Archive for the ‘Economics’ Category

My credo

January 18, 2017

 

unknownAs our political transition unfolds, I find myself caught between the Scylla of a Democratic party increasingly romanticizing socialist economics hostile to enterprise and trade, and a Republican Charybdis fallen into a dark hole of nativism romanticizing a past that won’t return and shouldn’t. Today’s real divide is between mindsets of openness and closedness. With irresponsible foolishness of every sort running rampant, trampling sound classically liberal principles, I will not give up on them, but will continue to defend them in the years ahead. Here I recap those core principles.

 

  • Democracy and rule of law, so government is accountable to citizens, its powers over them restricted.

 

  • Freedom of speech, expression, and argument. images-1No idea immune from critical examination – even if that offends or discomfits some. This is not only integral to personal freedom, it is also crucial for society to evaluate ideas and progress thereby.

 

  • Limited government, filling only roles that individuals cannot. People able to choose for themselves how to live and act, with society dictating only when its reasons are compelling; basically, only to protect others from harm.

 

  • Free market economics is the best way to grow the pie so all can prosper. images-2Profit-seeking business is how people’s needs and desires get satisfied. That is best promoted when businesses are forced to compete openly and fairly with each other, none gaining advantage through government intervention. Instead government should function to remove barriers to competition and business enterprise.

 

  • This does not mean businesses unregulated. They too are subject to laws to protect others from harm.

 

  • Inequality is the inevitable result of people striving to better themselves, and is not unjust or an evil. Successful people are not the enemy, nor the cause of want. But a market economy generates enough wealth that we can afford to give everyone a decent living standard, out of simple humanity.

 

  • When another country can sell us something cheaper than we can produce it ourselves, we benefit as well as they. images-3Impeding such trade only impoverishes both nations. The gains from freer global trade, through lower consumer prices, vastly exceed the costs in any jobs lost.

 

  • America prospers best in a world wherein democracy, free trade, and peaceful development prevail among other countries, making them too more prosperous; so promoting those values must be the core of our foreign policy. Forces in the world threatening those values must be actively combated.

 

  • Government spending and taxation must be brought into a sustainable balance. Heedlessly piling up excessive debt will not end well.

 

  • Truth and facts should be sought objectively, and should shape our beliefs, rather than our beliefs shaping what we think are facts. unknown-1Confirmation bias is the enemy of reason. We acquire truth through science, a method of rational inquiry which progresses by self-correction as more facts become known and understood.

 

  • No religion is better or truer than any other. All are equally false; and that false consciousness can only impede people in grappling with challenges all too real.

 

  • Human beings are natural animals, resulting from Darwinian evolution. Ultimately the only thing that matters in the Universe is the well being of creatures capable of feeling. All people have equal dignity and worth (except for those who imagine their kind is superior, thereby proving they are inferior).

 

  • Over the centuries, the increasing application of all these principles has made for enormous global progress, with ever more people able to live ever better lives. unknown-2Abandoning these principles endangers that progress.

Jobs of the future and Idiocracy

January 9, 2017

The Economist magazine recently tried to identify where America’s job growth will come from. Of course, pessimists are always seeing the opposite, afraid that advancing technology will put people out of work – starting with the 19th century Luddites, who campaigned against factory automation – and could not have foreseen the explosion of new jobs that technologies like railways, telegraphy, and electrification would soon bring.scan-2

So using data from the U.S. Bureau of Labor Statistics, The Economist presented the job categories that should see the highest growth rates in the years ahead, to 2024. Now, America, judging from current politics, is fixated upon old-time factory jobs (like Carrier’s). But here’s what struck me from that Economist article. It’s not just that such factory jobs aren’t in it. Of course not. However, I asked myself whether the kinds of people who did such factory jobs can switch into these other professions. I don’t think so.

Well, maybe for one or two of the 16 shown, like “ambulance drivers.” Though even that may overlook the advance of self-driving technology.

images-1The top job growth category is “wind turbine service technicians,” reflecting increasing emphasis on alternative energy technologies. But most of the list reflects a different trend: ageing populations, and the panoply of services they’ll require. And, as The Economist notes, “[t]hese are all tasks that require empathy and social skills.”

Again – not the métier of America’s army of less educated assembly line jockeys. They’re yesterday’s men.

The Economist’s writer also points out that the analysis doesn’t take into account job categories that don’t exist yet. Some will be related to technologies that are just emerging, like virtual reality and drones. unknownHe notes that his 16-year-old daughter wants to be a robopsychologist (who figures out why robots are misbehaving). Such jobs don’t exist now, but probably will soon. And then there are all the future jobs we can’t even conceive of today.

A lifeline for all those yesterday men? Not a chance. Yet we’re still producing such people. Our educational system still spits out a sizeable cohort of folks without even a high school diploma. Some can do those remnants of low skill jobs that aren’t automated away. Many though have to be supported by the productive population, in one way or another; the “disability” system covers a lot of people whose “disability” is really just being useless.

unknown-1The movie Idiocracy (one of those dystopian-future flicks) began by contrasting two families. A highly educated, brainy couple agonize over having even a single child. While a bunch of doofuses pops them out right and left. Result, after multiple generations: a nation of doofuses. Apparently everyone is supported somehow because technology dispenses with a need for human work. Not very realistic.

The fact is that, to support all our yesterday’s men (and women) we’ll need a lot of tomorrow people, capable of doing the tomorrow jobs that the former cannot. And Idiocracy wasn’t entirely cuckoo in highlighting that advanced modern populations are not reproducing themselves. So where will we get the tomorrow people we need? Immigration.

