is that it isn't natural to both be willing for combat for our own win and willing for empathy to understand the other's win. We tend to toggle into either courage or consideration rather than try to encompass both.

Trump introduces a new variable in this model that I hadn't really considered before: the role of comparison or status. It takes him to a new and odd place.

Trump's trade wars seem to have played a factor in the fact that Germany and China's economies are now stuttering. Automobile production has fallen dramatically in Germany. China's growth has slowed. In response to these sorts of issues, bond markets suggest there is a higher probability of a global recession. None of this seems to deter Trump from his trade war.

Part of Trump's bulldoggery of course is related to the fact that Trump has never once admitted to a mistake of any kind. I suspect, though, that it actually points to something else that is so defining of Trump: his quest for status above all else. In the wake of the 9-11 tragedy he called in to announce that with the collapse of the World Trade Center, his building was now New York's tallest. There was a tragedy but it gave him more status and that was what he wanted to talk about. Trump cares less about living in time of antibiotics and internet than being the top dog and if he had to choose between being Attila to the Huns or middle-class guy in a wildly affluent future, he'd choose to be Attila. What matters most is to be at the top.

China's economy has grown more rapidly than ours for the last 20+ years. This makes perfect sense given their relative stage of economic development. (It takes the average Chinese all week to make as much as the average American makes by the end of the day Monday.) This contrast outrages Trump who wants to be better.

I get the very real sense that given the choice between winning less than China wins (for instance, our economy grows 3% and theirs grows 6%) or losing less than China loses (our economy contracts only 1% while China's economy contracts 3%), he would choose losing less. It doesn't matter nearly as much that we're winning as it does that our position is better than our rivals.

Trump's little graph is not about win-win or win-lose quadrants. It is simply this: we're doing better or worse than the other guy. Better can include a loss in real terms as long as our loss is not as bad as the other guy's loss.

The probability that the US economy tips into recession goes up every time Trump's Twitter Tourettes drives him to spew out trade war nonsense. Remarkably, the probability of recession still seems considerably less than 50%; recession within the year is unlikely. In any case, our economy will likely be doing worse in 2020 than it was in 2016 but China and Germany's economies will likely be doing even worse even than ours. The global economy doesn't matter to him. Our relative position does. I'm not even sure what to call Trump's mindset. (Who cares about winning as long as we're doing better than than the other guy?)

Trump's 2020 campaign slogan could simply be, "You should see the other guy."  

How Hosting or Squelching Science Determines Where Progress Goes Next

In 1642, Galileo died and Newton was born. That's still a poignant symbol of the hand off from Italy to Britain for progress.

In 1500, Italy's per capita GDP was about 50% higher than Britain's. By 1820, Britain's per capita GDP was about 50% higher than Italy's.

Galileo was arguing that the earth rotated around the sun. The church had the authority of Joshua 10:13, a verse that made it clear that it was in fact the sun that orbited the earth. They put Galileo under house arrest and made it clear that developing theories based on observation was not to be tolerated as long as Italy had the church's authority.

Science traveled north. The Protestants of Northern Europe accommodated Galileo's theories and became host to the scientific method that the Italians had helped revive from Greek and Roman time. Newton went further than Galileo, developing a set of laws to explain what Galileo observed. Newton's science and math became a foundation for the Enlightenment and that, in turn, became a foundation for the Industrial Revolution and Democracy. Italy protected its past and the UK created a new future.

Today, we have a similar inflection point in the transition from fossil fuels to alternative energy. China now leads in the production of wind turbines and solar panels. Meanwhile, we Americans have elected a president intent on protecting coal - an industry that dates back to the time of Newton. Trump - like so many of his supporters - denies climate change in the same way that the Catholic Church denied we orbit around the sun. And science, less interested in the vested interests of coal industry profits or old testament prophets than reality, is shifting away from the greatest home to science since, well, Italy during the Renaissance or the UK during the Enlightenment.

