Entries in economics (14)

Sunday
Feb092014

"Do What You Love" as a Weapon and Shield

A recent article in Slate had a critical take on the ideology of work as self-actualization:

There’s little doubt that “do what you love” (DWYL) is now the unofficial work mantra for our time. […]

DWYL is a secret handshake of the privileged and a worldview that disguises its elitism as noble self-betterment. According to this way of thinking, labor is not something one does for compensation but is an act of love. […] Its real achievement is making workers believe their labor serves the self and not the marketplace.

DWYL ideology sweeps non-elite work under the carpet:

Think of the great variety of work that allowed [Steve] Jobs to spend even one day as CEO. His food harvested from fields, then transported across great distances. His company’s goods assembled, packaged, shipped. Apple advertisements scripted, cast, filmed. Lawsuits processed. Office wastebaskets emptied and ink cartridges filled. Job creation goes both ways. Yet with the vast majority of workers effectively invisible to elites busy in their lovable occupations, how can it be surprising that the heavy strains faced by today’s workers—abysmal wages, massive child care costs, etc.—barely register as political issues even among the liberal faction of the ruling class?

And it makes elite work more exploitative:

The reward for answering this higher calling is an academic employment marketplace in which about 41 percent of American faculty are adjunct professors—contract instructors who usually receive low pay, no benefits, no office, no job security, and no long-term stake in the schools where they work.

There are many factors that keep Ph.D.s providing such high-skilled labor for such low wages, including path dependency and the sunk costs of earning a Ph.D., but one of the strongest is how pervasively the DWYL doctrine is embedded in academia. Few other professions fuse the personal identity of their workers so intimately with the work output. Because academic research should be done out of pure love, the actual conditions of and compensation for this labor become afterthoughts, if they are considered at all.  [links theirs]

Robin Hanson had a simple explanation for the popularity of this ideology in a much earlier essay that refers to the same Steve Jobs commencement address:

Now notice: doing what you love, and never settling until you find it, is a costly signal of your career prospects. Since following this advice tends to go better for really capable people, they pay a smaller price for following it. So endorsing this strategy in a way that makes you more likely to follow it is a way to signal your status.

It sure feels good to tell people that you think it is important to “do what you love”; and doing so signals your status. You are in effect bragging. Don’t you think there might be some relation between these two facts?

Hanson also has this more recent post about status and advice:

We get status in part from the status of our associates, which is a credible signal of how others see us. Because of this, we prefer to associate with high status folks. But it looks bad to be overt about this. […] Since association seems a good thing in general […] we mainly need good excuses for pushing away those whose status has recently fallen. Such opportunistic rejection, just when our associates most need us, seems especially wrong and mean. So how do we manage it?

One robust strategy is to offer random specific advice. You acknowledge their problems, express sympathy, and then take extra time to “help” them by offering random specific advice about how to prevent or reverse their status fall. Especially advice that will sound good if quoted to others, but is hard for them to actually follow, and is unlikely to be the same as what other associates advise.

Then when your former friend fails to follow your advice, you get annoyed at them and present that (instead of their lowered status) to yourself and others as the reason why you’re not on such good terms with them anymore.

I think that advice can certainly play such a distancing role.  But I think Hanson’s explanation misses some of the things that make this mechanism complicated:  The proactive nature of advice, the loose coupling between the emotional drives behind status and actual status, and the way status-related drives aren’t isolated from other psychological drives (not by coincidence, that form makes hypocrisy more effective).

When a friend is worried that they will suffer a setback, people want to help them avoid that setback (both due to empathy and a desire to not be associated with failure).  They also want to create emotional distance so that the setback, if it happens, will hurt them less (pain caused both due to empathy and status-anxiety). Both of these motivations underlie a variety of biases in favor of advice-giving.

When offering advice, I’m tempted to overestimate the effectiveness of advice-giving for the following false reasons:

  1. When thinking about my own problems, my emotions cloud my judgment, but I see other people’s problem’s objectively.  Also, being outside of their psychology makes their problems easier to understand, even if those problems involve things like their emotions and goals.
  2. I recognize that my imperfect understanding of my own emotions and goals make my problems harder to solve, but I can solve this problem with second-order advice about what emotions or goals should be.
  3. An understanding of what worked (or would work) for me is generally applicable.
  4. I could solve my problems effectively through sheer intelligence if only I was better at “following my own advice”.  And maybe seeing someone else succeed based on my advice will motivate me!

I think all of those biases increase the tenacity of “do what you love”.

Wednesday
Dec252013

A Random Dance Down Wall Street

In the last few weeks, I’ve been reading A Random Walk Down Wall Street by Burton Malkiel.  Definitely an investment classic, required reading for anyone with more than a few months expenses in their savings.  The very simple conclusion of the book can be summed up as follows:

The strategy for the average investor with the highest expected value is to invest in broad-based low-cost index funds.  Though that’s obviously not the strategy with the optimum return, but it’s impossible to reliably identify a better strategy in advance.

(If you think you’re an above-average investor, the advice still applies to you if: You want some of your investments to be relatively low-risk, you don’t want to put substantial time and effort into researching investments (you’d rather spend it increasing and/or enjoying your income), or you’re willing to consider that your assessment of your investment abilities may be incorrectly high.) 

