Random Thoughts Edition (Daniel Ellsberg, George P. Schultz) (April 2018)

1. Humanity's most damning flaw in the modern information overload era is its over-reliance on sight and visual images. Such over-reliance on a single sense leads to an inability to understand the varied reasons a result has occurred. 

For example, most Americans waste time mocking the current--or any--President when it should be clear his or her views are the culmination of numerous variables and their interplay over the last fifteen years. After all, no four-year data set could justify both 2016 presidential candidates turning so quickly against international trade (e.g., TPP) or immigration while Canada moves in the opposite direction, nor any other "shift" (i.e., globalization and technology have been with humanity as long as it has existed). And yet, almost every single commentator or writer discussing North America's political landscape speaks in short-term tongues. One cannot arrive at an effective solution if one cannot ask the right questions. 

2. A simplistic example of hubris is as follows: a person will argue that Australia is safe because it has strict immigration laws, while another person will argue Australia has been unable to generate Canada's economic gains because of its failure to increase skilled immigration. After a rigorous debate, both sides may agree to increase skilled immigration but with stricter regulations and better-trained staff to sort through each applicant's submission. Both educated participants will walk away satisfied not only that they have resolved the issue, but that others ought to follow their example. 

Neither one will realize the reason Australia can discuss a certain immigration policy is because of its geographic location--in the middle of nowhere, walled off from unwanted intruders by an all-encompassing ocean. Neither one of them will realize that without discussing refugees (as part of a shared international responsibility), illegal immigration (which occurs despite anyone's best efforts), assimilation, and funding (for the immigrants and increased staff to vet application), they have not yet begun to create comprehensive solutions. Finally, neither will realize the roles of interest rates, trade agreements, international investment, and other complex economic issues that affect funding any new immigration staff. In a world more interlinked than ever, "first-world" educational and employment systems sincerely believe in models where experts study only one or two subjects for years (often from educators lacking recent experience even in their subject areas) and where the private sector retains a fragmented approach. 

Humility is the opposite of hubris, and humility comes from knowing every situation is Rashomon-like. Furthermore, even if every angle is understood, one still cannot know all the variables that led to a present-day situation being x instead of y. The tragedy of humanity is that its imagination is its greatest asset but to stay comfortable, the brain's limited nature seeks a specific rationale, which then renders imagining a just-as-likely alternate scenario almost impossible. 

3.  America looks to be firmly on a path to its new role as the USSR, but with new and improved propaganda. Modern history teaches us that an economy driven by military spending will eventually fail. I'm not going to write about the different ways America is emulating the USSR's failed model--the deliberate use of sports rather than art, philosophy, or literature to bring the nation together; a disdain for religion, which often provides non-elites the opportunity to discuss timeless issues; a prosperous mafia or underground economy, which then justifies a larger security state than necessary; executive contempt for checks and balances, including from journalists; and excessive rates of risk-taking and alcoholism--but I urge you to think about why nations that succeed in defeating their enemies often become like them. 

4. I'll end on a happy note: I met one of my heroes, Daniel Ellsberg, last weekend in San Francisco, California. 

Ellsberg is still going strong at 87 years old, his mind sharper than ever. Before explaining that "miracles are possible by ordinary people taking chances," Ellsberg covered wide ground. He spoke of modern-day nuclear weapons able to wreak unimaginable havoc disrupting the world through environmental and food shortage effects, not just immediate murder; the March 10, 1945 firebombing of Tokyo during WWII, a deliberate attack causing the murders of 100,000 civilians, more than Hiroshima; Gorbachev being the most recent Russian leader who would work with the United States (and Reagan) on nuclear de-proliferation; Reagan's proposed plan to shift funding for nukes to missile-defense shields to protect both countries from rogue actors, technology he would then share with Russia (Gorbachev was skeptical about the promise of sharing); his inspiration coming from 5,000 Americans willing to be jailed for their opposition to the Vietnam War; and the CIA's attempt to "terminate [him] with extreme prejudice," to "neutralize," or to "incapacitate [him] totally," a fate he escaped because the CIA assets may have believed they were being set up to take the fall for Nixon. 

How would this American hero want to be remembered? As "part of a movement that ended the Vietnam War and nuclear weapons." Will we honor him and his sacrifices by helping conclude what he started?