Economic growth and prosperity follows science. It has for centuries. If we continue to deny the reality of climate change and what that means for a shift in strategies and the source of prosperity, we will play the role of Italy in the 1600s. It's not a good role. Shakespeare - born the same year as Galileo - set half his tragedies there.

Ron's Economic Forecast for 2018 - Highest Probability of a Recession in 8 Years

A Chinese recession? A bumbling Fed Chair? A downturn in stocks? Your blogger predicts a 33% chance of bad news for the American economy in 2018.

THE LAST SEVEN YEARS

As we were coming out of the Great Recession, people continued to fixate on threats. When you've been beaten you flinch even when someone raises a hand to wave at you, so this makes sense. The Great Recession was awful and it left people anxious about what might happen next. I've reported it before but it bears repeating: in the decades before and after, the economy created an average of 2 million new jobs each year: in the oughts, from 2000 to 2009, the economy did not create jobs but rather destroyed an average of 100,000 jobs per year. Rather than create 22 million jobs, that decade destroyed a million jobs. Just consider what a shortfall of 23 million jobs in a decade means for a moment.

In light of that, it only makes sense that early in this decade people were so aware of what all could go wrong that they lost track of what all could go right. I was cautiously but unrelentingly optimistic about the economy throughout the recovery and it has gone well; now the unemployment rate could soon fall below 4% and the S and P 500 is up nearly 4X (well, 3.6X) what it was when the market bottomed out in early 2009. Even last year, after the election of Trump, I put aside my disbelief and repugnance in his presidency to predict that he would likely preside over another great year for the economy. 

Now, for the first time since the end of the Great Recession, I'm pessimistic about the economy. It seems as though that 8 years of good have distracted people from the fact that bad things, too, can hit. Just as 7 years ago most people seemed skeptical that things can go well, most people now seem skeptical that things can blow up.

PERCEPTION AND POLICY

One thing that I've learned is that people mostly don't distinguish between the state of conditions (e.g., we have high or low unemployment), the rate of change in conditions (e.g., the unemployment rate is dropping) or the rate of change in the rate of change (e.g., the economy is still creating jobs but at a slower rate). Obama took office as the Great Recession was at its worst and to this day many people associate him with that state of terrible unemployment. Trump took office when the economy was mostly recovered and many people now associate him with that state of wonderful employment. I do believe that policy makes a difference but the most obvious complicating factors are simply this: it takes time to get policy passed, it takes even more time for that policy to impact the economy, and easily the clearest instance of when policy makes a difference is during a recession. Simply put, there are a variety of theories about how policy changes long-term economic conditions but the causation lag is long and filled with uncertainty. (For instance, most people would agree that early childhood education and wellness programs are positive but assuming those are targeted at kids under 7, it'll be half a century before those children reach their peak earning years and any number of complicating factors - from wars to the popularization of computers or robots - could exacerbate or mitigate the impact of this early childhood intervention. In any case, it's safe to assume that the president and members of congress who instigated such policy would be dead by then and most people will have forgotten them and their policies.)

And a further complication is that about two-thirds of Republicans and a third of Democrats can't see the good when the other party has the White House. 

WHAT IS POSITIVE

Debt levels in the US are relatively low; as a percentage of GDP, federal debt is up about ten percentage points, corporate debt is up about six percentage points and household debt is actually down about five percentage points in the last 5 years, making for a net change of about 11 percentage points. With less reason to pay down debt in 2018, households, corporations and even the government have reason to continue with - and potentially even increase - current levels of spending. This should have a positive impact on future spending.

Unemployment is 4.1% and has now been below 5% for two years. The impact of sustained low levels of unemployment not only include the fore-mentioned debt pay down but great increases in net worth. One of the most extraordinary statistics from the recovery? The net worth of households is up $42 trillion since the depth of the Great Recession and up $30 trillion from its pre-recession peak in 2Q 2007. When people are collecting regular paychecks they're able to save and invest in homes and stocks. This, too, is promising for 2018.

