Is a Blue Wave Coming?

The commentariat is all atwitter about the impending Blue Wave. FiveThirtyEight, for example, predicts an 80% chance that the Dems will take the house. RealClearPolitics, which averages all recent polls, gives the Dems an edge 206-189, with 40 seats in the toss-up column (all but two with Republican incumbents). With such odds the wave doesn't even need to be all that high--the Dems are odds-on favorites to win a majority in November.

Count me skeptical.

These are the same people that all but assured us of Hillary's victory in 2016. For example, the New York Times' Upshot blog gave her an 85% chance of winning. Others made similar predictions--indeed, a lot of us Republicans expected it to be an early and disappointing night.

But they were wrong in 2016. Nate Silver, of FiveThirtyEight, offered a lengthy postmortem of that election.

Why, then, had so many people who covered the campaign been so confident of Clinton’s chances?...[T]he answers  are potentially a lot more instructive for how to cover Trump’s White House and future elections than the ones you’d get by simply blaming the polls for the failure to foresee the outcome. They also suggest there are real shortcomings in how American politics are covered, including pervasive groupthink among media elites, an unhealthy obsession with the insider’s view of politics, a lack of analytical rigor, a failure to appreciate uncertainty, a sluggishness to self-correct when new evidence contradicts pre-existing beliefs, and a narrow viewpoint that lacks perspective from the longer arc of American history.

This seems true enough. But all the listed sins--groupthink, obsession, sluggishness, and narrow vision--are even more in evidence now than ever. Indeed, not only have the media not taken Mr. Silver's advice, they've fallen into all-out Trump Derangement Syndrome, apparently no longer able to distinguish fantasy from reality. Of course Trump has pwned them relentlessly, inspiring them to ever greater levels of irrationality.

So their predictions of a Blue Wave are likely wishful thinking.

For that matter, there is cause to think we might be on the cusp of a Red Wave. That certainly is the opinion of Newt Gingrich. Let's examine the evidence in favor.

Polling is a difficult business these days. Landlines have all but disappeared, and there's no such thing as a phone book anymore. Even area codes no longer mean anything. And then people are less willing to answer personal questions from strangers.

These problems have been around for awhile, and pollsters have adjusted. Sometimes polls are taken online, which introduces a whole new set of difficulties. The key problem is collecting a random, representative sample. Pollsters weight their samples to ensure that the views of different demographics are fairly represented. The weights are based on past experience.

The problem is that past experience is no longer a reliable guide. Trump--the Great Disrupter--has completely upended the American political scene. Post-Trump, blue-collar workers have become a solid, Republican constituency. Even AFL-CIO president Richard Trumka these days has positive things to say about the president. This is qualitatively different from the past. Yes--we used to talk about Reagan Democrats, but that was a minority of the blue-collar crowd. Unlike Reagan, Trump has completely refashioned the demographics of the Republican Party.

The commentariat recognizes Trump's blue-collar support, but they usually preface it with the word white, as in "white, blue-collar voters." I think this blinds them to the fact that many Latinos and Blacks are also blue-collar, and can vote their class interest along with their ethnic interest. Pollsters, concentrating as they do on ethnicity, also miss the trend.

This is most evidently happening among Latinos. A special election to fill a Texas state senate seat in a majority Latino district led to a Republican winning that seat for the first time in 139 years. (Yes--I know--all special elections are special. In this case there were only 50,000 votes cast in a district with a population of 800,000. But the Dems keep touting their special election victories, so why can't the GOP?)

Republican Will Hurd represents the Rio Grande Valley, an overwhelmingly Hispanic congressional district, and his reelection chances are now nearly assured. Likewise, Democrat Donna Shalala, running in a Miami-based, majority Hispanic, congressional district that Hillary carried by 19 points, now looks to be losing.

I think it's pretty clear why many Latinos like Trump--immigration. After all, that illiterate, traumatized single mother from El Salvador released by ICE pending a court date a year from now, will not be moving to Scarsdale, Berkeley or Ann Arbor. No--she'll settle in a Spanish-speaking neighborhood, her children will join an immigrant street gang, and her income will come from tax dollars. Failing that, if she does get a job she's competing against citizens--e.g., citizens from the Rio Grande Valley who have lived here since before the Mayflower.

