Why the crisis of 2016 will continue for decades to come

I haven’t written recently about why Crisis 2016, sometimes called Crisis-T, happened. For that matter, why Brexit. My last takes were in 2016 …

• In defense of Donald Trump - July 2016. In which I identified the cause of the crisis, but assumed we’d dodge the bullet and HRC would tend to the crisis of the white working class.
• Trumpism: a transition function to the world of mass disability - Aug 2016. “How does a culture transition from memes of independence and southern Christian-capitalist marketarianism to a world where government deeply biases the economy towards low-education employment?"
• After Trump: reflections on mass disability in a sleepless night - Nov 11, 2016. "Extreme cultural transformation. Demographics. China. The AI era and mass disability. I haven’t even mentioned that pre-AI technologies wiped out traditional media and enabled the growth of Facebook-fueled mass deception alt-media … We should not be surprised that the wheels have come off the train.”
• Crisis-T: What’s special about rural? - Nov 16, 2016: "The globalization and automation that disabled 40% of working age Americans isn’t unique to rural areas, but those areas have been ailing for a long time. They’ve been impacted by automation ever since the railroad killed the Erie canal, and the harvester eliminated most farm workers. Once we thought the Internet would provide a lifeline to rural communities, but instead it made Dakka as close as Escanaba.”

How has my thinking changed two years later? Now I’d add a couple of tweaks, especially the way quirks of America’s constitution amplified the crisis. Today’s breakdown:

• 65% the collapse of the white non-college “working class” — as best measured by fentanyl deaths and non-college household income over the past 40 years. Driven by globalization and IT both separately and synergistically including remonopolization (megacorp). This is going to get worse.
• 15% the way peculiarities of the American constitution empower rural states and rural regions that are most impacted by the collapse of the white working class due to demographics and out-migration of the educated. This is why the crisis is worse here than in Canada. This will continue.
• 15% the long fall of patriarchy. This will continue for a time, but eventually it hits the ground. Another 20 years for the US?
• 5% Rupert Murdoch. Seriously. In the US Fox and the WSJ, but also his media in Australia and the UK. When historians make their list of villains of the 21st century he’ll be on there. He’s broken and dying now, but he’s still scary enough that his name is rarely mentioned by anyone of consequence.
• 1% Facebook, social media, Putin and the like. This will get better.

That 1% for Facebook et all is pretty small — but the election of 2016 was on the knife’s edge. That 1% was historically important.

Rupert Murdoch will finally die, though his malignant empire will grind on for a time. Patriarchy can’t fall forever, eventually that process is done. We now understand the risks of Facebook and its like and those will be managed. So there’s hope.

But the crisis of the white non-college will continue and our constitution will continue to amplify that bloc’s political power in rural areas. Even if civilization wins in 2020 the crisis of 2016 will continue. It will test human societies for decades to come.

Dyer on the 21st century crisis of mass unemployment

I believe this is true — though I’d be more confident if one of my favorite economists thought this was plausible (emphases mine):

If The Model Is Broken, Fix It | Gwynne Dyer

… The political model of Western-style democracy, which grew up alongside and then within a capitalist economic model, is now broken. Exhibit Number One is Donald Trump, but there’s lots of other evidence too.

One-third of French voters backed Marine Le Pen, a cleaned-up, user-friendly neo-fascist, in last year’s presidential election. In last September’s German election, one-eighth of the electorate voted for Alternative for Germany, a party whose more extreme wing is neo-Nazi – but it is now leads the opposition in the Bundestag, the German parliament.

Last month in Italy, the two biggest parties to emerge from the election were both led by populist rabble-rousers, one from the left and one from the right. Not to mention Brexit in Britain. And in every case the themes that dominated the populists’ rhetoric were racism, nationalism, hostility to immigrants – and jobs.

Trump rarely talked about anything else during the presidential election campaign: immigrants are stealing the jobs, free-trading American businessmen are exporting the jobs, the foreigners are eating America’s lunch….

Trump may not know a lot, but he knows One Big Thing. We are living in a new era of mass unemployment, and nobody has noticed. As Trump said the night after he won the New Hampshire primary in February 2016: “Don’t believe those phony numbers when you hear 4.9 and 5 percent unemployment. The number’s probably 28, 29, as high as 35. In fact, I even heard recently 42.”

It’s not really 42 percent, but it’s not 4.1 percent (the current official US rate) either. According to Nicholas Eberstadt’s ‘Men Without Work’, the real unemployment rate among American men of prime working age (24-55) – including those who don’t get counted because they have given up looking for work – is 17 percent.

Why didn’t we notice? Because the unemployed weren’t protesting in the streets like they did in the Great Depression of the 1930s, although the rate is getting up to Depression era levels. After the Second World War, all the Western democracies built welfare states, mainly so a new generation of radical populist leaders would not come to power the next time there is mass unemployment.

It has worked, in the sense that there is not blood in the streets this time around, but the jobless millions are very angry even if the welfare state means that they are not starving. They do vote, and unless something is done to ease their anger, next time they may vote for somebody who makes Trump look good by comparison.

But if the problem is unemployment, then the answer is not obvious, because the main cause of unemployment in Western countries is not immigration or ‘offshoring’ jobs, as Trump pretends. It is computers.

One-third of American manufacturing jobs have vanished in the past 20 years, and the vast majority of them (85 percent) were destroyed by automation. The algorithms and the robot arms have already killed the Rust Belt, and there is a plausible prediction that almost half of existing American jobs may be automated out of existence in the next 20 years.

