When GDP is a Scam

Look, just… think about this for a moment. How does a group in which 65% are unemployed and can’t speak the language add anything to the economy?

You could do some sleight of hand where a few very productive workers, a random billionaire like Carlos Slim or Steve Jobs, get lumped in with a bunch of people they have nothing to do with on the grounds that they are all “Syrian,” and come up with numbers like this, but that would be a sleight of hand. It’s deceptive, and it’s obviously lumping together completely disparate groups in order to make one group look much better than it is.

How to tell if someone is lying to you with GDP:

  1. Consider splitting the population in two. Say, Germans and non-Germans. Would GDP for one group go down?If yes, then you’re being lied to. Simply “growing” the GDP by drawing a bigger circle on the map and adding up the GDP inside of it doesn’t mean the people inside the circle have more money. It just means you drew a bigger circle.
  2. Is this GDP “growth” entirely due to government spending to deal with the problems brought by the newcomers, like funding schools to teach them German?If yes, then it is not real spending. Everyone who was already in Germany was just taxed to provide service to non-Germans. You could do that without anyone immigrating to Germany.
  3.  

    Does this “growth” translate into a higher standard of living or happiness for the average or median German?

    If not, you are being lied to.

  4.  

    If you could magically replace every one of those migrants with a German of the same age and sex, would GDP go up or down?
    If Up, then these migrants are a bad investment.

  5. If these immigrants are so great for the German economy, why were they so bad for their home economies?

Let’s summarize these varieties of “GDP” abuse: 1. Not looking at Per Capita, 2. “Growth” that doesn’t help the locals, 3. Growth that goes to elites, 4. Opportunity cost, 5. Not making any sense.

GDP is one way to measure the economy, but it isn’t the only way–and it certainly isn’t the only thing that matters.

Let us consider the simplest possible economy:

Joe and Bob are sailors who have been marooned on a desert island. They have plenty of fish to eat and two coconuts, which they use as currency. When Joe wants something from Bob, he pays him one Coconut. When Bob wants something from Joe, he pays him one Coconut.

Bob and Joe are also economists, so they keep track of their local GDP, tallying up every Coconut exchange. After two months, they have a robust GDP of 4,000 Coconuts per month–and then the coconuts sprout. For the next two months, Bob and Joe abandon the Coconut and just do favors for each other. The economy crashes. The island has a GDP of 0 Coconuts–but oddly, Bob and Joe are doing just as well and eating just as much fish as before.

You might be objecting that the Coconut Economy is a bit contrived, but it is relevant to our real world.

Over in our economy, if I hire a maid to vacuum my carpet, this is “economic activity” and it counts toward the GDP–but If I vacuum it myself, it doesn’t count. If I am hired as a nanny to take care of someone else’s children, this is “economic activity,” but if I take care of my own children, it doesn’t count. Even hiring a prostitute is “economic activity” as far as GDP is concerned, but having sex for free is not.

It is easy to see how something like “women entering the workforce” might generate a substantial GDP boost–while not actually changing anything but the location where particular jobs are done. There is no more economic value to vacuuming my carpet or yours. It’s all carpet.

There are plenty of non-economic arguments relevant here. I might be happier hiring someone to vacuum my carpet so I can spend my time on other activities, or I might be happier tidying up my own home to get everything just the way I like it. I might provide more nurturing childcare to my own children, or a professional might be able to invest in expensive toys and games that can be enjoyed by the many children in their care. People may enjoy consensual sex with their spouses more than with prostitutes–or may hate people and just want to visit the occasional prostitute. Etc.

All of these nuances of life are missed in any simple argument about GDP.

Any argument that hinges solely on what immigrants add (or subtract) from GDP is misguided because ultimately, people don’t exist to make economies better–economies exist to make people better.

Would you try to “improve” the lives of the Amish by inviting a bunch of Silicon Valley executives to settle in their area and boost GDP?

Of course not. It wouldn’t even be a meaningful exercise–the Amish are perfectly happy the way they are. Different people want different things in life. Sometimes that’s more money. Sometimes it’s community, free time, health, or nature. The Silicon Valley folks wouldn’t be too happy having to deal with the Amish, either.

About 30 years ago, economists-on-TV and pundits became convinced that the key to the economy was “spending” and therefore we had to convince people to spend more. Tracking things like “how much people spend on Christmas shopping” became an annual theme.

Of course, spending comes at a cost (future saving), and future saving comes at a cost (current consumption).

Here is a good article on why GDP and CPI are Broken:

Imagine China is implementing a mercantilist policy. An American spends cash to buy goods exported from China. The Chinese recycle the money earned from exporting goods to America into buying mortgage backed securities. The American takes out a big mortgage to buy a house, mortgage bought by the Chinese. The American is effectively borrowing from the Chinese in order to fund current consumption. The net result is that America is a net seller of home equity and in return has recieved goods. The price of homes will be pushed up. In the GDP statistics this will actually show up as economic growth (since the cheap Chinese goods will push down the GDP deflator). But in reality, there has been no growth, the U.S. is simply selling off its own wealth and getting poorer.

Of course, this is what is actually happening.

Meanwhile:

The GDP numbers do not include depreciation. So if existing infrastructure is crumbling faster than it gets replaced, GDP might show the country as actually growing while in reality things are falling apart.

If the entire city of Detroit gets destroyed in riots, fires, crime waves, and ethnic cleansing, and is left in ruins, this catastrophe not show up in GDP numbers. In fact, GDP might actually increase since the destruction would spur the creation of new housing (which does show up in the numbers) and the average home price might actually fall (reducing the GDP deflator) due to violence making the neighborhoods unlivable.

GDP for GDP’s sake is burning houses down just so you can rebuild them–or importing foreigners just so you can spend money to teach them to speak your language.

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A few quick thoughts on Millennials and Burnout

How Millennials became the Burnout Generation, a recent Buzzfeed article, makes some very good points:

In Kids These Days: Human Capital and the Making of Millennials, Malcolm Harris lays out the myriad ways in which our generation has been trained, tailored, primed, and optimized for the workplace — first in school, then through secondary education — starting as very young children. “Risk management used to be a business practice,” Harris writes, “now it’s our dominant child-rearing strategy.” …

Harris points to practices that we now see as standard as a means of “optimizing” children’s play, an attitude often described as “intensive parenting.” Running around the neighborhood has become supervised playdates. Unstructured day care has become pre-preschool. Neighborhood Kick the Can or pickup games have transformed into highly regulated organized league play that spans the year. Unchanneled energy (diagnosed as hyperactivity) became medicated and disciplined.

Like most old millennials, my own career path was marked by two financial catastrophes. In the early 2000s, when many of us were either first entering college or the workforce, the dot-com bubble burst. … skilled jobs were in short supply. I worked as a nanny, a housemate worked as an assistant, a friend resorted to selling what would later be known as subprime mortgages.

Those two years as a nanny were hard — I was stultifyingly bored and commuted an hour in each direction — but it was the last time I remember not feeling burned out. I had a cellphone, but couldn’t even send texts … I was intellectually unstimulated, but I was good at my job — caring for two infants — and had clear demarcations between when I was on and off the clock.

Then those two years ended and the bulk of my friend group began the exodus to grad school. … It wasn’t because we were hungry for more knowledge. It was because we were hungry for secure, middle-class jobs — and had been told, correctly or not, that those jobs were available only through grad school. Once we were in grad school, and the microgeneration behind us was emerging from college into the workplace, the 2008 financial crisis hit. …

More experienced workers and the newly laid-off filled applicant pools for lower- and entry-level jobs once largely reserved for recent graduates. We couldn’t find jobs, or could only find part-time jobs, jobs without benefits, or jobs that were actually multiple side hustles cobbled together into one job.

These are the good points, and all of us can recognize how, regardless of our personal trajectory, that dealing with two recessions in a row when you are trying to enter the workforce can be a major problem. This is stuff that no one except maybe the President or the Fed Chairman can do much about, and it’s good to recognize that some of us had an easier start in life than others.

After some more very reasonable points, article makes an unfortunate turn, discussing the tyranny of things people definitely do have control over:

… They’d never seen the particular work that they do described, let alone acknowledged. And for millennials, that domestic work is now supposed to check a never-ending number of aspirational boxes: Outings should be “experiences,” food should be healthy and homemade and fun, bodies should be sculpted, wrinkles should be minimized, clothes should be cute and fashionable, sleep should be regulated, relationships should be healthy, the news should be read and processed, kids should be given personal attention and thriving. Millennial parenting is, as a recent New York Times article put it, relentless.

Stop. Just stop.

Most of this is unnecessary bullshit being sold to you by ads in women’s magazines.