The Rio Grandians may not like the wall (that goes right through the middle of their neighborhood), but they like foreign immigrants a whole lot less. Of course they'll vote for Trump!

For Blacks it is more speculative. If approximately 30% of Blacks fit the stereotype--living off welfare in the ghetto--that means 70% don't live that way. They've joined the middle class--however tenuously--and moved to the suburbs or down south. From my old haunts in Chicago I know this for a fact. Woodlawn (directly adjacent to my alma mater, the University of Chicago) was a classic Black ghetto like what you now see in movies from the 1970s. Today it's mostly abandoned--civilized people have all moved away.

They moved to get away from the crime and gangs. They moved to a place where they could buy a house, however modest. They moved to a place where their kids could go to school without getting shot. They moved to neighborhoods like where I currently live (majority Black), where there is absolutely zero gangland graffiti.

So Maxine Waters (D-Street Gangs) and Black Lives Matter, who are the political wing of the street gang movement, are not popular among these folks. Waters and BLM speak for the ghetto 30%, not the civilized 70%. Trump and the Republicans are appealing directly to that civilized 70%.

Evidence:

1.  HBCU presidents are remarkably sympathetic toward Trump. 
2. A significant number of Black pastors have come out in favor of Trump. 
3. A few celebrities (e.g., Kanye West) have endorsed Trump. 
4. Blacks are culturally much more conservative than white Democrats. They tend to oppose both abortion and gay marriage. 

OK--so that's much less convincing than the abundant evidence that Latinos are already voting Republican. But it is evidence, and I'll be surprised if the Republicans don't do relatively well among Black voters (outside ghetto neighborhoods) this November.

The commentariat, because of Mr. Silver's list of sins, can't see any of this. They assume Latinos won't vote their economic interest. They assume Black people must love high crime and street gangs. Trump's digs against Maxine Waters may inspire a few white racists, as liberals maintain. But his main audience are Black folks--civilized people--who understand that law & order is important for their well-being.

Further Reading:

• Affirmative Action
• If Everybody is a Racist, Then Nobody is a Racist
• Charlottesville

Book Review: Life After Google

George Gilder's book Life After Google is hot off the press, published earlier this year. It predicts the demise of Google, along with its kindred, cloud-computing competitors such as Facebook and Amazon.

Mr. Gilder is a marvelous writer--I've read much he has written. (My essay on Knowledge & Power is not my best work, but here it is.) I'm deeply sympathetic to Mr. Gilder's argument because he predicts a much more libertarian internet.

Mr. Gilder offers a larger philosophical argument beyond simply business and technology. I enjoyed that discussion, but I restrict my comments here to economic issues.

Famously, Google gives most of its content away for free, or (in comments Gilder credits to Tim Cook) if it's free, you're not the customer; you're the product. That's the least of it. Spanish has two words for "free"--gratis and libre. In our context it means gratis.

Let's count the ways gratis benefits Google:

• They are completely immune from any antitrust prosecution and most other regulatory oversight. 
• They can roll out buggy, beta software to consumers and improve it over time. 
• They don't have to take responsibility for security. Unlike a bank, Google is at no risk if somehow your data gets corrupted or stolen. 
• They provide no customer support. 
• Your data doesn't belong to you. Instead it belongs to Google, which can monetize it with the help of AI. 
• You get locked into a Google world, where everything you own is now at their mercy. (I'm in that situation.) Your data is precisely not libre. 

Note that Google didn't even bother to show up at the recent Congressional hearings about "fake news." They consider themselves above the law (or, perhaps more accurately, below the law). They can get away with this because it's free.

There are some disadvantages.

• It's not really free, but instead of paying with money you pay with time. Attention is the basic currency of Google-world. 
• People hate ads. "[O]nly 0.06 percent of smartphone ads were clicked through. Since more than 50 percent of the clicks were by mistake, according to surveys, the intentional response rate was 0.03 percent." This works only for spammers. Ad-blockers are becoming universal.
• Google thinks it can circumvent that by using AI to generate ads that will interest the user. No matter--people still hate them.The result is the value of advertising is declining. Gilder does not believe that AI will ever solve this problem. (I agree with him.) 
• Most important--Google loses any information about how valuable its products are. Airlines, for example, respond sensitively to price signals when determining which routes to fly, what equipment to use, what service levels to provide, etc. Price is the best communication mechanism known for conveying economic information. You immediately know what is valuable to consumers, and what isn't. Google loses all that information by going gratis.
  
