Falsifiability, String Theory, and Policy

An interesting post by Noah Theory vs. Data in economics. This is related to the long-standing debate over falsifiability and science, and this ties into Popper’s demarcation problem:

Logically, no number of positive outcomes at the level of experimental testing can confirm a scientific theory, but a single counterexample is logically decisive: it shows the theory, from which the implication is derived, to be false. The term “falsifiable” does not mean something is made false, but rather that, if it is false, it can be shown by observation or experiment. Popper’s account of the logical asymmetry between verification and falsifiability lies at the heart of his philosophy of science. It also inspired him to take falsifiability as his criterion of demarcation between what is, and is not, genuinely scientific: a theory should be considered scientific if, and only if, it is falsifiable. This led him to attack the claims of both psychoanalysis and contemporary Marxism to scientific status, on the basis that their theories are not falsifiable.

This is the major criticism of String Theory – not that String Theory is wrong, but because it cannot even be shown that it is wrong. So the debate is, if something or some theory cannot be readily falsified, it is still science?

String Theory succeeds because it offers a means that is logically consistent to bridge gravity and quantum mechanics, and the strings themselves are building blocks for all particles. If someone can come up with a logically consistent theory that is as encompassing as string theory and can be tested and verified with existing technology, the physics community is all ears.

The tyranny of Popperism impedes the progression of knowledge and theory. The Graviton may never be detected, but that doesn’t render String Theory useless or invalid. Theoretical physicists and economists have the tools to dismiss theories that are nonsense prima facie, so what remain are theories that are mathematically and logically consistent even if they cannot be adequately falsified.

Nicholas Nasisim Taleb, for example, is a major critic of science that uses abstract, difficult-to-test models, instead preferring simple heuristics instead of theory.

The models, while sometimes having limitations, are good enough for the vast majority of situations. Even a non-deterministic system like stock market can often be adequately approximated with models. Black Scholes option pricing works in most instances, and then more complicated modifications like stochastic volatility, barriers, and jumps can be added for improved accuracy. Eventually the model is very comprehensive for all but very, very few outliers, but presence of these outliers doesn’t mean we throw away the model. For Taleb to imply that statisticians are clueless about the limitations of their models, when in fact statisticians are well aware of them, is pedantic nitpicking on his part, an example of how Taleb intentionally misconstrues the views of his ideological opponents to advance his own personal biases. A complete option table for a stock, with all expirations and strikes, typically has thousands of entries, all of which are updated continuously as the underlying stock rises and falls throughout the day. To make these updates with heuristic methods would be impractical, hence the use of mathematical option pricing models to perform all these updates instantly.

But public policy, on the other hand, is a different matter. String Theory is likely to remain confined to laboratories, but economic policy can have ramifications for everyday life, with individuals who may bear the consequences of bad economic policy that is based on a faulty theoretical model. So the questions is, what is sufficient burden of proof for public policy? The problem with economics, unlike the hard sciences, is that it’s almost always possible to find counterexamples. Even fundamental concepts like Comparative Advantage are subject to debate among economists, which would be like the equivalent of physicists debating Newton’s Second Law. I can cite studies where tax cuts help the economy, but others can probably find studies that show the opposite. I can show studies that raising the minimum wage hurts job growth; others can find counter-evidence. And so on. In almost every economics study, there are counterexamples.

Liberal policies like the Obama Stimulus and Cash for Clunkers failed because the results did not align with the economic models that underpinned those policies, but one could try to make the same argument against Bush tax cuts as also being an example of policy that did not meet the expectations of the model, specifically the Laffer Curve. My idea of ‘good policy’ biased in favor of private policy that combines low taxes and low regulation of Reaganomics with HBD-based public policy, and liberals will have a different idea of ‘good policy’.

Economics Myths, Part 2: America Is In Decline/The Dollar Is Weak

This is part two of the ongoing economics myths series. A common refrain among the media these days is that ‘America is in decline’ or that the ‘dollar is going to become obsolete’. The Economist has jumped onto the dollar-is-doomed bandwagon, with the article The primacy of the US dollar looks unsustainable, which offers no compelling evidence that the dollar is actually in decline, or proof that is will become superseded, just suppositions that maybe in the distant future for vague reasons it will be. 95% of economics articles are vague and wishy-washy, often because there is little in the way of solid, empirical evidence to support the author’s view, so the author is left with little recourse but to do a lot of “hand-waving” and hope that the reader doesn’t notice.