Stop doing “outings.” Eat what you need to get by and you won’t need to exercise. Sleep when you’re tired. Shop less. Don’t read the news.

 “I’m really struggling to find the Christmas magic this year,” one woman in a Facebook group focused on self-care recently wrote. “I have two little kids (2 and 6 months) and, while we had fun reading Christmas books, singing songs, walking around the neighborhood to look at lights, I mostly feel like it’s just one to-do list superimposed over my already overwhelming to-do list. I feel so burned out. Commiseration or advice?”

You know what? I don’t like holidays. I’m perfectly happy taking advantage of whatever fun activities are available for my kids, but I’m not adding to an already overwhelming to-do list. Holidays are supposed to make you feel better, not worse. If what you’re doing isn’t helping, then STOP.

While writing this piece, I was orchestrating a move, planning travel, picking up prescriptions, walking my dog, trying to exercise, making dinner, attempting to participate in work conversations on Slack, posting photos to social media, and reading the news. I was waking up at 6 a.m. to write, packing boxes over lunch, moving piles of wood at dinner, falling into bed at 9.

I assume the job, move, and prescriptions are required. Owning a dog, exercising, travel, posting photos on social media, reading the news, and making dinner in the midst of a move are not. For goodness’ sakes, order a pizza. If posting on Instagram is stressing you out, stop posting on Instagram.

Even the trends millennials have popularized — like athleisure — speak to our self-optimization. Yoga pants might look sloppy to your mom, but they’re efficient: You can transition seamlessly from an exercise class to a Skype meeting to child pickup.

Let me tell you something about poor people: they don’t take exercise classes. They certainly don’t buy special pants for their exercise classes and then complain that their mom calls them sloppy.

Poor people don’t have the money for fucking exercise classes.

So there are two separate things going on in this article. The first is a very reasonable thing about recessions, temp work, work that bleeds into free time, never ending to-do lists, etc. And really, this is something that I think needs to be said louder and more often: many people worked hard, their parents worked hard, they did “everything right” and still got screwed by a system that is simply bigger than themselves.

The second is a very stupid thing about how hard it is to change pants between Yoga class and picking your kids up from daycare.

Look, I know you want to do everything, but you can’t. I know there are popular magazines out there claiming that you should spend two months salary on a diamond ring, but this is a complete fiction made up to benefit the diamond companies. Your parents never did extra curriculars–either they went to school clubs, church, or they rode their bikes around the neighborhood. These things are nice if you can afford them and have the time for them, but they are not necessary.

Take back your time. Learn to say no. YOU DON’T HAVE TO DO EVERYTHING.

Focus on the things that matter.

Book Club: The Code Economy, Chapter 11: Education and Death

Welcome back to EvX’s book club. Today we’re reading Chapter 11 of The Code Economy, Education.

…since the 1970s, the economically fortunate among us have been those who made the “go to college” choice. This group has seen its income row rapidly and its share of the aggregate wealth increase sharply. Those without a college education have watched their income stagnate and their share of the aggregate wealth decline. …

Middle-age white men without a college degree have been beset by sharply rising death rates–a phenomenon that contrasts starkly with middle-age Latino and African American men, and with trends in nearly every other country in the world.

It turns out that I have a lot of graphs on this subject. There’s a strong correlation between “white death” and “Trump support.”

White vs. non-white Americans

American whites vs. other first world nations

source

But “white men” doesn’t tell the complete story, as death rates for women have been increasing at about the same rate. The Great White Death seems to be as much a female phenomenon as a male one–men just started out with higher death rates in the first place.

Many of these are deaths of despair–suicide, directly or through simply giving up on living. Many involve drugs or alcohol. And many are due to diseases, like cancer and diabetes, that used to hit later in life.

We might at first think the change is just an artifact of more people going to college–perhaps there was always a sub-set of people who died young, but in the days before most people went to college, nothing distinguished them particularly from their peers. Today, with more people going to college, perhaps the destined-to-die are disproportionately concentrated among folks who didn’t make it to college. However, if this were true, we’d expect death rates to hold steady for whites overall–and they have not.

Whatever is affecting lower-class whites, it’s real.

Auerswald then discusses the “Permanent income hypothesis”, developed by Milton Friedman: Children and young adults devote their time to education, (even going into debt,) which allows us to get a better job in mid-life. When we get a job, we stop going to school and start saving for retirement. Then we retire.

The permanent income hypothesis is built into the very structure of our society, from Public Schools that serve students between the ages of 5 and 18, to Pell Grants for college students, to Social Security benefits that kick in at 65. The assumption, more or less, is that a one-time investment in education early in life will pay off for the rest of one’s life–a payout of such returns to scale that it is even sensible for students and parents to take out tremendous debt to pay for that education.

But this is dependent on that education actually paying off–and that is dependent on the skills people learn during their educations being in demand and sufficient for their jobs for the next 40 years.

The system falls apart if technology advances and thus job requirements change faster than once every 40 years. We are now looking at a world where people’s investments in education can be obsolete by the time they graduate, much less by the time they retire.

Right now, people are trying to make up for the decreasing returns to education (a highschool degree does not get you the same job today as it did in 1950) by investing more money and time into the single-use system–encouraging toddlers to go to school on the one end and poor students to take out more debt for college on the other.

This is probably a mistake, given the time-dependent nature of the problem.

The obvious solution is to change how we think of education and work. Instead of a single, one-time investment, education will have to continue after people begin working, probably in bursts. Companies will continually need to re-train workers in new technology and innovations. Education cannot be just a single investment, but a life-long process.

But that is hard to do if people are already in debt from all of the college they just paid for.

Auerswald then discusses some fascinating work by Bessen on how the industrial revolution affected incomes and production among textile workers:

… while a handloom weaver in 1800 required nearly forty minutes to weave a yard of coarse cloth using a single loom, a weaver in 1902 could do the same work operating eighteen Nothrop looms in less than a minute, on average. This striking point relates to the relative importance of the accumulation of capital to the advance of code: “Of the roughly thirty-nine-minute reduction in labor time per yard, capital accumulation due to the changing cost of capital relative to wages accounted for just 2 percent of the reduction; invention accounted for 73 percent of the reduction; and 25 percent of the time saving came from greater skill and effort of the weavers.” … “the role of capital accumulation was minimal, counter to the conventional wisdom.”

Then Auerswald proclaims:

What was the role of formal education in this process? Essentially nonexistent.

Boom.

New technologies are simply too new for anyone to learn about them in school. Flexible thinkers who learn fast (generalists) thus benefit from new technologies and are crucial for their early development. Once a technology matures, however, it becomes codified into platforms and standards that can be taught, at which point demand for generalists declines and demand for workers with educational training in the specific field rises.

For Bessen, formal education and basic research are not the keys to the development of economies that they are often represented a being. What drives the development of economies is learning by doing and the advance of code–processes that are driven at least as much by non-expert tinkering as by formal research and instruction.

Make sure to read the endnotes to this chapter; several of them are very interesting. For example, #3 begins:

“Typically, new technologies demand that a large number of variables be properly controlled. Henry Bessemer’s simple principle of refining molten iron with a blast of oxygen work properly only at the right temperatures, in the right size vessel, with the right sort of vessel refractory lining, the right volume and temperature of air, and the right ores…” Furthermore, the products of these factories were really one that, in the United States, previously had been created at home, not by craftsmen…

#8 states:

“Early-stage technologies–those with relatively little standardized knowledge–tend to be used at a smaller scale; activity is localized; personal training and direct knowledge sharing are important, and labor markets do not compensate workers for their new skills. Mature technologies–with greater standardized knowledge–operate at large scale and globally, market permitting; formalized training and knowledge are more common; and robust labor markets encourage workers to develop their own skills.” … The intensity of of interactions that occur in cities is also important in this phase: “During the early stages, when formalized instruction is limited, person-to-person exchange is especially important for spreading knowledge.”

This reminds me of a post on Bruce Charlton’s blog about “Head Girl Syndrome“:

The ideal Head Girl is an all-rounder: performs extremely well in all school subjects and has a very high Grade Point Average. She is excellent at sports, Captaining all the major teams. She is also pretty, popular, sociable and well-behaved.

The Head Girl will probably be a big success in life…

But the Head Girl is not, cannot be, a creative genius.

*

Modern society is run by Head Girls, of both sexes, hence there is no place for the creative genius.

Modern Colleges aim at recruiting Head Girls, so do universities, so does science, so do the arts, so does the mass media, so does the legal profession, so does medicine, so does the military…

And in doing so, they filter-out and exclude creative genius.

Creative geniuses invent new technologies; head girls oversee the implementation and running of code. Systems that run on code can run very smoothly and do many things well, but they are bad at handling creative geniuses, as many a genius will inform you of their public school experience.