Further, as unemployment stays low companies have to offer higher wages to attract workers. Wages are growing. As an anecdote, at Thanksgiving we were with three young women all in their early thirties; within the prior four months all three had accepted new positions (two at new employers) for raises ranging from about 15% to 100%. This is the kind of thing that happens when unemployment threatens to drop below 4%.

Further, the Republican tax plan looks to be front-loaded in its impact. Some indications are that it will stimulate the economy the most in 2018 and then slightly less in each of the next few years. It has the potential to add another one percentage point to GDP growth in 2018; that impact is huge.

Finally, the popularization of entrepreneurship - the essence of my book The Fourth Economy - is continuing. Economic policy at the regional level is increasingly focused on entrepreneurship programs within universities and emulating Silicon Valley's success. (None of that will be easy but even mediocre efforts at things that matter a great deal pay off more than extraordinary effort on things that matter little.)

This is all great news and the most likely thing is that it will translate into another great year.

There is about a 67%  chance that the stock market will again rise by double-digits, unemployment will drop below - and stay below - 4%, and wages will rise faster than they have all century. 2018 could be one of the best years since the late 1990s and will likely start out that way. Among other things, this would mean a rise in household income at every level, including median and lower-income and not just those in the top 1 to 20%.

WHAT IS WORRISOME

There is about a 33% chance that the economy turns down in 2018. That turn would probably start some time between May and October.

There are a few reasons that it may turn down: China, a new Federal Reserve Chairman and monetary policy, Trump, and the nature of business cycles.

BUSINESS CYCLES

There are two common measures for these cycles: unemployment rates and the stock market. Sometimes an economy is creating jobs and wealth and sometimes it is destroying them. Since 1900, the US has had 23 recessions, including the Great Depression that began in 1929 and the Great Recession that began in 2008. The length of those downturns has varied from 6 months (the shortest period of downturn that can qualify as a recession) to 43 months (the Great Depression in the early 1930s).

If you were plunked down into a random month between January 1900 and December of 2017, the odds that you'd land in a month in which the economy is suffering from a recession is roughly 24%. Of course Keynesian economics made great advances in the aftermath of the Great Depression and since then the odds of any given month being in recession are 14%. (In the 33 years leading up to the end of the Great Depression, the odds of you landing in a recession plagued month were 48%.)

Curiously, the odds that you would have a month since 1948 in which the unemployment rate is as low - or lower - than it is now is 15%, nearly identical to the odds that you'd be in a recession. The odds that the unemployment rate is 4.1% or lower is the same as the odds that it is 7.4% or higher. (Which is to say that most - about 70% - of the time the unemployment rate bounces around between it's current rate of 4.1% and 7.4%.)

Why does the economy rise and fall? It's because good optimism eventually becomes bad optimism. The economy is bad and someone is optimistic enough to start a business that depends on rising sales. Their optimistic bet pays off, they get rich, and that optimism fuels more optimism. More businesses are started, more stocks bought, more employees hired ... and the economy expands. There comes a day, though, when the optimism is unfounded. New businesses fail at a little faster rate, old businesses expand more slowly or even contract, and the economy begins to destroy jobs and wealth. Now, pessimism is the wise bet and companies layoff and investors hold onto their money. In a bust the pessimists become the leaders. Until the cycle starts anew, as it has a dozen times since the end of the Great Depression in 1933. The booms help to create new things and the busts help to destroy the old; between them job and product markets transform over time, and what we buy and what we do for a living radically changes over a lifetime.

Why mention this? Well, if we're just betting on probabilities - putting aside reasons for optimism mentioned above - there is an 85% chance that unemployment goes up from 4.1% and only a 15% chance that it goes down from there. This claim is less scientific than simply based on data since 1948. Again, the unemployment rate of 4.1% or lower occurs only about 15% of the time. The next month we draw out of the hat is more likely to be higher than lower. Let me be clear: many of the fundamentals suggest that the economy will continue to do well in 2018; that said, economies do not expand without interruption and the odds that it will falter, that unemployment will tick up, are never zero.