This book suggests that markets approximate the effect of the efficient market hypothesis (the disclaimer is important, since it’s unlikely that even the weak form of that hypothesis is precisely true, that would, among other things, imply P=NP).  Prices may not reflect all public information right away.  But there’s an incentive for prices to match public information eventually, so in the long-enough term there’s no easy augury that can profit reliably.  (And in practice that term is fairly short, if you want easy money, it’s probably shorter than you like.)  Not to say there’s nothing you can do to accurately predict the future.  It’s just really hard.

There are strong logical arguments in favor of both components of the book’s theory.  As to why the average institutional investor fails to beat the market:

  1. Every time someone chooses to buy an asset that beats the market, someone else chooses to sell it.  (It takes two to tango.)
  2. Generally, both the buyer and the seller are institutional investors because institutional investors do basically all of the buying and selling.
  3. Thus any time an institutional investor gains a relative advantage, another is likely to gain a relative disadvantage.  Taken together, they’d do as well as the market average, excluding the cost of all this buying and selling.
  4. The cost of all this buying and selling is substantial, so on average they do worse.
  5. Thus, buying an index fund also gets you a pre-expenses expected performance of the market average, but with substantially lower expenses.

As to why you (probably) can’t easily beat the market:

  1. If something is predictably under-valued, people will buy it until it isn’t.  (Even if only some people realize it’s undervalued, so there’s little time lag on this component.)
  2. If something is predictably over-valued, at some point people will start to sell it.  (There’s more of a time-lag on this component because they might expect to be able to sell it at an even higher price to a “greater fool”, but savers want to spend eventually and fools have finite money.)
  3. If some investor is predictably good, people will copy them until they no longer beat the market.  (Also, past performance doesn’t guarantee future results.)

So, good stuff.  The book focuses on presenting empirical evidence to back up those arguments, along with a lot of interesting history and a critical look at competing theories.

One weakness of the book is that, for an economics book, it seems to underestimate the effects of supply and demand.  It notes that the value that the market places on earnings and dividends varies during different “eras” of the market, that it was particularly low during the “Age of Angst”, 1969-1981.  During that era, stocks failed to keep up with inflation not because earnings failed to keep up with inflation, but because the P/E multiple fell sharply.  It mentions that the era was characterized by “demand-pull inflation” (demand for spending, not for saving!) suggests that investors were rationally “scared” and thus demanded higher risk premiums, which the market provided with lower P/E multiples.  But that sounds like an ultra-roundabout way to say that lower demand for savings and lower demand for having savings in stocks relative to other (perceived as less “risky”) things caused the P/E multiple to drop.

Which is odd, if you’ve accepted the author’s frame of referring to that earnings times market-average P/E multiple as a “firm foundation of value”, when that multiple is not nearly so firm, and may have as much to do with aggregate demand for stocks (in general) as opposed to anything about the specific companies being priced.  Something like gold, which Malkiel describes as “impossible to predict” has no dividends or earnings, only that unpredictable multiple.

Tuesday
Feb262013

Real Life Cypherpunk

No, the hurricane didn’t blow this blog away, but I’ve been hosed nonetheless.  Still, I want to get back to writing, so will maybe stick to something a bit shorter-form.

Lately, I’ve been fascinated with the rise in value of Bitcoin (BTC), a distributed, anonymous, cryptographic token transaction system intended for use as a currency.  My original thought on the technology was “nifty idea”, but never would have thought it would have much in the way of real value (not that virtual goods can’t have real value, but BTC isn’t, by itself, much of a game).  I certainly didn’t see it rising again after the initial bubble and crash, but if you look at the charts, you’ll see that the value is now above the June 2011 bubble and crash.  That crash was precipitated by a security breach and subsequent flash-crash at Mt. Gox (the largest Bitcoin exchange). Subsequent high-profile security breaches in the immediate months following surely didn’t help, but it’s worth noting that such incidents didn’t cease in November 2011, BTC was able to regain its value despite the occasional digital bank-robbery.

So given my interest, and my surprise, I was fascinated by this essay by Gwern on anonymous black-market website Silk Road (the site itself can be found here, I link to this for educational/informative purposes only and not to encourage you to do anything illegal).  The essay is a very detailed, down-to-brass-tacks look at how Silk Road works and what its weaknesses might be.

Silk Road is designed to conduct business with only the minimum amount of information possible.  A normal e-commerce website ends up with the following information:

  1. Payment information for the buyer
  2. Payment information for the seller
  3. Reviews left by the buyer for the seller
  4. Information sent by buyer to seller (including at least a shipping address)
  5. Information sent by seller to buyer (if sent via site)
  6. The seller’s name / pseudonym
  7. Users IP addresses
  8. Metadata about users connections

Making the process anonymous involves several technologies:

So Silk Road actually ends up with:

  1. Bitcoin addresses the buyer used to transfer bitcoins to Silk Road
  2. Bitcoin addresses the seller used to transfer bitcoins from Silk Road
  3. The reviews left by the buyer for the seller
  4. Encrypted gibberish sent by the buyer to the seller (including at least the buyer’s address), plus a public key for the seller (which everyone can see)
  5. Encrypted gibberish sent by the seller to the buyer, if any (the buyer has no need to post a public key, they can send it to the seller in their message if they need a reply)
  6. The seller’s pseudonym
  7. The last hop of the connection path users take to access the site

Silk Road can also strengthen their resilience against outside attack by only keeping recent data for items 1, 2, 4, and 5, and no data for item 7 (there is, however, no way for users to verify that they are in fact doing so).

