Why Didn’t I Blog More About Economics?

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Over the years as my interests have changed so have the topics on my blog. From hiking to financial to fitness to nutrition to cooking to whatever sparked my curiosity. But there is one huge exception and that is economics.

For the past 5 or 6 years I have spent a considerable amount of time learning more about economics. Podcasts, articles and books. I didn’t have a goal in mind. It was just something I gravitated to as my interest in finance was fading. Yet I almost never post about economics unless it relates to a topic that is connected to me personally.

The EconTalk podcast continues to be my favorite source of economic knowledge. Often times I would end up reading the books by the guests to further my understanding of the topic. (NPR’s Planet Money is pretty good too. Never cared for Freakonomics.)

Photo by Paul Downey

A while back someone asked my why I don’t discuss economics on this blog. The reason is that early on I realized that people are biased to their core on their opinions of government and the free market and that will cloud how they will approach any economic topic. It is just like politics. Whatever your belief is you can certainly find data or information to support that belief. And that isn’t just true with average people like us, but some of the top economists of the last 100 years. The Keynes vs Hayek battle is still being debated.

I have my own bias, which I am aware of, and I know that I’m not going to convince anyone of anything. And if I did, so what? As energy draining as all those fitness posts became, I’m certain that tackling topics on economics would be magnitudes worse. Trying to convince a CrossFit enthusiast of SuperSlow HIT – as difficult as that sounds – would be much easier than trying to defend a free market principle to someone that doesn’t trust free markets. So, why bother?

Learning about economics has helped me become a better decision maker. Not just with matters of time and money, but also approaching topics such as nutrition where I believe I have incomplete information. And that is good enough for me.

Opinions are becoming more and more dangerous. Hold the wrong one at the wrong time and you can expose yourself to serious backlash. If there is little to no upside in sharing a controversial viewpoint, but it does carry downside risk, why bother? It makes economic sense to stay silent.

Why the Events of 2016 Did Not Surprise Me

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After my long blogging hiatus I returned with a list of topics that I wanted to cover.

One item on the list was why the events of 2016 did not surprise me. I expected both Brexit and that Trump would not only win the GOP Primary but the General Election.

This post is not about my political opinions. How I may or may not feel about an issue or candidate is irrelevant. Just like with fitness and nutrition, my opinions have changed a lot over the years. They continue to change. But how I feel at this moment is of no importance. I hope I stressed that enough.

The reason 2016 made sense to me is because I was able to view current events as an impartial observer. Much like an excellent investor doesn’t get emotionally attached to the value of a stock. It may be undervalued or overvalued, but it is what it is.

Below are the people that helped guide my thinking that prepared me for 2016.

#1 A. Gary Shilling

One of my favorite investors is Gary Shilling. He top called interest rates in the early 1980s and advised investors to buy Treasuries when interest rates were sky high and declining. That was the one of the best investment calls in history. I cover him more in detail in the post The Age of Deleveraging.

About 4-5 years ago he was being interviewed about the sluggish recovery and with the same calmness he always exhibits he mentioned how pro-labor movements always come in cycles. A pro-labor cycle was coming and we would see things unfold that were common in periods where labor movements get strong. Calls for higher minimum wages, protectionism, tariffs, rent control, curbing immigration and other populist ideas aimed at reducing inequality.

Shilling was clear that those methods were not the strategies he would implement to boost hiring, but this is what was going to happen. Something about that interview really stuck with me. Not just his calls, but how even one of the top investors of our generation with an opinion and a voice on TV could play the roll of the impartial observer. I found it something to aspire to. Look past what you may want to happen and see the world for what it is.

What happened next? Cities around the country started passing increases in their minimum wage laws. You saw the rise of Bernie Sanders and Donald Trump. Both tapped into the rise of these labor movements from different angles and both candidacies did far better than the general media expected.

#2 John Xenakis and Generational Dynamics

His website is hideous and a lot of his financial stuff I disagree with, but the daily newsletter from Generational Dynamics is an amazing resource. Each newsletter usually focuses on just one or two events. It begins with an overview of what happened and then jumps into the histories of the countries involved, followed by his analysis.

One of the core themes in GD is how different generations respond differently to conflict and crisis. Not just in Western Countries but around the world. And not just going back decades, but hundreds of years. There are similarities to the Strauss-Howe generational theory that was covered in the book The Fourth Turning, which I have not read.

One of themes of GD is predicting how a crisis will unfold based upon how many generations a society has had since it experienced a major conflict. Are the leaders in charge the children, grandchildren or great-grandchildren from the prior major conflict? Answering that question is predictive of what the response will be.

One of the takeaways from GD for 2016 is that now that the children of the Depression and the soldiers of WW2 have mostly died off, we will begin to see nations take a more nationalistic tone. First it was Brexit and Trump. This trend is likely to continue.

#3 Martin Armstrong

When I first started reading Martin Armstrong, I wasn’t sure what I was reading. Was he brilliant or nuts? Just as General Dynamics goes into generational responses, Armstrong goes deep into financial history. He might post on something that happened an hour ago or something that happened during the Roman empire.