Similar for stock prices. Since 2000, stock prices have fallen in five years, or 29% of the time.

ANOTHER REASON TO WORRY? TRUMP

Worst case, his stupid ideas become bad policy. It's not clear that anyone in the Republican Party will resist him and he has at least another year to run with a Republican led House and Senate. If he signs legislation that leads to the deportation of millions of illegal aliens, we'll have a recession. If he manages to jettison NAFTA, we'll have a recession. If he cuts funding for research, per capita GDP growth will slow and the steady increase in life expectancy that we've enjoyed for more than a century could stall. 

And of course the Mueller investigation could result in a number of Trump's administration - even Trump himself - facing charges that could force his resignation or even imprisonment. While the final resolution - him in jail or remaining in the White House with Mueller's investigation finally concluded - could stabilize or even rally markets, it's hard to imagine that in the space between when Mueller makes his big reveal and when there is a resolution won't be a time that rocks markets.

In the 10 months before Nixon resigned in the aftermath of the Watergate scandal, the S and P 500 fell 43%.

NEW FEDERAL RESERVE CHAIRMAN JEROME POWELL

Janet Yellen's replacement as head of the Fed (he'll take over in February) is Jerome Powell. I have two big concerns with him: he has no degree in economics and he will be responsible for tightening monetary policy, a delicate operation that can frighten markets.

Work experience - Powell has served in the Fed for years - helps a great deal when it is business as usual. Theory, though, is essential when things change and unlike Yellen and Bernanke who had studied, researched and published on the topics of recessions and recoveries, Powell has never published anything that would suggest he has thought deeply about these topics. The last Fed Chairman to lack an economics degree served in the 1970s but this disregard for expertise is, of course, characteristic of Trump.

The Fed has announced that it will raise interest rates. If it does this too quickly, it slows down the recovery. If it does this too slowly it fuels an asset bubble and / or inflation. Simply put, money pumped into the system helps encourage "real" economic activity (actual investment, consumer borrowing, and hiring) but also drives up prices. People have argued that since the emergence of the World Trade Organization, it is harder for that money to drive up the price of goods that can be imported but instead drives up the prices of assets like stocks and homes. They argue that loose monetary policy is less likely to drive up the price of apples than it is to drive up the price of Apple stock. 

Before the Great Recession, excess reserves in American banks ranged from about $1.5 to $3 billion. As the Fed pumped more money into the economy to counter the credit crash, excess reserves rose to $2.9 trillion, roughly 1,000X more. Yellen has quietly lowered that to $2.3 trillion but there is still a lot of money to pull out of the system. Related, the Fed is finally moving interest rates back up, something that will have a ripple effect on lending and all the hiring, expansion, and spending that accompanies low interest rates.

Unwinding loose monetary policy is somewhat like the game of operation, an attempt to remove something without setting off buzzers that suddenly send markets down or - worst case - cause a contraction in credit and a stutter in hiring or consumer spending. I simply trust a lawyer less than I do academics who have studied these matters extensively. I'd be much more comfortable with Yellen serving another term (as the men have for decades back) than I am with Powell learning this new position during a sensitive time in the transition of monetary policy. He's a risk.

AND FINALLY, CHINA

Ruchir Sharma has been worried about a global recession emanating from China for a year or two. He has a couple of plausible concerns, chief among them the amount of debt China has  recently created. 

Sharma cites thirty instances in which private debt over a 5-year period grew faster than GDP by at least 40 points. (Imagine in year 0 that a country's private debt is equal to 100% of of GDP and in year 5 it is equal to 140%.) In each of these cases, GDP growth fell by more than half over the next five years, occasionally slipping into recession. [See page 300-1 of Sharma's The Rise and Fall of Nations] Sharma is worried about China because over the last five years private sector debt as a percentage of GDP has gone up 56.5 points. It could be that China will escape a downturn as it pays down debt but, again, 30 of 30 countries have been caught in the consequences of rapidly growing debt.