How different stages in the adoption of new technology and its codification into platforms translates into wages over time is a subject I’d like to see more of.

Auerswald then turns to the perennial problem of what happens when not only do the jobs change, they entirely disappear due to increasing robotification:

Indeed, many of the frontier business models shaping the economy today are based on enabling a sharp reduction in the number of people required to perform existing tasks.

One possibility Auerswald envisions is a kind of return to the personalized markets of yesteryear, when before massive industrial giants like Walmart sprang up. Via internet-based platforms like Uber or AirBNB, individuals can connect directly with people who’d like to buy their goods or services.

Since services make up more than 84% of the US economy and an increasingly comparable percentage in coutnries elsewhere, this is a big deal.

It’s easy to imagine this future in which we are all like some sort of digital Amish, continually networked via our phones to engage in small transactions like sewing a pair of trousers for a neighbor, mowing a lawn, selling a few dozen tacos, or driving people to the airport during a few spare hours on a Friday afternoon. It’s also easy to imagine how Walmart might still have massive economies of scale over individuals and the whole system might fail miserably.

However, if we take the entrepreneurial perspective, such enterprises are intriguing. Uber and Airbnb work by essentially “unlocking” latent assets–time when people’s cars or homes were sitting around unused. Anyone who can find other, similar latent assets and figure out how to unlock them could become similarly successful.

I’ve got an underutilized asset: rural poor. People in cities are easy to hire and easy to direct toward educational opportunities. Kids growing up in rural areas are often out of the communications loop (the internet doesn’t work terribly well in many rural areas) and have to drive a long way to job interviews.

In general, it’s tough to network large rural areas in the same ways that cities get networked.

On the matter of why peer-to-peer networks have emerged in certain industries, Auerswald makes a claim that I feel compelled to contradict:

The peer-to-peer business models in local transportation, hospitality, food service, and the rental of consumer goods were the first to emerge, not because they are the most important for the economy but because these are industries with relatively low regulatory complexity.

No no no!

Food trucks emerged because heavy regulations on restaurants (eg, fire code, disability access, landscaping,) have cut significantly into profits for restaurants housed in actual buildings.

Uber emerged because the cost of a cab medallion–that is, a license to drive a cab–hit 1.3 MILLION DOLLARS in NYC. It’s a lucrative industry that people were being kept out of.

In contrast, there has been little peer-to-peer business innovation in healthcare, energy, and education–three industries that comprise more than a quarter of the US GDP–where regulatory complexity is relatively high.

Again, no.

There is a ton of competition in healthcare; just look up naturopaths and chiropractors. Sure, most of them are quacks, but they’re definitely out there, competing with regular doctors for patients. (Midwives appear to be actually pretty effective at what they do and significantly cheaper than standard ob-gyns.)

The difficulty with peer-to-peer healthcare isn’t regulation but knowledge and equipment. Most Americans own a car and know how to drive, and therefore can join Uber. Most Americans do not know how to do heart surgery and do not have the proper equipment to do it with. With training I might be able to set a bone, but I don’t own an x-ray machine. And you definitely don’t want me manufacturing my own medications. I’m not even good at making soup.

Education has tons of peer-to-peer innovation. I homeschool my children. Sometimes grandma and grandpa teach the children. Many homeschoolers join consortia that offer group classes, often taught by a knowledgeable parent or hired tutor. Even people who aren’t homeschooling their kids often hire tutors, through organizations like Wyzant or afterschool test-prep centers like Kumon. One of my acquaintances makes her living primarily by skype-tutoring Koreans in English.

And that’s not even counting private schools.

Yes, if you want to set up a formal “school,” you will encounter a lot of regulation. But if you just want to teach stuff, there’s nothing stopping you except your ability to find students who’ll pay you to learn it.

Now, energy is interesting. Here Auerswsald might be correct. I have trouble imagining people setting up their own hydroelectric dams without getting into trouble with the EPA (not to mention everyone downstream.)

But what if I set up my own windmill in my backyard? Can I connect it to the electric grid and sell energy to my neighbors on a windy day? A quick search brings up WindExchange, which says, very directly:

Owners of wind turbines interconnected directly to the transmission or distribution grid, or that produce more power than the host consumes, can sell wind power as well as other generation attributes.

So, maybe you can’t set up your own nuclear reactor, and maybe the EPA has a thing about not disturbing fish, but it looks like you can sell wind and solar energy back to the grid.

I find this a rather exciting thought.

Ultimately, while Auerswald does return to and address the need to radically change how we think about education and the education-job-retirement lifepath, he doesn’t return to the increasing white death rate. Why are white death rates increasing faster than other death rates, and will transition to the “gig economy” further accelerate this trend? Or was the past simply anomalous for having low white death rates, or could these death rates be driven by something independent of the economy itself?

Now, it’s getting late, so that’s enough for tonight, but what are your thoughts? How do you think this new economy–and educational landscape–will play out?

Book Club: The Industrial Revolution and its Discontents, Code Economy, ch. 5

1. The Industrial Revolution and its consequences have been a disaster for the human race. They have greatly increased the life-expectancy of those of us who live in “advanced” countries, but they have destabilized society, have made life unfulfilling, have subjected human beings to indignities, have led to widespread psychological suffering (in the Third World to physical suffering as well) and have inflicted severe damage on the natural world. The continued development of technology will worsen the situation. It will certainly subject human beings to greater indignities and inflict greater damage on the natural world, it will probably lead to greater social disruption and psychological suffering, and it may lead to increased physical suffering even in “advanced” countries. –Kaczynski, Industrial Society and Its Future

The quest to find and keep a “job for life”–stable, predictable work that pays enough to live on, is reachable by available transportation, and lends a sense of meaning to their daily lives–runs though every interview transcript, from those who are unemployed to those who have “made it” to steady jobs like firefighting or nursing. Traditional blue-collar work–whether as a factory worker or a police officer–has become increasingly scarce and competitive, destroyed by a technologically advanced and global capitalism that prioritizes labor market “flexibility”… Consequently, the post-industrial generation is forced to continuously grapple with flux and contingency, bending and adapting to the demands of they labor market until they feel that they are about to break. –Silva, Coming up Short: Working-Class Adulthood in an Age of Uncertainty

The historical record confirms that the realities of the ongoing processes of mechanization and industrialization, as noted early on by Lord Byron, were very different from the picture adherents to the wage fund theory held in their heads. While the long-term impact of the Industrial revolution had on the health and well-being of the English population was strongly positive, the first half of the nineteenth century was indeed a time of exceptional hardship for English workers. In a study covering the years 1770-1815, Stephen Nicholas and Richard Steckel report “falling heights of urban-and rural-born males after 1780 and a delayed growth spurt for 13- to 23-year old boys,” as well as a fall in the English workers’ height relative to that of Irish convicts. By the 1830s, the life expectancy of anyone born in Liverpool and Manchester was less than 30 years–as low as had been experienced in England since the Black Death of 1348. –Auerswald, The Code Economy

On the other hand:

Chapter 5 of The Code Economy, Substitution, explores the development of economic theories about the effects of industrialization and general attempts at improving the lives of the working poor.

… John Barton, a Quaker, published a pamphlet in 1817 titled, Observations on the Circumstances Which Influence the Condition of the Laboring Classes of Society. … Barton began by targeting the Malthusian assumption that population grows in response to increasing wages. … He began by noting that there was no a priori reason to believe that labor and capital were perfect complements, as classical economists implicitly assumed. The more sensible assumption was that, as wages increased, manufacturers and farmers alike would tend to substitute animals or machines for human labor. Rather than increasing the birth rate, the higher wages brought on by the introduction of new machinery would increase intergenerational differences in income and thus delay child-bearing. Contrary to the Malthusian line of argument, this is exactly what happened.

There’s an end note that expands on this (you do read the end notes, right?) Quoting Barton, 1817:

A rise of wages then does not always increase population… For every rise of wages tends to decrease the effectual demand for labor… Suppose that by a general agreement among farmers the rate of agricultural wage were raised from 12 shillings to 24 shillings per week–I cannot imagine any circumstance calculated more effectually to discourage marriage. For it would immediately become a a most important object to cultivate with as few hands as possible; wherever the use of machinery, or employment of horses could be substituted for manual labor, it would be done; and a considerable portion of existing laborers would be out of work.

This is the “raising the minimum wage will put people out of work” theory. Barton also points out that when people do manage to get these higher-paid jobs, they will tend to be older, more experienced laborers rather than young folks looking to marry and start a family.