Silk Road also employs several technologies / methods to mitigate the effects of anonymity:

  • Pseudonymous escrow
  • Reputation economy (presumably the reason they allow for pronounceable seller pseudonyms (6), while keeping information to an absolute minimum in so many other ways), plus methods for quantitative and qualitative analysis of buyer feedback data
  • Seller account auctions (SR admins say the primary reason for this is to make the sort of attacks (note that includes scams or stings) that can be done with new accounts at least very costly to do repeatedly; of course, this also makes money for whoever’s running Silk Road)

So Silk Road not just a straightforward application of Bitcoin.  Bitcoin is just a main ingredient in the whole cypherpunk stew!

Also, this is not to imply that the system doesn’t have weaknesses.  It still falls short of the goal of full cryptographic anonymity.  For one thing, the seller ends up with a physical post address for the buyer.  Postal addresses are a lot harder to generate and anonymize than Bitcoin addresses or private keys, and the movement of physical packages is a lot easier to inspect and trace than TOR connections.

Gwern suggests that Silk Road could be brought down through DDoS or acquiring a large number of accounts for some coordinated scam.  Acquiring new accounts to do individual stings is too high cost for too little gain, especially since the value of “flipping” a Silk Road buyer is very low (there’s little they can do to get information on Silk Road sellers).  Perhaps law enforcement will decide to do some stings anyways to make an example of a few cypherpunk drug-purchasers; the ineffectiveness of that tactic as a deterrent doesn’t stop people from trying.

Gwern doesn’t mention the demise of Bitcoin scenario described by Moldbug in this post, where the value of Bitcoins is brought down by a broad-scale legal attack on the Bitcoin exchanges, indicting them all for money laundering (Bitcoin tumblers might be more deserving of this attack, but targeting the exchanges will be easier and more effective).  That wouldn’t prevent people from trading Bitcoins for goods.  But Silk Road’s selection still isn’t as good as Amazon’s, and Bitcoins are still not sufficiently liquid when it comes to things like rent and groceries, so the value of a Bitcoin in rent and groceries still depends on the exchange rate with less science-fictiony currencies.  Not that it would be impossible to find someone on Silk Road to ship you food, but you really don’t want to buy your necessities at black market prices if you can help it.  Being able to spend money earned at a black market premium on things not sold at a black market premium is a big advantage of illicit trafficking.

Thursday
May032012

The Bumpy Downside

One big debate within the peak oil community is if the world is facing an economic contraction due to scarce energy, will that be a “fast” or a “slow” collapse?  In a fast collapse, failures cascade in a rapid, catastrophic way.  In a slow collapse, there isn’t out-of-control acceleration, but past problems and a shrinking resource base undermine the ability to deal with future problems effectively, so the slide cannot be easily halted.

In 2005, I would have leaned towards “fast”, but I was wrong.  All signs, including the Baltic caviar price curve for oil (instead of the sustained high prices I would have expected) point to slow.

A great case-study for this sort of collapse in modern times is the fall of the Soviet Union, which Dimitri Orlov analyzes in his book, Reinventing Collapse.  So I was struck by a recent blog entry that discusses how Greece is now following a similar pattern:

What brought this thought about was reading the heartbreaking article: Suicides in Greece increase 40%

And I remembered a comment I head from Dmitry Orlov in an interview about how much of his high school class were now dead. Yet there were no headlines and there was never any official crisis or emergency. They did not die in gunfights over scraps of food like in The Road. Rather, more quotidian things like alcoholism, unemployment, suicide, homelessness, exposure, lack of medications and ordinary sicknesses like bronchitis and pneumonia took their lives.  Russia’s life expectancy fell dramatically. It’s birth rate declined. Public health fell apart. Suicide rates went up. The population shrank. Entire towns became abandoned. In post-collapse Russia there was a slow die-off that occurred outside of the daily headlines that no one seemed to notice. They were ground down slowly by day-to-day reduction in the standard of living, a million little tragedies that, like pixels in an image, looked like nothing until the focus was pulled back.

And right now the entire continent of Europe is looking an awful lot like post-collapse Russia […]

An excerpt really doesn’t do it justice, go read the whole thing.

On a similar theme, consider this post on bus fuel efficiency improvements:

Orion buses, by stark contrast, are so far almost doubling the miles a coach can travel on a tank. Thanks to the fact that the diesel engine driving them is half the size of a conventional bus’s, they are also quiet enough for the driver to hold a conversation with a passenger on the freeway without either raising their voices. Oh, and don’t let that small engine fool; they move up hills faster than the conventionals. These buses are nice.

And they are going to be needed. As the financial crisis deepens, more and more are riding the bus. A financial analyst stumbled upon probably the best graph yet for visualizing the present perhaps post-peak world […]

The graph is question is this:

The post goes on to note:

Remember my excitement over the new Orion coaches? One of their chief investors in the hybrid technology, Daimler, has decided that increasing bus fuel mileage is simply not profitable:

Daimler Buses North America no longer will manufacture buses at its Orion facility in the Oneida County Industrial Park, officials announced Wednesday…

“Daimler Buses considered all possible options for reconfiguring our transit bus operations in North America,” said Harmut Schick, head of Daimler Buses. “But at the end of the day, Orion is facing a situation where the cost position is not competitive, the local market is in a continued slump and growth opportunities are not available from selling the product overseas.”

