The Deadly Equations

Brian Hamilton, co-founder of Sageworks, writes at USA Today:

The arrogance of the tech world (I’m in it) is that we believe we are immune from the basic laws of economics. We are physicists who have created our own world in which we jump off a building and expect not to fall or, if we do fall, we expect someone else to catch us. Moreover, we are enabled by others (like bankers) who ought to know better that we are not worth more simply because we are tech people or “cloud people” or people who wear Steve Jobs smart-guy glasses.

I have never heard a good argument as to why tech companies should be valued more than, say, a dry cleaner or a construction company.

I’ll offer him one. Tech companies are unlikely to see the expense side of their ledgers grow directly with their revenues. The real question is whether they have any prospects for revenues.

And those are precisely the reasons that as a society we shouldn’t be as interested in tech companies as we are. By concentrating wealth they aggravate our problems.

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The No-Brainer

You know, if you only count the income side of the ledger, as Kevin Shih does at The Conversation in his post in support of increasing immigration, the argument in favor will prevail every time.

As I have said innumerable times before I think we should have a skills-based immigration policy along the lines of those in Canada, Australia, and New Zealand. I also favor more federal oversight to ensure that importing workers is not used as a device for pushing domestic wages down. I also support greatly increasing the number of work visas available to Mexican citizens. “Comprehensive immigration reform” stands athwart such commonsense policies screaming “Stop!”

I wish that Dr. Shih would write another article on the net gains or costs of immigration looking solely at immigrants without high school educations or even moderate command of the English language. I suspect that I will never see it.

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The Problem of Pensions

In his most recent Washington Post column on the fiscal problems presented by public pensions, after noting Illinois as an object lesson, George Will remarks:

The generic problem in the public sector is the moral hazard at the weakly beating heart of what Walter Russell Mead calls the “blue model” of governance — the perverse incentives in the alliance of state and local elected Democrats with public employees’ unions. The former purchase the latter’s support with extravagant promises, the unrealism of which will become apparent years hence, when the promise-makers will have moved on. The latter expect that when the future arrives, the government that made the promises can be compelled by law or political pressure to extract the promised money from the public.

This game, a degradation of democracy, could be disrupted by laws requiring more realistic expectations about returns on pension fund investments, or even by congressional hearings to highlight the problem. But too much of the political class has skin in the game.

Unlike most Illinois cities, Chicago bears the full burden of the public pensions, whether for teachers or other public employees, it has offered over the years. But Chicago can’t solve its problems on its own, not with the barriers the state has placed in its path. The city does not have the power to impose an income tax or city earnings tax, moves which in all likelihood would drive more businesses out of Chicago. The state constitution, supported by Illinois Supreme Court decisions, insists that not only must public pensions be paid they cannot be reduced.

Consequently, Chicago will need help from the state.

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How to Become Irrelevant

At the Washington Post Lanae Erickson Hatalsky and Jim Kessler concur with my analysis. Winning 100% of the vote in a handful of counties or even a handful of states is not the path to victory for the Democrats:

“Demography equals destiny” also presumes voters are static beings with unwavering ideologies and consistent voting behavior. But voters aren’t merely reflections of their demographic characteristics, and it’s insulting to treat them that way. Young voters and voters of color aren’t monolithic liberal blocs who will always and reflexively support Democrats. As noted in our report, 44 percent of millennials call themselves independents and only 30 percent are liberals. Among Latinos, 37 percent are Independents and only 28 percent liberals. That means 7 in 10 within these rising American electorate groups consider themselves moderate or even conservative.

That is why we sometimes see dramatic shifts in voting. Independent voters went for Democrats by 17 points in 2006 then supported Republicans by 18 points just four years later. This changeability is evident at the presidential level as well. While Clinton won basically the same number of voters as President Barack Obama did in 2012 (both just under 66 million), there was tremendous voter volatility underneath the surface. A stunning 403 counties that voted for Obama at least once flipped to Trump. In 28 states, the margin of victory for either Trump or Clinton moved decisively from 2012 — by five points or more. Clinton actually outperformed Obama by more than 1 million votes in New York, Massachusetts and California and underperformed him by 3 million votes everywhere else. These are not the presumptively partisan decisions of an electorate driven to vote based on static demographic characteristics. They are the messy result of a push and pull with voters of all demographic stripes who aren’t in the bag for either side.