A quick perusal of minimum wage vs. unemployment rate graphs reveals some that are good evidence against minimum wages, and some that are good evidence in favor of them. Here’s a link to a study that found no effects of minimum wage differences on employment. The American minimum wage data is confounded by things like “DC is a shithole.” DC has the highest minimum wage in the country and the highest unemployment rate, but Hawaii also has a very high minimum wage and the lowest unemployment rate. In general, local minimum wages probably reflect local cost of living/cost of living reflects wages. If we adjust for inflation, minimum wage in the US peaked around 1968 and was generally high throughout the 60s and 70s, but has fallen since then. Based on conversations with my parents, I gather the 60s and 70s were a good time to be a worker, when unskilled labor could pretty easily get a job and support a family; unemployment rates do not seem to have fallen markedly since then, despite lower real wages. A quick glance at a map of minimum wages by country reveals that countries with higher minimum wage tend to be nicer countries that people actually want to live in, but the relationship is not absolute.

We might say that this contradicts Barton, but why have American wages stagnated or gone down since the 60s?

1. Automation

2. Emergence of other economic competitors as Europe and Japan recovered from WWII

3. Related: Outsourcing to cheaper workers in China

4. Labor market growth due to entry of women, immigrants, and Boomers generally

Except for 2, that sounds a lot like what Barton said would happen. Wages go up => people move where the good jobs are => labor market expands => wages go down. If labor cannot move, then capitalists can either move the businesses to the labor or invest in machines to replace the labor.

On the other hand, the standard of living is clearly higher today than it was in 1900, even if wages, like molecules diffusing through the air, tend to even out over time. Why?

First, obviously, we learned to extract more energy from sources like oil, coal, and nuclei. A loom hooked up (via the electrical grid) to an electric turbine can make a lot more cloth per hour than a mere human working with shuttles and thread.

Second, we have gotten better at using the energy we extract–Auerswald would call this “code.”

Standards of living may thus have more to do with available resources (including energy) and our ability to use those resources (both the ‘code” we have developed and our own inherent ability to interact with and use that code,) than with the head-scratching entropy of minimum wages.

Auerswald discusses the evolution of David Ricardo’s economic ideas:

By incorporating the potential for substitution between capital and labor, Ricardo led the field of economics in rejecting the wage fund theory, along with its Dickensian implications for policy. He accepted the notion the introduction of new machinery would result in the displacement of workers. The upshot was that the workers were still assumed to be doomed, but the reason was now substitution of machines for labor, not scarcity of a Malthusian variety.

Enter Henry George, with a radically different perspective:

“Like a flash it came over me that there was the reason of advancing poverty with advancing wealth. With the growth of population, land grows in value, and the men who work it must pay more for the privilege.” …

George asserted that increasing population density, (not, as Malthus claimed, population decline) was the source of increased prosperity in human societies: “Wealth is greatest where population is densest… the production of wealth to a given amount of labor increases as population increases.”  The frequent interactions among people in densely populated cities accelerates the emergence and evolution of code. However, while population growth and increased density naturally bring increased prosperity, they also, just as naturally, bring increasing inequality and poverty. Why? Because the fruits of labor are inevitably gathered by the owners of land.

In other words, increasing wages => increasing rents and the workers are right back where they started while the landlords are sitting pretty.

In sharp contrast with Karl Marx, … George stated that “the antagonism of interest is not between labor and capital… but is in reality between labor and capital on the one side and the land ownership on the other.” The implication of his analysis was as simple as it was powerful: to avoid concentrating wealth in the hands of the few, it was the government’s responsibility to eliminate all taxes on capital and laborers, the productive elements of the economy, and to replace those taxes with a single tax on land.

Note: not a flat tax on land, but a tax relative to the land’s sale value.

I was glad to see Henry George in the book because I enjoy George’s theories and they are under-discussed, especially relative to Marxism. You will find massive online communities of Marxists despite the absolute evidence that Marxism is a death machine, but relatively few enthusiastic Georgists. One of the things I rather appreciate about Georgism is its simplicity; the complication of the tax code is its own, additional burden on capitalists and workers alike. Almost any simplified tax code, no matter how “unfair,” would probably improve maters a great deal.

But there’s more, because this is a dense chapter. Auerswald notes that the increasing complexity of code (ie, productivity) has lead to steadily increasing standards of living over the past two centuries, at least after the Industrial Revolution’s initial cataclysm.

Quoting economist Paul Douglas, some years later:

“The increased use of mechanical appliances in offices has tended to lower the skill required. An old-fashioned bookkeeper, for instance, had to write a good hand, he had to be able to multiply and divide with absolute accuracy. Today his place is taken by a girl who  operates a book-keeping machine, and it has taken her a few weeks at mot to become a skilled bookkeeper.” In other words, the introduction of machinery displaced skilled workers for the very same reason it enhanced human capabilities: it allowed a worker with relatively rudimentary training to perform tasks that previously required a skilled worker.

…”Another way of looking at it, is this: Where formerly the skill used in bookkeeping was exercised by the bookkeeper, today that skill is exercised by the factory employees who utilize it to manufacture a machine which can do the job of keeping books, when operated by someone of skill far below that of the former bookkeeper. And because of this transfer of skill form the office to the factory, the rewards of skill are likewise transferred to the wage-earner at the plant.”

This is a vitally important pint… The essence of this insight is that introducing more powerful machines into the workplace does more than simply encode  into the machine the skills or capabilities that previously resided only in humans; it also shifts the burden of skill from one domain of work to another. … A comparable shift in recent decades has been from the skill of manufacturing computing machines (think IBM or Dell in their heydays) to that of creating improved instructions for computing machines’ the result has been a relative growth in programmers’ wages. The underlying process is the same. Improvements in technology will predictably reduce demand for the skills held by some workers, but they also will enhance the capabilities of other workers and shift the requirements of skill from one domain of work to the other.”

The problem with this is that the average person puts in 15-20 years of schooling (plus $$$) in order to become skilled at a job, only to suddenly have that job disappear due to accelerating technological change/improvement, and then some asshole one comes and tells them they should just “learn to code” spend another two to four years unemployed and paying for the privilege of learning another job and don’t see how fucking dispiriting this is to the already struggling.

The struggle for society is recognizing that even as standards of living may be generally rising, some people may absolutely be struggling with an economic system that offers much less certainty and stability than our ancestors enjoyed.

A final word from Auerswald:

… work divides or “bifurcates” as code advances in a predictable and repeatable way. The bifurcation of work in a critical mechanism by which the advance of code yields improvements in human well-being at the same time as it increases human reliance on code.

Book Club: The Code [Robot] Economy (pt. 2)

Welcome to EvX’s book club. Today we’re discussing Philip Auerswald’s The Code Economy, Introduction.

I’ve been discussing the robot economy for years (though not necessarily via the blog.) What happens when robots take over most of the productive jobs? Most humans were once involved in directly producing the necessities of human life–food, clothing, and shelter, but mostly food. Today, machines have eliminated most food and garment production jobs. One tractor easily plows many more acres in a day than a horse or mule team did in the 1800s, allowing one man to produce as much food as dozens (or hundreds) once did.

What happened to those ex-farmers? Most of us are employed in new professions that didn’t exist (eg, computer specialist) or barely existed (health care), but there are always those who can’t find employment–and unemployment isn’t evenly distributed.

Black unemployment rate

Since 1948, the overall employment rate has rarely exceeded 7.5%; the rate for whites has been slightly lower. By contrast, the black unemployment rate has rarely dipped below 10% (since 1972, the best data I have.) The black unemployment rate has only gone below 7.5 three times–for one month in 1999, one month in 2000, and since mid-2017. 6.6% in April, 2018 is the all-time low for black unemployment. (The white record, 3.0%, was set in the ’60s.)

(As Auerswald points out, “unemployment” was a virtually unknown concept in the Medieval economy, where social station automatically dictated most people’s jobs for life.)

Now I know the books are cooked and “unemployment” figures are kept artificially low by shunting many of the unemployed into the ranks of the officially “disabled,” who aren’t counted in the statistics, but no matter how you count the numbers, blacks struggle to find jobs at the same rates as whites–a problem they didn’t face in the pre-industrial, agricultural economy (though that economy caused suffering in its own way.)

A quick glance at measures of black and white educational attainment explains most of the employment gap–blacks graduate from school at lower rates, are less likely to earn a college degree, and overall have worse SAT/ACT scores. In an increasingly “post-industrial,” knowledge-based economy where most unskilled labor can be performed by robots, what happens to unskilled humans?

What happens when all of the McDonald’s employees have been replaced by robots and computers? When even the advice given by lawyers and accountants can be more cheaply delivered by an app on your smartphone? What if society, eventually, doesn’t need humans to perform most jobs?