His other concern has to do with a belief in the way business cycles purge the old and create the new. As mentioned, since the US has become the major economy in roughly 1900, it has had 23 recessions. By contrast, in the quarter century since China has begun its great ascent it has had 0 recessions. None. This is a long time to go without market correction.

My own concern with China has to do with my belief in the progress that communities make through four economies: agricultural, industrial, information and entrepreneurial. China - in my opinion - has successfully made the transition from agricultural to industrial economy. Its per capita GDP is now about $10,000, which is one mark for the transition to a new economy. Curiously, President Xi has recently assumed more power than any leader since Mao and is making sounds of a crackdown on dissent. It seems plausible to create an industrial economy coincident with tight government controls; it does not seem plausible to do that with the emergence of an information economy. Simply put, I'm dubious about the compatibility of government control and the emergence of an information economy reliant on knowledge workers who have easy access to information technology and - obviously - information.  I don't know how you create an information economy while limiting access to information. 

China has not only emerged as the second biggest economy in the globe but it has accounted for a huge portion of global GDP growth over the last quarter of a century. If it falters, it will have a ripple effect.

Finally, things happen that haven't been predicted. The price of mortgage backed securities suddenly falls. Terrorists fly planes into the World Trade Center. I've listed a variety of triggers for a recession but it could easily be something completely unforeseen that is the trigger.

THE FORECAST

For now I'm keeping my money in stocks until the end of the first quarter of 2018. I think the market will rise another 3% to 8% by May and the unemployment rate will go as low as 3.8%. Home construction will rise, as will business investment.

I'm worried, though, that the the market will turn down about mid-year, as will job creation. The market could finish the year down about 5% to 10% and while unemployment will still be decent (4%? 4.5%?) job creation will turn negative for the first time in 8 years. The total number of jobs created in 2018 will be about 1 million, give or take, about half what it has averaged during the recovery.

For the year:
S and P 500: down 5 to 10%

Jobs: up 1 million

Unemployment: Roughly unchanged or up slightly to somewhere between 4.0 to 4.5%

Finally, where we are as of when this was published:
S and P 500 is at 2,692.71
Unemployment is at 4.1%

Why Even the Experts Vastly Underestimate the Impact of Trade Wars with Developed Countries

I harp on the prospect of a trade war for a host of reasons. For one thing, like the invasion of Iraq or the deregulation of financial markets that helped to set us up for the Great Recession, few people appreciate just how devastating this can be. A trade war has the potential to be as devastating as the Great Recession.

Expert economists worry about the magnitude of this. As someone who regularly works with product development teams in this and other countries, I think even they underestimate it.

A chip maker I worked with this year at a facility in Scotland represents the sort of trade reality that  a simple number like "China represents 4.4% of our trade" does not capture.

This chip company makes chips for cars - everything from the chips that help to control your air conditioner to chips used in self-driving cars. Chips in cars have become ubiquitous and every new car uses more than 100 chips. So what I'm about to describe could be multiplied by 100.

First, a single chip is designed with inputs from design and marketing people from Austin, TX, Germany, Scotland, China, India and Malaysia. Perhaps other sites I was not aware of.

Second, when the chip is physically made it literally travels around the globe in its production process. Value is added in Singapore, Austin, Tianjin, and then Kuala Lumpur.

Third, once the chip is made it still isn't a final product. For that it has to be integrated into a car. The cars it will be incorporated into are assembled in places like Bavaria, Detroit, Seoul, and Puebla.

Fourth, the cars these chips are incorporated into are not made at just one place. A tiny chip that is put into a car comes from half a dozen places. The same is true of the fuel injector, the axle, the pistons, the seat belts, etc. Final assembly just represents a final step in a series of complicated assembly steps for raw materials, intermediate products and final units that are then assembled into a car. Some variation of what I described for the single chip has occurred with most every discrete component in that car.