I believe that the road to relevance lies through good governance. Indiana may be Republican because it’s heavily white but good governance helps to keep it Republican. There are both Democrat-dominated states and Republican-dominated states on the lists of both well-run and poorly-run states. Affiliation won’t prevail forever. Minnesota is even whiter than Indiana and it was run by Democrats. Whatever they were doing worked. Then it stopped working and eventually the people turned elsewhere.

As a famous Illinoisan once said, you can fool all of the people some of the time and some of the people all of the time but you can’t fool all of the people all of the time. Even in Illinois. I guess the question is whether those you can fool are a majority of the voters.

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It’s Illinois That’s Over the Barrel

The editors of the Wall Street Journal weigh in on Illinois’s ongoing political kabuki:

The deal now being crafted in the state Senate would increase the state’s flat income-tax rate to somewhere around 5% from the current 3.75%. That is close to the increase the state endured in 2011 when former Governor Pat Quinn raised the income tax to 5% from 3%. That tax hike partially expired (declining to 3.75%) on December 31, 2014 and Democrats say restoring it is the secret to solving the state’s problems.

That’s hilarious since the years of an elevated income tax produced one of the country’s weakest state economic recoveries, with bond-rating declines in Chicago and staggering deficits statewide. The state has a $11.9 billion backlog of unpaid bills and $130 billion in unfunded pension liabilities, according to the state’s Commission on Government Forecasting and Accountability.

In 2011 Senate President John Cullerton said the point of the temporary hike was to pay pensions, “pay off our debt [and] to have enough money to pay the interest on that debt.” But the roughly $31 billion it generated made hardly a dent. Since 2011 the unfunded pension liability in Illinois has grown by $47 billion, even as the tax hike was mostly spent on pensions. Meanwhile, Democrats won’t change the state constitution to allow for pension reform that won’t be overturned by the Illinois Supreme Court.

I’m not opposed to a tax hike out of hand but there are limits. Here in Chicago if my property taxes double every triennial assessment as they did this time around it will drive me out. I can’t afford that. Very few can and it hits the poor the worst of all. Even those who rent rather than own are affected by increases in property taxes.

Thinking that absent any pressure to introduce reforms that would actually help the state of Illinois our state legislators will act out of public spiritedness requires the willing suspension of disbelief in our fiscal drama. We don’t just need higher taxes. We need a prospering economy and the smaller tax base as 40 years that Mike Madigan’s Speakership has brought us makes our problems that much harder to solve.

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Loss

Regardless of where you place yourself on the political spectrum, I urge you to read Nicholas Eberstadt’s recent essay on the state of the United States in the 21st century at Commentary, “Our Miserable 21st Century”:

On the morning of November 9, 2016, America’s elite—its talking and deciding classes—woke up to a country they did not know. To most privileged and well-educated Americans, especially those living in its bicoastal bastions, the election of Donald Trump had been a thing almost impossible even to imagine. What sort of country would go and elect someone like Trump as president? Certainly not one they were familiar with, or understood anything about.

Whatever else it may or may not have accomplished, the 2016 election was a sort of shock therapy for Americans living within what Charles Murray famously termed “the bubble” (the protective barrier of prosperity and self-selected associations that increasingly shield our best and brightest from contact with the rest of their society). The very fact of Trump’s election served as a truth broadcast about a reality that could no longer be denied: Things out there in America are a whole lot different from what you thought.

Yes, things are very different indeed these days in the “real America” outside the bubble. In fact, things have been going badly wrong in America since the beginning of the 21st century.

I think he makes a pretty good case that something has gone seriously awry, producing economic and health evidence to support it.