Fortunately in the comments section on Hacker News people did notice, rightfully tearing apart the article.

Best of luck finding an investment as safe as US Treasuries (dominated in good ole greenbacks).
With Europe in economic malaise and China’s economy hitting the brakes, it’ll be a long time before US economic supremacy is challenged.

Someone else comments:

Not likely, the US is on the rise again after suffering a decade plus of weakness.

The strong dollar is powering the US economy ahead while most of the world is struggling to stay above water. Americans gained roughly 20-25% in purchasing power against the rest of the world in just the last 18 months. US households have paid down a vast amount of debt in five years, significantly improving their debt to income ratio (while much of the world has done the opposite). Full-time job openings are at 15 year highs. The US share of all global wealth remains above 45%. The US median income remains among the highest of any nation, with no indication of erosion inbound. US economic competitiveness is among the highest, and total US manufacturing output is the highest it has ever been. Economically the US has been persistently getting better the last three to four years. The US is also about to enter a significant wage increase cycle that will see the standard of living move upward for the first time since the late 1990s.

By comparison, China is a disaster; Japan is stuck in the same hole it has been in for 25 years with ‘deflation’ (debt) continuing to eat away at their economy; Europe hasn’t seen net GDP expansion since roughly 2007, with the Eurozone having twice the unemployment rate of the US, and with the Eurozone QE program failing to boost growth meaningfully.

Further, US neighbors Canada and Mexico both have done tremendously well over the last decade and will continue to, which will act as a multiplier for the US economy.

All of this is true….compared to the rest of the world, America’s economy is doing pretty well, as I explain further here: Evidence That America Is Not In Decline.

Post-crisis US GDP growth is trouncing other developed countries:

And since 2014, the US dollar has trounced its peers:

The left, as part of their ‘anti-America’ agenda, want to believe that primacy of the US is unsustainable due to wealth inequality and other imagined problems. But, despite the left’s pessimism, the rest of the world apparently cant get enough of America, as I explain Wealthy foreigners bought $100 billion in US real estate:

So much for the ‘post America’ era that many leftist pundits predicted in 2008 and 2009 – the exact opposite has happened. From surging stocks, to the unending inflow of foreign capital, to a strong dollar, America has been emboldened, it’s economic hegemony only strengthened in recent years compared to the rest of the world, with the exception of China and India, which has fallen behind or stagnated. America is not just pulling ahead of the rest of the world, it’s running victory laps. As middle-America, bombarded with doom and gloom from the sensationalist media, gripe about the lousy labor market, flat wages, and America’s ‘best days being behind it’, rich, high-IQ foreigners can’t get enough of America, buying-up America’s most valuable real estate in the epicenters of intellectualism and wealth creation, Manhattan and Silicon Valley, and inundating America’s most prestigious schools and tech companies with applications.

Since 2008 or so, we’ve seen the rise of the West and the decline of the rest. But why is this? Maybe because America, through its free market, rewards high-IQ and innovation more so than other countries, which tend to be corrupt, inefficient, and socialist (or at least worse than America). If you’ve ever been to a a liberal-leaning foreign country, you’ll immediately notice how lackadaisical everything is, and that is because there is little accountability, unlike in America where employees are under a lot of pressure to perform good service or risk getting fired in the competitive job market. America, more so than most countries, values competence and quantifiable results.

Economics Myths, Part 1: Budget Surpluses Are Always Good

This is the first post of a multi-part series of common economics misconceptions. Economics may be the ‘gloomy science’, but it also tends to be a counterintuitive one as well. The media, often ignorant about the intricacies of macroeconomics, unwittingly spread these fallacies to the general public, as well as regurgitated by politicians who, like the media, also tend to be naive about economics.

The first part is about the fallacy of composition as it pertains to budget deficits in America. The fallacy of composition is the mistaken belief that a large system can be generalized by one of its smaller components, or the belief that a smaller system is representative of the bigger one it belongs to. While it may be prudent for a household to save money (run a surplus), it may not be so for a country. In this case, the smaller component is the household, which is a part of the bigger system (the state). A state, unlike a household, is better suited to running deficits due to these key differences:

A state can roll over its debt in perpetuity, whereas for a household debt is discharged upon death of the debtor.