What would our politics look like then? Not very democratic, unless we do something to ease the anger of the unemployed. This doesn’t just mean giving them more money – a massive expansion of the welfare state – but also finding way of taking the shame out of unemployment, because it is the humiliation of being seen as a loser that breeds the anger…

I’ve called this ‘mass disability’, because to me it’s a mismatch between the skills the majority of humans have and the skills needed to earn a middle class or better income.

I don’t have any other explanation for why the entire western world is simultaneously in crisis other than what I wrote about in 2010 - Globalization (China) and Information Technology.

See also:

• Unemployment and the new American economy - with some fixes 1/2011. I don’t think Universal Basic Income will work as well as engineering work.

Understanding century 21 - IT, Globalization and urban-urban migration

In the 90s the world kind of made sense. Since then, not so much. I don’t know if teens truly are experiencing an anxiety epidemic, but any American growing up in the new millennium has reason to be anxious.

I think the root causes of our disruption are globalization (China and India) and information technology (AI, robots, advertising supported web, etc) leading to peak human/mass disability and the collapse of the GOP.

I’m now considering a third factor — namely urban-urban migration (though it may be a consequence of globalization and IT rather than a root cause). The population required to sustain a viable local economy keeps increasing; this is absolutely not what we expected when the net was young. Once a city of 10,000 was viable, then a city of 50,000, then a few hundred thousand. We seem too heading towards a million as baseline.

This is politically potent here because the structure of American government gives disproportionate power to low population density regions. The pain of these communities is politically consequential. This is usually described as a “rural” crisis, but these aren’t “rural” in the traditional sense. They are regions around large towns and small cities that are no longer economically viable.

I was a family medicine resident and a young physician in communities like these. Recent stories feel familiar — they remind me of my desolate drives along the Erie Canal and the IT driven end of the mill town. It’s a worldwide thing.

Humans have been migrating from rural areas to cities for centuries. It’s often been socially disruptive. It still is, particularly because of the way American government works. The dying regions have power, and as they lose their cognitive elite they are ever more desperate and easier to deceive.

See also

• Gordon’s Notes: Crisis-T: What’s special about rural? 2016. Similar ideas from a year ago.

Peak Human and Mass Disability are the same thing

For reference - DeLong’s Peak Human and my Mass Disability are synonyms. Both refer to a surplus of productive capacity relative to labor supply, particularly the supply of non-elite cognitive labor.

I like the term ‘mass disability’ because we have a long history of supported labor for people we have traditionally called ‘cognitively disabled’.

Ok, that’s not the whole story.

I also like the term because I have a personal agenda to support persons with traditional cognitive disabilities. Using the term ‘disability’ forces us to think about how individual features become abilities or disabilities depending on the environment — something Darwin understood. Addressing the needs of the majority of human beings can also help the most disadvantaged.

Mass Disability - how did I come up with 40%?

How, a friend asked, did I come up with the 40% number for “mass disability” that I quoted in After Trump: reflections on mass disability in a sleepless night?

I came up with that number thinking about the relationship of college education, IQ curves, and middle class status. The thesis goes like this…

1. Disability is contextual. In a space ship legs are a bit of a nuisance, but on earth they are quite helpful. The context for disability in the modern world is not climbing trees or lifting weights, it’s being able to earn an income that buys food, shelter, education, health care, recreation and a relatively secure old age. That is the definition of the modern “middle class” and above; a household income from $42,000 ($20/hr) to $126,000. It’s about half of Americans. By definition then half of Americans are not “abled”.
2. I get a similar percentage if I look at the percentage of Americans who can complete a college degree or comparable advanced skills training. That’s a good proxy for reasonable emotional control and an IQ to at least 105 to 110. That’s about 40% of Americans — but Canada does better. I think the upper limit is probably 50% of people. If you accept that a college-capable brain is necessary for relative economic success in the modern world then 50% of Americans will be disabled.

So I could say that the real number is 50%, but college students mess up the income numbers. The 40% estimate for functionally disabled Americans adjusts for that.

As our non-sentient AI tech and automation gets smarter the “ability” threshold is going to rise. Somewhere the system has to break down. I think it broke on Nov 8, 2016. In a sense democracy worked — our cities aren’t literally on fire. Yet.

After Trump: information wants to be free, but knowledge is expensive

Fourteen  months ago I wrote that Trump was a sign of a healthy democracy.

That one might rank up with my Peak Oil prediction. I’m really not very good at the precision business. It’s hard to know what the future will be like, it’s harder to know when the future will be.

Trump now looks more like a cardiac arrest. Not a bit of chest pain that inspires healthier living; a full out arrest with defibrillators, chest compression and, at best, a long slow recovery. Whatever Systems we had to prevent something like Trump, they didn’t work. We have a political never event; the worst of America contending for the presidency.

When the plane crashes, when the healthy patient dies, we do a root cause analysis. Usually half a dozen things went wrong all at once; multiple safeguards failed. Some of these we know about. We had the Great Recession. We had home and wealth loss concentrated in the non-college population. We had globalization. We had, have, will have the AI world eliminating jobs — especially for the non-college. We have a demographic transition form white protestant to a mix of peoples. We have rapid evolution of social mores and constant technology churn. We have the secularization of America, the end of a historic religious consensus. We have the collapse of the GOP’s historic coalition of the wealthy and the white working class.

Those are big things. But I think we needed something else to create Trump. We needed to eliminate reality.

In our era it started with right wing AM talk radio and Rupert Murdoch’s media empire — not least Fox News. Today it manifests as a torrent of consensual hallucination racing across Facebook. Most of America, especially the non-college, live in world of dreams with only a loose connection to reality. I didn’t see that coming.

How can we correct this? The economics are not good. It takes money to do run the New York Times, almost nothing to create a false news story. The New York Times costs $200 a year — only the elite can read it now. Breitbart is free — supported by AARP ads.