Will most people simply be unemployed, ruled over by the robot-owning elite and the lucky few who program the robots? Will new forms of work we haven’t even begun to dream of emerge? Will we adopt some form of universal basic income, or descend into neo-feudalism? Will we have a permanent underclass of people with no hope of success in the current economy, either despairing at their inability to live successful lives or living slothfully off the efforts of others?

Here lies the crux of Auerswald’s thesis. He provides four possible arguments for how the “advance of code” (ie, the accumulation of technological knowledge and innovation,) could turn out for humans.

The Rifkin View:

  1. The power of code is growing at an exponential rate.
  2. Code nearly perfectly substitutes for human capabilities.
  3. Therefore the (relative) power of human capabilities is shrinking at an exponential rate.

If so, we should be deeply worried.

The Kurzweil View:

  1. The power of code is growing at an exponential rate.
  2. Code nearly perfectly complements human capabilities.
  3. Therefore the (absolute) power of human capabilities is growing at an exponential rate.

If so, we may look forward to the cyborg singularity

The Auerswald View:

  1. The power of code is growing at an exponential rate [at least we all agree on something.]
  2. Code only partially substitutes for human capabilities.
  3. Therefore the (relative) power of human capabilities is shrinking at an exponential rate in those categories of work that can be performed by computers, but not in others.

Auerswald notes:

In other words, where Kurzweil talks about an impeding code-induced Singularity, the reality looks much more like one code-induced bifurcation–the division of labor between humans and machines–after another.

The answer to the question, “Is there anything that humans can do better than digital computers?” turns out to be fairly simple: humans are better at being human.

Further:

1. Creating and improving code is a key part of what we human beings do. It’s how we invent the future by building on the past.

2. The evolution of the economy is driven by the advance of code. Understanding this advance is therefore fundamental to economics, and to much of human history.

3. When we create and advance code we don’t just invent new toys, we produce new forms of meaning, new experiences, and new ways of making our way in the world.

What do you think?

Time to Invest in Polish Real Estate?

DISCLAIMER: I am probably the last person you should listen to for advice about major investments. Please do lots and lots of your own research before buying anything big. Please take this post in the entertaining thought experiment style it is intended.

I’d like to start with an interesting story about Poland’s most famous daughter, Marie Curie, and her family:

1927 Solvay Conference. Marie is in the first row, between M. Planck and H. A. Lorentz

Marie was born in 1867 in what was then the Russian part of partitioned Poland. (Russia, Prussia, and Austria had carved up Poland into pieces back in the 1700s.) Her mother, father and grandfather were teachers–unsurprisingly, her father taught math and science. When the Russians decided to shut down science laboratories in Polish highschools, her father simply brought all of his equipment home and taught his kids how to use it instead.

Because of the Russian occupation and interference in the local schools, the Poles began operating their own, underground university known as the Flying University (there’s a name for you). As a woman, Marie couldn’t attend the official colleges in Warsaw, but was accepted to Flying U.

Marie’s sister wanted to study medicine in Paris, but unfortunately their parents and grandparents had lost all their money supporting Polish nationalist uprisings, and the girls were left to support themselves. So Marie and her sister had an agreement: Marie would work and send money to Paris while her sister studied, and then her sister would work and send Marie money while she finished her education.

Marie went to work as a governess for some distant relatives, and fell in love with one of the young men of the family, Kazimierz Żorawski, future mathematician. Unfortunately for the starry-eyed couple, his parents rejected the match on the grounds that Marie was penniless.

Żorawski went on to become a professor of mathematics at Krakow University and later Warsaw Polytecnic. Marie went to Paris, married Pierre Curie, won two Nobel prizes, and founded the Radium Institute at Warsaw Polytecnic. A statue of Marie was erected here, and as an old man, Żorawski would come and sit before the image of his young love.

You didn't seriously think we'd make it through this post without a polandball comic, did you?Poland has had a rough couple of centuries. According to Wikipedia:

An unsuccessful attempt at defending Poland’s sovereignty took place in 1794 during the Kościuszko Uprising, where a popular and distinguished general Tadeusz Kosciuszko, who had several years earlier served under Washington in the American Revolutionary War, led Polish insurrectionists against numerically superior Russian forces. Despite the victory at the Battle of Racławice, his ultimate defeat ended Poland’s independent existence for 123 years.[57]

Poland was unfortunately situated for both WWI and WWII, losing 1/5th of its population in the latter. The aftermath–occupation by the Soviets–wasn’t much better, as Ian Frazier recounts in his book, Travels in Siberia:

As Russia retook Poland, many Poles once again wound up in the gulag. Some who had lived through the Nazi occupation said Hitler was nothing compared to this, and they now wished they had fought on Hitler’s side. A prisoner who had survived Dachau hanged himself when he was shipped to Kolyma. Gulag prisoners who knew the novel Uncle Tom’s Cabin regretted that fate had put them in thsi time and place, and not in slavery in the American South, a hundred years before. As Negro slaves, they reasoned, at least they would have lived someplace warm, and would have been whipped and branded but not worked to death outright. In 1945, news reached the camps that the United States now possessed the atomic bomb. According to Solzhenitsyn, this unexpected development gave hope to many prisoners, who began to pray for atomic war.

But despite all of these troubles, Poland remains one of the world’s better countries–it’s ranked 36th out of 188 nations on the Human Development Index, and has an average IQ of 99, the same as its neighbors, Germany and Finland.

Despite this, Poland is ranked only 68th in per capita GDP ($27,700, lower than Puerto Rico, which isn’t even a country,) and has had a net negative migration rate (that is, more people have left than arrived) for most of the past 60 years. (Poland lost a net of almost 74,000 in 2015, most of them to other EU countries.)

In sum, Poland is a country with high human capital whose economy was probably artificially depressed by Communism, but has been steadily improving since 1990.

Net immigration increases the number of people in a country*, putting pressure on the local housing market and raising land prices. Net emigration decreases pressure on housing, leading to lower prices.

*Assuming, of course, that fertility rates are not collapsing. Poland’s fertility rate is slightly lower than Japan’s.

Poles have emigrated to countries like Germany and the UK because of their stronger economies, but if Poland’s economy continues to improve relative to the rest of Europe, Brexit goes forward, etc., Poland may become a more attractive employment destination, attracting back its migrant diaspora.

All of which leads me to suspect that Polish land is probably undervalued relative to places with similar long-term potential.

 

The Activation Energy of Economic Activity

Both Bourgois’s In Search of Respect: Selling Crack in El Bario and Joel Salatin’s Everything I Want to do is Illegal: War Stories from the Local Food Front discuss legal difficulties faced by small-scale entrepreneurs (albeit in very different situations.)

One of the crack dealers in Bourgois’s ethnography has amassed a small fortune (for the ghetto, at least,) and wants to “go honest.” So he uses his money to open a convenience store, but gets shut down by the authorities (state or local, I don’t recall which,) because his bathroom isn’t disabled-accessible. So he went back to selling crack.

Salatin also complains about ADA compliance, particularly in the matter of parking lots (if he pours a few concrete spaces in his yard so customers can park at his farm and buy a few chickens, does he need to make a handicapped spot?) and bathrooms.

Now that I think of it, back at one of my former jobs, we had a changing room that was officially a “supply closet” because it wasn’t large enough to meet ADA standards. (Obviously I was not in charge of this business and had no control over the closet.)

Salatin’s principle complains, though, focused on food-regulation laws–What counts as organic? What is an approved butchering facility? What if you are only butchering five chickens and want to sell them to your neighbors? What, exactly, is “organic”?

The amount of paperwork and legal compliance required to add a few organic potatoes or locally slaughtered chickens to such an operation are enormous.

According to Wikipedia:

In chemistry, activation energy is a term introduced in 1889 by the Swedish scientist Svante Arrhenius to describe the minimum energy which must be available to a chemical system with potential reactants to result in a chemical reaction.[1] Activation energy may also be defined as the minimum energy required to start a chemical reaction.

360px-activation_energy-svgSome chemical reactions basically happen instantly, like if you throw sodium into water (NOTE: Don’t throw sodium into water. It will explode.) Others, like starting a fire in your fireplace, require the input of some amount of energy to get the reaction going. (Typically we supply this energy by hand, by striking matches, rubbing sticks together, or striking flint on steel.)

We can also think of activation energy in economic terms as the inputs necessary to start a business. Beyond the obvious physical requirements–if you want to produce shoes, you will need material for making shoes–we also have legal requirements. You cannot simply bake a bunch of cookies at home, walk outside, and start selling them. There are some serious food safety laws on the subject.

