Why the Richest States Are Voting for Biden and the Poorest States Are Voting for Trump: A Study in Economic Policy Cause and Effect

Ranked by personal per capita income, 8 of the 10 highest income states will probably go for Biden and 7 or 8 of the 10 lowest income states will probably go for Trump. 

Why are the richest states so very Democratic? It is partly cause and partly effect.

First the cause. Intellectual capital has surpassed industrial capital as the source of wealth and income in this information economy. The communities around the various University of California campuses, for instance, have become host to a lot of exciting companies that have spun off from the staff, students and studies on those campuses. Democratic states invest more in the science and education that create jobs and wealth.

The only two states in the top ten by personal per capita income that Trump will win are Wyoming and Alaska. These are land-based economies, rich with oil, mines, livestock, grains, and forests. And of course, these economies are not the kind that create jobs; Wyoming's total population is 580,000 and Alaska's only slightly more at 730,000.

The economies in states like Connecticut and Massachusetts depend on a heavy public investment in schools and research, classic Democratic policy prescriptions. 42% of Massachusetts has a BA; only 26% of Wyoming does. By contrast, Wyoming and Alaska's economies depend on continued subsidies to oil and gas and lax regulation on greenhouse gases, classic Republican policy prescriptions.

Every year, more people can profit from technology advances in computing and genetics or new materials, the sorts of research and industries that spin off from universities. An oil well is zero-sum, though. If I own it, you don't. Meanwhile, knowledge builds on knowledge. You're going to hear more about AI and genetics in the next decade, the confluence of two research areas that promise products that might analyze patterns in your genetic code that make you more susceptible to Alzheimer's, for instance. This does not come at the expense of genetics or computing research but instead makes both more valuable. Oil wells and mines are zero sum but research and development literally stimulate more research and development; knowledge creates more knowledge.

Folks in places like Wyoming see the world as zero-sum because their economy actually is. The state can't even sustain a population the size of the cities in LA county that you've never heard of. Folks in places like Cambridge, Massachusetts tend to be more win-win because their economies actually lend themselves to that. If you give me an acre and I give you an acre, we leave the transaction unchanged. If you give me an idea and I give you an idea, we may both leave better off. You better understanding my AI technology and me better understanding your genetic analysis might enable us to collaborate to create a new industry with trillions in wealth and millions of jobs.

Zero-sum communities are also more susceptible to conspiracy theories that point them towards threats, that turn complex phenomenon into simple us vs. them narratives, a stark contrast to the pragmatic relationship knowledge workers in the information economy have to reality and theories about it.

So that's the cause. Wealth, income and jobs in the modern economy are increasingly the product of intellectual capital and the communities like New York and California that do the most to invest in it are the ones that will create the most jobs and highest incomes.

What is the effect? Well, richer people are less tolerant of low-quality of life. A poor person in West Virginia who lives near a mine doesn't have the resources to take on a business that endangers their child's health. Meanwhile, some mother in Santa Clara, CA - where per capita income is $106,000 a year - is not about to put up with risks to her child's health ... and she and her neighbors have the resources to fight a business that would put their children's health at risk. It is true that blue states have more regulations. Why? They are democracies and the residents of those states demand more regulations. There is little sense in making twice the national average income and then having to listen to the loud noises of a jack hammer at 4 AM or breathe noxious fumes from a factory.

Weirdly, though, the US rewards states unable to create jobs with more political power. The 21 least populous states have 42 senators and less population than California with its 2 senators. What does that mean in practical terms? If your policies can't create jobs to grow your population, your political policies have more influence. This may be the biggest design flaw in our current political system.

This design flaw is slowing the creation of jobs and wealth and improvements to quality of life. It is a weird thing to give more influence to less advanced communities, as if we were bringing in economic advisers from Afghanistan to decide what to do with Manhattan.

It is a weird election. The 30 states in between the top and bottom 10 are debating whether to follow the lead of the country's richest states - states that include Silicon Valley, Wall Street and the nation's top universities - or rural Mississippi, West Virginia, Kentucky, and Alabama. You might think that such a debate would have an obvious outcome. It does not. And that may be the weirdest thing about this very weird year.

Gales of Creative Destruction and the Need for Aggressive Investment post-Pandemic

In the 3Q of 2018, the economy created 67,000 jobs.
In the 3Q of 2019, it created 11,000 jobs.
In the three quarters between, it created 811,000, 525,000 and 182,000 jobs.
That sounds innocuous enough but those are net.

In the 3Q 2019, the economy destroyed 7.3 million jobs and created 7.3 million jobs and the difference between them was this tiny sum of 11,000 jobs. This is what gales of creative destruction look like.