It’s not because these buses won’t prove cost effective in a future with ever-rising fuel costs. That’s not it at all. It’s because an era of ever-rising fuel costs will force everyone to reorganize their expenditures. Businesses that rely upon cheap fuel will cut back or go out of business, and closed and/or downsized businesses can’t pay as much in taxes.

Taxes pay for buses.

So just when they need to cut back on their own travel expenses, many workers will see a shortage of buses available to get them to and from work.

That’s slow collapse for you.  Mundane problems with mundane solutions so close at hand.  And yet…

Friday
Apr202012

Who Will Pay for the Future?

I recently read The Coming Generational Storm.  It’s an alarming book, and well worth reading.  Of particular note is the method of generational accounting.  It seems to take a page from formalism in treating all promises equivalently (whether that promise is that benefits will be delivered, that bonds will be paid off, or that taxes will not be raised) and treating the status quo as an implicit promise.  Looking at the possibility of implicit and explicit default is also key:  Benefits delivered worthless are the same as benefits not delivered at all, and inflation functions as a tax on financial assets even if taxes aren’t raised.

Of course, the question isn’t just whether promises will be broken or renegotiated, but whose promises will be subject to adjustment.  The youngest generation had little say in the current political order, so to what extent will they be willing to foot the bill?

If there’s a generational conflict, the young don’t seem to be winning, as noted in the Esquire article, “The War Against Youth”:

In 1984, American breadwinners who were sixty-five and over made ten times as much as those under thirty-five. The year Obama took office, older Americans made almost forty-seven times as much as the younger generation.

This bleeding up of the national wealth is no accounting glitch, no anomalous negative bounce from the recent unemployment and mortgage crises, but rather the predictable outcome of thirty years of economic and social policy that has been rigged to serve the comfort and largesse of the old at the expense of the young.

[…]

Nobody ever talks about generational conflict. […] Even the Occupy Wall Street crowd, while rejecting the modes and rhetoric and institutional support of Boomer progressives, shied away from articulating the fundamental distinction that fills their spaces with crowds: young against old.

The gerontocracy begins at the top. The 111th Congress was the oldest since the end of the Second World War, and the average age of its members has been rising steadily since 1981.

And it’s not just congress (and other formal, governmental politics), but academia:

From 1980 on, the price of attending a four-year college has risen by 128 percent. While the price has spiked, the quality has tanked. […] In a survey published in 2011, 45 percent of students showed no improvement in “critical thinking, complex reasoning and writing” after two years of college. […] And how could the results be any different? Three decades ago, 43 percent of professors were adjuncts. Now, with colleges bloated by older, tenured professors who take up huge slices of academic budgets while teaching crumbs of courses, the vast majority of classes are taught by adjunct.

[…]

But maybe […] you want to get a master’s or a professional degree. With entry to the professions comes another opportunity to be taken advantage of, and it’s not just the inherently ridiculous price of a creative-writing M.F.A. or journalism school, where on some level, everybody understands the students are being played for suckers. The cost of medical school has spiked over the past three decades. In 1981, average medical-school debt was less than $20,000. Today it is $158,000. Law-school tuition rose 317 percent between 1989 and 2009 while American laws schools wildly increased the number of lawyers they graduate. Naturally, a glut of lawyers decreases their value. So kids pay more for a worse education that leads to lesser prospects in order for the schools to prosper temporarily. […]

And unions:

New workers will earn a “globally competitive wage.” […] Newer workers at unions across the country earn ten to fifteen dollars an hour less than established workers, and the unspoken but widely reported understanding with the AFL-CIO is that the wage of these workers will not increase. In other words, Boomer workers make almost double what their young counterparts do […]

To the extent that the recent economic crisis hurt retirees as well, it’s not clear that this doesn’t exacerbate the transfer of wealth and opportunity away from the younger generation, as would-be retirees delay retirement.  This MarketWatch commentator notes that the BLS statistics on that point may be exaggerated if compared with statistics from different samples at face value, but concludes the trend is still there:

Part of this story is a real phenomenon: More baby boomers are staying on the job because they are healthy enough to keep working. They like working. Further, many of them desperately need the money: They lost their retirement nest egg when the housing market collapsed and the stock market stalled. Fewer of them can rely on a defined benefit pension, and more of them must rely on their own savings to fund their retirement.

[…]

The good news is that employment has been growing faster than the population in every major demographic group. In other words, the employment-population ratios have been rising since the depths of the recession. But, except for the oldest age group, the employment-population ratio is far below pre-recession levels.

[…]

The same thing happened to the generation that came of age in the 1930s. They put their lives on hold for years, and we are still living with their legacy: the baby boomers who are now clinging to their jobs. [emphasis mine]

American politics in particular is hooked on wishful thinking about the future.  If the future is one of unmitigated economic growth, increase productivity might pay all bills and pave over the entire problem.  Admitting that this is not to be is politically untenable.  It is tempting (and reasonably so) for middle-class children to view their parents as excessively optimistic, as opposed to viewing them as short-sighted cowards who sold their children’s birthright to the ultra-rich in order to secure their own retirement.

And it will be hard to renegotiate the social safety net in the face of a retiree voting bloc convinced on the one hand that the whole thing was a bad idea after all and should be scrapped, but on the other hand it’s good that we can just barely afford to keep it around for those who are really counting on it.

As the Esquire piece concludes:

Youth should be the only issue of the 2012 election, because all the subsidiary issues — inequality, the rising class system in America, the specter of decline, mass unemployment, the growing debt — are all fundamentally about the war against young Americans. But the choice young Americans face is between a party that claims to represent their interests but fails to and a party that explicitly opposes their interests and actively works to disenfranchise them.