Bonus 1: "I firmly believe in sex, drugs, and rock 'n roll but I always wear a condom, never take illegal drugs, and can't sing or dance." -- Anonymous 

Bonus 2: at the seminar, I had lunch with Philip Zimbardo and several others, including a now-discharged military enlistee. To give you an idea of the level of conformity in America post-9/11, I'll share the following story: 

Prior to the Iraq invasion, a 2002 meeting was held with George P. Schultz in attendance. (Mr. Schultz is often viewed as the GOP's strongest living intellectual.) After the military enlistee (now an art dealer) raised his hand questioning the invasion, Mr. Schultz accosted him, pointed a finger in his face, and said, "You've been watching too many Gary Cooper movies--we're not going to wait for them to hit us first." The art dealer said he was shocked at the aggressive reaction to his question and now realizes why almost no one questions the prevailing orthodoxy--they don't want to be kicked out of their "tribe." 

"He who walks in the middle of the roads gets hit from both sides." -- George P. Schultz 

Anyone who doesn't understand power only lasts if it stress-tests itself is unworthy of admiration. 

April 24, 2018

To prevent history from repeating itself, our youth must answer the following question: "How do we create a country that can stress-test its ideas even when its leadership is under severe pressure to take immediate action?" 

Random Thoughts: Welcome to 2017 Edition & UBI

Welcome to 2017! May your year be filled with wonder, health, and joy.

1. Reporting earnings once a year makes a lot of sense, especially for cyclical industries. For instance, many consumer companies make most of their revenue in the holiday season. What's the point of reporting four times a year? It's as if businesses want to encourage short-term outlooks. If it didn't work in American foreign policy, why would it work in American multi-national policy?

Response: "For that reason, it makes sense to report data adjusted for seasonality:)"

My response: Your approach is better than the current one, but doesn't address short-term outlooks or the practice of excessive end-of-quarter discounting based on nothing more than needing a sales boost at the end of an artificially-created time period.

2.  Emma Stone's face in La La Land (2016) when she said, "Are you serious?" is forever preserved in cinematic history, dedicated to everyone who's ever been given a zinger out of anger and hurt so badly, the idea of a response never even enters the equation.

3.  Think of UBI (universal basic income) as a small VC investment in everyone. Right now, VCs invest millions and hope for a 2 to 5% home run rate.The idea of UBI is to invest thousands of dollars and hope for a 10%+ home run rate as more people pursue their passions, requiring both corps and govs to compete for talent, which also leads to better overall outcomes.

4.  I fear that universal basic income (experimental) pilot programs miss the point. They use too little money (the minimum in the U.S. should be 700 USD/mo), and/or they increase costs rather than cutting programs and diverting the savings into the UBI pilot. Such pilot programs would probably work best in cities with higher unemployment relative to the rest of the population and would need to be funded through foundations rather than governments. Some current UBI-like programs cut hours but not employee pay, requiring more expenditures--the exact opposite of a properly administered plan.

The idea behind UBI is to eliminate the gov's hand in direct welfare completely, and in doing so, make the citizen less dependent on the gov's moral and political whims, while focusing the gov's attention on providing essential services in a sustainable way, such as healthcare.  (Perhaps politicians forced to focus on decreasing health problems and/or escalating medical prices to prevent the implosion of a healthcare system are less likely to meddle in taxpayers' personal lives.)

In addition to lowering dependency, the goal of any UBI program should be to encourage cities to compete for residents rather than chaining them to specific places using housing inflation (through the mortgage tax deduction) as a lure. Note that our current tax system cannot adapt quickly to changing demographics or macroeconomic upheavals, encouraging boom-and-bust cycles (for example, Detroit, MI) or holding cities hostage to corporations playing them off against each other for tax incentives.

To prevent escalating UBI costs and political temptation to tamper with the amounts and recipients, the program ought to apply to everyone 22+ years old and cap the amount per adult, with an additional amount for each child, up to two children from ages 0 to 18. (Yes, there's a 4-year gap, which encourages college enrollment.)  Governments may publish the names of millionaires not donating their UBI to charity but must still provide the UBI to them.  The amounts provided must relate rationally to the amount the gov has saved by eliminating food aid, subsidized housing, direct payments, etc.  (But hopefully not unemployment insurance, an excellent program for employers above a certain revenue and employee threshold.)  The major source of revenue to divert would be from phasing out the Social Security program and from reasonable defense cuts.  If done judiciously, hundreds of billions would be available, and younger voters would not be at a disadvantage against older voters. Even on a local and state level, combining the myriad of welfare programs into a single UBI program that applies to everyone--thereby reducing enforcement and other administrative costs--and also reducing K-12 funding by eliminating employee pensions for new employees or linking the pension ROI to 10 or 20-year Treasury rates would help generate the financial equilibrium desired.