  Is Gmail more valuable than Waze? Google has no idea. As a result it has no way of knowing where to invest its money and resources. It's just blindly throwing money at a dartboard.

The above disadvantages are manageable as long as the marginal cost per user is very small. Google invested billions of dollars in huge data farms (Gilder visited the one in The Dalles, OR), located near sources of cheap electricity and cold water (for cooling). Iceland is a prime location for these things. Each center contains thousands of racks of high-end servers connected by millions of miles of fiber-optic cable. This investment has paid off--the marginal cost per search is essentially zero.

But the world is changing fast--according to Gilder the tipping point is the transition from 4G to 5G; from the internet of web pages to the internet of things; from the internet of text and images, to the internet of virtual reality and video rendering; from the internet of computers to the internet of mobile phones, smart watches, and medical devices. To accommodate this new world Google will need to make a massive new investment.

The marginal cost--far from approaching zero--is now becoming near infinite. Without any price information the company has no clue who its most valuable "customers" really are, and cannot determine how best to allocate its resources. Further, the new world opens the door for much nimbler and low-cost competitors. So while Google may be a successful search engine, it will lose its hold over our data. We will own our own data.

Among those nimbler competitors is a Warsaw-based start-up called Golem. Realizing that most CPU clock cycles around the world go unused, the company is trying to tap into that wasted resource. For example, even while I'm busily typing away, my computer's CPU is mostly sitting idle doing nothing. If it were possible for me to rent out those excess clock cycles, then I'd make a little extra cash, and somebody else gets extra computing power they can use.

That's Golem's business model--by installing their software they enable me to rent out my clock cycles in exchange for payment. (In Michael Munger's language Golem is selling a reduction in transaction costs--i.e., making it easier to match my computer resources with somebody who is willing to pay for them.)

Two things need to happen before Golem's business model works. First, my computer needs to be on a 5G network. 5G eliminates the need for fiber-optic cables (at least over the last mile) by enabling high-bandwidth, wireless communication between my computer and the world. Without 5G I can't compete with Google. With 5G, my connection is just as efficient, or--put another way--Google has a few million miles of useless fiber-optic cables on its hands.

Second, Golem needs to handle micropayments--I will be paid pennies per minute of CPU time. The user--who is likely doing a massively parallel calculation--will owe pennies to thousands of computer-owners like me. Golem has got to keep track. The way they do that is through a blockchain currency known as GNT (Golem Network Tokens). The user will buy GNT's from Golem, and use them to pay me and all the others who contribute their clock cycles. As GNT is built on top of bitcoin, at the end of the day I can convert my GNTs to bitcoin, and hence to whatever currency I prefer.

This is more profound than it sounds. In our cloud-centered Google-world, processing and storage have become centralized, as required by fiber-optic technology. But as wireless displaces fiber, then there is no longer a reason for Google's huge data farms--everything can be decentralized. But this new technology requires a new operating system--a different computer architecture. The organizing principle of this new architecture is the blockchain--in all its forms, from distributed ledgers to secure financial transactions.

The blockchain will keep track of who owns what, who is owed what, and how people get paid. A hash of that whole transaction will be embedded in the software as a watermark. My few cents worth of CPU time will be embedded in the output for the ages.

There are currently two competing platforms on top of which the blockchain edifice can be built: bitcoin and ethereum. Bitcoin is very simple and secure--and slow. Ethereum comes with a Turing-complete programming language, in principle making it much easier to use. But it is manifestly less secure.

It turns out Mr. Gilder is agnostic on this choice. That surprises me--from Knowledge & Power I would have expected him to favor the simpler, more reliable bitcoin. Golem, after starting with Ethereum, switched to bitcoin.

I highly recommend reading Life After Google.

Further Reading:

• Crypto as a Global Currency
• Book Review: Gorbachev
• Book Review: Rise & Fall of American Growth

Jeff Mackler on Trade

Jeff Mackler pens a piece in Socialist Action (SA) entitled Inside Trump's trade bluster. It is an opinion which, while I think is mistaken, deserves a serious response.