[…]

By bus and train and car pool, they will follow the gerontocracy to Tampa and Charlotte, the cities with the utter misfortune of hosting the presidential nominating conventions. Then we’ll see if the people inside the convention centers can find the youth anything better to do.

We’ll see then how the flowers of rage, planted and nurtured so carelessly for three decades, have sprung up and who will harvest them.

Saturday
Feb252012

The Fall of "Fishtown"

A while ago, I picked the January 2012 issue of conservative journal The New Criterion (Volume 30, Number 5) from a local newsstand.  The issue caught my eye because it had a symposium on the question “Is America in decline?”, a topic I find fascinating as a futurist and someone interested in Peak Oil and similar phenomena.

One of the essays on the purported decline of America was “Belmont & Fishtown” by Charles Murray, summarizing Murray’s book Coming Apart, which discusses “The State of White America”.  (Presumably “white America” specifically for rhetorical reasons, given the fate of Murray’s most famous work.)  Murray discusses the richest and poorest of whites, using Belmont and “Fishtown” as emblematic labels for these groups.  Murray’s conclusion is that since the 1960s, “Fishtown” has gone into deep decline in terms of American core values (Murray refers to such as “Founding virtues”).  “Belmont” has avoided such decline, but become isolated (geographically (for more on that topic, see Bill Bishop’s The Big Sort) and in terms of tastes and preferences (becoming David Brooks’s bourgeois bohemians).

Murray talks about four values in his study:  Marriage (and single vs. married birth and parenting), industriousness (Murray just looks at hours worked and participation in work force), honesty (Murray just looks at crime rates), and religiosity (which Murray posits causes increased civic engagement, but I’d say that it’s just correlated to civic engagement in general; church attendance is just a civic engagement thing religious people do).

Why did this happen?  Murray goes into little detail (at least in the short essay version of his work, I have not read the book).  One reason cited is the sorting effect of elite universities, coupled with financial aid.  This is an unintended consequence of meritocracy, the best and brightest, no matter how poor, are able to escape from troubled “Fishtown” (and, presumably, ensconce themselves in isolated “Belmont”), leaving “Fishtown” with even less social, cultural, human, and financial capital to deal with its escalating problems.  (Affirmative action would presumably bring the same effect to a broader cross-section of de-facto-segregated communities, but Murray doesn’t discuss this because he’s focusing on whites.)  As the problems get worse, the best and brightest of “Fishtown” have fewer opportunities where they grew up and more incentive to leave.

There’s one big thing missing from Murray’s explanation, though, perhaps best explained by a graphic like this:

(Excerpt from a graphic by the New York Times, from this opinion piece, HT Nick Huber.)

I’d say that’s the real power behind the wedge that’s driving “Fishtown” and “Belmont” apart.  I’d guess that the decline in the top marginal tax rate has something to do with that phenomena, though that came too late to be the primary cause.  Once you have the wedge of economic inequality (that is, declining economic opportunity that disproportionatly affects those already worse off (and pretty much anything will disproportionately affect those already worse off)), all sorts of feedback loops start up related to Murray’s metrics:

  1. Marriage: Less economic opportunity means fewer people can find a match who will make them better off. Job-related stresses also take a toll on relationships.
  2. Honesty: Less economic opportunity means more desperate people on the fringes.
  3. Industriousness: Murray asserts that divergence on this metric began when demand for labor was still high, but work that pays less (relative to national standards of living) is still less motivating.
  4. Civic Engagement: Less economic opportunity means less funds for church dues and other activities.  Increased job stress may mean less time/energy for other activities.
  5. Honesty + Marriage: Harder to get married if you’re a criminal.
  6. Honesty + Industriousness: Ditto for finding employment, even if it’s available.
  7. Honesty + Civic Engagement: Why participate in your community if you don’t like/trust your neighbors?
  8. Civic Engagement + Marriage: A good context to meet people, and in terms of child rearing in or out of wedlock, you’re more likely to care about social censure if you’re a member of a social group in the first place.
  9. Civic Engagement + Honesty: Building the sort of trust and norms that discourage crime.
  10. Any one of those four + itself: Norms change, it’s a vicious cycle.  The sorts of capital that keep these metrics high is also driven out when they decline.  Successful people leave, organizations move or cease to exist, webs of trust break down.

The above isn’t an inclusive list, and that’s not all that’s going on.  Technology has a role to play, too, and given my earlier points about the Robot Revolution (related), I expect the trend in the graph above to get worse.

I think both liberals and conservatives are aware of the decline Murray discusses, though I’ve seen rhetoric from both sides accusing the other of being in denial.  The underlying problem is largely untargeted by either side.  Liberals only have the political power to defend stop-gap measures that help the poorest of the poor.  Conservatives deny that a gap between productivity and wage growth is a problem, or suggest that the poor will pull themselves up by their own bootstraps if only liberals stopped “helping”.  That line misses two things:  First, the “rising tides lift all boats bit” doesn’t really fit with the psychological reality of the situation, which is that people judge how well off they are relative to others in their society, so economic inequality means social breakdown even if standard of living continues to rise.  Second, there seem to be some implicit and very rosy assumptions about the form such bootstrap-pulling would take, especially if the “social safety net” really is removed (or overwhelmed).