Reasonable people can differ in their opinions on the explanation for this. My own view is that significant proportions of the American people have rejected the heretofore prevailing mythology and ethos of America, without which, since we don’t have ties of blood or shared history, there isn’t much left of America.

Additionally, roughly a sixth of Americans arrived here from somewhere else. As I’ve documented here previously, immigrants may not arrive on our shores with much in the way of material possessions but they do carry their myths and their ethos with them and, with the loss of confidence in our own myths and ethos, they don’t see any compelling reason to change.

Keep in mind that when John Dewey laid the foundation for the American public school system more than a century ago it was under conditions that resemble our present ones more than any time in the intervening years. The explicit object of that system was to cultivate that shared mythology and ethos and inculcate it into the children of immigrants. How can you inculcate in others something in which you do not believe?

I presume the retort to Mr. Eberstadt’s observations will be that at least we have NetFlix, Facebook, and Google.

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The Fallacy of Education

I said I’d write some more about higher education today and this is it. The table below lists the percent of the population with college degrees, the gross state product, and labor productivity for six states not exactly taken at random.

State Percent with college degrees GSP in Millions Labor Productivity
California 37.9% 2,448,467 295.87
Oregon 37.6% 228,120 333.33
Washington 40.9% 448,404 234.49
Iowa 45.5% 171,532 391.15
Minnesota 49.8% 334,780 289.10
Wisconsin 41.3% 300,699 369.08

Why did I pick those states? Because the three West Coast states I picked are frequently held up as examples of the future of the economy and I just happened to know that the Upper Midwest has a very strong tradition of higher education, bolstered by the large number of small public and private colleges in those states. Basically, lots of farmers send their kids to college in Iowa, Minnesota, and Wisconsin.

If this were a doctoral dissertation rather than a blog post I’d go to the trouble of listing all 50 states rather than just a 6 state sample. If there is a relationship between a state’s percentage of college educated individuals, its gross state product, or it labor productivity, it’s not an obvious straight-line one.

Labor productivity is defined as the gross state product divided by hours worked. I couldn’t find that reported by state so I calculated it myself. I’m going to admit right off that in calculating the labor productivity factors I’ve made all sorts of assumptions so it can’t be anything more than the crudest of approximations. But here’s the thing. If there were a relationship among any of those things, you’d expect to see something even in a crude approximation. In a vague analogy with the Michelson-Morley experiment, that table is significant because of what it fails to reveal rather than what it does.

If you’ve got some compelling proof beyond average incomes that higher education increases income, GDP, or labor productivity, show it. The income differentials between different sectors of the economy and different jobs within sectors are so enormous that averages tell us nothing. A couple of hundred MBAs who just happen to be CEOs of Fortune 500 companies skew the results of the tens of thousands of English majors working at minimum wage jobs too much.

Sources:
U. S. Department of Education
Overflow Data (based on Census Bureau Community Survey)
Bureau of Economic Analysis

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Too Soon We Get Old Too Late We Get Smart


I see that the editors of the New York Times have finally gotten wise to something I’ve been pointing out for years:

Blaming robots, though, while not as dangerous as protectionism and xenophobia, is also a distraction from real problems and real solutions.

The rise of modern robots is the latest chapter in a centuries-old story of technology replacing people. Automation is the hero of the story in good times and the villain in bad. Since today’s middle class is in the midst of a prolonged period of wage stagnation, it is especially vulnerable to blame-the-robot rhetoric.

And yet, the data indicate that today’s fear of robots is outpacing the actual advance of robots. If automation were rapidly accelerating, labor productivity and capital investment would also be surging as fewer workers and more technology did the work. But labor productivity and capital investment have actually decelerated in the 2000s.

While breakthroughs could come at any time, the problem with automation isn’t robots; it’s politicians, who have failed for decades to support policies that let workers share the wealth from technology-led growth.