Regarding Trump's trade policy, Mr. Mackler states:

Obviously, he is an embarrassment to the majority of the ruling-class elite. Virtually every major corporate newspaper and media outlet in the country daily pillories his too overtly right-wing tweets and pronouncements, but the essence of his direction, as opposed to the form, is not too dissimilar from mainstream ruling-class views.

This is unusual for SA--normally they write Trump off as a bone-headed klutz. Now they give him credit for substantial policy, however poorly advertised. I agree with them--the world has changed, and Trump's efforts are redirecting American policy in response to that change. It is not simply random outbursts from a senile old man.

Where Mr. Mackler fails is in identifying what has changed. He quotes Marxist economist Michael Roberts.

"... The Great Recession of 2007-8 and the ensuing Long Depression since 2009 has changed the economic picture.

In a stagnating world capitalist economy, where productivity growth is low, world trade growth has subsided and the profitability of capital has not recovered, cooperation has been replaced by increasingly vicious competition—the thieves have fallen out.”

All of the premises are arguable. Certainly, at least in the US, corporate profits are currently at record highs, so that claim seems undeniably false. The statement about poor productivity growth can be disputed. The slowdown in growth is probably due more to demographic factors--low birth rates and an aging population--than any failure of "capitalism."

By blaming Trump's tantrums on the 2007-8 financial crisis, Mr. Mackler misses the big picture. He doesn't see what is really going on.

Mr. Mackler asserts that, circuses notwithstanding, Trump's policies represent America's ruling class. This is not true. Every business organization--from the Chamber of Commerce to the National Association of Manufacturers, to the car manufacturers, to big and little Ag, and so on down the line--has come out strongly against Trump's tariffs. Whenever he announces them the stock market goes down.

The people who do like the tariffs are the unions. AFL-CIO chief Richard Trumka has stated his support. So at least part of Trump's motivation is political--he wants to keep his word to his blue collar constituents. Promises made--promises kept.

The unavoidable fact is that tariffs will hurt the economy. Everybody knows this, barring Mr. Trumka, Pat Buchanan and a few Trotskyists. I think even Trump knows this--otherwise why would he have Larry Kudlow on the White House staff?

The implication of all this is that "Trump's trade bluster" has nothing to do with the economy at all. Instead, it is about geopolitics--an effort to weaken China, who is today America's greatest military competitor. Mr. Mackler alludes to this.

Trump’s denunciation of China for “stealing” U.S. technology was followed by his administration’s widely publicized list of proposed tariffs on Chinese imports. The list includes 1102 categories of goods, all focused on high-tech industries like nuclear reactors, aircraft engine parts, ball bearings, bulldozers, motorcycles, and industrial and agricultural machinery. These are precisely the categories in which China has employed the advanced robotics and related super-modern production technologies—that is, intellectual property rights.

Though he doesn't mention it, the military applications of those technologies are what is most in Trump's mind. The president is willing to take the economic hit now to avoid having a rival superpower in the future. They don't call it a trade "war" for nothing.

So the question is not how tariffs help the economy (they don't) but about how to minimize the blowback they will inevitably cause. And here one can separate the conversation into three topics: China; Fracking; and NAFTA.

China: Mr. Mackler's opinion very much resembles that put forward by Lynn Henderson. I responded to that gentleman here, so no need to repeat it.

Fracking: A milestone was reached in 2010--in that year for the first time in ages the United States exported more oil and gas than it imported. We became energy self-sufficient. Today we import ZERO oil from the Persian Gulf.

This has huge consequences: First, the Straits of Hormuz are no longer a core national security interest of the US. Iran's threat to close them is no longer compelling--we only care about their nukes. That is the essential difference between Europe and the US on the Iran nuclear treaty. Europe is very worried about the Straits of Hormuz, while we are not. Our strategy toward Iran is accordingly much less compromising than the Europeans would like.

Likewise, as Mr. Mackler points out, the US is no longer a reliable defense partner for Europe. If Iran were to close the Straits of Hormuz, it is Europe that will have to send in the cavalry, not the US. That means Germany is going to need a blue water navy--and fast. They're working on it already.

Second, we used to pay for our Persian Gulf oil in dollars, that were then known as petrodollars. But the petrodollars got deposited in dollar accounts in Switzerland, Hong Kong, the Cayman Islands, and elsewhere offshore, whence they acquired the (misleading) name eurodollars.