The UBI calculation and revenue-sourcing are the easy parts because they're ultimately math problems that reverse long-tail programs and shift revenue back into the present-day and to a broader class of citizens.  The hard part is also accounting for the amounts the gov must spend on persons who spend their UBI irrationally and in doing so, cause additional hospital and other law enforcement costs. Thus far, I've seen no article that accounts for the latter problem. (One idea of a good pilot program would be to require a city's citizens to only spend their UBI within the borders of the city and render the UBI card ineligible for "sin" purchases, such as alcohol and cigarettes anywhere.)  In short, current UBI pilot programs are a good start, but so incomplete that the main conclusions will be psychological rather than economic.

Looking ahead, after some time--no more than 5 years after the start of a permanent program--the amount of the UBI should be adjusted downward if GDP declines. It may be adjusted upward if GDP increases, but only if the increase in GDP is not due to increased debt issuance or financial alchemy.

Why? The only way any UBI program can sustain itself is if voters and recipients understand that the program, if poorly managed, will sap resources from other necessary expenditures, especially ones promoting innovation.  The goal isn't to create an entitled class of layabouts, but to create less dependency on larger forces, whether governmental, banking, or corporate; to mitigate criticism of citizens currently receiving some form of government assistance by eliminating the ability to "game" welfare programs; to increase time for pursuing happiness (making it easier to raise children on a one-income household, traveling the world, etc.); to promote entrepreneurship; or to promote some other endeavor that creates a positive impact.  Thus, strong checks and balances are needed, and pegging UBI amounts to some formula of GDP growth and decline, but removing the impact of artificial boosters like debt when calculating the numbers, is one way to handle voter temptation.  As you can see, honest accountants are necessary for such programs to work, and the CBO--or some other permanent, independent body--will need to be given some form of veto power over Congressional attempts to increase or lower UBI amounts.  Like any government program, UBI will be subject to corrupting and political forces, so economics and finance must be rigorously taught from sixth grade and up.

If implemented properly and with appropriate discipline, UBI in countries with strong currencies might reduce internal conflict and shift "culture wars" to practical matters, creating healthier societies.  There's no way to tell whether such an option is possible, however, if pilot programs are done in ways that fail to capture the entire point of UBI.  Mild efforts will surely create uninspiring results.

Update: I just realized phasing out or minimizing the mortgage interest tax deduction would also allow funds to be used for UBI, though my idea is to minimize future projected expenditures, especially in ways that promote political tampering (i.e., COLA adjustments, age limit changes, etc.). (On a related note, as long as the military's budget and appropriations are unaudited or enabled by "risk-off" central bank printing, they present a clear target for fiscal conservatives.)

The idea behind phasing out Social Security isn't just to free up money for UBI--it's to shift long-tail, unpredictable obligations applying to a small segment of society (e.g., seniors) to a broad-based, easier-to-manage program that removes "gaming" as well as the risks in long-term accounting and life expectancy calculations.  Why is the government in the business of calculating life expectancies in the first place without adequate health data on each potential Social Security recipient/creditor? 

Random Thoughts of the Day: Observant Edition

1. "Let us touch the dying, the poor, the lonely and the unwanted according to the graces we have received and let us not be ashamed or slow to do the humble work." -- Mother Teresa

2. Next to my building is a small retail store area with room for two tenants. A hookah lounge has filled up half of the space for the last couple of years, but one of the spaces seems to change tenants every six months. Recently, a bartending school moved out and was replaced by a medicinal marijuana clinic. It's very nondescript from the outside, so I knocked and said hello. Two people, one male, one female were present. There were several very comfortable looking white couches. A large television was playing a Dave Chappelle movie or show. Here's a paraphrased version of the conversation:

Male: Do you have a license?

Me: No, I'm a neighbor, just saying hi. Most tenants move out after six months, so I just wanted to see who had moved in this time.

Female: [She was friendly and said she hoped to be here longer than six months, etc.]

Male: [Asked me for my business card after I said I was a lawyer. I produced my business card. He still didn't look very happy. For some reason, people tend to think I'm either a cop or a nice target when they first meet me.]

Ah, the wonders of California. Anyway, I wonder if this business lasts more than six months. I find it a little weird that the new businesses that tend to move in have some connection to legal drugs (e.g., booze, MJ, nicotine, etc.).