Making knowledge available only to the elite is not a great survival strategy.

See also:

• The Year Knowledge Died. Conservative source, via Clark Goble. 11/2016
• How Social Media Got Weaponized—War in the Digital Age - The Atlantic 10/2016
• Beyond Lying: Donald Trump’s Authoritarian Reality 11/2016

How does the world look to Trump's core supporters?

Set aside the neo-Klan-Nazi minority. Set aside the truly despicable - Coulter, Hannity, Falwell and the like. Forget the hell-spawn who think only of their personal wealth.

Think about the white non-college male voter:

… Trump’s fortunes rest on his core supporters, white men who lack a four-year college degree … He leads Clinton among them by 76-17 percent, an enormous 59-point advantage. That’s widened from 40 points early this month; it’s a group Mitt Romney won by 31 points -- half Trump’s current margin -- in 2012.

Whatever happens with this election, that 60% gap is a staggering fact.

How does the world look like to these non-college white men of the 4th quintile?

I have limited exposure to this cohort. A few Facebook friends — but they don’t post much about Trump. A family member with a cognitive disability claims to like Trump. That’s about it.

I need a journalist-anthropologist to falsify my story. I can’t help imagining a story though. It goes like this …

• I have no hope of a secure economic future with savings, stable employment, good healthcare benefits and a pension.
• I have limited marriage opportunities. I really miss the patriarchy. I feel that in my bones.
• I watch Fox. I can understand it. Fox approves of me. Nobody else cares what happens to me.
• I don’t understand economics, but I’ve lived through the past ten years. I’ve heard a lot of broken promises. Maybe nobody understands economics. Maybe the people who understand economics are lying to me. I definitely don’t understand borrowing from a wealthier future.
• I don’t like academics.
• I don’t care about the damned polar bears. I like warm weather. I don’t like bugs. I like motors and pavement. I don’t care about CO emissions.
• I watch reality cop shows, where every criminal is a black man. I directly encounter crime and it’s always black men. I am afraid of black men. [1]
• I don’t have a lot to lose.

None of this is going to go away. If we want to keep civilization going we need to give this cohort hope.

See also:

• In defense of Donald Trump 7/2016
• Donald Trump is a sign of a healthy democracy. Really. 8/2015 (Where the alternative is the french revolution…)
• Trump explained: Non-college white Americans now have higher middle-aged death rates than black Americans 11/2015
• Trumpism: a transition function to the world of mass disability. 8/2016

- fn -

[1] As a pedestrian and cyclist I am far more likely to be injured or killed by a white woman on a phone than a black man. FWIW.

Trumpism: a transition function to the world of mass disability.

We know the shape of the socioeconomic future for the bottom 40% in the post globalization post AI  mass disability world.

But how do we get there? How does a culture transition from memes of independence and southern Christian-capitalist marketarianism to a world where government deeply biases the economy towards low-education employment?

There needs to be a transition function. A transform that is applied to a culture. With the anthropology perspective I’ve long sought Arlie Hochschild makes the case that Trump is, among other things, a transition function that erases Tea Party Marketarianism and embraces the heresy of government support (albeit for the “deserving”).

In a complex adaptive system we get the transition function we need rather than the one we want. No guarantee we survive it though.

See also:

• Trumps is a Politics of Loss and Revenge 8/2016: Marshall demolishes false dichotomy between economic distress and white racism.
• Gordon's Notes: Donald Trump is a sign of a healthy democracy. Really. 8/2015. Well, today I’d write “a desperate democracy”, but my tough love take on why we have this pathologic human being contending to more or less destroy civilization.
• Trump explained: Non-college white Americans now have higher middle-aged death rates than black Americans 11/2015. Marshall does a better job in his 2016 post.

Dissecting drug price leaps: The hydroxychloroquine story

Hydroxychloroquine (HCQ) is an old drug. It’s a descendant of chloroquine, which is as old as dirt:

Chloroquine was discovered in 1934 by Hans Andersag and coworkers at the Bayer laboratories, who named it “Resochin".  It was ignored for a decade because it was considered too toxic for human use. During World War II, United States government-sponsored clinical trials for antimalarial drug development showed unequivocally that chloroquine has a significant therapeutic value as an antimalarial drug. It was introduced into clinical practice in 1947 for the prophylactic treatment of malaria.

HCQ largely replaced chloroquine in the 1940s; when it was on patent it was sold as Plaquenil. Today it’s still used for malaria, but it’s mainstay drug for Lupus (increasingly popular) and rheumatoid arthritis. Some rheumatologists use it for osteoarthritis because it’s thought to slow cartilage erosion (few studies, mixed results).

It has a fascinating 400 year history (emphases mine):

The Nine Lives of Hydroxychloroquine | RheumNow

The HCQ story begins in 1638 when the wife of the Viceroy of Peru, Countess Cinchona, acquired malaria while living in the New World. Rather than getting the “approved” therapy, blood-letting, she was treated by an Incan herbalist with the bark of a tree (eventually, named for the countess-Cinchona Tree). Her response was dramatic; when the Viceroy returned to Spain, he brought with him large supplies of the powder for general use, which at the time was controlled by the Church and was thus called “Jesuit’s Powder”.

It took nearly two centuries for the active substance, Quinine, to be isolated from the bark (and was eventually to make a name for itself as a tonic to be added to gin).

Over the next century, quinine would become a common component in folk medicines and patent remedies for the treatment of malaria in the southern states of America, as well as for generic malaise. By the 1940s, quinine, or rather its derivative chloroquine, was recognized for its anti-malarial properties and found use among troops fighting in the Pacific during WW-II. However, it was noted that this compound had significant toxicities. In 1945, a modification of this compound via hydroxylation led to the development of HCQ, which was found to be less toxic and remains in use, without change, to this day.