Now to be clear, I value clean water, food, and medicines. I appreciate that my doctors are skilled. I don’t want to end up with brain-damage just because a local entrepreneur decided it was a good idea to dump old batteries into the drinking water, and I understand that disabled people need to pee just as much as everyone else.

But at the same time, we need to make sure we are not putting in so much regulation that small-scale entrepreneurs are effectively shut out of the market, because the costs of compliance either make the economic activity completely unprofitable, or are just too high for someone trying to start a business to bear.

(Large, already-established corporations, by contrast, tend to be less impacted by such regulations both because they hire armies of lobbyists to ensure that regulatory legislation favors them and also because their profits are high enough that they have money to spare for compliance. Still, they, too, are probably impacted in significant ways.)

Cost Disease and the Alt-Right

As I mentioned yesterday, among many important things, Scott’s post on Cost Disease explains (IMO) the rise of the Alt-Right (VERY broadly defined) and Trump’s victory in a way that I don’t think any mainstream publication can. (Not explicitly, mind.)

“Cost disease” is Scott’s (and others’) term for “things getting more expensive without any increase in quality or quantity.”

Over the past 40 years or so, some of the most expensive–and important–things in life like housing, education, health care, and infrastructure have doubled, tripled, or dectupled in price with very little improvement to show for it (except maybe in healthcare, where we are in fact living longer.)

Getting less bang for your buck is downright frustrating.

Now let’s suppose you’re an American conservative of some stripe. Maybe you think abortion is immoral. It’s been about 40 years since Roe V. Wade, and abortion is still legal. Maybe you’re opposed to gay marriage. Sorry, that horse has left the closet. Did you hope to bring democracy and freedom to the people of Iraq? Yeah… Good luck with that.

picture-5ba Maybe you’d just like to live in a community full of people who share your religious beliefs and cultural norms, like the average person actually did back in 1950 and before. Well, demographics have not been on your side for a long time–not only have whites gone from about 88% of the country to <50% of babies and thus soon a minority overall, but the whole country is becoming increasingly atheistic.

 

picture-28

screenshot-2016-12-08-16-48-331Or perhaps you’d just like to get an entry-level job without going 100k into debt and having your entire paycheck cleaned out by health insurance and rent, in which case you and Scott are on the same page.

So what, exactly, have Republicans been “conserving” all this time? Tax cuts for the wealthy? Hell, they didn’t even succeed at building a democracy in Iraq, and they spent trillions of dollars on it! And that’s our money, not theirs! They killed a bunch of people in the process, too.

Looking back, the two biggest Republican victories (that I can see) in my life time have been “getting tough on crime” and overseeing the Fall of the Soviet Union. That one was basically a coincidence, rather than the results of any specific Reagan/Bush I policies, but they do generally get credit for the Tough on Crime business. Note that this is all stuff that happened in the 80s and early 90s; for the past 20 years

And come this election (2016,) who were they running? JEB BUSH. Yes, little brother of the last Bush. You might as well make his campaign slogan “Just like last time, but with more Mexicans!”

Disclaimer: I understand wanting the Mexican vote. I understand wanting to appeal to Hispanics. They live here, they’re a huge voting block, (most of them are great people,) and I hear they’re not really down with the whole SJW agenda thingie.

But do you know the problem with Bush II?

It was pouring our money into a black hole in Iraq, inflating housing prices, and then crashing the economy. It was the general progression of every single thing outlined above that has made life harder for everyday Americans.

Maybe I’m missing some finer details here, but “not enough Mexicans” was not even remotely on the list of complaints.

The folk running the Republican Party had their heads so far up their asses they thought they could just play demographic games (“It works for the Democrats!”) without offering a plan to actually CONSERVE anything.

Okay, I am pissed that these incompetents have any role in our politics.

I stole this graph from Steve Sailer
I stole this graph from Steve Sailer

I’ve noticed that people tend to be liberal when they’re young and become more conservative as they age, essentially locking in the liberalism of their college years but then erecting barriers against the liberalism of college students a decade younger than themselves. While this is natural and probably sensible in many ways, it leads to certain inconsistencies, like people who champion “women’s lib” but criticize “feminism.” Um. So many of the older conservatives I know basically just want to return to sometime in the late 70s/early 80s–you know, the cusp of the AIDs epidemic, the crack wars, rising crime turning America’s cities into burnt-out shells, etc. Great times!

Some people try to correct for this by invoking their grandarents’ or great-grandparents’ time–as though anyone were actually eager to re-live WW2 and the Great Depression. I don’t know about you, but I hear those times were pretty awful. And if we go back further than that, we start hitting things like “Massive epidemics kill millions of people.”

Simply trying to rewind the clock to some earlier year doesn’t solve today’s problems, but I understand the urge to conserve the things you value and love about your own society, childhood, culture, etc.–and the Neocons/Mainstream Republicans have failed miserably at that.

Trump’s message–and the “alt-right,” broadly–has focused on Law and Order; safety (from Terrorism;) jobs (“it’s the economy, stupid;) Cost Disease (“repeal two regulations for every new one” and “repeal Obamacare;”) and the general preservation of Americans as a people/culture (by limiting immigration, especially from groups that didn’t contribute to America’s founding stock.)

Meanwhile, mainstream Republicans are still kicking and screaming that what the country really needs is more Bush II policies.

Entropy, Life, and Welfare (pt. 3/3)

Communism works so well, soldiers had to push Fidel Castro's hearse because the Cuban government couldn't find a working truck
Communism works so well, soldiers had to push Fidel Castro’s hearse because the Cuban government couldn’t find a working truck

This is Part Three of a series on how incentives affect the distribution of energy/resources throughout a society and the destructive effects of social systems like communism. (Part One and Part Two are here)

But before we criticize these programs too much, let’s understand where they came from:

The Industrial Revolution, which began around 1760 in Britain, created mass economic and social dislocation as millions of workers were forced off their farms and flooded into the cities.

Communism: the world's single biggest source of murder in the 20th century
Communism: the world’s single biggest source of murder in the 20th century

The booms and busts of the unregulated (and regulated) industrial economy caused sudden, unpredictable unemployment and, without a social safety net of some kind, starvation. This suffering unleashed Marxism, which soon transformed into an anti-capitalist, anti-Western ideology and tore across the planet, demolishing regimes and killing millions of people.

Reason.com attributes 94 million deaths to communism. The Black Book of Communism places the total between 85 and 100 million people. Historian on the Warpath totals almost 150 million people killed or murdered by communist governments, not including war deaths. (Wikipedia estimates that WWII killed, between battle deaths in Europe and the Pacific, disease, starvation, and genocide, 50-80 million people–and there were communists involved in WWII, also.)

cdchqnbumaaj5sjThe US and Europe, while not explicitly communist, have adopted many of socialism’s suggestions: Social Security, Welfare, Medicaid, etc., many in direct response to the Great Depression.

These solutions are, at best, a stop-gap measures to deal with the massive changes new technologies are still causing. Remember, humans were hunter-gatherers for 190,000 years. We had a long time to get used to being hunter gatherers. 10,000 years ago, a few of us started farming, and developed whole new cultures. A mere 200 years ago, the Industrial Revolution began spreading through Europe. Today, the “post industrial information economy” (or “robot economy,” as I call it,) is upon us, and we have barely even begun to adapt.

We are in an age that is–out of our 200,000 years of existence–entirely novel and the speed of change is increasing. We have not yet figured out how to cope, how to structure society for the long-term so that we don’t accidentally break it.

We have gotten very good, however, at creative accounting to make it look like we are producing more than we are.

ceumwjhviaiaquiBy the mid-1950s, the Industrial Revolution had brought levels of prosperity never before seen in human history to the US (and soon to Europe, Japan, Korea, etc.) But since the ’70s, things seem to have gone off-track.

People fault outsourcing and trade for the death of the great American job market, but technical progress and automation also deserve much of the blame. As the Daily Caller reports:

McDonald’s has announced plans to roll out automated kiosks and mobile pay options at all of its U.S. locations, raising questions about the future of its 1.5 million employees in the country and around the globe.

Roughly 500 restaurants in Florida, New York and California now have the automated ordering stations, and restaurants in Chicago, Boston, San Francisco, Seattle and Washington, D.C., will be outfitted in 2017, according to CNNMoney.

The locations that are seeing the first automated kiosks closely correlate with the fight for a $15 minimum wage. Gov. Andrew Cuomo signed into law a new $15 minimum wage for New York state in 2016, and the University of California has proposed to pay its low-wage employees $15.