A state can print money; a household obviously cannot.

A state, particularly in the case of reserve currency status, has much cheaper borrowing costs than an individual. The US government can borrow 30-year debt at just 3% a year and 10-year debt at less than 2%; meanwhile credit card debt for an individual can run as high as 20-30% a year. Japan and Germany are other examples of countries that have very cheap borrowing costs due to reserve currency status. The best an individual can hope for is to have a high credit score.

This is why, as I’ve explained numerous times, contrary to the debt doom and gloom in the media, the national debt may not be such a big of a deal. But doesn’t mean we should squander our reserve currency status by spending indiscriminately. Emerging markets like Brazil and Turkey, on the other hand, do not have reserve currency status, and this a major reason why they pay much higher interest on their debt and are at a much higher risk of defaulting.

But back to the topic of surpluses, why are they not so great? Remember the infamous Clinton surplus, widely touted by the media as the crowning economic achievement of the Clinton administration? What the liberal media won’t tell you is that the economy actually entered a recession in 2001 on it, which is why the recession is sometimes mistakenly called the ‘Bush recession’, but it began in the late 90′ at the end of the Clinton’s second term. That’s right… ‘the great Clinton surplus’ may have caused a recession. The reason why is explained in an excellent article by L. Randall Wray, Teaching the Fallacy of Composition: The Federal Budget Deficit. This should be required reading for anyone who wishes to better understand macroeconomics:

We can divide the economy into 3 sectors. Let’s keep this as simple as possible: there is a private sector that includes both households and firms. There is a government sector that includes both the federal government as well as all levels of state and local governments. And there is a foreign sector that includes imports and exports; (in the simplest model, we can summarize that as net exports—the difference between imports and exports—although to be entirely accurate, we use the current account balance as the measure of the impact of the foreign sector on the balance of income and spending).

At the aggregate level, the dollar spending of all three sectors combined must equal the income received by the three sectors combined. Aggregate spending equals aggregate income. But there is no reason why any one sector must spend an amount exactly equal to its income. One sector can run a surplus (spend less than its income) so long as another runs a deficit (spends more than its income).

Historically the US private sector spends less than its income—that is it runs a surplus. Another way of saying that is that the private sector saves. In the past, on average the private sector spent about 97 cents for every dollar of income.

Historically, the US on average ran a balanced current account—our imports were just about equal to our exports. (As discussed below, that has changed in recent years, so that today the US runs a huge current account deficit.)

Now, if the foreign sector is balanced and the private sector runs a surplus, this means by identity that the government sector runs a deficit. And, in fact, historically the government sector taken as a whole averaged a deficit: it spent about $1.03 for every dollar of national income.

Note that that budget deficit exactly offsets the private sector’s surplus—which was about 3 cents of every dollar of income. In fact, if we have a balanced foreign sector, there is no way for the private sector as a whole to save unless the government runs a deficit. Without a government deficit, there would be no private saving. Sure, one individual can spend less than her income, but another would have to spend more than his income.

While it is commonly believed that continual budget deficits will bankrupt the nation, in reality, those budget deficits are the only way that our private sector can save and accumulate net financial wealth.

Budget deficits represent private sector savings. Or another way of putting it: every time the government runs a deficit and issues a bond, adding to the financial wealth of the private sector. (Technically, the sum of the private sector surpluses equal the sum of the government sector deficits, which equals the outstanding government debt—so long as the foreign sector is balanced.)

Of course, the opposite would also be true. Assume we have a balanced foreign sector and that the government runs a surplus—meaning its tax revenues are greater than government spending. By identity this means the private sector is spending more than its income, in other words, it is deficit spending. The deficit spending means it is going into debt, and at the aggregate level it is reducing its net financial wealth.

Here is another excellent article that explains why surpluses may not be desirable, with computer-generated simulations of how surpluses can cause the economy to shrink and private debt to soar.