3. I have never seen so many vacant buildings in downtown San Jose, California--and I was here during the dot com bust. It is becoming clear that this recession will impact Silicon Valley for at least another year, if not longer. Meanwhile, the last of the residential five-year ARMs are coming due in 2012. Hard to see a recovery before then.

Also, according to a CBO slideshow presentation, the unemployment rate won't go below 6% until around 2014-2015. The CBO is an independent, non-partisan government agency.

Random Thoughts: 2010 Political Edition

1. Almost all conflicts are because of land, money, and/or women, or the protection thereof. Religion, race, etc. are just atavistic proxies that help human beings justify violence and exclusion in order to protect land, money, and/or women.

2. I predict Hilary Clinton will run for President in 2012.

3. I am still sad that Russ Feingold lost the recent Wisconsin election. He was the lone Senator who voted against the Patriot Act in 2001. [Senator Landrieu (D-LA) abstained.]

In 2006, the following Senators voted against the Patriot Act's renewal:

Akaka (D-HI) Bingaman (D-NM) Byrd (D-WV) Feingold (D-WI) Harkin (D-IA) Jeffords (I-VT) Leahy (D-VT) Levin (D-MI) Murray (D-WA) Wyden (D-OR)

3. The more I learn about Tom Harkin (D-IA), the more I respect him. (What is it about Iowa that seems to produce reasonably progressive people instead of the scorch-the-earth-to-change-the-world California types?)

Random Thoughts

1. If the South had a way to make money without needing to enslave Africans, would we have had a Civil War?

2. The surest path to tyranny is hyperinflation.

3. Public sector compensation and private sector compensation are completely different. Unlike the private sector, public sector compensation usually includes unpredictable long-term structural debt, such as pensions and medical costs. The costs of pensions and medical treatment depend on a person's age and health. If it was so easy to analyze costs relating to a person's age and health, we could all run insurance companies. Moreover, when governments make long term compensation promises, they are using taxpayer money (OPM) and have little incentive to get the numbers right. More here, from a letter to The Atlantic (Nov 2010):

In the final analysis, it doesn’t matter whether you work for GM or N.Y. or U.S.A.; it doesn’t matter if you are in a defined-benefit or defined-contribution plan--your retirement is dependent upon the earnings and productivity of your grandchildren and their friends. All of the pieces of paper in these plans are just proxies: claims on a portion of the labor of future generations. All of these retirement schemes seemed affordable when they were new. We didn’t see why they were inexpensive: because they were built on leverage. They depended upon borrowing against the future growth of the three unsustainable pyramids: economic, population, and credit. None of those can continue forever, and as one fades, the others must take up the slack. But once all three pyramids are played out, the plans face a few stark choices: substantially raise contributions, substantially lower payouts, or go bankrupt.

Steven Flint Manasquan, N.J.

4. People's voting preferences are probably based in large part on whether they have children. Most parents probably favor the status quo. Why? The more society changes, the less knowledge they can pass along to their kids. The parents' economic skills may also decline in value if society changes too much. In contrast, people without kids have more time to adapt to changes and also have a higher incentive to change society to suit their own needs and wants. In conclusion, I bet parents tend to be more "conservative" while childless adults tend to be more "liberal."

5. The S&P 500 is about 1180. The Dow is about 11,142. Perhaps the market is a bit frothy. Markets may be anticipating an extension of the Bush-era tax cuts, which means an assumption of a more politically balanced federal government. But elections can be unpredictable...

Random Thoughts: On Elitists and Inflation

"Liberals" and Democrats like to argue that poorer Americans vote Republican because they are misled by rich people and corporations. (See Frank Thomas's What's the Matter With Kansas, which argues that conservatives have manipulated poor people into voting for the GOP and against their own self-interests.) This smug, self-serving thesis puts liberals in a position to "help" the poor, usually through more government programs.

In reality, poorer people vote based on their economic circumstances and tend to focus on economic issues because they know the value of a dollar. In contrast, rich people's life experiences tell them that money is abundant and can be spent and created again. For example, blue state residents tend not to be offended when the federal government prints money and puts their grandchildren in debt. Unsurprisingly, West/East coast liberals (blue states) have higher salaries and earnings than Midwestern and Southern conservatives (red states).

The problem is that the perception of money as an easily renewable resource leads to inflationary policies that create higher costs of money for those on the lower end of the income scale who tend to be net borrowers of money, not lenders or large savers. (Printing more money also causes the devaluation of the dollar, decreasing the purchasing power of the poor, but that's a separate and more complicated issue).