Those offshore banks lent out those eurodollars to finance international trade. The abundance and liquidity of eurodollars is what made the dollar the reserve currency, and what enabled the WTO. Since the US ultimately controlled the flow of dollars (euro- or otherwise) around the world (the SWIFT system), the US became the enforcer of WTO rules.

The absence of new petrodollars, along with rising interest rates in the US, means that the supply of eurodollars is drying up--there is now a severe shortage. The liquidity needed for international trade is sharply reduced. This has two big implications.

1. The dollar will cease to be the reserve currency, and there is nothing that in the short term can take its place.
2. The WTO will fall apart--without a reserve currency and without US enforcement, it can't survive.

All of this is a disaster for any country not called the United States.

NAFTA: The new Mexico-US trade agreement will insulate the US from the coming trade disruption. The basic idea is to move manufacturing from China to Mexico. This will be a huge boon to the Mexican economy, which is why they eagerly signed it. It's described very well by Gloria van Rees--here is the money quote.

The big question about the impact will be the economic efficiency of the impact of trade diversion into NAFTA and away from other countries. By this I mean, what will be the impact of buying more parts intra-NAFTA rather than outside NAFTA and layering on top of that the low skill parts outside of NAFTA and the high wage parts intra-NAFTA? Here is what I suspect, and feel free to disagree respectfully of course. Assume there are currently, for simplicity sake, four parts needed to make a car. Each part costs $20, $15, $10, and $5 respectively. For simplicity sake, let’s assume that currently the $20 and $15 parts are made inside NAFTA and the $10 and $5 parts are not. Under the new agreement, I think we can expect the $20 part to remain unchanged, the $15 part rise to a $16 part, the $10 part move to Mexico, and the $5 part stay outside of NAFTA. Again, this is a very simple model, but this would meet the general requirements before and after. What we see primarily is a diversion of trade to Mexico as the primary recipient with some increased work likely going to the US and Canada. However, the major question, which is very difficult to know with good foresight is the impact of trade diversion from the rest of the world to the trade agreement partners.

In summary, Mr. Mackler, for all his facts, misses the elephant in the room. It's fracking. Fracking changes everything.

Further Reading:

• Solidarity on Trump & Trade
• Trade Wars
• Book Review: The Absent Superpower

Book Review: Tomorrow 3.0

Tomorrow 3.0, by Michael Munger, is subtitled Transaction Costs and the Sharing Economy. That's actually a much better title--more descriptive of the actual thesis. The "three-point-zero" claim is, in my view, over the top. Version 1.0 was the Neolithic revolution, when hunter-gatherers settled down and became farmers. Version 2.0 was the industrial revolution, when said farmers moved to cities, got "jobs" in our modern sense of the word, and created the consumer cornucopia we enjoy today.

Version 3.0, upon which we are just now embarking, is when workers (most of them, anyway) will lose their jobs because the new economy will not depend on production in the way it has in the past. Instead of finding new and better ways to produce things, entrepreneurs will instead "sell reductions in transaction costs."

The first fruits of this new world are represented by Uber, a company which does not sell taxi services. Instead, taxi services are sold by drivers, for which they are paid by passengers. This exchange is unchanged from the good old days.

What Uber sells instead is a reduction in transaction costs. Consider the bygone era: on a rainy NYC evening after the theater you had to go outside and try to hail a cab. You spend a lot of time waving at yellow cars as they whiz by, already taken. If you're lucky you'll find a taxi within 10 or 20 minutes--or possibly you'll wait an hour.

None of this helps the cabbie. Despite the desperate desire for taxi services, he can't raise his rates by even a penny. He has no incentive to spend his Saturday evening sitting in Broadway traffic in the rain. Better to go someplace else where a passenger can be found with less hassle. (As a former cab driver I am intimately familiar with these sorts of trade-offs.)

So now comes Uber, which solves three problems: triangulation, transfer, and trust. Triangulation is the problem of the driver finding the passenger--the phone tells him exactly where you are. Transfer is the problem of getting you to your destination--the driver already knows where you're going along with the best route to get you there. Finally trust means that you've already given your credit card information--the driver knows he's not gonna get stiffed. And further, the driver has been vetted by all his previous passengers--you are unlikely to be assaulted or robbed.