This related to Modern Monetary Theory:

In any given time period, the government’s budget can be either in deficit or in surplus. A deficit occurs when the government spends more than it taxes; and a surplus occurs when a government taxes more than it spends. MMT states that as a matter of accounting, it follows that government budget deficits add net financial assets to the private sector. This is because a budget deficit means that a government has deposited more money into private bank accounts than it has removed in taxes. A budget surplus means the opposite: in total, the government has removed more money from private bank accounts via taxes than it has put back in via spending.

Therefore, budget deficits add net financial assets to the private sector; whereas budget surpluses remove financial assets from the private sector. This is widely represented in macroeconomic theory by the national income identity:

G − T = S − I − NX

where G is government spending, T is taxes, S is savings, I is investment and NX is net exports.

While people talk nostalgically about the ‘go-go 90s’, beneath the veneer of rising stock prices there may have been rust, which I explain in greater detail in the widely-cited dyseconomics article. The bull market and economic expansion that began in the early 80′s during Reagan’s tenure was running on fumes by the late 90′s, as PE ratios were very high, GDP growth had slowed, and corporate profit margins were falling.

You can see above how corporate profits began to shrink in the late 90′s, culminating in a recession by 2001 and, of course, the 911 attacks did not help the situation. In 1993, Clinton raised taxes, which many years later may have caused the recession, as the government slowly began to suck money from the private sector to fatten its own balance sheet, creating this ‘surplus’ that looked good on the 2000 campaign trail for Al Gore, but was draining the life out of the economy. Then Bush stepped in, lowering taxes and boosting other spending (which I know many Republicans now regret), ending the recession. Also the post-2002 BRIC boom helped, which allowed the fed to keep rates lower longer than usual, as well boosting the economy through exports.

As you can see above, by running a surplus in the 90′s, the government was, essentially, taking from the private sector, which could explain why the economy recovered when taxes were lowered under Bush. By 2000, when the economy entered recession, private sector balances hit multi-year lows while government balances were at record highs.

So the question is, if deficits are good and surpluses are bad, why did this not work in Greece and Japan? Technically, we can’t assume beyond all reasonable doubt that Japan’s policies failed; had they done nothing, things could be much worse than they are now. Likely, things would have been worse, but it’s impossible to know. Japan, like America has large economy and reserve currency status, so they pay very little interest on their debt. Greece has a much smaller economy, making it hard for to find buyers of their debt, whereas America always has buyers, the result being much higher yields for Greek debt due to the increased risk of default and lack of buyers. Also, how the money is spent is also important. Spending for low-ROI programs like welfare, pensions, and disability will not grow the economy as much as spending on high-ROI programs like tax cuts, technology start-ups, gifted education, and defense. Relative to GDP, Greece’s ratio of public pension payments is higher than America or the rest of the European Union:


The New Mainstream Media

As I’ve mentioned before, there are three ‘great debates’ raging online now: the debate about economics and automation, the debate over college and whether or not it’s worth it, and the SJW/gamergate one, which is related to the ongoing online implosion of the SJW movement. The SJWs are losing their war on Gamergate that is being waged on sites like Twitter, Hackernews, Reddit, 8chan, and 4chan. NRX, HBD and Red Pill are more popular then ever, with thousands of members dispensing empirical based reality in refutation to political correctness. From Scott to Mike, to Vox Day, Roosh, and Aaron, the biggest players in the ‘alt right’ have audiences that match or even exceed the mainstream media – they are becoming the mainstream, and there is nothing the left can do about it.

Here is an example of an imgur post in regard to college tuition, which is one of the three debate topics, that went viral.

Even better, a meme about the left’s hypocrisy of preaching racial ‘tolerance’ yet at the same time being judgmental about race:

The fact that it went viral is further evidence of how the left is losing the culture wars online, at least.

But literally every conversation I’ve had with them somehow loops back to me being white and how I don’t understand the “real world” because of my skin.

SO and I can go a whole weekend at my parents talking about food, football, and family and just normal conversation.

We can’t go 15 mins at SOs family without talking about my whiteness in one way or another.

tl;dr – My skin color is constantly talked about bc im white. My SOs skin color is never talked about bc she’s black.

Whether it’s about race or carbon emissions, liberals are hypocrites.