Also, poorer people intuitively understand that injecting more money into something causes inflation. For example, if you pay LeBron James more, the cost of NBA tickets increases, because the owners have to make more money, and most businesses make more money by raising prices. For poorer people, inflation tends to show up in higher prices, making it more difficult for them to buy things (like a good seat in an NBA game).

Another example: it's much easier for poorer people to buy a decent house in a decent neighborhood if a house costs 100K and the median price is 150K, than if a house costs 400K in a neighborhood where the median price is 600K. Think about why house prices tend to be so much higher on the coasts compared to the Midwest and South, and why someone in the Midwest or South wouldn't want his/her children to pay 400K to live in a decent neighborhood. (Why increase the cost of living in a decent neighborhood if you don't have to?)

Rich people, unlike poorer people, tend to be the beneficiaries of inflation--when it happens, their salaries go up along with prices, so they notice no changes or believe they are doing even better. (Think about it: 80% of Americans would never pay $650,000 for a 4 bedroom, 2 bathroom house in a so-so school district, but rich people in the Bay Area do this all the time and rely on continued inflation to increase their home's value.)

Bottom line: if you don't have much of something, it becomes more precious to you, and you can't stand to see too much of it being used or spent. Generally speaking, abundance mitigates caution and tends to cause inflation. Inflation tends to be bad for poorer people and good for some people, especially educated and affluent people. Therefore, poorer people tend to vote for fiscally conservative candidates because they want to keep their costs low, and they intuitively understand that more money tends to lead to higher prices.

Bonus: historically, the Democrats have favored bigger government. Well, big government costs money, and paying government workers higher salaries and expensive benefits costs money, and they both cause inflation. Inflation hurts poor people. Ergo, in most blue states where Democrats have controlled the legislature for long periods of time, it is harder for poor people to buy homes, afford to live in decent neighborhoods, etc. It's really interesting that anyone would actually think that the Democrats help the poor when it's harder in most blue states for a family making 30K to buy a home and be debt-free than it is for the same family in most red states.

Random Thoughts

1. In most cases, the single most important factor in keeping a marriage together is keeping the primary breadwinner employed.

2. I read the following line in a review of the German film, The White Ribbon: the main character is "an intellectual whose pursuit of the truth is enabled by the inability to change anything." It made me stop and think about the possibility of an inverse relationship between power and truth.

3. I was playing chess in Campbell, and my opponent gave me the following gem: "In the old days [before cell phones, email, etc.], it was harder to communicate, but easier to understand each other. Now, it is easy to communicate but harder to understand each other."

4. If you like action flicks, you should see the Korean film, The Good, the Bad, and the Weird (2008). The plot involves a treasure hunt where a cowboy, gangsters, the Japanese military, and various thieves are all after the same prize. Lots of fun.

5. I recently discovered Republican Chuck Hagel. Along with Ron Paul and Richard "Dick" Armey, he appears to be a true Republican. When he was Senator, he questioned George W. Bush and the Patriot Act, stating, "I took an oath of office to the Constitution. I didn't take an oath of office to my party or my president."

Random Thoughts

1. Whatever happened to Gorillaz, the innovative band that did the catchy "Feel Good Inc."? I loved their single, and I haven't heard anything quite like it since.

2. I went food shopping today. I always try to find the discounted items, but the grocery stores are getting tricky. I saw one discount of 9 cents--hardly a reason to favor a particular brand over another. Many of the discounts I saw were less than thirty cents. If this keeps up, I am going to have to save lots of coupons and go shopping only when I have lots of coupons.

One item that stores seem to consistently discount is ice cream. If you go in the middle of the week, sometimes you will save 50%. For a big ice cream fan like myself, this is sweet indeed.

Random Thoughts

With GE reporting decent earnings and no corresponding effect on the overall market, I have only three thoughts in my head:

1. The beatings will continue until morale improves.

2. The market can stay irrational longer than you can stay solvent.

3. Omnia munda mundis. (All things are pure to the pure in heart.)

I'm not sure why the last one popped in my head, but perhaps it's my subconscious asking for divine intervention. After today's buying, my retirement accounts are now fully invested. From December 7, 2007 until today, my retirement accounts have decreased 22.6%. The S&P 500 has fallen 42.8% during the same time period. My retirement accounts need to increase 29% to get back to December 2007 levels (a decline of 1% in your portfolio requires more than 1% to get it back to the pre-existing level--it's counter-intuitive, but true). I would say today is the bottom, but I've been wrong before.