One of themes Armstrong writes about is Public vs Private confidence. Money flows with confidence. During the 2008-2009 financial crisis money poured into government debt for safety. Now we are seeing confidence falling in government. Money is pouring out of Asia and Europe into the US Stock market. Armstrong wrote this in May 2015:

When capital loses confidence in government, it flees to the private sector, but you have to understand at that point it is not about profit – it is about survival.

Armstrong called both Brexit and Trump. He also predicted that governments under the pretense of cracking down on crime and terrorism would begin going after cash for revenue. We are seeing this now in India as well as in articles penned by prominent economists. Whether you believe or disbelieve the motives of the governments is up to you and likely irrelevant.

#4 Scott Adams

Scott Adams is best known as the creator of the Dilbert comic. If you do not read his blog, you are missing out on the best political analysis that I’ve ever seen. What makes his take fascinating is he isn’t discussing issues, but persuasion.

Adams called for Trump to win the entire election over a year ago. This was back when most people thought his candidacy was a joke. Adams has studied persuasion techniques for decades and saw something in Trump that most didn’t.

It would take too much time to summarize a year of what I learned from him, but the very short version is that most of the decisions we make as humans are irrational and emotional. We later use reason and logic to back up those decisions. This is why debating facts almost never works. We each choose our own facts.

I highly recommend listening to this 68 minute interview with Scott Adams to understand what I am talking about.

#5 Me and the Wikipedia

Using the information I learned from Scott Adams and by reading a single Wikipedia page, I predicted months before the general election that Trump would win by 100 electoral votes. He won by 77.

The page I read: Electoral history of the Libertarian Party (United States)

If you read the Wiki page you will see that the Libertarian Party has historically received 1% or less of the popular vote. Yet during the 2016 election we consistently saw Gary Johnson polling between 5-9%. Johnson ran in 2012 and only received 1% of the vote. His campaign wasn’t inspiring and he came across as incompetent on 60 Minutes. I sensed there was something wrong with the polls.

My thesis was most of the people polled that said they would vote for Johnson were really saying that they didn’t like either candidate, but really did not like Clinton. In their own mind, they may have honestly believed they would cast a rebel 3rd party vote, but on election day they would defect and vote against Clinton. And that is exactly what happened. In the end, Johnson only received 3.2% of the popular vote. Trump gained most of the Johnson defector votes, as I predicted.

Wrapping Up

I want to conclude by saying once again that my opinion is not relevant. My goal was to just be better informed and understand the world around me a little better. The four gentleman listed above and one page on the Wikipedia helped me make sense out of 2016.

On Friendship

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Since late last year, I’ve been thinking about the following quote by Jim Rohn.

You are the average of the five people you spend the most time with.

5 sign

Photo by N Ino

I want to share my interpretation of the quote. It has to do with falling into a group where we feel comfortable. College students tend to hang out with college students and not high school dropouts. Not that they can’t be best of friends, but the relationship can become uncomfortable for obvious reasons.

If our group is growing, then either we are growing or we feel comfortable around those that are and the group needs to feel the same way about you. Those 5 people represent loose boundaries.

Last year I had a lot of good luck. There is no need to go into details, but my life changed and for the positive starting in the spring. Prior to that my life and relationships had been pretty much consistent. As my luck started to improve, I found the relationships of those closest to me became more difficult. But why?

I just recently finished the book How Adam Smith Can Change Your Life: An Unexpected Guide to Human Nature and Happiness by economist Russ Roberts. The book is an excellent discussion on the modern application of Adam Smith’s ideas from his book The Theory of Moral Sentiments.

How Adam Smith Can Change Your Life: An Unexpected Guide to Human Nature and Happiness
How Adam Smith Can Change Your Life: An Unexpected Guide to Human Nature and Happiness by Russ Roberts

In the book Roberts quotes Gore Vidal to explain a point made by Adam Smith regarding how those closest to us can react to our good fortune.

Every time a friend succeeds, I die a little.

Personally, I have never understood this static world view of happiness and success. I want all my friends and family to be wildly successful, even if it means they will be too successful to spend time with me. I’d rather their successes inspire me than feel resentment to their good fortune. I don’t view happiness and success as a fixed pie. When someone else has good fortune, it does not rob good fortune from the others in the group.

But others don’t feel as I. They align more with Gore Vidal. But unlike Vidal, I don’t think they are consciously aware of how they are responding. When a member of the group is having good fortune and it isn’t them, they feel threatened. And they respond by withdrawing or creating tension where none existed before. They need to create a narrative that makes them feel better. And often the only way that can happen is for them to replace your presence in their group of 5 with someone else.

An Unintended Consequence of a $15 Minimum Wage

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The higher minimum wage debate is something I have hesitated discussing. The reasons are numerous, but mostly because I think the discussion is missing what I predict will be the worst unintended consequence of the law. A higher minimum wage increases the incentives for skilled labor to compete with and displace unskilled labor. Let me illustrate this with a personal story.