If you say that 4% of our trade is with China, that may naively refer to the fact that 4% of our products come from there. And that might accurately capture it but I suspect that reality is more like 8% of the value in 60% of our products have some input from China. What I believe the average person wildly underestimates and even expert economists probably somewhat underestimate is the massive complexity in product development and manufacturing and the extent to which any one finished product sitting in your garage, hand or kitchen has design inputs or parts that come from dozens of countries. One of the simplest examples of surprising complexity often used in introductory economics classes is the No. 2 pencil: at one point the lead for the graphite, the rubber for the erasure, and the wood for the pencil came from three different continents.

A trade war would disrupt millions or billions of complex product and design flows that result in the thousands or millions of products that we can buy here in the US. Even disrupting 4% of our GDP would be devastating but a ban on trade from China is likely to impact more than 4% of our GDP. (And of course China is not the only country that trades with North Korea.) If we ban trade with, say, a less developed nation like Cuba an estimate of our trade with them would probably be roughly accurate. Cuba is exporting cigars rather than complex technology made with inputs from knowledge workers scattered all around the globe. But if we ban trade with a country like China that has a complex trading pattern, the ripple effect is incredibly difficult to calculate and could quickly grow beyond casual, initial estimates.

We can only hope that Trump will be less effectual at implementing trade disruption than he was with the Repeal and Replace of Trumpcare. And given that most of Congress is less deluded about how independent we can be of other countries than Trump is, it is unlikely that a trade war will break out. That said, the probability is not zero and the probability is higher than it should be simply because so few people realize how complex are the trading patterns that define even some of our simplest products. It's good that people were outraged at Trump's comments after Charlottesville, but his ignorance there isn't going to cost millions of jobs. A trade war easily could.

A Stimulus that Doesn't Cost Trillions - Raising the Quota for Foreign Workers

One of the ideas behind any economic stimulus package is that spending has a multiplier effect. If the government spends $100, the people who get that money will spend a portion of it on services and products that will, in turn, be spent again, and again, and again. The defense contractor gives his money to the restaurant owner who gives it to the flooring store who .... The $100 originally put into the economy might stimulate a total of $200 to $1,000 before its ripples fade into insignificance.

Communities can also get a multiplier effect from jobs that create goods that are sold globally. Engineers and manufacturers, for example, eat out, pay taxes that pay teachers, hire plumbers, and stimulate the local economy in various ways that are obvious when someone like GM closes a plant or office in a community.

We now are spending borrowed money in the hopes of stimulating the economy. Had our policy towards foreign graduate students and employees not become so xenophobic since 9-11, we might be getting more of that stimulus from high-paid professionals who are, instead, now living and working in places like Bangalore and Shanghai.

One of the most noticeable things about American high-tech firms is what a high percentage of their team members are foreign born. As a consultant, more than once I have been with development teams where I was the only American-born person. It is not unusual for about 90% of the team to be from either China or India. They are living and working here in the US but they had moved here either for graduate school or work.

Most Americans are unaware of how much work the nice couple from India or China brings into the area. When a high-tech company hires a software developer or hardware designer for a six-figure salary and his wife gets on at the local ER, making the same or more, these two stimulate the local economy in various ways. They spend money at local restaurants and bid up the prices of homes. They make it more probable that a book store will come into the area or that a college will offer MBAs to aspiring professionals. The plumbing company owner who makes even more than the engineering director can make that much because his clients make good money. Everything ripples. Surgeons in rich countries are rich and in poor countries are poor.

But if in a post-9-11 world this Indian software developer stays in Bangalore, so will the things he can buy. The bump in pay for the plumber, the expansion of the local MBA program, the steadier business for the restaurants ... all of this now accrues to Bangalore instead of Chandler, Arizona, or San Jose.