Beyond which, Uber knows where more cars are needed. No, it doesn't keep track of when the theaters let out, but it realizes that all of a sudden lots of people on Broadway need cabs. So to incentivize the drivers to put up with the traffic, a "surge" is added to the price--which means you'll have your cab within 10 minutes. (Uber now gives you the option to pay a cheaper rate, in exchange for waiting until all the surge payers have already gotten their rides.)

In short, Uber clears the market. It's selling reductions in transactions costs. It saves passengers long waits in the rain, and it compensates drivers for putting up with traffic and hassle. It automates payment, security, and transfer problems, to the advantage of both passenger and driver.

Expand the Uber concept to all sorts of goods and services. Airbnb isn't selling lodging--instead it's selling a reduction in transaction costs for both landlord and tenant. Uber itself is expanding its business in the form of Uber Eats--again not selling take-out food, but instead a reduction in transaction costs.

Mr. Munger argues that this transition from selling products to selling reductions in transaction costs will be as profound a change as the Neolithic and industrial revolutions--Tomorrow 3.0. Somehow I doubt that, but there is no question it will change the way we live.

One implication of the Uber model (especially after robots start doing the driving) is that people won't see any need to buy their own car--they'll just rent a ride when they need one. The result is the automobile market will be far smaller than it is today. So auto workers are gonna be put out of work, and not just because of automation.

Similarly, Airbnb easily puts all hotel front desk and reservations office employees out of a job. Indeed, it likely erases the distinction between a hotel room and an apartment. People--according to Mr. Munger--will be much more likely to rent. (Count me skeptical--most people want to put down roots.) Similarly, take-out food with sharply lower transaction costs competes with the home kitchen--the market for kitchen appliances goes south.

In short, a reduction in transaction costs means that 1) many more items will be rented rather than purchased, implying that 2) less space will be required for storage (you don't need to park your Uber car), and 3) a much smaller market for manufactured goods.

Yesterday we bought personal computers with big hard drives. Today we buy software as a service and store our stuff in the cloud. The size of your computer's hard drive becomes irrelevant. Mr. Munger suggests the same trajectory for many manufactured products--we'll rent them rather than own them, and the need for large garages and extra storage lockers will decline accordingly.  Further, manufacturing firms will also avail themselves of the reduction in transaction costs by sourcing their products from whatever facility in the world is cheapest.

Two things will result from this trend. First, many people, if not completely unemployed, will experience significantly lower wages. And second, prices for manufactured items will decline dramatically. (See my piece, Getting Richer While Feeling Poorer for a description of this trend.)

Mr. Munger describes two phenomena: saltation and separation. The former is a dramatic change in lifestyle because of a disruptive change in technology. Mr. Munger cites a woman named Parisa--a burkha-clad lady from Herat, Afghanistan, not permitted to attend school. But she had a smartphone through which she enrolled in coding class, enabling her to write apps that she posted on Github, for which she was paid in bitcoin. It earns her a first-world income. She's a beneficiary of saltation.

Separation, meanwhile, refers to those who can't adapt to new technology. Consider Parisa's hypothetical cousin (not mentioned by Mr. Munger) who was a seamstress--until the dramatic fall in apparel prices rendered that profession completely obsolete. She wound up unemployed.

The dual trends--saltation and separation--will blur the distinction between the advanced and developing world. The beneficiaries of saltation will get rich, regardless of where they live. Those who are separated, meanwhile, will become poor, again independent of location. Global inequality will grow--not between countries but within countries.

Mr. Munger's solution to a world in which large numbers of people are unemployed is a Basic Income Guarantee (BIG), also known as a negative income tax. In his version, BIG will replace all other social welfare spending: food stamps, housing vouchers, education costs, social security, Medicaid, etc.--maybe even Medicare. Everybody (not just poor people), in lieu of the panoply of vouchers will instead get cash--perhaps as much as $20,000/year per person--just for being alive.

I'm not against the idea, though I think it's a political non-starter.

There's lots more in Mr. Munger's book. It's well worth the read.

Further Reading:

• Crypto as a Global Currency
• Arnold Kling's Moonshot
• Book Review: The Complacent Class