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The employment data above are from Randall Parker (seasonally adjusted for what it’s worth), and originally the Labor Department. Randall had it as a tabular display, but I think a simple bar plot is more illustrative. The percentage of unmarried births is from the Census.

It looks like Americans with university degrees or higher are basically at full employment. Additionally, the substantial majority of Americans with university degrees or higher are in the labor force. In contrast, only a minority of Americans without high school diplomas, and only a simple majority of Americans with high school diplomas, are in the labor force.

Labor force participation is pretty straightforward. If you are looking for a job, or have a job, you are part of the labor force. Everyone else is part of the whole population (e.g., those who are homemakers, etc.).

FT_15.12.4.college.marriage2 As for births to unmarried women, those with university degrees basically live in a different universe. I didn’t want to clutter the above chart anymore, so I didn’t mention divorce. But you can see from the data to the left that college educated Americans tend to have very long marriages. In contrast, when the non-college do get married, divorce is rather common.

I’m pretty bullish on America, and the world. But that’s easy for me to say, since I am the sort of person who has more work than time, and my work is very fulfilling. Also, I’m married, with beautiful healthy children. I’m a lucky person, and the world seems charmed. It’s simply not in my interest to rock the boat.

But for those for whom only desperation stretches out before them, desperate acts can seem quite rational. Those with nothing to lose have nothing to lose.

 
• Category: Economics, Ideology • Tags: Class 
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9781400067930 Though Nassim Taleb is more well known for The Black Swan, I actually liked his earlier book Fooled by Randomness, better. It seemed aimed toward more general issues than The Black Swan.

One of Taleb’s hobby-horses in Fooled by Randomness is that the book The Millionaire Next Door was based on faulty inferences, and misleading many people. This was back in the heady days before the property bust, so many middle class individuals were investing in the “can’t miss” and eternally appreciating real estate bubble. In any case, The Millionaire Next Door had a simple strategy: observe the characteristics of millionaires, and so gain insight into what might make you a millionaire. The problem pointed out by Taleb is that the sample set is highly biased; you see all the millionaires with the characteristics of interest, but not the more numerous non-millionaires. One of the major variables, perhaps the major variable, in becoming a millionaire is what we’d all luck. There may be many necessary conditions, but luck is one we can’t cultivate. One might increase the chance that one is a millionaire…but The Millionaire Next Door misled many people into thinking that just by doing what millionaires had done any person could become on themselves.

So consider this from The Wall Street Journal, Best-Paid CEOs Run Some of Worst-Performing Companies:

The analysis, from corporate-governance research firm MSCI, examined the pay of some 800 CEOs at 429 large and midsize U.S. companies during the decade ending in 2014, and also looked at the total shareholder return of the companies during the same period.

MSCI found that $100 invested in the 20% of companies with the highest-paid CEOs would have grown to $265 over 10 years. The same amount invested in the companies with the lowest-paid CEOs would have grown to $367. The report is expected to be released as early as Monday.

The original report is also online. There are other studies which support this conclusion. The correlation between CEO pay and firm performance is relatively weak to non-existent.

Does this mean CEOs are worthless? Not necessarily. There’s some range constriction going on. The average person on the street wouldn’t have the minimum necessary skills and aptitudes to be a CEO of a large firm. But the variation among CEOs in pay might be due to a whole different set of skills than the characteristics which constrain the set of individuals who might become CEOs. For example, the average CEO might be far more conscientious and intelligent than the average person. But, it may be that the less conscientious CEOs actually get paid more. And then of course there is luck in falling into a good board situation, which anchors you to a particular set point in terms of future salary expectations. And the outcome of a firm may have only the most marginal relationship to the CEO performance (consider how we attribute macroeconomic performance to American presidents, when they probably have only marginal influence on the business cycle).

And once you make it into a particular class, social connections can help prevent you from sliding back down. To a great extent the same of Yahoo to Verizon is a failure for Marissa Mayer. But she’ll be fine, and obtain another CEO position if she so chooses. If she had turned around Yahoo, always a long shot, she would have been dubbed a genius. As it is, she’ll get a golden parachute and look to future opportunities.

What’s the take-home less? Social mobility is a thing in the United States. But the reality is that what you really need to do is somehow make it into a particular segment of the class structure. Once you are there, the reality is that your own competence probably matters less than chance and necessity. Even if you don’t become a superstar, the nature of the American class structure will probably make it so you’ll be shielded from the bracing consequences of creative destruction.

 
• Category: Economics • Tags: Economics 
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33AlyFT
In the comments below it seems that most people don’t know about the existence of Eurostat, and the NUTS2 and NUTS3 maps which they generate. They’re really great, insofar as they give you a fine-grained picture of variation within Europe. Sometimes you see how national boundaries matter a great deal…and in other ways how they don’t.

Above you see a NUTS3 map of purchasing power in relation to the European median. A few things that are salient.

1) France and the United Kingdom exhibit a great deal of wealth concentration around their capital cities.

2) The geographically fragmented and culturally diverse zone from the Low Countries down to Italy’s Po River Valley is seems to be characterized by a large number of economically vibrant cities/regions. The only common variable that I’ve ever been able to point to for this area is that they were under Habsburg hegemony for a very long time.

3) There are zones of poorer nations, such as Spain, which are wealthier than most regions of wealthier regions (e.g., Catalonia is more prosperous than the north of England or rural France across the border).

4) A few of the cities of Eastern Europe seem to be diverging from their host nations.

Below are screenshots of maps I generated from Eurostat, submitted for your comment (remember, don’t be stupid).