In the last six weeks, 30 million people have filed for unemployment. This quarter the economy is likely to destroy closer to 50 million jobs than it's typical 7-ish million.

What does this mean? To counter this unprecedented level of destruction we will need unprecedented levels of creation. One tactic is to preserve businesses that will hire back once this is over. The other - complementary - tactic is to launch a tsunami of startups, turn cheap money (interest rates are absurdly low) into precious jobs. A third tactic is to literally create new infrastructure, knowledge and industries.

We should stop having infrastructure weeks and start an infrastructure decade - included in that the creation of green energy solutions that hasten the obsolescence of oil. Also, start spending as much research and development for federal departments like Housing, Transportation, Energy, Interior, and Education as we do on Defense.

We have a huge economic problem that will only get more complicated. Like any problem, we'll have to create our way out of it. When you have more destruction, the solution is more creation.

In the Long Run We Are All Rich: What Negative Interest Rates Mean for Good Policy

The Dutch have records that go back to the time of Martin Luther - 500 years. In that entire time, including the European settlement of continents, 30-year religious war, the end of knighthood, serfs, industrial revolution, the car, telegraph, telephone, TV, computer, modern medicine, introduction of democracy .... interest rates never went negative. Until about 2 years ago.

Now the Dutch, the EU, Japan and even the US (for the US still only briefly and after adjusting for inflation) have all had and / or have negative interest rates.

This is huge.

One of the things I've not seen anyone talk about is how valuable it makes investments.

Imagine that you start with $100 income. Each year that income grows by 5%. You want to price this income stream for the next 50 years.

If you assume that interest rates are +1%, then you discount next year's income by that amount. $100 next year is worth only $99 this year. You discount the amount by 1%. And of course the further out in time, the more you discount that income stream.

If you assume that interest rates are negative 1%, -1%, you actually increase next year's income. $100 next year is worth $101.

What is the price of a 50 year income stream growing at 5% a year when interest rates ....

are 1%? $1,903.

are -1%? $1,014,861,688

It's the difference between two thousand and one billion.

What does this mean? The lower interest rates are, the bigger the reward for investments now. What kind of investments will pay off long term? R&D. Education. Startups. Infrastructure.

As we come out of this incredibly painful downturn, we should invest money as if we were drunk or billionaires. This will do two things. One, it will employ a lot of people right now in construction of infrastructure, R&D, teaching and working in or managing startups. Two, it will generate future income that is worth more than it ever has before.

Negative interest rates signal a wonderful thing. It means that the future has never been more valuable and with capital so cheap, never a better reason to invest in this future. In a twist on Keynes, in the long run, we are all rich.

Trump Hikes Taxes - How Tariffs Really Work and Why They Rarely Do (work, that is)

Here in mid-September, Trump just announced tariffs on $200 billion in goods from China.

This is a tax on American consumers that works out to about $60 per American. Americans will pay that much more for items.

Who gets that money? American companies that have already proven themselves incapable of competing. American companies who need protection in the form of tariffs.

There are times when it makes sense to have trade protection in the form of tariffs. If your national policy is working to move from an agricultural to an industrial economy, or from an industrial to information economy it makes sense that you may want to protect some sectors or companies from foreign competition as they establish themselves against global competition. For awhile.

Companies that benefit from trade protection have a few options about what to do with the added revenue. They can increase the wages of hard-hit employees who have been competing against cheaper foreign labor. They can use the extra revenue to invest in new capacity or technology so that they are more competitive. Or they can payout the profit to stockholders and executives in the form of bonuses, using this subsidy from American consumers as a reward for having the political clout to do what they could not do through the market.

Tariffs are essentially a tax but not a tax that go to the government. Government spending can actually help displaced workers by funding unemployment and retraining. Government spending can finance infrastructure building that makes regions more competitive because of better rails or roads or cheaper energy or water. Government spending can go into the basic research that companies can develop into products.

Apple is now the most valuable company in the world, worth more than a trillion. It's most profitable product is the iPhone. The iPhone represents product development that incorporates research advances like touchscreen, satellite, and small chip technology originally funded by government research. (This is well documented in Mariana Mazzucato's The Entrepreneurial State.) Government research can lead to breakthroughs that not only help citizens but that can be the basis for new products that companies develop into highly profitable markets. A few billion in research spending can help to create trillions in value.

Tariffs don't help to finance basic research, infrastructure, education, or the creation of new industries and companies. Tariffs often subsidize companies that have not kept up, doing more to reward executives who have made campaign contributions than executives who have invested in the future. Within the last year, the GOP passed a tax cut that makes it harder to do any of these things. With Trump's new tariffs, it has just reversed that tax cut for the typical American and will now give that tax or tariff revenue to uncompetitive companies instead. 

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.