Over time, physicians began to experiment with the medication and, in the early 1950s, began to use it for the treatment of SLE. ….. combination therapy [for rheumatoid arthritis], which became popular in the 1980s and has culminated in the recent studies showing the notable efficacy of triple therapy when HCQ was combined with MTX and sulfasalazine.

Most of the science regarding HCQ’s mechanism of action falls in the realm of speculation…

..  has been clearly shown to reduce the number of SLE flares, reduce the severity of SLE flares when they occur, can in some cases lead to “remission” including lupus nephritis, increase the risk of flares when stopped, and decrease the doses of prednisone needed to control the disease. In at least one study, the use of HCQ increased survival in patients with SLE by 70%…

HCQ used to be quite inexpensive — in the range of $30 a month, covered by all insurances. It’s a generic drug and it’s been off patent for decades. Things changed in late 2014 and early 2015 - shortages developed and the price jumped. The 2014-2015 Ebola epidemic disrupted health care systems and led to a surge in malaria and then high demand for HCQ to treat it.

The demand surge ended, and the drug shortage resolved, but the price has stayed high. In the US a month’s supply now costs about $400. Why hasn’t the price come down?

There used to be at least two manufacturers, but now there is only one: Covis Pharmaceuticals. Covis was acquired by Concordia, a company that makes its money by increasing the costs of old drugs. Ranbaxy, an Indian manufacturer, had severe quality issues and has itself been acquired by another similar predator - Sun Pharma. Sun is another Indian multinational with substantial power in the US generic drug market. Sun has also had FDA warnings; it’s likely their competitive edge comes from dodging FDA rules.

With the price increase the most profitable payors, like Aetna, have dropped coverage for HCQ. So the price has gone up ten fold, but Aetna’s patients are paying out of pocket.  Aetna has been more profitable than less unethical competitors like Cigna. So Aetna is growing and Cigna is being acquired. That’s another reason why DOJ should block Aetna and Anthem acquisitions.

Hydroxychloroquine is just one drug, but it’s a classic story. Dodgy manufacturers, globalization and regulatory evasion, monopoly development, price manipulation, ruthless healthcare insurance companies — the same themes appear across the lengthy ASHP drug shortage page.

There are fixes. The DOJ should absolutely block consolidation of US payors. Voters should demand government function — which today means voting against the GOP. Governments should coordinate responses. We need the “public payor” option that had to be dropped from Obamacare to keep a few Dem senators on board (all GOP opposed of course). We need the national formulary price negotiations most other countries have. We need a mixture of regulatory actions, market forces and buyer coordination to drive competition into the drug manufacturing industry. We need to end the monopolies.

It all begins with voters. Fortunately we have a meaningful election coming up. If the GOP is routed they may reform as a “smart-government” rather than “no-government” party — and we’ll have a better chance at intelligent action going forward. Vote accordingly.

Riots

Over the past few decades developed world growth in wealth and income has been captured by a small segment of the population.

Globalization and information technology have reduced demand and opportunity for the majority of Americans. We don’t have jobs filing papers, we don’t have jobs filling gas tanks, we don’t deliver mail, we don’t hand out cash at the bank. We can barely service cars any more. Computers/smartphones can’t be serviced. I call this mass disability.

America was built on slavery; the civil war was only 150 years ago. We’ll be working on our slavery issues for at least another hundred years. Black America has been, and will be, our most vulnerable and stressed population. Euro-americans are in denial about the work remaining. (We’ve made progress, but it’s one hell of a long crawl back from that abyss.)

So, riots.

1973 vs. 2013: Stagflation vs Stagbubbilation

Stagflation was a catchy way to describe the economics of the Vietnam war West:

Stagflation, a portmanteau of stagnation and inflation, is a term used in economics to describe a situation where an inflation rate is high, the economic growth rate slows down, and unemployment remains steadily high.... 

... In the version of Keynesian macroeconomic theory which was dominant between the end of WWII and the late-1970s, inflation and recession were regarded as mutually exclusive, the relationship between the two being described by the Phillips curve....

The end of this period, around the time of the Zero-sum Society [1], is conventionally ascribed to Volcker's US rate increases @1980 that increased unemployment and supposedly controlled inflation. [3]

We don't have stagflation in year 13 of the Forever War and year 16 of the Bubble era. Instead the US has "The Great Stagnation" (Cowen version) or "Secular Stagnation" [2] -- a time of low inflation/deflation, "free money" that's fueling corporate acquisitions and mega-growth, neo-Feudalism, recurrent Bubbles, and, of course, mass disability and the related return of the Basic Income movement. All, I personally believe, arising because our economic structures can't respond quickly enough to the rise of China, India and information technology. We've fallen off the exponential curve [3].

Now the people who have been mostly right over the past five years are saying we need to embrace the Bubble. Another analogy, one I prefer, is to that we can't get out of the whitewater, we have to shoot the rapids.

Which is kind of desperate advice, since there could be a waterfall down this river. It's easy to invent policy alternatives, but hard to imagine how today's democracies can implement them.

- fn -

[1] "... Thurow proposes that the American economy will not solve its most trenchant problems-inflation, slow economic growth, the environment-until the political economy can support, in theory and in practice, the idea that certain members of society will have to bear the brunt of taxation and other government-sponsored economic actions"

[2] Krugman - stagnation "of or relating to a long term of indefinite duration”

[3] Around the time the IT world began.