Screenshot 2016-05-17 22.41.22

Screenshot 2016-05-17 22.43.58

Screenshot 2016-05-17 22.45.08

Screenshot 2016-05-17 22.46.07Screenshot 2016-05-17 22.46.40Screenshot 2016-05-17 22.47.30Screenshot 2016-05-17 22.48.02Screenshot 2016-05-17 22.48.38Screenshot 2016-05-17 22.49.05Screenshot 2016-05-17 22.49.30Screenshot 2016-05-17 22.49.58Screenshot 2016-05-17 22.50.23Screenshot 2016-05-17 22.50.58

 
• Category: Economics, Foreign Policy • Tags: Geography 
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Japan orange, Taiwan navy South Korea green, China light blue

Update: On Twitter it came to my attention that some think that this post is about growth Actually, my point is that the Communist period, and Mao’s period of domination, with the Great Leap Forward and the Cultural Revolution, probably are huge decrements to utility over the 20th century which the Chinese are now just compensating for. I think a KMT China, even if it unified less quickly and thoroughly than China, would probably have resulted in a far more prosperous China far earlier than in our “timeline.” Perhaps not as prosperous as South Korea, and definitely not Japan, but still quite prosperous over the past three generations in comparison to Communist China when state socialism was the dominant motor of the economy. Ergo, look not at the growth itself as opposed to the “area under the curve” from 1950 on.

The_Black_Book_of_Communism_(front_cover) Organized international Communism was responsible for on the order of tens of millions of deaths in a direct and concerted fashion, conservatively estimated. It also resulted in decades of repression for those who lived under it, but did not die under it. It fell with the Soviet Union, and today post-Communist (e.g., Russia) and quasi-Communist (e.g., China) nations are trying to move on beyond what was by and large a failed experiment in social engineering, with the failure resulting in massive levels of mortality and reduced life satisfaction on the part of those who lived under Communist regimes.

But can we move on? I have noted before that over the past generation in the aggregate Chinese economic development has resulted in the greatest reduction in poverty in the history of the world. With the economic crisis which is starting to afflict China, in all likelihood a deceleration from the very rapid growth phase induced by increased labor and capital inputs is upon us, and people are wondering about the long term trajectory of the nation. The problem is that China may grow old before it grows rich. The Chinese total labor force already peaked a few years ago. Over the next few decades its dependency ratio will shift in a direction similar to Japan’s. I am hopeful that the Chinese can meet their demographic challenges, and there are those who are optimistic. But we really don’t know.

And yet it has been brought to my attention that one could argue the Communist period in China is the cause of our current predicament. Compare the wealth trajectories of South Korea and Taiwan to the People’s Republic of China. It may be that for various reasons (e.g., Japanese investments in Korea and Taiwan, as well as differences between China’s Han population and the Fujianese preponderant in Taiwan) China under a non-communist regime would never have been as wealthy as South Korea or Taiwan are today. But does anyone doubt that China would be wealthier far earlier without the convulsions of the Great Leap Forward, Cultural Revolution, and grinding poverty of the 1970s? A billion people experienced deprivation due to the miscalculations of elite intellectuals in the mid-20th century, when Communism fused with nationalism was on the march. That’s behind us. But the late economic start for China is something we continue to live with today. We might have avoided this problem of China growing old before it grows rich, if it had a 30 year head start toward entrance into the modern economy. The world might have been a very different place…. (in fact, a best case scenario is that a dynamic China would have prodded India’s Permit Raj to liberalize earlier than the 1990s).

 
• Category: Economics, Foreign Policy • Tags: Economics 
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As you can see from the Tweet above some people are trying to score political points about off Sundar Pichai being tapped to lead Google. I joked in response that these CEOs “sure don’t look like America.” Excessive focus on whom/whom issues inevitably gets knotty and difficult to navigate. I don’t personally care who makes good products as long as the products are good. But reading a Time magazine piece, Everything You Need to Know About the New CEO of Google, made me reconsider an assumption I’d had. The article ends: “He’ll join Microsoft chief Satya Nadella as one of the few minority CEOs in Silicon Valley.” This is a pretty strong assertion. My impression is that at large firms like Apple the management does tend to be white males, while the engineering talent is Asian or Asian American to a much higher degree. But I’d never bothered to check.

If you go to the Wikipedia entry for “Silicon Valley” it has an entry for notable companies. In particular, I looked at the ones which were “Fortune 1000.” Some are very well known. Google, Yahoo, and Apple, for example. Others are lower key, but not obscure. Juniper Networks is probably one of those. Then there’s Xilinx and Maxim Integrated Products, which occupy opposite poles of distinctiveness and lack thereof of corporate names, despite being obscure to the general public. I don’t recall hearing of them before I saw them on the list.

It’s not that hard to look up CEOs, and that’s what I did. The results are below.

CEO_htm_m41383dd9

To my surprise there’s actually a fair number of minorities as CEOs at large firms with a a presence in Silicon Valley. This went against my expectation. 5 out of 32 CEOs in “Fortune 1000″ Silicon Valley firms were of Indian ethnicity. That’s ~16%. As ~1% of the American population is Indian American, that means they are more than an order of magnitude over-represented among CEOs. 21 out of the 32 CEOs were white, 23 if you include the two Middle Eastern men (if they had Southern European names they would definitely be categorized as white). So whites are actually barely over-represented among these CEOs in comparison to the general American population (~63% for non-Hispanic whites). Of course I don’t deny that in comparison to their representation in professional ranks at these types of firms people of Asian origin do seem under-represented in management overall. But, I’d challenge the null hypothesis that society can or should aim for perfect proportionality in all facets of life, and deviations are only due to invidious discrimination, implicit or explicit (there’s very little explicit discrimination, but there is some implicit discrimination when people use words like “corporate culture”). We don’t know all the various factors which result in these sorts of statistics, and Silicon Valley is too important to American productivity to tinker with too much.