Occasionally PC crap like this will go viral, but the commenters, who tend to be smarter than average, correctly point out that a private business should have the right to refuse service to anyone. Unfortunately, the state is impugning on this fundamental right to refuse service, with recent a example being a Colorado Supreme court ruling that a bakery cannot refuse to bake a cake for a gay couple. If the left wants their separation from church and state, how about separating business from state as compromise?

Eugenics Summary, and HBD-Based Policy

Concise summary of eugenics by polymath Martin Sewell.

The most important passage:

Herrnstein and Murray found that when they moved the average IQ down statistically by just 3 points, from 100 to 97, all social problems were exacerbated: the number of women chronically dependent on welfare increased by 7%; illegitimacy increased by 8%; men interviewed in jail increased by 12%; and the number of permanent high school dropouts increased by nearly 15%.

The problem is politicians, both the left and the right, are afraid to touch the hot potato that is HBD, instead regurgitating same ol’ environment-based solutions to societal problems. For the left, we need more wasteful social programs in a futile effort to close an achievement and wealth gap, which is really an IQ gap. For the right, they say that with smaller government, stronger family units, and more religion, problems like crime, unemployment, and poverty will be lessened. I’m more receptive to the right’s approach but, even then, these solutions lack originally, and despite decades of trial and error and good intentions, among certain groups, social problems like unemployment, academic underachievement, and crime remain high. It’s time to at least consider biology-based solutions to these problems. For example, make welfare conditional on birth control, with possible serialization for repeat offenders. Encourage abstinence/birth control among high-risk groups.

On Reddit in early August, upon news of gunshots being fired in Ferguson on the one-year anniversary of Michael Brown’s death, someone suggested, perhaps jokingly, that Ferguson needs some Planned Parenthoods. Maybe he’s right. That’s an example of an HBD-based solution that could solve the crime problem, and that’s also an example of where the right could bridge the gap with the neo-liberal left by supporting such policy. That’s where I agree with neo liberal Steven Levitt in his assessment that maybe not all life is sacred. But neither the right nor the left want to accept the biological reality that maybe some people are born ‘worse’ than others, predisposed to poverty and incarceration, while others are born ‘wired’ for success, and that policy should reflect this reality. No, let’s just keep repeating the same tired platitudes over and over and hope these problems go away. But, again, the reason why people are afraid to speak out is for fear of the consequences which, in our era of political correctness and public relations, can be quite grave.

Related: World’s ‘Smartest Man’ Supports Eugenics

‘Trickle Up’ Economics; Silicon Valley Technocracy; Neo Liberals

From AVC Trickle Up Economics

I would like to propose another approach that I call “trickle up economics” in which we lower the tax and other burdens on the lower and middle class, we invest in educating their children (and them), we make sure they have the skills to get good jobs in the economy of the future, and we make sure they have access to things like good transportation, safe neighborhoods, healthy food, quality health care services, etc that are required for them to be fully functioning citizens in our society.

Fred is ignoring how the effective tax rate for the lower and middle class has actually been declining for the past few decades due to growing entitlement spending, tax credits, and other benefits that are paid for by higher-income earners. The lowest of income earners actually have a negative effective tax rate:

If anything, we’re spoiling the underclass. The top 5% deserve more, as they the individuals who create jobs, businesses, economic value, and wealth – too much of which is redistributed to those on the bottom who do not contribute to the economy or to technological progress in any meaningful way.

But it’s not that I want the government completely out of the picture – I’m not a libertarian anarchist – but resource optimization is needed. In much the same way that a company restructures to become more efficient and productive, America needs a similar restructuring. Silicon Valley has proven again and again adept at weathering all macroeconomic storms – from recessions, to financial crisis, emerging markets busts, to oil crashes – while other regions struggle with chronic stagnation. Maybe this is a testament to the efficacy of high-IQ and ingenuity of Silicon Valley, combined with a free market and meritocracy, and if the ethos of this technology subculture is applied to broader governance, maybe America will reach its full potential.

But then why do I read AVC if Fred is wrong many times? Because he still gets a few things right, and his optimism about technology and markets sets him apart from welfare liberals, the worst kind of all, like Stiglitz, midget Robert Reich, Krugman, and, of course, Bernie Sanders. There are perspectives from across the political aisle that are congruent to some of my views, particularly some aspects of macroeconomics. The ‘neo left’, which includes Larry Summers and Steven Levitt, to their credit, understand the importance of property rights and the ownership society within a meritocracy, and they are more receptive to science that runs counter to the egalitarian/’blank slate’ worldview, whereas welfare liberals try to censor HBD-based science while promoting dubious global warming science. The welfare left attacks creationism, yet they become creationists when confronted with the science of IQ as it pertains to socioeconomic achievement.