(There’s been about Murray going around the blogosphere (especially among alt-righters), some posts to start on include this speculation about Charles Murray and the Future and this review of the book.  I’d be curious to see more left-wing reactions to the book, too, if there are good ones to read.)

Thursday
Feb162012

Inflation, Hyperinflation, and Gold

Here are two interesting pieces that address the same issue.

First, a great bit of explanation from this alarmist essay:

[…] hyperinflation is not an extension or amplification of inflation. Inflation and hyperinflation are two very distinct animals. They look the same—because in both cases, the currency loses its purchasing power—but they are not the same.

Inflation is when the economy overheats: It’s when an economy’s consumables (labor and commodities) are so in-demand because of economic growth, coupled with an expansionist credit environment, that the consumables rise in price. This forces all goods and services to rise in price as well, so that producers can keep up with costs. It is essentially a demand-driven phenomena.

Hyperinflation is the loss of faith in the currency. Prices rise in a hyperinflationary environment just like in an inflationary environment, but they rise not because people want more money for their labor or for commodities, but because people are trying to get out of the currency. It’s not that they want more money—they want less of the currency: So they will pay anything for a good which is not the currency.

In other words, in inflationary conditions, everyone is pulling the currency.  They want (and need) more of it because everyone who they buy goods and services from wants (and needs) more of it.  On the other hand, in hyperinflationary conditions, everyone is pushing the currency, they want anything but currency and require more currency as a sort of bribe to except currency at all.  In either case, the currency flows more rapidly, the pushing and pulling happen in the same direction.  The symptom in terms of on-the-shelf prices is similar, but the effect on everything else in the economy is quite different.

One significant difference is what happens relative to alternate currencies, which brings me to the other piece:

I can guarantee that the majority of people who make the claim that gold is an inflation hedge have never looked at the data. Imagine you were a retiree in 1980 looking to protect yourself against inflation. If you were to accept conventional wisdom and bought gold to hedge against inflation, your retirement would have been a nightmare. […]

The reason I am very bullish on gold is because of the obvious debt problems we face. The truly monster spikes in gold are going to come because of sovereign debt defaults.

In inflation, people want more of the inflating currency relative to other currencies (not to sit on, to spend).  In hyperinflation, people want any other currency (since they still need to buy day-to-day stuff).  In the former situation, gold will do poorly against things that are significantly more useful.  In the latter situation, gold will do well to the extent that it functions as a not-currency currency.  It’s not tightly-coupled to other currencies, and “you can’t print gold”, after all.

Disclosure: I’m long in gold and silver, for pretty much the reasons above.
Disclosure disclaimer: The above should not be construed as investment advice.  Any investment advice I do give may be terribly bad.

Thursday
Nov032011

The Robot Revolution

Pithy:

Idea #6: The history of the 21st century will be one of technological singularity and collapse.

More accurate:

The history of the 21st century will be shaped by, on the one hand, labor-saving technologies (with vast and unpredictable effects on society), and on the other hand, peaks in resource production and attendent problems in maintaining complex systems in the face of random disasters, demographic shifts, increasing population, and so on.

For now, let’s focus on the former.

The history of capitalism is one of labor displacement and capital accumulation.  Really expensive tools make increased productivity possible.  Only the rich can afford really expensive tools.  The way to get guaranteed access to work is to sell most of the product of your labor in exchange for access to such tools.  Those that don’t make the trade are out-competed.  The rich get richer.  The new unemployed (since productivity increases exceed demand increases (which are at least somewhat constrained by population increases, but that’s a whole other post)) end up in newer, cooler jobs made possible by the same sort of technological development.  Or so the story goes.

The question is what happens when the newly-created labor demand from technological development is less than the labor-displacement from technological development.  A related question:  What happens when labor saving technology just creates demand elsewhere for not labor but more labor saving technology?

Or: What happens when having your job outsourced to Chinese robots just creates jobs for more Chinese robots?  (The robots are also built by Chinese robots.  In China.)

I’d argue that the marginal cost of adding production through labor-saving technology has probably been lower than the marginal cost of labor in many areas of production for a while.  However, there were a few mitigating factors delaying the robot revolution.  Both have to do with “developing markets”.  First, there was the desire to expand quickly into new markets.  If hiring people is quicker than building more-automated factories, it might be better to do the former than let your competitors beat you to the punch.  Second, there was a desire to produce stuff in areas that didn’t have the infrastructure to support highly-automated production (especially since many of those areas have fewer regulations and lower labor costs).

I think that’s no longer the case.  The most promising developing markets are developed, first-to-market incentives are diminished (i.e. the resource grab is over).  Infrastructure development has also come a long way.  Hence stories like this.

I’m not the only one who’s noticed this trend:

A faltering economy explains much of the job shortage in America, but advancing technology has sharply magnified the effect, more so than is generally understood, according to two researchers at the Massachusetts Institute of Technology.

[…]

During the last recession, the authors write, one in 12 people in sales lost their jobs, for example. And the downturn prompted many businesses to look harder at substituting technology for people, if possible. Since the end of the recession in June 2009, they note, corporate spending on equipment and software has increased by 26 percent, while payrolls have been flat.

Corporations are doing fine. The companies in the Standard & Poor’s 500-stock index are expected to report record profits this year, a total $927 billion, estimates FactSet Research. And the authors point out that corporate profit as a share of the economy is at a 50-year high.

Productivity growth in the last decade, at more than 2.5 percent, they observe, is higher than the 1970s, 1980s and even edges out the 1990s. Still the economy, they write, did not add to its total job count, the first time that has happened over a decade since the Depression.