Sympathy for Economists

A good feature of teenagers is that they sometimes sleep in. So Emily and I can chat on a quiet Saturday morning about wearable tech (remember 1988?), and how 2013 feels a bit like 1997 or 2007 or 1923. The times when technological change seems to rev up again. To be followed, if recent  history is any guide, by yet another crash.

Which brings us to Economics, and especially to economists like Brad DeLong and Paul Krugman. 

I suspect that DeLong, and even Krugman, believe that the fundamental drivers of our economic instability are the simultaneous and related rise of both digital technologies and China and India (RCIIIT). Both DeLong and Krugman, have, at various times, written about the disruptive impact of "smart" robots (including robot/human pairings) and the related rise of 'mass disability'. Both, I suspect, share my opinion of the economic consequences of artificial sentience.

These aren't however, topics they can discuss in the context of models and mechanisms. How do you measure technological disruption? Economists still struggle to describe the productivity impacts of typewriters. Corporations can't make an internal business case for products like Yammer. We can't measure technological disruptions, and what we can't measure we can't model. What Economists can't model they can't discuss, and so they look through a keyhole into a dimly lit room and see monsters, but can't speak of them.

But the situation for Economics is even worse than that. There is a reason Krugman rants about economists who cling to models when all their predictions fail and yet retain academic respect. A discipline without falsifiability can be scholarly, but it can't be a science. It can't progress.

Economics thus lies between the Scylla of the monsters than can't be mentioned, and the Charybdis of the non-falsifiable.

No wonder Economists are dismal.

Cash purchases driving a new real estate bubble - too much wealth, too few investments

Cash-only real estate speculation in LA, Boston, Miami, San Francisco and so on (emphases mine) ...

Cash Is Fueling Quick Home Sales - NYTimes.com

... These days, the only way for would-be buyers to secure a home, it often seems, is to offer all cash and be ready to do so within hours, not days.

...first-time home buyers are competing with investors to get into single-family homes with prices approaching $1 million.

... large investors purchasing thousands of properties

... a third of all homes purchased in Los Angeles during the first quarter of this year went for all cash, compared with just 7 percent in 2007. In Miami, 65 percent of homes sold were for cash deals, compared with 16 percent six years ago.

... In Los Angeles, the median price on an all-cash home this year is about $351,000, compared with $230,000 in 2009. Over the same period, the median price over all increased to $410,000, up $85,000. In fact, last month, home prices in Southern California hit their highest level in the last five years.

... Buyers in Boston are offering $100,000 more than the asking price or placing offers on homes they have spent only minutes in.

... He also waived the inspection clause, an increasingly common practice... offers today are more likely to include escalation clauses, saying buyers will pay an additional amount over the highest bid.

... cash purchases fueled in part by international investors and retirees awash in cash after selling their homes elsewhere....

This fits reports a few months back of large numbers of purchased but unoccupied condominiums in luxury markets.

Where is all the cash coming from? The article doesn't say, but there's vast wealth in China now and few safe places to park it. Real estate is a classic Chinese investment. There's also a large amount of boomer wealth in play as my generation (noisily, because we are nothing if not loud) shuffles off the stage.

What happens next? I assume we're in for another one of our worldwide boom-bust cycles...

Gordon's Notes: Stock prices - resorting to another dumb hydraulic analogy

Why are having these worldwide boom bust cycles? 

Ahh, if only we knew. Since I'm not an economist, and thus I have neither credibility to protect nor Krugman to fear, I'm free to speculate. I think the world's productive capacity has grown faster than the ability of our financial systems to manage it. There's too much wealth and potential wealth (in a fundamental sense, regardless of central bank actions) for our system to productively absorb. We're filling a 100 ml vial from a 10 liter bucket. Or, in Bernd Jendrissek's words: "The gain is too high for the phase shift for this feedback loop to be stable."

If there's anything to this idea then we little people may want to remember the advice of Victor Niederhoffer, a wealthy man who has lost vast amounts of money in the post RCIIIT economy:

... Whenever disaster strikes, the very sagacious wealthy people take their canes, and they hobble down from their stately mansions on Fifth Avenue, and they buy stocks to the extent of their bank balances, and then a week or two later, the market rises, they deposit the overplus in their accounts, invest it in blue-chip real estate, and retire back to their stately mansions. That's probably the best way of making money, to be a specialist in panics. Whenever there's panic hanging in the air, that's a great time to invest...

Of course this implies one has a relatively tax efficient way of moving money in and out of cash -- and lots of cash to gamble without fear of unemployment. When downturns hit most of us need our cash as a hedge against job loss; only the 0.05% don't need to work. Even so, there may be a lesser version of the long game we can play to at least limit our crash pain. For example, perhaps a 21st century John Bogle will create a derivative that retail investors can purchase on the rise (when we have cash) that pays off on the fall (when we don't).

How long will it be before the world's financial systems catch up with our productive capacity -- especially given the rise of Africa and the unfolding of the post-AI world?

I suspect not in my lifetime [1]. It's whitewater as far as the eye can see.

Update: In surfing lingo a hard breaking wave is a called a "Cruncher". Perhaps "new Cruncher" is a better term than "new bubble".

- fn -

[1] Though if wealth were better distributed we might have the equivalent of filling that 100 ml vial from 10,000 1 ml vials. Much easier to stop before overfilling.

Stock prices - resorting to another dumb hydraulic analogy

Stocks are overpriced again. It's probably not too much of a bubble (yet), but we continue to be significantly above "trend".

Whatever the heck that means. Economists no longer have rational models for stock prices, Apple's share price alone makes efficient market theory seem silly.

It is at times like this that barbers stock talking about stock picks, insider traders get arrested, deficit figures improve, and people notice that BlackRock holds 4 trillion dollars in US stocks. Yeah, trillion. Soon we'll see headlines, if Time is still around, declaring "America is back".