Fortune 1000 Company Demographic
Adobe Systems Brown man
Marvell Semiconductors Asian man
Nvidia Asian man
Advanced Micro Devices (AMD) Asian woman
Brocade Communications Systems Black man
Google Brown man
LSI Logic Brown man
NetApp Brown man
SanDisk Brown man
Juniper Networks Middle Eastern man
Maxim Integrated Products Middle Eastern man
Agilent Technologies White man
Apple Inc. White man
Applied Materials White man
Cisco Systems White man
eBay White man
Electronic Arts White man
Facebook White man
Intel White man
Intuit White man
KLA Tencor White man
National Semiconductor White man
Netflix White man
Oracle Corporation White man
Salesforce.com White man
Sanmina-SCI White man
Symantec White man
Western Digital Corporation White man
Xilinx White man
Hewlett-Packard White woman
Lockheed Martin White woman
Yahoo! White woman
 
• Category: Economics • Tags: Silicon Valley 
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4146cuHZENL._SY344_BO1,204,203,200_ Strange as it may be to say this, but the film San Andreas made me reflect on the nature of particular service sector professions, and their future, recently. It was typical for its genre. Very little plot or characterization (less than a week out I’m still vague on these aspects), and a lot of CGI. A lot. Dwayne Johnson plays the father of Alexandra Daddario, with Carla Gugino plausibly cast as the mother. In fact, Daddario resembles Gugino enough that you might wonder about the possibility of genomic imprinting. But the real star was the CGI.

Alexandra_Daddario_April_2015 And the effects overwhelmed the acting so much that it made wonder again when actors will become totally dispensable. The “comic book movie” genre is already known for being driven more by special effects and the characters than the actors who play them (with the notable exception of Robert Downey Jr.). Which brings me to porn. Recently a controversial documentary came out, Hot Girls Wanted, about a group of young women living a house and trying to break into the industry (the controversy is not the porn, but rather how the women and the industry were depicted). One event in the film is that one of the actresses quits because of family pressure. It has to be admitted that In relation to porn many men are quite happy for it to be around, but would be aghast if any women in their personal social network participated in the industry. So perhaps CGI the answer to this tension? Once you have CGI good enough to simulate real actors, it would be pretty easy to apply to pornography. And porn has some major downsides which would be obviated by CGI “performers.”

But it wouldn’t be so easy, and that is because demand for flesh & blood performers will always be there. In How Pleasure Works Paul Bloom teases out the implications of the latest cognitive psychology in this domain, making extensive recourse to concepts such as “aliefs.” The easiest way for me to illustrate what an alief is is to give an example. Imagine that you see someone use the raw ingredients of fudge brownies to construct the simulacrum of feces. You know for a fact that the faux-feces are not feces, and in fact are delicious fudge brownies…which happen to look like feces. Your beliefs about this are informed by copious facts at hand. But many individuals would nevertheless exhibit difficulty and aversion in consuming these faux-feces. Deep in your bones are concepts and ideas about entities which inform how you react to them. In simple “objective” hedonic units of sensory qualia a $200 dollar wine may not be superior to a $10 wine, but the knowledge that the $200 wine is expensive, rare, and from France (as opposed to California or Australia for the $10 wine), can actually impact how you experience the taste.

414IU4oOQnL._SY344_BO1,204,203,200_ Paul Bloom asserts that we are all born essentialists (see Descartes’ Baby). And this fact about human nature is probably why we pay so much for “artisanal.” Artisanal isn’t necessarily better in a reductionist sense that Jeremy Bentham would recognize. But people appreciate the products better because of their history of production, and who made them. In short, a service isn’t just about what, it’s about who. Which brings me back to porn. At some point in the very near future software will get good enough to mass produce pornography where the performers are virtual. Likely these performers will be produced “on the fly” by consumer preferences (e.g., there almost certainly is someone out there who prefers blonde Asian females with small breasts and large buttocks). In terms of raw dimensions, and flawlessness of skin, they will blow real actresses out of the water. But one of the appeals of “amateur porn” for many consumers is who the performers are. That means there will be a demand for “real” porn by “real” women. Artisanally produced porn, not the faceless (in a metaphorical sense) output from a well tuned algorithm. Of course the CGI can simulate the more rough and natural “artisinal” look, so there will be authenticating agencies or firms so that consumers know that these girls are actually “real amateurs.”

This line of argument could apply to many service sector activities. In the near to medium term future it seems plausible that the bottom 90% of the population will be employed in occupations which serve the demand of the top 10% for “authentic” human servility and handcrafts.

 
• Category: Economics • Tags: Porn 
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https://www.youtube.com/watch?v=vQfmpXsLV_4

This week Planet Money had an episode about the economic angle of how gyms make money off you not using your services (transcript). The basics are easy enough to understand. If you buy a memership to a gym, and actually showed up every day, then you’d wear out the equipment. If you are a member and pay dues and don’t utilize the services then the costs are kept down. In fact it is obvious that gyms have many more members than they have capacity to service at any given time. The radio piece quotes one manager as saying that her Planet Fitness has 6,000 members, but a capacity of only 300 (and often it is rather empty). In fact the whole idea of gyms like Planet Fitness is to mix a portfolio of projecting the ideal of fitness while enabling your more slothful tendencies. People join for the cardio machines, but they stay for the pizza nights and socials.