There is an obvious trade-off between robots and employees: where wages are low enough, there is little incentive to invest capital in developing and purchasing robots. Where wages are high, there is more incentive to build robots.

labor_forceThe Robot Economy will continue to replace low-skilled, low-wage jobs blue collar workers and young people used to do. No longer will teenagers get summer jobs at McDonald’s. Many if not most of these workers are simply extraneous in the modern economy and cannot be “retrained” to do more information-dependent work. The expansion of the Welfare State, education (also paid for with tax dollars,) and make-work administrative positions can keep these displaced workers fed and maybe even “employed” for the foreseeable future, but they are not a long-term solution, and it is obvious that people in such degraded positions, unable to work, often lose the will to keep going.

picture-30But people do not appreciate the recommendation that they should just fuck off and die already. That’s how you get communist revolutions in the first place.

Mass immigration of unskilled labor into a market already shrinking due to automation / technological progress is a terrible idea. This is Basic Econ 101: Supply and Demand. If the supply of labor keeps increasing while the demand for labor keeps decreasing, the cost of labor (wages) will plummet. Likewise, corporations quite explicitly state that they want immigrants–including illegal ones–because they can pay them less.

In an economy with more demand than supply for labor, labor can organize (unions) and advocate in behalf of its common interests, demanding a higher share of profits, health insurance, pensions, cigarette breaks, etc. When the supply of labor outstrips demand, labor cannot advocate on its own behalf, because any uppity worker can simply be replaced by some desperate, unemployed person willing to work for less and not make a fuss.

gr2009012802033Note two professions in the US that are essentially protected by union-like organizations: doctors and lawyers. Both professions require years of expensive training at exclusive schools and high scores on difficult tests. Lawyers must also be members of their local Bar Associations, and doctors must endure residency. These requirements keep out the majority of people who would like to join these professions, and ensure high salaries for most who do.

While Residency sounds abjectly awful, the situation for doctors in Britain and Ireland sounds much worse. Slate Star Codex goes into great detail about the problems:

Many of the junior doctors I worked with in Ireland were working a hundred hours a week. It’s hard to describe what working 100 hours a week is like. Saying “it means you work from 7 AM to 9 PM every day including weekends” doesn’t really cut it. Imagine the hobbies you enjoy and the people you love. Now imagine you can’t spend time on any of them, because you are being yelled at as people die all around you for fourteen hours a day, and when you get home you have just enough time to eat dinner, brush your teeth, possibly pay a bill or two, and curl up in a ball before you have to go do it all again, and your next day off is in two weeks.

And this is the best case scenario, where everything is spaced out nice and even. The junior doctors I knew frequently worked thirty-six hour shifts at a time (the European Court of Human Rights has since declined to fine Ireland for this illegal practice). …

The psychological consequences are predictable: after one year, 55% of junior doctors describe themselves as burned out, 30% meet criteria for moderate depression, and 12% report considering suicide.

A lot of American junior doctors are able to bear this by reminding themselves that it’s only temporary. The worst part, internship, is only one year; junior doctorness as a whole only lasts three or four. After that you become a full doctor and a free agent – probably still pretty stressed, but at least making a lot of money and enjoying a modicum of control over your life.

In Britain, this consolation is denied most junior doctors. Everyone works for the government, and the government has a strict hierarchy of ranks, only the top of which – “consultant” – has anything like the freedom and salary that most American doctors enjoy. It can take ten to twenty years for junior doctors in Britain to become consultants, and some never do.

I don’t know about you, but I really don’t want my doctor to be suicidal.

Now, you may notice that Scott doesn’t live in Ireland anymore, and similarly, many British doctors to take their credentials and move abroad as quickly as possible. The British medical system would be forced to reform if not for the influx of foreign doctors willing to put up with hell in exchange for not living in the third world.

From the outside, many of these systems, from underfunded pensions to British medicine, look just fine. Indeed, an underfunded pension will operate just fine until the day it runs out of money. Until that day, everyone who clams the pension is in deep trouble looks like Chicken Little, running around claiming that the sky is falling.

There’s a saying in finance: The market can stay irrational longer than you can stay solvent.

BTW, the entire state of California is in deep trouble, from budget problems to insane property tax laws. They already consume far more water than they receive, (and are set for massive forest fires,) but vote for increased population via immigration with Mexico. California’s economy is being propped up by–among other things–masses of cash flowing into Silicon Valley. This is Dot.Com Bubble 2.0, and like the first, it will pop–the only question is when. As Reuters reported last February:

LinkedIn Corp’s (LNKD.N) shares closed down 43.6 percent on Friday, wiping out nearly $11 billion of market value, after the social network for professionals shocked Wall Street with a revenue forecast that fell far short of expectations. …

As of Thursday, LinkedIn shares were trading at 50 times forward 12-month earnings, making it one of the most expensive stocks in the tech sector.

Twitter Inc (TWTR.N) trades at 29.5 times forward earnings, Facebook Inc (FB.O) at 33.8 times and Alphabet Inc (GOOGL.O) at 20.9 times.

Even after the selloff, LinkedIn’s shares may still be overvalued, according to Thomson Reuters StarMine data.

LinkedIn should be trading at $71.79, a 30 percent discount to the stock’s Friday’s low, according to StarMine’s Intrinsic Valuation model, which takes analysts’ five-year estimates and models the growth trajectory over a longer period.

Linked in has since been bought out by Microsoft for $26 billion. As Fortune notes, this is absolutely insane, as there is no way Microsoft can make back that much money off of LinkedIn:

Source Fortune http://fortune.com/2016/06/13/microsoft-linkedin-overpaid/
Source Fortune

“Ebitda” stands for Earnings Before Interest, Tax, Depreciation and Amortisation. There is absolutely no way that LinkedIn, a social network that barely turns a profit, is worth more than Sun, EMC, Compaq, and Time Warner.

Shares normally trade around 20x a company’s previous year’s earnings, though right now the S & P’s P/E ratio is around 25. In 2016, LinkedIn’s P/E ratio has been around 180. (Even crazier, their ratio in 2015 was -1,220, because they lost money.)

Ever wonder where all of that money from QE is going? It’s turning into Ferraris cruising around San Francisco, and LinkedIn is not the only offender.

But these companies will not maintain fantasy valuations forever.

(While we’re at it: Why the AOL-Time Warner Merger Went so Wrong:

When the deal was announced on Jan. 10, 2000, Stephen M. Case, a co-founder of AOL, said, “This is a historic moment in which new media has truly come of age.” His counterpart at Time Warner, the philosopher chief executive Gerald M. Levin, who was fond of quoting the Bible and Camus, said the Internet had begun to “create unprecedented and instantaneous access to every form of media and to unleash immense possibilities for economic growth, human understanding and creative expression.”

The trail of despair in subsequent years included countless job losses, the decimation of retirement accounts, investigations by the Securities and Exchange Commission and the Justice Department, and countless executive upheavals. Today, the combined values of the companies, which have been separated, is about one-seventh of their worth on the day of the merger.)

So, that was a bit of a long diversion into the sheer artificiality of much of our economy, and how sooner or later, the Piper must be paid.

picture-5bWhen I try to talk to liberal friends about the problems of increasing automation and immigration on the incomes of the American working class, their response is that “We just need more regulation.”

In this cheerful fantasy, we can help my friend who cannot afford health insurance by requiring his employer to provide health insurance–when in reality, my friend now cannot find a job that lasts for more than a month because employers just fire him before the health insurance requirement kicks in. In fantasy land, you can protect poor people by making it harder for landlords to evict them, but in the real world, this makes it even harder for the poorest to get long-term housing because no landlord wants to take the chance of getting stuck with them. In fantasy land, immigration doesn’t hurt wages because you can just legislate a higher minimum wage, but the idea that you can legislate a wage that the market does not support is an absurdity worthy only of the USSR. In the real world, your job gets replaced with a robot.

picture-4bThis is not to say that we can’t have some form of welfare or social safety net to deal with the dislocations and difficulties of our new economy. Indeed, some form of social welfare may, in the long run, make the economic system more robust by allowing people to change jobs or weather temporary unemployment without dying. Nor does it mean that any inefficiency is going to break the system. But long-term, using legislation to create a problem and then using more legislation to prevent the market from correcting it increases inefficiency, and you are now spending resources to enforce both laws.

Just like Enron’s “creative accounting,” you cannot keep hiding losses indefinitely.

You can have open-borders capitalism with minimal welfare, in which the most skilled thrive and survive and the least skilled die out. This is more-or-less the system in Singapore (see here for a discussion of how they use personal savings accounts instead of most welfare; a discussion of poverty in Singapore; and Singapore’s migration policies.)

Or you can have a Japanese or Swedish-style welfare state, but no open borders, (because the system will collapse if you let in just anyone who wants free money [hint: everyone.])

But you cannot just smash two different systems together, heap more laws on top of them to try to prevent the market from responding, and expect it to carry on indefinitely producing the same levels of wealth and well-being as it always has.