Inevitably, people who know nothing compare post-1995 to pre-1995 stock behavior. Around the time that IT started to transform the world, and China and India became more-or-less industrialized nations, share prices became wavy over a five year timeline ....

Kind of like a roller coaster, which is what the last fifteen years have felt like. (Note roller coaster is "normal" to most people who read this, only old folks remember something more linear.)

We'd all love to know why this has happened, and if it's really going to go on like this for the next 30 years or so. So, in the last stage of desperation, amateurs like me resort to a hydraulic analogy.

Remember those trillions and trillions? It's as though they were a 10 liter bucket in the hands of BlackRock and the rest of us. The bucket is trying to hit the 1L mark in a 2L cylinder. It pours over the mark or under the mark. It's really hard to hit the mark. There's just too much money, and the market is too small.

We need a bigger market.

Update 5/26/13: I've been playing with this intuition, though I'm far from convinced it means anything. An obvious question is -- bigger compared to what? I think it's 'compared to the productive capacity of global economies. At this time, given the still underutilized potential of the educated populations of China and India, the potential of the post-AI era, and the unused capacity of recession-bound Europe, the global productive capacity is very large. Our public markets have grown over the past two decades, but my hunch is that this growth has been far exceeded by the world's productive capacity. Hence the need for bigger markets.

Why did productivity gains go to the elite after 1973?

After 1973, and especially after the early 1980s, productivity gains went towards the 1%. Media male compensation in particular went flatline... (emphases mine)

Where The Productivity Went - Krugman

Larry Mishel has a systematic breakdown of the reasons for worker income stagnation since 1973. He starts with the familiar divergence: productivity up 80 percent, the compensation (including benefits) of the median worker up only 11 percent. Where did the productivity go?

The answer is, it’s two-thirds the inequality, stupid. One third of the difference is due to a technical issue involving price indexes. The rest, however, reflects a shift of income from labor to capital and, within that, a shift of labor income to the top and away from the middle.

... Income stagnation does not reflect overall economic stagnation; the incomes of typical workers would be 30 or 40 percent higher than they are if inequality hadn’t soared.

Happily, Krugman doesn't say whether this is "fair" or "just". Those are meaningless words. Obviously one man's fair is another's unfair. No laws need be broken, though many may be bent. Purchasing politicians may speed the inequality process, but even that is probably not essential.

The interesting questions are

1. Why did this happen in the late 1970s? What changed? How much of this is a result of computerization, automation, and globalization?
2. Is this good?
3. Is this wise?
4. Should we do anything about it? If so, what should we do?

My answers are

1. It is technology and globalization, and large corporations changing the ecology of accounting and regulation to perpetuate themselves.
2. It is not good.
3. It is not wise. This is a recipe for social collapse.
4. We should do something. We should tax carbon. We should tax financial transactions. We should institute industrial policies that provide employment to the bottom 60%. We should expect to subsidize employment for the mass disabled of the information age. We should prepare for the AI age.

Your answers may vary.

See also:

• Slavery, technology, and the future of the weak 2/2012
• Life in the post-AI world. What's next? 9/2011
• The AI Age: Siri and Me 11/2011 (Shortly after I wrote this Siri stopped being useful. Coincidence :-)?)
• Mass disability goes mainstream: disequilibria and RCIIT 11/2011
• Attacking Inequality: Redistributing wealth 9/2006
• Opposition to redistribution - two causes 9/2011 - why income subsidies must be invisible
• Occupy Wall Street (OWS): the mass mind masticates 10/2011
• Where has the money gone? To the very American oligarchy. 2/2006
• The Quiet Coup - Atlantic Mobile 5/2009 - Simon Johnson. How America's de facto oligarchs came to emulate Russia's. I missed this one three years ago; it's a classic that deserves a post of its own.
• My Favorite Paul Krugman Essay: Brad DeLong (DeLong on Krugman 1998)

Foxconn vs. Apple?

A copyright troll claims ownership in China of a brand Apple thought it had bought from the original company ... in Taiwan. Chinese IP law allows litigants to block export outside China as well as sales within China ...

Second City in China Halts Sales of Apple iPads - NYTimes.com 

... the tablet computers are under “temporary impoundment” from retailers in Xuzhou, a city of 1.8 million people in coastal Jiangsu Province, Ma Dongxiao, a lawyer for Proview’s creditors and the company, said by telephone. State-owned CCTV television confirmed the seizures in Xuzhou. 

News reports Monday said that about 45 iPads had been confiscated from outlets in Shijiazhuang, the capital of Hebei Province, about 265 kilometers, or 165 miles, southwest of Beijing. Reports on the Chinese microblogging service Sina Weibo said that other retailers had removed iPads from displays, though some were selling them under the counter... 

... court in Shenzhen, China, acting in a legal dispute between the two firms, dismissed Apple’s contention that it owned the iPad name in China ... 

... Proview has also made a filing with the General Administration of Customs in China, he said, putting Apple on notice that the company could seek to block the export of iPads, should Proview’s ownership claims be upheld... . 

.. Proview, based in Hong Kong, was once one of the world’s biggest makers of computer displays. But it fell into financial difficulties and was delisted by the Hong Kong stock exchange in 2010. The company trademarked the name IPAD in several countries in 2000, intending to use it for a Web-capable hand-held device, but the project was scrapped, said Mr. Ma, the lawyer for the company. Apple bought the rights to the name from a subsidiary in Taiwan in 2009. 

Proview now contends that that sale did not cover its Shenzhen subsidiary, which had registered the trademark in China. The Shenzhen court rejected Apple’s argument against that in December, but Apple is appealing that ruling. Proview has filed another lawsuit in Shanghai; arguments in that case will be heard this month, Mr. Ma said.