In contrast another gym they profiled, Precision Athlete, serves an opposite clientele. While Planet Fitness charges $10 a month, Precision Athlete charges $500. Some of this has to be the fixed costs of a small operation with high level trainers, but it is also clear that their equipment gets used, a lot. This puts in stark relief the peculiarities of the normal gym, where there’s a power law distribution of utilization. About 10% of the members probably use 90% of the “gym time.”

Addendum: In some ways Planet Fitness perfectly encapsulates are our contemporary ethos among a certain set of middle class Americans. Since actually working out is “triggering,” they ban or discourage it.

 
• Category: Economics 
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Colossal_octopus_by_Pierre_Denys_de_MontfortProPublica and This American Life have broken an expose of sorts about the spinelessness of the New York Fed in relation to the Wall Street banks which it is enjoined to supervise, specifically Goldman Sachs (which is basically the apotheosis of a Wall Street bank). But this is really all style and no substance: as Daniel Gross points out the New York Fed has always been a creature of Wall Street, there to do its bidding. The reason that this story is worth reporting on is that a whistle-blower recorded some of the meetings between Fed officials and Goldman Sachs, and therefore highlighted just how clear it is that the latter calls the shots for all practical purposes. But we all knew that after 2008. Wall Street socialized its losses, and came roaring back, privatizing the gains which accrued from the easy money doled out by the Fed, as well as the now explicit back-stop of the American government. They know we know, and they know we won’t do a thing about it. Basically it’s like Wall Street punched us in the face, and then sent us a bill for the injury. Also, they demand an apology whenever we besmirch their honor.

There will always be winners and losers, the high and mighty and the low. The key is that it is optimal for the many when the great gain honor through actions which spill over into the public good. The ‘innovations’ of the financial sector, and the bloat that has occurred in ‘inter-mediation’, do not fall into that category. There are only so many gains on the margin of improved allocation of capital. At some point the proliferation of professions meant to smooth the institutions of an advanced society end up devolving into a zero-sum game for finite resources. This is true with bankers and lawyers. Both these are honorable and necessary professions, but when there is a surfeit of both you know that society has gone sclerotic.

downloadThis is why I put my hope in Silicon Valley, and in particular men such as Elon Musk. Musk is as much a megalomaniac as a Wall Street “master of the universe,” but his ambitions and greed for glory drive him to found firms which aim to change the fundamental rules of our civilization. And for the better. It’s not a zero-sum game he is playing; he wants to explode the pie and grab a huge chunk of it. A high-risk high-reward endeavor.

Ultimately to fend off sharks you need killer whales. Our civilization is premised on capitalism, and growth. Without growth elite over-production leads to the rise of zero-sum competition for resources, and the brutal games of greed which led in part to the financial crisis of 2008. The hope is that Silicon Valley and other genuinely innovation sectors of society can hoover in enough talent, creativity, and ego, to change the rules so that the crass an Byzantine machinations that are on display in the activities of the New York Fed become blips upon our near term historical trajectory. In contrast, if we stagnate, except the games to get bloodier and more desperate.

 
• Category: Economics • Tags: Finance 
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momsI fancy myself a relatively aware observer of the social scene, but I have to say that the graph to the left startled me somewhat. In less than my lifetime the modal young mother in the United States has gone from being married to unmarried. The effect is ameliorated by the rise in co-habitation, but we have to keep in mind that co-habitation tends to be a looser, and often more ephemeral relationship, than marriage.

But does this matter? I’ve asserted before that families don’t matter as much as you’d think, that marriage is not a panacea for long term social ills which play out in individual lives. Well first, there’s the short term experienced aspect. Even if children can bounce back from a less stable childhood better than you’d think, they still have to experience that instability during many years when they could have been in less stressed circumstances. We’re leaving utility on the table. But the bigger issue is that social statistics are often indicators of deeper underlying dynamics which we perceive but darkly.

Beware the moray in the reef!

Beware the moray in the reef!

Across the political spectrum there are particular and specific panics over a given set of phenomena. Generally conservatives worry about morality and social cohesion, and liberals fret over economic inequality. Though I have personal political views, and suspect that policy can affect change on the margins, I’d be willing to bet broader social dynamics are going to exhibit an internal inertia which all the political theater will not be able to change. The social cohesion which American conservatives yearn for is unlikely to come back due to basic demographics; only 50 percent of births today are to non-Hispanic whites, who themselves are divided by religion, class, and politics. Though some assimilation to a white identity will occur over the long term through intermarriage, in the medium term we’ll have greater multiculturalism. Liberals can change the economic inequality statistic through redistribution, but that doesn’t seem to build up long term human capital. Sweden has reduced poverty and improved the quality of life of immigrants through redistribution, but they remain situated in a social position predicted by their initial human capital (e.g., the children of well educated political refugees from Iran and Chile tend to flourish and assimilate, those of Somali nomads fleeing civil war, not so much).

Where does that leave us? If I had to make a prediction, the American future is going to be more like Brazil. If conservatives are ascendant then there will be attempt to create a myth of national unity to overcome the centrifugal pressures. If liberals are ascendant there will be economic policies to level differences. Likely these two visions will alternate periodically in a stable democracy. But neither will be able to change the reality of a diverse and segregated United States across a variety of metrics.* This isn’t entirely an exotic or novel development, recall the 19th century period of sectionalism.