Since 9-11, it has been increasingly difficult for American companies to hire foreigners. Recently, I heard a director of software from a medium-sized company say that he doesn't even try to get work VISAs for foreigners and accepts that he just won't be able to get enough talent here in the US. Meanwhile, he - like so many managers I've talked to - tells horror stories about working with teams in Bangalore or Shanghai, trying to coordinate the definition of specifications and the execution on tasks across cultures, languages, and time zones. American companies would often rather have the talent here in the US but do not have that option. This doesn’t just make it hard on American companies; it makes it hard on American communities.

We live in a global economy and we may well be experiencing the first significant recession of this most recent wave of globalization. Today's report about the loss of half a million jobs last month makes it obvious that this is already worse than the average recession. I can't help but think that it has been made even worse by our nearly xenophobic policy towards foreign graduate students and professionals. After World War 2, we were the magnet for talent from around the globe. We had the technology and labs that could be found nowhere else. We had the capital and the big corporations. Gradually, that advantage has eroded. In the 7 years since 9-11, American politicians have consistently exacerbated this trend with their apparent fear of foreigners.

As American politicians consider radical measures like bailing out huge swaths of the economy with trillions of dollars, perhaps they could consider a simpler measure. Perhaps they could raise the quota for foreign-born workers to allow the American economy to enjoy the most organic and natural of stimulus packages: great jobs that help to employ the millions of teachers, doctors, dry cleaners, waiters, and plumbers whose salaries ultimately depend on the pay and productivity of their clients.

I'm Banned in China

Well, my writing career has reached a new milestone. I'm now banned in China. Of course, this is true of everyone who posts on blogspot, but should I ever be invited to a cocktail party, I'll conveniently leave out that little detail.

Hmm. Maybe I'll get a t-shirt printed up.

The Future of Prosperity - When More is Less

A fascinating post at http://virtualeconomics.typepad.com/virtualeconomics/ leads with this:

"Jeff Jarvis is blogging from the Davos world leaders conference, finding (amongst other things) that 53% of Western Europeans think that the next generation will be less prosperous than this one. That's compared to 37% in the US, and just 14% in China."

Why the optimism gap? It could be that the West has an intuitive sense that the model we've been using for more than a century may be appropriate for a place like China but is increasingly less so in the West. China's per capita income is about 5% what it is in Western Europe or the US and Canada, making their perspective very different.

A single scoop of ice cream is nice - two can be fine ... but at some point (3? 6?) the enjoyment turns to nausea. More is nice for those who have little but after a while more becomes less desirable. Many Chinese are only now beginning to enjoy the benefits of prosperity - getting bikes, cars, stereos, and fashionable clothes for the first time. But once they have that, what is the next stage of prosperity? What happens when more is no longer better?

For decades we have confused quantity of goods with quality of life. Given that the prosperity of the last couple of centuries was the equivalent of our first scoop or two of ice cream, this confusion has not been particularly important. But now that we're facing our third or fourth scoop, it is important to make the distinction.

Our economies are still largely geared towards more, towards quantity of goods. Walk through a Costco or a landfill to see how voluminous our appetite for "goods" is. Yet these goods to have are not the only kind of goods. In fact, philosophers distinguish between goods to have and goods to do - considering the goods to do a higher good than those we have. Quality of life is related to goods to have - it is hard to imagine aspiring to a quality of life that didn't include at least some modicum of shelter, clothing, and food - much less those delightful bits of technology like laptops, mp3 players, or cell phones. Yet the marginal utility - the additional joy we get - from more goods (to have) does gradually drop. Eventually, goods (to have) simply do less to increase our quality of life.

Those in the West may well see that we're geared for getting more even as getting more has less and less impact on our quality of life. This may be the reason for the optimism gap between the West and China. Until the West has shifted its economies to more directly go after improvements in quality of life, this sense of pessimism in the West may only get worse.