China can be a rough place for US citizens with Chinese features, but this moves things up a notch -- particularly because of the ability to block iPad exports (else Apple would probably rename the device in China).

China being what it is, I wonder if the courts would rule this way if Foxconn had Apple's back. I've been wondering about Foxconn ever since I saw pictures of their MacBook clones a few months ago.

If Foxconn has decided they no longer need Apple, then Apple will find their cash reserves handy. I wonder if the big boys are betting on a stock fall.

Slavery, technology, and the future of the weak

Reading 9th grade world history as an adult I read over the names of the wicked and the great. I round years to centuries, and nations to regions.

Other things catch my eye. Reading of slavery in ancient Rome and Greece, I think of India's untouchables. The theme of surplus built upon slavery runs constantly through human history, until it blends into an industrial model of market utilization of the "The Weak".

Yeah, progress happens. I'd choose a minimum wage job in Norway, or even in Minnesota, over slavery.

So what's next? In a globalized post-industrial world, does the labor of the "Weak" have sufficient value to support a life of health and balance? If it does not, if within the framework of the post-AI world 20% of the population is effectively disabled, then what do we do?

Slavery was one answer to the problem of the weak. Industrial and agricultural employment was another. If we are fortunate, we will provide a third answer.

See also:

• Slavery and religion - Wikipedia
• A taxonomy of American politics 2/2011
• Mass disability goes mainstream: disequilibria and RCIIT 11/2011
• The AI Age: Siri and Me 12/2011
• Gordon's Notes: Life in the post-AI world. What's next? 9/2011
• The subprime mortgage story: a problem of the weak 11/2007
• Unemployment and the new American economy - with some fixes 1/2011
• Median male earnings - declining since 1969? 3/2011
• Political theory and the original position (Rawls) 6/2006
• DeLong, Mankiw and the Problem of the Weak 10/2006
• Noblesse Oblige and the Problem of the Weak: Buffett and Gates 6/2006
• French universities and the revenge of the weak 5/2006
• The market answer to dementia: Soylent Green 9/2007
• Attacking Inequality: Redistributing wealth 9/2006
• The WSJ, the American Right, and the Protestant view of sinful poverty 6/2006
• Seeking Dickens: mental illness and prisons 1/2007
• What Is Conservatism and What Is Wrong with It? 2/3005

Mass disability goes mainstream: disequilibria and RCIIT

I've been chattering for a few years about the rise of mass disability and the role of RCIIT (India, China, computers, networks) in the Lesser Depression. This has taken me a bit out of the Krugman camp, which means I'm probably wrong.

Yes, I accept Krugman's thesis that the proximal cause of depression is a collapse in demand combined with the zero-bound problem. Hard to argue with arithmetic.

I think there's more going on though. Some secular trends that will be with us even if followed Krugman's wise advice. In fact, under the surface, I suspect Krugman and DeLong believe this as well. I've read Krugman for years, and he was once more worried about the impact of globalization and IT than he's now willing to admit. Sometimes he has to simplify.

For example, fraud has always been with us -- but something happened to make traditional fraud for more effective over the past thirteen years. I think that "something" was the rise of information technology and associated complexity; a technology that allowed financiers to appear to be contributing value even though their primary role was parasitic.

Similarly, the rise of China and India is, in the long run, good for the entire world. In the near future, however, it's very hard for world economies to adjust. Income shifts to a tiny fraction of Americans, many jobs are disrupted, people have to move, to change careers, etc. It takes time for new tax structures to be accepted, for new work to emerge. IT has the same disruptive effect. AI and communication networks will further limit the jobs we can take where our economic returns are equal or greater than the minimum wage.

I think these ideas are starting to get traction. Today Herman Gans is writing in the NYT about the age of the superfluous worker. A few days ago The Economist reviewed a book about disequlibria and IT

Economics Focus: Marathon machine | The Economist

... Erik Brynjolfsson, an economist, and Andrew McAfee, a technology expert, argue in their new e-book, “Race Against the Machine”, that too much innovation is the bane of struggling workers. Progress in information and communication technology (ICT) may be occurring too fast for labour markets to keep up. Such a revolution ought to be obvious enough to dissuade others from writing about stagnation. But Messrs Brynjolfsson and McAfee argue that because the growth is exponential, it is deceptive in its pace...

... Progress in many areas of ICT follows Moore’s law, they write, which suggests that circuit performance should double every 1-2 years. In the early years of the ICT revolution, during the flat part of the exponential curve, progress seemed interesting but limited in its applications. As doublings accumulate, however, and technology moves into the steep part of the exponential curve, great leaps become possible. Technological feats such as self-driving cars and voice-recognition and translation programmes, not long ago a distant hope, are now realities. Further progress may generate profound economic change, they say. ICT is a “general purpose technology”, like steam-power or electrification, able to affect businesses in all industries...

... There will also be growing pains. Technology allows firms to offshore back-office tasks, for instance, or replace cashiers with automated kiosks. Powerful new systems may threaten the jobs of those who felt safe from technology. Pattern-recognition software is used to do work previously accomplished by teams of lawyers. Programmes can do a passable job writing up baseball games, and may soon fill parts of newspaper sections (those not sunk by free online competition). Workers are displaced, but businesses are proving slow to find new uses for the labour made available. Those left unemployed or underemployed are struggling to retrain and catch up with the new economy’s needs.