So far, so good. Unfortunately, they lurch from there into proposing the usual suspects:

When automation on the farm resulted in the mass migration of Americans from rural to urban areas in the early decades of the 20th century, agricultural states led the way in instituting universal public high school education to prepare for the future. At the dawn of the modern technological age at the end of World War II, the G.I. Bill turned a generation of veterans into college graduates.

When productivity led to vast profits in America’s auto industry, unions ensured that pay rose accordingly.

Corporate efforts to keep profits high by keeping pay low were countered by a robust federal minimum wage and time-and-a-half for overtime.

Fair taxation of corporations and the wealthy ensured the public a fair share of profits from companies enriched by government investments in science and technology.

IMO the problem is much simpler than that. Slow wage and productivity growth are being caused by a slack labor market which in turn has been produced by importing large numbers of foreign workers.

Chasing the will o’ the wisps of education or unionization won’t get you anything except higher wages for college administrators and union officials. Unionization was an effective way of producing higher wages during a period when the labor market was tight not slack. In other words it was the labor market not the unionization.

More on higher education later.

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That One Sentence

There’s one sentence in Scott Winship’s post at RealClearPolitics, ostensibly a review of Ed Conard’s book, The Upside of Inequality, that caught my eye. Here it is:

As Conard notes, “It is illogical for a CEO managing five employees to earn the same pay as one managing fifty thousand employees.”

I agree. That’s why I want there to be thousands more companies with five employees and fewer with fifty thousand employees. Especially when those companies with 50,000 employees got that way through crony capitalism, rent-seeking, federal bailouts, government-granted monopolies, or government contracts. I think you’d be surprised at how frequently that’s the case.

Remember that John D. Rockefeller founded his enormous fortune on war profiteering sales to the Union Army during the Civil War.

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What Happened With Globalization?

Non-zero sum, egalitarian Non-zero sum, non-egalitarian
Zero sum,egalitarian Zero sum, non-egalitarian

I hate to break it to Carl Bild, who, in his paean at Project Syndicate to globalization, longs to “restore faith” in it:

The strong will always manage, but the weak will bear the burden of a nostalgic protectionism that erodes the benefits of globalization. At the World Economic Forum’s Annual Meeting in Davos this year, Chinese President Xi Jinping was the one extolling the virtues of globalization, while many Western business leaders wandered the halls trying to sound concerned for the supposed losers of the process.

The communists are keeping the globalization faith; but the capitalists seem to have lost theirs. This is bizarre – and entirely out of sync with past performance and current facts. We have every reason to be confident in a process that has delivered more prosperity to more people than anyone could have dreamed of just a few decades ago. We must not be shy in defending globalization and combating reactionary nostalgia.

We can have a brighter future – but only if we don’t seek it in the past.

but it’s not faith that globalization needs but empirical evidence. And the line isn’t drawn between “communists” and “capitalists” but within “communist” countries or within “capitalist” ones.

Consider my little diagram above. What actually happened in globalization? Let me define a few terms. “Zero sum” means that whatever is lost by one participant is gained by another. “Egalitarian” means more or less evenly distributed within the economy or society of a participant.

A lot depends on what actually happened. I think there’s mounting evidence that globalization largely consisted of redistributing wealth from poor or middle income people in rich countries to rich people in poor countries or rich and secondarily the poor in poor countries. Whether you think that’s a benign process may depend on whether you’re a rich person or not.

It makes a huge difference whether globalization has been non-zero sum and egalitarian or zero sum and non-egalitarian.

Consider the evidence I produced a few weeks ago about the results of NAFTA. If that analysis was true Mexico benefited substantially by it while the U. S. benefited hardly at all. But who in Mexico benefited and what actually happened in the U. S.?

If poor or middle income people in Mexico did not benefit nearly as much as Mexico’s rich did, it would go a long way to explaining why NAFTA did not stem the flood of illegal immigration from Mexico to the United States as its proponents claimed it would. And, if there was little net benefit in the pact to the United States but poor and middle income Americans were hurt while rich Americans got even richer, that’s a reasonable explanation for what we’ve actually seen.

So, produce your evidence. Don’t ask us to take it on faith.

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