These data illustrate that reality for me personally. I’m a married “young” father of two in my 30s. I don’t really know people who have children in their early 20s or teens. If you read the full Census report you see that only 1 percent of these women giving birth at a young age have a bachelor’s degree or higher, so that stands to reason. In earlier periods the dynamic above would be sharply racialized in the public imagination, but the data are more nuanced than you’d think. Only 1 percent of these mothers are of Asian background, which one expects. But 43 percent are non-Hispanic white women, not that much lower than the 50 percent of all births. As Charles Murray documents in Coming Apart white America is itself breaking down into its constituent elements, defined by region and class.

As for my children, whose parents are middle class and college educated, the future has bright possibilities. But all the choices I make are going to be geared toward making sure that they are not at the American median, because unlike in decades past that median is not going to be quite so congenial and prosperous. As long as they move in a college educated world where parents are married I’ll be happy, as they can select from an appropriate menu of outcomes which will result in personal flourishing. The key is not to move down in the social pecking order, as therein lies a diminishing of expectations. And this last fact I think explains the panic and frantic aspect of middle class parenting in America today. You always worry that the kids won’t be alright if they aren’t in the top 25%.

* Diversity and segregation not just racially, as we’re wont to think, but economically and socio-politically.

 
• Category: Economics, Race/Ethnicity 
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Planet Money recently did a report on the difficulty of maintaining high economic productivity in southern Italy. I won’t rehash the specifics of the story, but, I think it is important to get a visual sense of just how large the contrast between the south and north of Italy is. Too often we speak of nation-states. Nation-states are real, and they are important, but they are often not comparable. Just like comparing the USA to Sweden is only marginally informative, so comparing a small nation like Ireland to a more substantial one like Italy is deceptive. Here is a 2008 regional GDP map with sub-national breakdowns. Though some of the values are certainly lower now (basically, everything outside of Germany and Sweden), the relationships still hold.

There has been a gap between the north and south of Spain and England, as well as the west and east of Germany, but none of these are of the same magnitude of what you see in Italy (for one, southern Italy is much more populous than eastern Germany). Sicily and the southern provinces are the poorest regions of western Europe. In contrast, the area between Milan and Bologna in the north is among the wealthiest.

Here is a map of unemployment rates:

 

 

(Republished from Discover/GNXP by permission of author or representative)
 
• Category: Economics, Science • Tags: Culture, Europe, Geography 
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Finally the social bubble seems to be bursting. Do remember that in 2000 there was backlash against Amazon as well, and it’s still around. Still, global oil demand level is low. Most people seem to agree that some of the “fixes” to the 2008 financial crisis were only band-aids, and the fundamental structural problems were put off for another day. Is that day now? Pessimism is cheap, but if you feel it, why not share it? I mused about a possible recession in May of 2007, and some of the comments were kind of funny and tragic. I’ll quote, with names removed to protect the guilty:

They’re practically glorified hiccups nowadays. I don’t get what the big deal is.

In a word, no. Unless you’re talking houses here in the Bay Area, but the “recession” is more like a return to a normal, vanilla market. All the economic signs I see look good. Krugman’s cat must be hurting.

The economy has been generally good, unemployment has been relatively low throughout. And so no, I don’t see the looming failure ecomomically.

I doubt it. People often react to one aspect of the economy without looking at the larger picture. Yes, there was an overextension of sub prime lending, but those are only a fraction of mortgages.
Other fundamentals are still very strong, and the yield on equities (earnings divided by price) is often less than the after tax cost of money (about two thirds the long term interest rate to borrow). I think a recession is extremely unlikely when stocks are so cheap compared to money and smart companies are using their cash to buy back in their own shares and acquire other companies.

I don’t get the impression of any looming recession, though I have read people predicting one over a year.

Razib, this article from Donald Luskin should put your mind at ease. “Growth This Spring Is Strong, and Looks to Continue.”

http://www.smartmoney.com/aheadofthecurve/index.cfm?story=20070504

“They’ve been saying the same thing for a year now, as housing has fallen off a cliff. But it just never comes true. There’s simply no evidence of infection of 95% of the economy by the 5% represented by housing.
“Income is strong. Spending is strong. Jobs are strong. Corporate earnings are strong. Everything is strong but housing.”

The U.S. Equity markets have been hitting all time highs, and valuations aren’t egregiously out of whack like they were back in 1999/2000. U.S. Corporations have posted double digit quarterly profit increases for at least 12 straight quarters, and are now sitting on boatloads of cash. Unemployment is at a reasonable level. I think at worst we’re going to see a *correction*, but not a depression. In addition, Alan’s doomsday prophesying aside, China has been posting nearly double digit *GDP* growth for the past 25 years (see here). Think about it: it’s unheard of for corporations to accomplish this, let alone an entire country. China may suffer the slings and arrows that come with grander economic cycles, but predicting its collapse is, I think, a bit misguided. And, as for Russia, Alan’s population numbers are 1) incorrect and 2) not taking into account the loss of population due to the breakup of the Soviet Union. Also, population loss does not equate with a deteriorating economy. That’s just Malthusian wrongheadedness.

(Republished from Discover/GNXP by permission of author or representative)
 
• Category: Economics, Science 
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I heard about the chart above on Marketplace. Track enough variables, and you’ll find some which correlate well with GDP…until they don’t. So this is a neat story, but is it true? Well, I do accept the underlying logic here. So I’m hoping this is a statistical artifact of some sort….

(Republished from Discover/GNXP by permission of author or representative)
 
• Category: Economics, Science • Tags: Economy 
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This clip with Dan Ariely telling off a dentist who tried to sell him on a more expensive item is classic. Would that we all behaved in such a manner, no? The problem when you interact with a particular set of professionals, in particular in healthcare, the information asymmetry is such that it is very difficult for you to make an informed choice as a consumer. I’ve had an experience very similar to Ariely with dentists.