They concluded on an optimistic note:

Yet computers, the authors say, tend to be narrow and literal-minded, good at assigned tasks but at a loss when a solution requires intuition and creativity — human traits. A partnership, they assert, is the path to job creation in the future.

But that misses both that many people are not capable of “intuition and creativity” jobs (at a high enough level to make a living at it) and, at any rate, that the demand for such jobs will never equal the previous demand for industrial-labor jobs.  Intuition and creativity don’t scale.

I expect this effect will also have a way of trickling up from industrial workers.  As everyone tries to avoid the industrial-work class if at all possible, the struggle for those “creative” jobs becomes more intense.  This analysis from Robert Cringley is telling:

In the near term how do we creatively respond to jobs going overseas? In the longer term what happens if Ray Kurzweil is correct and the Singularity rolls along in 2029 or so and humans suddenly become little more than parasites on a digital Earth?

The easy answer to this problem has been the same since the 1960s — become Paul McCartney. But how many Beatles can the world sustain?

[…]

Where you live counts as much as anything else, too, so position yourself in a city that has high serendipity.  Any kid living with his parents in Palo Alto can get a job today simply because he already has a place to live. No skills required.

[…]

Live in the coolest place, I tell Cole and his brothers. Have the coolest friends. Do the coolest things. Learn from everything you do. Be open to new opportunities. And do something your father hasn’t yet figured how to do, which is every few years take off 138 days and just walk the Earth. [emphasis mine]

Cringley takes an optimistic tone, but I find the content of his post rather grim.  He’s right.  Sure, there are some high-paying jobs that the robots can’t do for now, assuming that not too many others are trying to do the same thing.

But if you want to get into / stay in the middle class after the start of the robot revolution, you’d better be cool.  Have the right connections, be in the right place.  Hopefully have parents wealthy enough to facilitate that and smart enough to realize that it’s not about “job skills” anymore. Social skills are the new middle class job skills.  It’s hard to evaluate those “intuitive” and “creative” jobs, so appearances matter.  As the job search becomes more competitive, attributes not related to job performance matter more.

And be lucky (the repeated “serendipity”).  Maximize your opportunities to benefit from luck.  It’s all a gamble, victory goes to those who can roll (or rig) the most dice.

Hard enough for the middle class.  And for those not currently in the middle class, being either “cool” or “lucky” enough is going to be mighty tough.

Though angry may stil be an option.

Tuesday
Oct252011

How Can Occupy Wall Street Win?

Occupy Wall Street continues to be very interesting.  (On the economic side, see also.)

I previously mentioned that non-violent protests can only win by being economically or politically disruptive, but there are a few ways to achieve that goal:

Consumer Siege: Cut someone off from funding by refusing to do business with them (boycott) is the typical example.  Indirect boycotts can sometimes work (for example, see Color of Change’s successful campaign against the Glenn Beck Show, which worked by convincing advertisers that being associated with Glenn Beck was not a good idea for their brand (or at least that it would be better to spend their advertising budget’s elsewhere).  Divestment can also work, since the people running an institution tend to also be investors.  Of course, that only works if equity in the institution is publicly held and the protesters have a lot of it (not usually the case).

In the case of OWS, this is why I’m interested in this story in which a bunch of protesters who were Citi Bank customers tried to close their accounts, only to be locked in by guards and arrested by police.  Bizarre.  A question:  In the actual bank runs of the 1930s, did banks ever try to get police to arrest customers who were closing their accounts?

Disruption of Business: Protesters prevent the institution from doing business with anyone.  This either involves discouraging customers or actually preventing institutional activities from happening.  The strike is an obvious (and fairly mild) example of this type.  So is the picket line, in which customers and/or replacement workers are discouraged (but not actually prevented) from entering a place of business.

Given the name “Occupy Wall Street”, I’m surprised there isn’t more action of this type.  While seeing the protesters “occupy” Times Square was impressive, it’s a far cry from actually occupying, you know, Wall Street.  There’s no indication that OWS has been at all disruptive to the business activities of anyone working on Wall Street.

Petition: In general, just expressing one’s grievances, no matter how publicly is pretty useless unless you can effectively turn that to recruiting people for one of the activities listed in this post.  Getting arrested is only great if you emerge from jail with your numbers doubled.  (The IWW was great at this, Anonymous not so much.  (That topic might be worth its own post, but in the meanwhile, read this, which also includes some very good speculation about the possible outcomes of the protests.))

There’s one exception, though.  If your grievances are expressed directly, in person, to an institution itself, then the actions the institution takes against you can effect the institution’s reputation enough to be disruptive.  That only works if the institution is considered to be in control of the action taken against protesters and the institution is perceived to have some sort of obligation to listen to protesters.  Here, that’s likely to be just government, and maybe not even that.

That tactic can also work as the political equivalent of “disruption of business”.  If hundreds of people are showing up in person to present their grievances at each congressional office every day, it does give Congress a bit more personal motivation to resolve the situation.

Elections: In a democracy, if you can mobilize enough support to actually get incumbent legislators replaced with legislators loyal to your position, then that’s one way to change things.  To do this at a large scale, you really need to establish an effective political party.  Specifically, it must be able to do two things effectively: Get candidates elected, and ensure that candidates who don’t toe the party line on important issues (the platform) are not reelected (and preferably are left with their careers in total ruin, such that they actually fear defecting).