The american dream has always been about opportunity. You start out with nothing and through hard work and a good body and mind, you make it and lead yourself and your family to a better life. That, by the way, is the story of the Gotham Gal and me. We arrived in NYC in 1983 with not a penny to our names. Nada. Nothing. I am not even sure how we came up with the security deposit for our first apartment. But we had good educations and had secured good jobs. And we worked for everything we have. We made it.

The welfare left wants to believe that capitalism and the ‘American Dream’ is dead due to too much wealth inequality, yet hard-working, high-IQ people like Fred keep proving the left wrong.

The Millennial Mindset – Individualism Over The Collective

From the NYT: The Death of the Party

This agrees with my ‘thesis’ that millennials are perhaps smarter and better informed than prior generations, which is why millennials are eschewing socializing for solitary intellectual endeavors such as watching Netflix, reading, STEM, debating economics online, or coding rather than partying.

This quote seems to epitomize the INTP/INTJ millennial mindset of introversion being better than extraversion:

Then you have the hyper-competitive post-2008 economy that rewards intellectualism, ‘results’, and individuality over social skills and collectivism; for example, the decline of unions – which are inherently collectivist, diminishing employee benefits, increasing productivity, less job security, and the growing wage gap between the middle/lower and upper class:

Being smart means you make more money:

And you get worldwide internet sympathy and free stuff:

When you’re smart, people actually care about you, your opinions, and your problems; but, when you’re not smart, you’re just another cog, another ‘eater’.

And you see evidence of the embrace of ‘millennial mindset’ in popular culture, with hugely successful TV shows and movies featuring socially awkward protagonists, as well as Reddit AMAs by scientists getting thousands of up-votes and positive comments.

Millennials aspire to be like Buffett, Zuckerberg, and Thiel – people who are better at creating technologies than relating to other people, and who became rich through brains rather than family connections or the ability to throw football really far.

Home prices in the Silicon Valley are up a mind-blowing 70-100% since 2011. Who’s getting rich? The smart people, including rich foreigners, who own homes, as well as private quality run by high-IQ people. Same for stocks, which are up 200% since 2009. Only 49% of Americans own stocks, and those who do tend to be better educated and richer – or, in other words, smarter.

Since 2008, the rules of the economy have changed, and millennials know this, which is why the stigma of living with your parents until your 30′s, not having a social life, being cash poor, or being unemployed is gone. Millennials understand the trade-off between short-term gains ( pissing away rent every month to a landlord to achieve ‘independence’, a lousy summer jobs that pays peanuts) and the creation of long-term wealth: skipping the useless Summer job and instead learning high-paying skills like STEM, or living with parents and using the saved money to buy a home, hence achieving real financial independence instead of the illusion of independence.

The unemployed physicist or computer scientist who is flooded with six-future job offers is, economically speaking, at a much greater advantage than the liberal arts dropout working at Starbucks, even though the later technically earns more money. The former has much greater earnings potential over the long-run, and thus is ‘richer’ despite being ‘cash poor’. Millennials understand that wealth is not about how much money you have right now, but about your future earnings potential, which in the case of the unemployed physicist, coder, or quant is very high. The key is delaying instant gratification for long-term value creation, a concept which millennials seem to grasp.

Maybe that’s why millennials are so obsessed with personal finance, STEM, and self-sufficiency, for example. Even ‘selfie’ culture is an example of the ‘self’ being more important than the ‘collective’. Same for the rise of MGTOW and ‘mens’s rights’, both which emphasize individualism against politically correct social norms. Millennials understand that the economy is and will continue to become more competitive and that you cannot rely on the ‘collective’ – be it the government, friends, or family – to pull you up – you have to forge your own destiny, your own wealth, and your own success. Or in the words of James Altucher, ‘choose yourself’.