When I was in college I had a minimum wage job delivering pizzas. In addition to the basic wage, drivers got a per delivery fee and we got tips. If you got good shifts, you could take multiple pizzas on a run and make a good hourly wage. It has been a long time since I delivered pizzas but I recall making on average $12 an hour. Had I worked the job full time, that works out to $24,000 a year. To keep this example simple, we won’t count fuel and car maintenance costs.

pizza hut 2500 accident free hours

The 2,500 accident free hours pin I earned working for Pizza Hut.

As soon as I graduated college, I left Columbus for St. Petersburg, Florida and immediately got a job delivering pizzas. The tips were not as good as when I was Columbus. I estimate that I was averaging $9 an hour. After a few months, I landed an entry level office job making $24,000 (or $12/hr). Not a lot, but it was Florida and it gave me a foot in the door that would lead to better jobs at higher salaries.

My plan was to aggressively pay down the debt I racked up in college, so I would work the office job during the day and drive pizzas around in the evening and on weekends. That plan lasted for about two months. I was getting paid more per hour for my skilled labor (office work) than my unskilled labor (pizza delivery). My time was worth more than $9 an hour, so I quit delivering pizzas and instead devoted those hours to improving my coding skills.

I had a choice. Many of the drivers didn’t.

Both pizza delivery units I worked for had a combination of college students, college graduates looking for better work and unskilled workers that may have a high school degree or equivalent or they were drop outs. For every shift a college graduate worked, that was one less shift the guy without the college degree could work. It sounds harsh, but the managers had only so hours they could schedule.

Increasing the minimum wage feels like the right solution to helping unskilled labor, but it has the unintended consequence that more skilled labor will compete for those jobs. A far better solution is to increase the EITC (Earned Income Tax Credit). It is a cost paid for by all of society, not just the entrepreneurs and their customers and it is directed at those that need help the most.

Had the minimum wage been increased by $3 while I was working for the Florida pizza delivery place, I would have continued working there on nights and weekends at least until my office salary increased. Every hour I worked would have been one that the high school drop out driver couldn’t work. Now multiple my story a few hundred thousand or a million times and you could see how income inequality could potentially get worse with an increase in the minimum wage. And those stories won’t show up in the unemployment data.

Revising My Seattle Rent Outlook

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In May I posted Ballard Rents – Don’t Believe the Hype! in which I gave my thoughts about the rent situation in Seattle. Although I am still confident that the near vertical increase in rents is about to come to an end, it might just be a brief pause before rents continue to gradually rise.

Seattle is between Vancouver, BC and San Francisco, CA. Two cities where the rents are higher. I don’t know much about Vancouver, but the cost of living in the Bay Area are very high compared to Seattle. Seattle like the Bay Area is a technology hub. Not every city is a tech magnet, but those that are will have a higher demand for housing from those with high salaries.

The problem with Canada and California is not only the high cost of living, but the taxes. Washington has no state income tax. This has and will continue to be a reason tech companies will migrate to Seattle. There are other states with no income taxes, but none that host a true tech city. Some say Austin has a growing tech presence, but it is not in the same league as Seattle. Plus it is friggin hot.

seattle-downtown

Seattle 

When I look at a map of the United States and I try to pick out tech cities that don’t have a high cost of living or onerous taxes and with temperate weather, only Seattle remains. Throw in the University of Washington which is graduating more and more skilled computer engineers every year and you can see that Seattle might be undervalued, which means rents may very well rise even after the current demand shortage is met.

Average Is Over: Powering America Beyond the Age of the Great Stagnation
Average Is Over: Powering America Beyond the Age of the Great Stagnation by Tyler Cowen

In the book Average is Over, economist Tyler Cowen made a prediction that certain cities where highly skilled workers live would become much more expensive and that there would be an economic migration where those not highly paid would move away. So much migration that in a generation, it might be seen as odd for someone with a low income to still reside in an expensive city.

The prediction made sense to me, because lower skilled labor will increasingly be replaced via automation, computers and eventually robotics. We’ve already got robots that can flip burgers and machines that dispense burritos in 1 minute. This trend will not only continue, but accelerate.

What I didn’t consider was just fast it would start to happen. The economic migration has already begun. The article Affordable Housing Draws Middle Class to Inland Cities goes into detail how the fastest growing cities in America are not the ones with most job opportunities for high wage earners, but places where the cost of living is low and housing inexpensive.

What Cowen articulates in his book is how the most important factor in deciding where to live is how much you have left in your paycheck once your bills are paid. Those with higher incomes will migrate to cities with other people with high incomes and enjoy the culture and entertainment opportunities it brings. Those without will move mostly South where their lower salaries go a lot further.

Seeing Seattle in this light, I now believe it will be one of those cities where the cost of living will be high.

UPDATE August 19, 2014: TechCrunch has an article supporting my view that Seattle is the non-Silicon Valley tech city.