The laws of thermodynamics are against you.

(Return to Part One and Part Two.)

Entropy, Life, and Welfare (pt 2)

images(This is Part 2. Part 1 and Part 3 are here.)

Complex systems, because they must be homeostatic to exist at all, can absorb and disguise the symptoms of a great deal of internal stress.

The collapse of the Soviet Union remains one of the great mysteries of Political Science, not because it happened (that is easy enough to understand,) but because Political Scientists did not predict it.

The big problem with planned economies is that their incentive structures make self-correction almost impossible. For example, when the law allowed Soviet officials to confiscate unlimited quantities of grain in 1932, about 7 million people died. The people who could see the famine happening were not the ones with the power to change tax laws nor the incentives pressuring officials to confiscate so much grain in the first place. As Wikipedia relates:

Alexander Wienberger, Holodomor
Alexander Wienberger, Holodomor

From the 1932 harvest, Soviet authorities were able to procure only 4.3 million tons as compared with 7.2 million tons obtained from the 1931 harvest.[49] Rations in town were drastically cut back, and in the winter of 1932–33 and spring of 1933 people in many urban areas were starved.[50] The urban workers were supplied by a rationing system (and therefore could occasionally assist their starving relatives of the countryside), but rations were gradually cut; and by the spring of 1933, the urban residents also faced starvation. At the same time, workers were shown agitprop movies, where all peasants were portrayed as counterrevolutionaries hiding grain and potatoes at a time when workers, who were constructing the “bright future” of socialism, were starving.[51]

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Excuse me. I need a moment.

Say what you will for libertarianism, it has at least the basic ingredients for a self-correcting system. A farmer, left to his own devices, will not sell so much of his own grain that he starves. A factory owner will not order incorrect parts for his own factory because his profits would suffer. But in a planned economy, the person doing the ordering or deciding how much grain to sell does not personally benefit (or suffer) from these transactions, and so has no interest in their efficiency. Their incentives are totally different–they have a boss higher up in the party to please; they are required to increase the efficiency of Sector G; they are supposed to hire more people people from underrepresented groups; etc.

As Wikipedia notes:

Most information in the Soviet economy flowed from the top down. There were several mechanisms in place for producers and consumers to provide input and information that would help in the drafting of economic plans (as detailed below), but the political climate was such that few people ever provided negative input or criticism of the plan. Thus, Soviet planners had very little reliable feedback that they could use to determine the success of their plans. This meant that economic planning was often done based on faulty or outdated information, particularly in sectors with large numbers of consumers. As a result, some goods tended to be underproduced, leading to shortages, while other goods were overproduced and accumulated in storage. Low-level managers often did not report such problems to their superiors, relying instead on each other for support. Some factories developed a system of barter and either exchanged or shared raw materials and parts without the knowledge of the authorities and outside the parameters of the economic plan. …

The cumbersome procedures for bureaucratic administration foreclosed the free communication and flexible response required at the enterprise level for dealing with worker alienation, innovation, customers, and suppliers. During 1975–85, corruption and data fiddling became common practice among bureaucracy to report satisfied targets and quotas thus entrenching the crisis.

cw3bumxusaavkjbCastellano writes in Causes of the Soviet Collapse:

Around 1975, the Soviet Union entered a period of economic stagnation from which it would never emerge. Increasingly, the USSR looked to Europe, primarily West Germany, to provide hard currency financing through massive loans, while the U.S. became a major supplier of grain.[1] Despite moments of anti-Communist grandstanding, the Americans and Western Europeans maintained trade relations with the cash-strapped Soviet Union, which dipped into its Stalin-era gold reserves to increase availability of consumer goods.

Foreign trade and mild economic reforms were not enough to overcome the inefficiencies of the Soviet command economy, which remained technologically backward and full of corruption. Economic planners were frequently unable to diagnose and remedy problems, since they were given false reports by officials who only pretended to be productive. Soviet living standards remained poor by Western standards. By 1980, only 9 percent of Soviets had automobiles, which was actually a vast improvement under Brezhnev.

Back to Wikipedia:

One of the greatest strengths of Soviet economy was its vast supplies of oil and gas; world oil prices quadrupled in the 1973-74, and rose again in 1979-1981, making the energy sector the chief driver of the Soviet economy, and was used to cover multiple weaknesses. During this period, USSR had the lowest per-capita incomes among the other socialist countries.[49] At one point, Soviet Premier Alexei Kosygin told the head of oil and gas production, “things are bad with bread. Give me 3 million tons [of oil] over the plan.” [50] Former prime minister Yegor Gaidar, an economist looking back three decades, in 2007 wrote:

The hard currency from oil exports stopped the growing food supply crisis, increased the import of equipment and consumer goods, ensured a financial base for the arms race and the achievement of nuclear parity with the United States, and permitted the realization of such risky foreign-policy actions as the war in Afghanistan.[51]

Awareness of the growing crisis arose initially within the KGB which with its extensive network of informants in every region and institution had its finger on the pulse of the nation. Yuri Andropov, director of the KGB, created a secret department during the 1970s within the KGB devoted to economic analysis, and when he succeeded Brezhnev in 1982 sounded the alarm forcefully to the Soviet leadership. Andropov’s remedy of increased discipline, however, proved ineffective. It was only when Andropov’s protege Gorbachev assumed power that a determined, but ultimately unsuccessful, assault on the economic crisis was undertaken.[52]

And back to Castellano:

 By 1988, private ownership was permitted in certain manufacturing industries. Ironically, these reforms actually caused the Soviet economy to deteriorate further, as unprofitable private enterprises were now subsidized by the state, and the lack of state oversight of supply lines resulted in shortages of food and clothing, which were unknown even under Brezhnev.[8]

By the mid-1980s, the Warsaw Pact satellites had ceased to be an economic asset to the Soviet Union, and in fact Gorbachev’s withdrawal had been motivated in part by economic considerations. There was no longer a real danger of war with Western Europe, so the bloc had lost its strategic significance as well.

People atop the Berlin Wall near the Brandenburg Gate on November 9, 1989.
People atop the Berlin Wall near the Brandenburg Gate on November 9, 1989.

You know how this story ends. The Wall comes down, communism crumbles in all but Cuba and North Korea, and Russia is further assaulted by “shock therapy,” which it is in no position to cope with.

And yet, even in the months just before the Wall fell, no one predicted that it was about to happen. It was very easy to see, from an economic position, that the USSR couldn’t just keep limping on–even the KGB knew that. But “Communism is broken” is information we’d had for six decades already, and the USSR looked like it was in no hurry to finally go ahead and kick the bucket.

Socialism fails because it prevents economic feedback from directing the flow of resources to the places where they’re needed, but even a terrible system like the USSR’s can keep limping along like it’s going to last forever right until the day it falls.

There are reports now coming out of socialist Venezuela of people eating pets, rats, and worse, each other (I am not quoting the cannibalism article, you can read it yourself. This is from the one about eating cats, dogs, and garbage):

Ramón Muchacho, Mayor of Chacao in Caracas, said the streets of the capital of Venezuela are filled with people killing animals for food.

Through Twitter, Muchacho reported that in Venezuela, it is a “painful reality” that people “hunt cats, dogs and pigeons” to ease their hunger. … People are also reportedly gathering vegetables from the ground and trash to eat as well. … The week before, various regions of the country saw widespread looting of shopping malls, pharmacies, supermarkets and food trucks, all while people chanted “we are hungry.”

Meanwhile, Venezuela’s currency has become so worthless, shopkeepers are weighing piles of notes instead of counting them.

Command economies just don’t work very well.

cw1htkluuaatpa7We Americans have our own reasons why we should be concerned, from the death of manufacturing to the increasing national debt. The Federal Budget is about 20% of total GDP. The government periodically threatens to default on its debts while funding wars against non-enemies like Iraq. Obligations like pensions and Social Security are often ridiculously under-funded (to the tune of billions of dollars that investments simply haven’t produced) or depend on infinite population growth–which, of course, no nation can ever maintain. As CNBC reports:

Weak investment performance and insufficient contributions will cause total unfunded liabilities for U.S. state public pensions to balloon by 40 percent to $1.75 trillion through fiscal 2017, Moody’s Investors Service said in a report on Thursday. …

It has been a tough year for the funds, which earned a median 0.52 percent on investments in fiscal 2016 versus their average assumed return rate of 7.5 percent, Moody’s said.

Assumptions. The sheer gall of it is flabbergasting.

Steve Bannon gave this rather insightful speech about our deteriorating economic situation several years ago:

(But you know, underwear is racist so let’s ignore the economy…)

To be continued: Return to  Part 1 or continue to Part 3.)