As a result, the labour force is polarising. Many of those once employed as semi-skilled workers are now fighting for low-wage jobs. Change has been good for those at the very top. Whereas real wages have been falling or flat for most workers, they have increased for those who have advanced degrees. Owners of capital have also benefited. They have enjoyed big gains from the increased returns on investments in equipment. Technology is allowing the best performers in many fields, such as superstar entertainers, to dominate global markets, crowding out those even slightly less skilled. And technology has yet to cut costs for health care, or education. Much of the rich world’s workforce has been squeezed on two sides, by stagnant wages and rising costs.

In time the economy will adjust  -- unless exponential IT transformation actually continues [1]. Alas, the AI revolution well is underway and technology cycles are still brutally short.  I don't see adjustment happening within the next six years. The whitewater isn't calming.

[1] That is, of course, the Singularity premise, as previously reviewed in The Economist.

Update 12/3/2011: And how does the great stagnation play into this - Gordon's Notes: Ants, corporations and the great stagnation?

Netflix, Amazon, and Dickens

Netflix is getting out of the messy, labor intensive, business of mailing physical DVDs. Now they are purely digital. They won't need postmen or people to fill the gaps machines couldn't manage. They can scale without hiring.

It is the 21st century way.

Amazon can't do this [1]. They cannot, yet, make do with robots. They have jobs for the non-elite. Jobs in a Dickensian world...

The Fraying of a Nation's Decency - ANAND GIRIDHARADAS - NYTimes.com

... Thanks to a methodical and haunting piece of journalism in The Morning Call, a newspaper published in Allentown, Pennsylvania, I now know why the boxes reach me so fast and the prices are so low. And what the story revealed about Amazon could be said of the country, too: that on the road to high and glorious things, it somehow let go of decency.

The newspaper interviewed 20 people who worked in an Amazon warehouse in the Lehigh Valley in Pennsylvania. They described, and the newspaper verified, temperatures of more than 100 degrees Fahrenheit, or 37 degrees Celsius, in the warehouse, causing several employees to faint and fall ill and the company to maintain ambulances outside. Employees were hounded to “make rate,” meaning to pick or pack 120, 125, 150 pieces an hour, the rates rising with tenure. Tenure, though, wasn’t long, because the work force was largely temps from an agency. Permanent jobs were a mirage that seldom came. And so workers toiled even when injured to avoid being fired. A woman who left to have breast cancer surgery returned a week later to find that her job had been “terminated.”

The image of one man stuck with me. He was a temp in his 50s, one of the older “pickers” in his group, charged with fishing items out of storage bins and delivering them to the packers who box shipments. He walked at least 13 miles, or 20 kilometers, a day across the warehouse floor, by his estimate.

His assigned rate was 120 items an hour, or one item every 30 seconds. But it was hard to move fast enough between one row and the next, and hard for him to read the titles on certain items in the lowest bins. The man would get on his hands and knees to rummage through the lowest bins, and sometimes found it easier to crawl across the warehouse to the next bin rather than stand and dip again. He estimated plunging onto his hands and knees 250 to 300 times a day. After seven months, he, too, was terminated...

Which brings me to Bernstein, who echoed a recent post of mine ...

The Policy Backdrop of Inequality and Its Implications for “Class Warfare” | Jared Bernstein | On the Economy

...Technological change, most recently computerization/IT, is also thought to be a significant factor behind the changes in the graph, though the evidence here is more ambiguous.  (One strain of work, for example, argues that technology has increased labor demand for both high skill and low skill work, while leaving out the middle.)..

... Then there’s a bunch of stuff that directly raises or lowers the bargaining clout of middle and working class families—policy changes or missed policy opportunities that have hurt or failed to help them.

–the long-term erosion of the minimum wage
–the absence of legislative protection to balance the organizing playing field for those who want to collectively bargain
–the inattention to labor standards such as wage and hour rules, overtime regs, workplace safety, worker classification ...

We have a diverse population. We are not all equally suited to the narrow range of work that seems America's natural fate. Education is not the answer; we are not all didacts. We need a diverse set of employment opportunities, and we need to prevent the cruelties of the market red in tooth and claw.

[1] Update: Duh. After I wrote this I remembered they started out moving books, and now they ship them by wire.

Mass disability and the middle class

My paper magazine has another article on the Argentinification of America - Can the Middle Class Be Saved? - The Atlantic.

I'll skim it sometime, but I doubt there's much new there. We know the story.  The bourgeois heart of America is fading. In its place are the poor, the near poor, the rich and the near rich.

I have thought of this, for years, as the rise of mass disability. In the post-AI world the landscape of American employment is monotonous. There's work for people like me, not so much for some I love. Once they would have worked a simple job, but there's not much call for that these days. Simple jobs have been automated; there's only room for a small number of Walmart greeters. Moderately complex jobs have been outsourced.

Within the ecosystem of modern capitalism a significant percentage of Americans are maladapted. I'd guess about 25%; now 35% thanks to the lesser depression.

There are two ways to manage this - excluding the Swiftian solution.

One is to apply the subsidized employment strategies developed for adults with autism and low IQ. Doing this on a large scale would require substantial tax increases, particularly on the wealthy.

Another approach is to bias the economy to a more diverse landscape with a greater variety of employment opportunities -- including manufacturing. This is, depending on whether you are an optimist or realist, the approach of either modern Germany or Nehru's India. This bias compromises "comparative advantage", so we can expect this economy, all else being equal, to have a lower than maximal output. Since in our world the benefits of total productivity flow disproportionately to the wealthy (winner take all), this is equivalent to a progressive tax on an entire society.

So, either way,  the solution is a form of taxation. Either direct taxation and redistribution, or a decrease in overall growth.

I suspect that we will eventually do both.

See also:

• Unemployment and the new American economy - with some fixes (1/11)
• Post-industrial employment: adjusting to a new world (5/10)