The economy is forcing everyone to become ‘Objectivists‘, with economic reality showering cold water on the delusions all too many grew up believing from their friends, clergymen, family, and teachers – the delusion of a steady paycheck just for ‘showing up’, the delusion that social skills are more important than competence, and the delusion that we’re all special snowflakes when, in fact, biological reality means that some people are ‘better’ than others.

Could you imagine Ayn Rand at such a party? I think not. She, like many millennials, would probably be immersed in thought, or some form of solitude.

Sorry Marx, Capitalism May Not Be Self-Limiting

From the Wall St. Journal: The Middle-Class Squeeze

dire forecasts of Karl Marx…

The Marxian prophecy may be wrong because of the Pareto Principle, which is that the richest 20% contribute 80% to consumer spending, while the poorest contribute very little. This means that Capitalism may not be as self-limiting as commonly believed by some. America’s middle class may not be so important anymore, and the economy as measured by GDP, technological progress, profits & earnings, and exports can do fine even as many see their economic prospects stagnate. Capitalism as measured by profits & earnings, economic activity and consumer spending is doing better than ever. There is a billion-strong and growing middle class in China and all over the world that is overtaking the American middle class. Globalist consumer companies Apple and Nike keep posting blowout earnings year after year. Disney, too. Then you have business to business – Cisco, Oracle, and Microsoft, for example, selling enterprise software and hardware to other businesses all over the world.

In the Silicon Valley, techies strait out of college are making 6-figures. Anyone with a good idea and some coding can become a multi-millionaire or even a billionaire within 2-3 years, with notable examples being Dropbox, Facebook, Snapchat, Uber, and Pinterest..If that’s not capitalism, I don’t know what is.

If you’ve ever had the misfortune of arguing with a liberal about economics, he will tell you the problem is our regressive tax system that hurts wage earners, since the income tax is sometimes higher than the than long-term capital gains rate. What the liberal ignores is that investment involves risk, potentially 100% of invested capital or more, unlike a paycheck. Or in mathematical terms, the cumulative equity curve of a paycheck is monotonically increasing whereas investments have ups and downs.

But technology also means that while inflation adjusted wages may be stagnant, you get more bang for your buck. For example, a TV today has much more utility than a TV set manufactured 40 years ago. Before the invention of compact storage formats (VHS, DVD), movie choices were limited to what was playing at the theater or on TV, but Netflix, at an affordable monthly price, provides thousands of choices instantly at your fingertips.

And also, entitlement spending keeps surging, offsetting stagnation of wages. This is evidenced by declining out-of-pocket costs for healthcare and tuition; prices are high, but grants, loans, and other subsidies keep rising.

Inflation adjusted prices for food and energy keep falling; for example, food has become so affordable and abundant, there is an obesity epidemic. People have dozens of appliances plugged in all night and day, sucking power.

Also employee benefits, especially healthcare, have out-paced inflation.

But on the other hand, as part of the post-2008 bigger is better theme, capitalism may be harder for small business due to high borrowing costs, unlike large business that have very cheap borrowing. Forever low interest rates benefits multinationals that can raise gobs of cash by selling low-yielding debt, while small business has to pay very high yields. Large business also have better pricing power, economies of scale, and can buy inputs in bulk, which is good for profits. This allows large businesses to ‘price out’ smaller competitors, sometimes by lowering profit margins temporary to put a smaller competitor out of business before raising them again. So capitalism may great for big guy, but harder for small guy unless, I suppose, you’re in web 2.0 or other select industries. I’m sure there are some capitalism opportunities catering to the new ‘tech elite’ in Silicon Valley, whether it’s food, landscaping, or child care.

While nations, economies, and civilizations come and go, America is not typical. There have been only two major crisis in the past 100 years (1929, 2008). Emerging market, on the other hand, are a minefield. Pretty much every emerging market has at some point defaulted and or had a crippling crisis that required the IMF to bail them out. It’s better to not lose sleep over crisis, although the doom and gloom media tries to make it seem like financial crisis are an everyday occurrence.

The good news is policy markers are good at fixing crisis when they occur, which I think is more important than predicting them. We can’t let an irrational fear of crisis impede economic progress if we have the tools to quarantine crisis as it arises.

Bullshit & Success

It’s ironic how the site called ‘Without Bullshit’ posted some bullshit of its own in a recent article, How to judge people, by Josh Bernoff.