I’ve heard suggestions that OWS needs a “non-partisan political party”, which is nonsense.  To the extent that the concept is coherent, we already have a non-partisan political party, the Democrats, which is wildly ineffective at whipping their members into going along with even the core of the party platform.  The Republicans, on the other hand, are wildly effective whips, at least on the limited platform of opposing Obama (or whatever non-Republican is in power at the time).  (They’re less effectively partisan when actually in charge, but you don’t really have to coordinate much on how to burn the place down in order to do so effectively.)

You also need a lot of political power to push around the bureaucracy, but I don’t think that’s an intractable problem in the case of OWS.  (At least not compared to the difficulty of getting legislators elected in the first place.)

Friday
Jul222011

What's the Default?

There’s a lot of talk about the US debt ceiling and whether that will be raised or not by the August 2 deadline.  The odd thing about this is that it’s always framed in terms of an impending default, when it’s not clear that will happen at all.  Especially when that’s expressly prohibited by the US Constitution (Amendment 14, Section 4):

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.

Clearly, the amendment addresses debt in the context of the Civil War in particular, but it’s not unreasonable to read that as a blanket prohibition on a default on treasury bonds.  So on August 2, absent legislation, we’ll be in the following state:

  1. Congress has said “no more borrowing”.
  2. Congress has determined how money can be printed, and the answer is “not without more borrowing” (money is printed by the Fed and exchanged for new Treasury Bonds).
  3. Congress has specified the amount of taxes to be taken in.
  4. Congress has specified how much is to be spent and on what.  (But it’s a higher amount than the revenues provided for in 2!)
  5. Treasury Bonds specify when they need to be repaid and for how much, and the Constitution says Congress can’t just decide to not pay those.  (There are also a few other obligations the Constitution says Congress can’t decide not to pay, including judicial salaries.)

That’s an odd state, as of yet untested under US law.  Clearly, something’s got to give.  The executive department must faithfully meet conditions 1-5, which is impossible.  The Constitution gives only Congress the authority to alter 1-4, and no one the authority to alter 5.

Since the debt ceiling law and the most recent budget are in some sense contradictory, and Congress is the one with the power to alter those conditions, I think the relevant question is how to interpret the actions of Congress regarding those laws.  I can think of a two reasonable possibilities:

One: The budget implicitly raises the debt ceiling to cover the difference between revenues and expenses, since otherwise that law would be requiring the impossible.  (Bill Clinton seems to take almost this view, but it’s a way better argument to suggest that Congress implicitly loosened 4 than to say the Constitution gives the president the authority to violate 1 in order to fulfill 5.  Both are required by the Constitution, it would be quite an ass-pull to say that Am. 14 Sec. 4 gives additional emergency borrowing powers to the Executive Branch.)

Two: The debt ceiling law, unless explicitly repealed, implicitly limits spending after the debt ceiling is reached to revenues taken in.  The budget didn’t amend that restriction, so the restriction still applies.  Unfortunately, the debt ceiling law doesn’t specify what spending to cut or how that should be decided.  But a reasonable assumption might be that the Executive Branch (the Secretary of the Treasury?) would have the authority.

That puts the power in the right constitutional place:  When Congress passed the last budget, they either intended increased borrowing or decreased spending, they can’t have both.  That’s what should happen.  Of course, it’s not ideal for courts to try to interpret laws that are either overly vague or logically impossible, but it’s not the courts’ fault that Congress failed to do at least one of those in this case.

Some have suggested that the debt ceiling law is unconstitutional because they view all spending as sacrosanct under Am. 14 Sec. 4.  There’s a good take-down of that argument by Professor Lawrence Tribe, here.  His counter-argument is sort of like my second case above, except he doesn’t claim that “bend 4 to satisfy 1-3” is implicit in the budget, he just cites legal precedent.  (I like my argument a bit better, but Tribe’s argument certainly beats Clinton’s, and I’m willing to defer to his expertise.)  I also agree with the caveat on his conclusion:

I do not mean to suggest that, if it becomes necessary for the President to prioritize expenditures, the President is free to use whatever priorities he likes. First, the Constitution itself requires giving some expenditures (such as the payment of judicial salaries, Art. III, § 1, or payments on the public debt, Amdt. XIV, § 4) priority over others. Second, even if circumstances make it impossible for the President to obey the anti-line item veto rule announced in Clinton v. New York, he must do his best to honor the principles animating that rule: namely, using the line item veto to give the President unbounded power over spending would allow the Chief Executive to reward political allies and punish political adversaries. The President may not, for example, prioritize spending in blue states over spending in red states. Within those constitutional boundaries, however, it is up to the President to determine how spending must be prioritized when it becomes impossible to comply with all of the President’s legal obligations simultaneously.

I don’t know if that’s a reasonable prediction of what would actually happen if the debt ceiling failed to be raised.  Obama would have the first move, so if he did something other than prioritize spending, the courts would have to react to that instead.

And it’s not clear that such a “default” (not actually a default!) will happen.  There are still possible ways to avoid that, including congress actually raising the debt ceiling, or harebrained schemes in which Congress restores the “out of power party futilely opposes the debt limit raise” status quo by handing over the raise-the-debt-limit power to the Executive, reserving for Congress enough power to oppose Obama’s decision but not enough to actually succeed.

(Also, if all this media default hullabaloo has you thinking about fleeing to gold or some such, you should find this Moldbug piece interesting.)