The problem here though that is that dentists are professionals. In other words, they should be motivated by something other than the profit motive. Ergo, we (the public) confer upon the profession licensing for exclusive services. The problem is that professionals are not immune from incentives. On the conscious level it seems that professionals generally do perform services without the profit motive in mind (e.g., dentists and doctors encourage your toward good health).* The problem is that on the unconscious and implicit level is where subtle biases and preferences come to the fore.

Naturally professionals don’t want to admit that they have biases. I’ve listened to Dr. Thomas P. Stossel dismiss the possibility that gifts and perks by pharmaceutical companies might have an effect on their practice. Stossel’s assumption seems to be that as smart and educated professionals of course doctors wouldn’t allow such practices to bias their judgment. First, just because you have a medical degree doesn’t make you the genius of all things. A psychologist or economist he is not. Second, these firms themselves have marketing professionals who likely are aware of some of the literature on influencing people.

The point here is that there are no gods. Professionals are humans as well, and they are providing you services. Unfortunately because of the way medical insurance is designed in the United States we don’t see the price of these services, ergo, one reason for inflation in the health care sector (insurance companies have had difficulties imposing price pressure; they’re less popular than hospitals). Ultimately one thing we can do is behave in a more critically rational manner. I’m going to see a dentist in the next month for a basic check-up, and my consciousness has been raised by Ariely’s points (I probably wouldn’t be as direct as he was, but I’m going to be firm in not being persuaded into something before doing my own research).

Of course one problem with this tack is that turning something into a consumer-monetized transaction changes the interaction. Often not for the better. Ariely himself pointed this out in Predictably Irrational. Right now professionals have some moral and cultural pressure to not behave as financial optimizers. If consumers start to behave like…consumers, then they may change in response.

* I believe that in the modern American context many professional organizations operate as guild which are engaging in rent-seeking, but that is a different discussion.

(Republished from Discover/GNXP by permission of author or representative)
 
• Category: Economics, Science • Tags: Behavioral Economics 
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Happy Days Are Here Again! Don’t believe the naysayers: An economic recovery is right around the corner.:

Economic forecasting is a mug’s game. There are simply too many unknowable factors that affect “the economy” for anyone to make accurate predictions. The Fukushima earthquake and nuclear disaster, for instance, had a noticeably negative macroeconomic impact around the world, and nobody knows what lurks inside the hearts of central bankers. Plus, if I did possess the secrets to the future, I’d be making a fortune as a speculator, not telling you about it.

There are plenty of financial types who have funds where investment is contingent upon expectation of macroeconomic conditions. You know what they think because you know how they invest, and they’ll tell you what they think as well. What’s the point of journalists and academics even offering predictions if they don’t have “skin the game”? You can basically just say anything to be contrary, perhaps like in a publication such as Slate.


Here’s another anti-pessimism piece from Slate, No Pessimists Allowed! America’s economic recovery will be twice as big as experts predict. Date: January 2nd, 2010. With hindsight this was obviously unwarranted optimism. But how sure was the author, Dan Gross, about his prediction? It would be nice to get a sense if Gross had some put real money down on his predictions and made the values transparent. The amount of money would have given you a sense of the individual’s confidence in their proposition.

Of course, as Matt Yglesias says above why would he even publish his predictions instead of investing them? As Yglesias has said explicitly and implicitly he’s not a blogger for the money, he likes his job a great deal. He likes making predictions and performing rapid analyses. So that’s one reason why a Harvard grad with a degree in philosophy didn’t go to law school or into finance to make more money. But another issue here is that most journalists are probably not big enough individually to move the market. Therefore, their “small bets” would be a good gauge at least of how seriously to take any given prediction for their readers. Though obviously most readers aren’t interested in this stuff for truth. They just want to be entertained….

(Republished from Discover/GNXP by permission of author or representative)
 
• Category: Economics, Science • Tags: Human Evolution 
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Andrew Oh-Willeke, Esq., observes:

One example of cyclicality that continues to today is the practice of law. The basic principles of Roman private law and the complaints that people made about lawyers and litigation were remarkably similar in the 300s to what they are today.

In the 6th century Justinian the Great sponsored a compilation of the body of law which was being widely practiced in the Roman Empire at the time, what is now known as the Corpus Juris Civilis. This is not an abstract or obscure point in the history of modern law:

The present name of Justinian’s codification was only adopted in the 16th century, when it was printed in 1583 by Dionysius Gothofredus under the title “Corpus Juris Civilis”. The legal thinking behind the Corpus Juris Civilis served as the backbone of the single largest law reform of the modern age, the Napoleonic Code, which marked the abolition of feudalism.

Imagine that the astronomical models of Ptolemy served as a basis for modern astrophysics! There’s only a vague family resemblance in this case. The difference is that law is fundamentally a regulation of human interaction, and the broad outlines of human nature remain the same as they were during the time of Justinian and Theodora. In this way law resembles many humanities, which don’t seem to exhibit the same progressivity of science. Our cultures may evolve, but there are constraints imposed by our nature as human beings. Human universals in humanistic enterprises speak to us across the ages. The story of Joseph and his brothers in in Genesis speaks to us because it is not too unfamiliar from our own. The meditations of Arjuna are not incomprehensible to the modern, even if they come from the imagination of Indians living thousands of years in the past. The questions and concerns of the good life are fundamentally invariant because of the preconditions of our biology.