Bernoff gives some examples of ‘failure’ that aren’t really failures when put in the correct context. You see this all the time online – off people telling their stories of how they were at a supposed ‘disadvantage’ only to succeed wildly, but you never hear the countless stories of people who failed and continue to fail, never succeeding. Such people make up the ‘hidden’ bulk of society, who achieve little in life. They are hidden because you never hear about the, yet they are the majority. All we hear are the Daredevil stories.

Bernoff lists the following as his ‘failures’:

My first job was writing software manuals.

I’ve never joined a company with more than 150 people in it.

How are these failures? Facebook, Google, Apple, and Microsoft all at one time had less than 150 employees. Were all those early employees failures?

How is writing software manuals a ‘failure’. It beats working at Walmart, and probably pays more, too.

I’m currently earning next to nothing.

Kinda misleading. A person with marketable skills but temporary unemployed is in a much better position than someone who is gainfully employed but with low-paying skills. Many successful people get gigs and contracts which, while sporadic, pay large sums when they are realized, compared to people who go to work for a smaller but more consistent paycheck.

I was laid off from my last two jobs. All my other jobs lasted three years or less each.

Being laid off doesn’t mean you personally failed, unless you obviously didn’t meet the goals of the company in spite of your best efforts. Maybe you were laid off because of the the economy or other factors outside of your control. Choosing to leave a job doesn’t mean you failed, if you find a better job. There just isn’t enough information by provided by the author to assume he failed.

Every book I’ve written has had someone else’s name on the cover alongside mine. Each book I publish sells less than the last one.

Considering the majority of manuscripts are rejected, getting anything published is a success, unless he’s talking about self-publishing.

My teenage children have made choices that would horrify some people.

Economist Bryan Caplan has some interesting research that parenting has little influence on long-term behavior of children:

Instead of thinking of kids as lumps of clay that parents “mold,” we should think of kids as plastic that flexes in response to pressure – and springs back to its original shape once the pressure goes away.

Some successes:

I was the best math student at Penn State in decades, graduating in 3 years with a 4.0 average.

I earned a National Science Foundation Fellowship and accepted MIT’s offer to join their Ph.D. program in mathematics.

The successes obviously outweigh the failures. Is his successes weren’t so impressive and rare, he probably would not have had the courage to list the failures, which aren’t really that big of failures to begin with.

Most people have poor critical thinking skills, accepting things prima facie – if it’s written by an ‘authority’, it must always be true. I can read anything and, provided it’s not too long or outside of my expertise, immediately find counterexamples in about 90% of instances. Counterexamples don’t necessarily refute a thesis, but often the author will write a strong-worded article without even considering counterexamples, which are obvious to anyone with even average mental ability who is paying attention.

Does Tesla Really Lose $4,000 Per Car?

Excellent article that dispels the liberal myth that Tesla is an unprofitable company that is dependent on subsidies.

Although California offers a $2,500 rebate per electric car, this is just a tiny fraction of the sticker price for a Tesla, and the people who are buying are not doing it for the subsidy but instead to project status and for the high performance of the car.

Tesla has profit margins of 25% per car, and similar to the Amazon business model, Tesla is reinvesting its profits to build its infrastructure. Wall St. is aware of this, which is why no one cares that Tesla is cash flow negative.

There is a big difference between losing money for every car sold and spending more money than you make. Considering the profit margin on the Model S is over 25%, Tesla is actually in the latter category. Making the Model S is profitable. Rapidly expanding into a major car manufacturer while making the Model S is not.

*Edit: look at it this way. You want to open a McDonalds. It will cost you $500,000, which you borrow from a bank. The first year you bring in a million dollars in revenue, and make $100,000 profit from sales. However, you borrowed and spent $500,000 opening the store, which means you sort of lost $400,000 that first year.

Would Reuters say you lose $2.00 for every Big Mac sold? I guess so.

The left is so desperate to see Tesla fail, but keep coming up empty-handed each time. Whether it’s imagined regulatory issues or ‘exploitation’ of its drivers, the same for Uber, which keeps defying the left’s insistence that it’s a bubble. All these companies keep rising in value year after year, as their businesses continue to grow despite all the doom and gloom from the media.