Science is different. It is the basis for real magic, in a Clarkian sense. It is a necessary precondition for humanity’s slipping the Malthusian trap for any period more than a generation or two. Science drives innovation which increases per unit productivity fast enough that it is feasible that in concert with the demographic transition utopia is possible. Many of the other hallmarks of the modern world we cherish are not unique. The Romans had law, as shown by the experiences of St. Paul, who was a citizen and due the appropriate rights. The Greeks had the Golden Age of Athens, which produced artistic works still valued today. The Chinese had a meritocratic bureaucratic system ~1,000 years ago. The British lacked the joint-stock corporation for a century thanks to the South Seas Company fiasco, but that didn’t stop them from initiating the Industrial Revolution. Institutions and norms are important, but they are not sufficient for the flourishing of affluence. We live in an age of the “secret sauce” of just enough innovation to outpace population growth. This is singular and distinctive in the history of mankind.

This is why the most recent episode of This American Life is so disturbing to me. It is redolent of ages best forgotten. And if you haven’t heard it yet, listen now! It’s titled “When Patents Attack!” The piece narrates the misuse and abuse of intellectual property law today in the United States for the profit of a few. Sound familiar? Like the frontiers of the financial sector it is clear that a system whose ultimate purpose was to smooth the aims of innovation and ingenuity is actually squelching and smothering it one step at a time. Gangs of lawyers are now marching together as collective legions of patent trolls whose sole aim is to shakedown technology firms. This is nothing new, a clever lawyer has always been an asset. Cicero lives on today as he did in the past. What’s new are the legions of would be James Watts. Throughout history the clever, sly, and ingenious, have managed to climb to the top of the pile. What is different about the past 200 years is that the spread of the gains to productivity to the masses. The gap between the skilled and unskilled worker in 1750 was far greater than it is today (though that gap was at a minimum in 1970). This massive redistribution of wealth has occurred through the positive externalities, the spillover effects, of science & technology, as well as institutional amplifiers (e.g., welfare state) possible to a large extent enabled by the productivity surplus.

Like parasites blooming within an organism the proliferation of patent trolls is disturbing. The very fact that someone as brilliant as Nathan Myhrvold perceives rich profits in this sector is a signal of the reality that the system has structural incentives which are warped in terms of its long term aims. Most of history has been a story of the few clever and strong bullying labor and produce out of the many. We’ve seen this before. What does it profit a civilization to gain the eloquence of Cicero if it loses its silent genius? (we know what it profits particular individuals, but that’s not rocket science, those the iron laws of history we aim to keep at bay)

In this story the United States of America is alas no longer on the side of the angels. From what I can tell one way that our nation aims to maintain its “competitiveness” is not to innovate, but to extract rents from our accumulated “intellectual capital.” This is just spending down the the savings of ages, rather than building new stores. Years ago my friend Joel Grus made me to be skeptical of the long term utility of intellectual property today, but my reading of economic history since then has moved me more toward his radical position rather than further from it.

(Republished from Discover/GNXP by permission of author or representative)
 
• Category: Economics, Science • Tags: Culture, Intellectual property 
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Silicon Valley: Not Enough Of A Good Thing:

The right questions to be asking aren’t “why does Silicon Valley create so few jobs;” it’s “why doesn’t everyone move to the Bay Area” (the rent is too damn high) or “how come there’s only one high-tech cluster.” After all, if industrial age capitalism had just created the prosperity of the Detroit area in its heyday, we’d look on it as a huge bust. But we had lots of industrial production clusters, of which the Detroit automobile industry was just the most famous.

I think there’s a standard geographical reason why capital intensive production of material goods exhibits polycentrism: the cost of transport matters. Many of the early industrial nuclei were located relatively close to the inputs for manufacturing. Additionally, once the goods were produced they had to be distributed as cheaply as possible, so location was another essential fixed parameter. Big eastern industrial centers loom large in the public imagination, but the same logic applies in other regions of the nation. Cheap electricity and abundant clean water is why many tech-oriented manufacturers are based out of the Pacific Northwest. It isn’t as if you could just relocate the Columbia river.


The same constraints don’t apply to virtual products and services. These rely on one primary input: humans. Not only that, it seems possible that the returns on density of humans may exhibit increasing marginal returns, at least for a period. One can imagine that when you put a lot of bright minds in the same town you have a “bidding war” in terms of audacity and innovative spirit. Not only that, but a free exchange of ideas in a hyper-charged intellectual milieu transforms creativity from a purely individual activity to a communal one, albeit one which balances the wisdom of smart crowds with individual competitiveness and excellence. One can attain this sort of social critical mass online, but the reality is that there are things you miss currently through pure virtual interaction. Nerds are still human beings, and there’s a lot that happens in the “meat space” that you don’t want to miss out on. So the incentive is that if possible you want to get as close to the heart of the “action” as possible. Geography still matters on the margin for individuals.

Once this process starts in a mind-hub positive feedback loops and winner-take-all dynamics drive the system so that polycentrism shifts toward one-hub-to-rule-them-all. That’s one reason that Route 128 has been overshadowed by Silicon Valley. Though Silicon Valley has some advantages by virtue of geography (the weather is better), I suspect its current advantageous position is due more to chance and contingency. Once it achieved a small heart start in terms of the “place to be” if you wanted to be a tech entrepreneur, then the unstable equilibrium of parity collapsed.

This sort of dynamic generalizes to mind-hubs overall. London has the City and New York has Wall Street. Unless non-human inputs start to loom larger in financial services (e.g., the computers gain significant advantages from cheaper and more reliable power sources on the tiniest margin and it is critical that the humans interface as close to the metal as possible) I assume that their commanding position in the national economy will remain as is. Of course course my caveat about the national level is critical. Despite a globalized world because of the fractionization along cultural, linguistic, and national lines, you will have a polycentrism on an international scale. For now.

(Republished from Discover/GNXP by permission of author or representative)
 
• Category: Economics, Science 
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This article in The New York Times focuses on cash in terms of paper currency, but the lessons are generalizable to coinage as well, which pre-dates paper currency by 1,500 years. Some fascinating numbers:

…In 1970, at the dawn of plastic payment, the value of United States currency in domestic circulation equaled about 5 percent of the nation’s economic activity. Last year, the value of currency in domestic circulation equaled about 2.5 percent of economic activity.

…Indeed, cash remains so pervasive, and the pace of change so slow, that Ron Shevlin, an analyst with the Boston research firm Aite Group, recently calculated that Americans would still be using paper currency in 200 years….

… Thanks to technological advances, the average dollar bill now circulates for 40 months, up from 18 months two decades ago, according to Federal Reserve estimates….

…. In 1989, the Fed replaced 46 percent of returned dollar bills. Last year it replaced 21 percent….


We don’t know if the United States of America will be around 200 years from now, so the question about the persistence of cash is rather moot in my opinion. But in any case, the marginalization of (relatively) untraceable cash for abstract monetary units of value is going to entail some changes. Not only are financial institutions going to track and analyze your purchasing habits in fine-grained detail, but governments will able to get their hands on that information if they have a will to do so. Additionally, that information and the meta-data will be stored somewhere, so there are going to be solutions which emerge to resolve the problem of information getting stolen by pirates. Finally, at some point within the next generation or two I suspect that utilization of paper currency might suggest that something is off in your circumstance or intent. That is, people may wonder why exactly you are using an antiquated currency medium whose primary benefit is that it renders your transactions invisible. It will be an order of magnitude worse than the cases we encounter now with people who write checks in retail lines. They are sources of hapless inconvenience, not targets of suspicion.

(Republished from Discover/GNXP by permission of author or representative)
 
• Category: Economics, Science • Tags: Finance 
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In the mid-2000s many regular folks knew that something was weird in housing. Of course everyone was aware that there was a short term windfall to be made if you could flip. But there were normal discussions about the bubble, and when it would burst, or if the weird arguments by some economists and the real estate industry that there wasn’t a bubble were true. In contrast regular people weren’t aware of the possibility of a financial crisis. I recall saying stupid things about the “Great Moderation,” parroting what I’d heard smarter people who I assumed knew better say, in the summer of 2008. Or take a look at some of the comments when I mooted the possibility of a recession in mid-2007: “They’re practically glorified hiccups nowadays. I don’t get what the big deal is.”

With that in mind I looked at Google Trends for two queries, “housing bubble” and “financial crisis.” The top panel is search query, and the bottom panel is news query. The financial crisis query is what you’d expect:

The housing bubble query is more interesting:

People were searching for the “housing bubble” query probably because it wasn’t saturating the media. Once it was they had no reason to search, it was confirmed as a bubble. I vaguely recall similar issues in late 1999 and early 2000. Before the “internet bubble” burst we were all talking about it. Once it burst it was kind of depressing and we didn’t want to talk about it, but the news wouldn’t stop covering it.

(Republished from Discover/GNXP by permission of author or representative)
 
• Category: Economics, Science • Tags: Google Trends 
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Bhutan famously espouses “gross national happiness”:

The term “gross national happiness” was coined in 1972 by Bhutan’s former King Jigme Singye Wangchuck, who has opened Bhutan to the age of modernization, soon after the demise of his father, King Jigme Dorji Wangchuk. He used the phrase to signal his commitment to building an economy that would serve Bhutan’s unique culture based on Buddhist spiritual values….

Apparently the nation has recent switched from absolute to constitutional monarchy:

Bhutan’s political system has developed from an absolute monarchy into a constitutional monarchy. In 1999, the fourth king of Bhutan created a body called the Lhengye Zhungtshog (Council of Ministers). The Druk Gyalpo (King of Druk Yul) is head of state. Executive power is exercised by the Lhengye Zhungtshog, the council of ministers. Legislative power was vested in both the government and the former Grand National Assembly.

On the 17th of December 2005, the 4th King, Jigme Singye Wangchuck, announced to a stunned nation that the first general elections would be held in 2008, and that he would abdicate the throne in favor of his eldest son, the crown prince….

From what I can tell the royal house of Bhutan seems genuinely sincere. More plainly paternalist than deiviously despotic.

Below are some Google Data trend lines comparing Bhutan to some of its smaller South Asian neighbors, as well as Sweden and Equatorial Guinea as comparisons at the high and low ends.

(Republished from Discover/GNXP by permission of author or representative)
 
• Category: Economics, Science • Tags: Data, Data Analysis 
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Steve Hsu points me to this essay which discusses ‘high-frequency trading’, How to Make Money in Microseconds. This might elicit a takfir from my friends at the Singularity Institute, but that piece makes me less ill-disposed to a Butlerian Jihad. A lot of this stuff on the margins and frontiers of finance reminds me of intragenomic conflict or cancer; entities and phenomena which are generally proposed to serve as means toward particular ends develop their own internal logic and ends through a co-evolutionary “arms race” in their own domains.

(Republished from Discover/GNXP by permission of author or representative)
 
• Category: Economics, Science • Tags: Finance 
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Razib Khan
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