Indeed, a key reason why America’s economy has been more dynamic than Europe’s is our greater ability to assimilate immigrants. They fill the gaps our own natives cannot. Our schools don’t produce enough Americans to do all the high tech and skilled service jobs; a lot of them are done by immigrants (especially from Asia).

unknown-2The idea that other countries send us losers and scroungers is stupid. People willing to uproot themselves and start fresh in a new and unfamiliar environment are, to the contrary, full of the kind of enterprise and drive we need.

America’s fixation on manufacturing jobs – and its growing hostility toward immigration – are a double whammy of, well, idiocracy.

 

Eat the Rich

December 17, 2016

unknownP. J. O’Rourke is the funniest serious writer I know. Or the most serious humorist. Even the “Acknowledgments” section of his book Eat the Rich is hilarious. Its subtitle is A Treatise on Economics – often called the dismal science. Some dispute that – denying economics is a science. But it’s normally no laff riot. O’Rourke makes it one while actually treating the subject in deadly earnest.

O’Rourke asks why countries are rich or poor. It’s not obvious. He starts by naming the usual suspects – brains, education, natural resources, culture, history, hard work, technology, government – and exonerating them all with counter-examples. Admittedly that’s a mite glib. While he says government doesn’t cause affluence, because places with a lot of government are often broke, the kind of government matters.

unknownSo he visits countries, seeking enlightenment. First stop, Albania. So dysfunctional is Albania in O’Rourke’s telling that it’s a mystery Albanians don’t just starve. He titles the chapter “Bad Capitalism,” but capitalism per se is not Albania’s problem. It’s a deficiency of civil society. Albanians never got the memo about living decently among other people.

Next, Sweden: “Good Socialism.” This “socialist utopia” is often romanticized – the common mistake of confusing labels with reality. O’Rourke: “When the Social Democrats did get in office, they made socialism work by the novel expedient of not introducing any.” Instead, they retained a free market capitalist economy, and heavily taxed the resulting prosperity to fund egalitarian redistribution and social welfare spending. Swedes bought into this because, on the civil society spectrum, they’re at the opposite end from Albanians – really nice people who believe in egalitarianism and social welfare.

unknown-1But unfortunately, O’Rourke explains, politicians found they could buy votes with ever increasing hand-outs. Whereas originally, benefits mainly went to working people, now non-work started to pay.

Guess what. Redistributing the fruits of prosperity might fly, but not redistributing fruits you’re not producing. Sweden got into a deep hole. But at least, being Swedish and sensible, they saw the need for retrenchment. So today’s Sweden is very much not what lefties dream.

images-1Then on to Cuba: “Bad Socialism.” Worse even than Albania which at least actually has an economy, sort of. I won’t go into details, but if you’re one of those ideologues who thinks Cuba is the cat’s meow (the healthcare! the healthcare!) – you’re an idiot.

I mean, come on, really, you are.

O’Rourke quotes a Cuba guidebook that a museum’s antique furniture was “recovered from the great mansions of the local bourgeoisie” – “Tactfully put,” he says. “Outside the tourist areas, however, there was a fair danger of experiencing some freelance socialism; you might find that you were the local bourgeoisie from which something got recovered.”

Finally, Hong Kong: a tiny place with huge population density and no natural resources, poor as dirt when the Brits came in. They made it rich. How? By doing nothing. Just letting Hong Kongers freely do their own thing. The freest market economy on Earth. Today its per capita income exceeds Britain’s own (the Brits partly socialized themselves).images-2

This sets the stage for O’Rourke’s summing-up chapter – a cogent, compelling defense of free market capitalism.

In pre-industrial times, nearly everyone was poor as dirt. Economic growth was approximately squat. Since then, growth has multiplied average incomes around tenfold. More efficient production is part of it. But you also need secure property rights, rule of law, and democratic (hence accountable) government. These are interconnected, and part of a society’s culture.

unknown-2So is a free market – enabling people to freely utilize their abilities to improve their lot, and enjoy the fruits of their efforts. No freedom is more fundamental. This is also more moral than any alternative – even though it results in inequality, which some deem unfair. O’Rourke: “The market is ‘heartless.’ So are clocks and yardsticks.” Blaming inequality on free markets is like gaining twenty pounds and blaming the bathroom scale.

The common error is thinking Joe’s wealth causes Sue’s poverty. As though there’s a fixed amount of wealth to go around, and Joe having more means Sue having less. Not so. Mainly, the world’s Joes get richer by producing something of value, enlarging the pie, enabling Sue to have more too. So wealth is not an evil, it’s a good thing. And actually, the ethic of capitalism, as opposed to mere wealth, is to reinvest riches, not just hoard them. This also grows the pie.

unknown-1Adam Smith, in 1776, called it the “invisible hand.” The truth that folks striving to enrich themselves wind up enriching society. Many still don’t get it. Why? Because it is invisible. Yet because of it, globally, the gap between rich and poor is in fact narrowing, not just in money, but in quality of life measures like literacy, infant mortality, longevity, etc. Some unfairness is a reasonable price to pay for the betterment of all (or most).

unknown-3But O’Rourke deems it actually wrong to care about fairness. He invokes the Tenth Commandment: don’t covet thy neighbor’s stuff. Get your own. A message to socialists, egalitarians, and fairness fetishists.

Here’s my own summation – also a concept that eludes many people (like Bernie, the Cuban government). All wealth comes from producing goods and services people need or want. Whatever encourages (or at least doesn’t hinder) folks getting on with it is good economic policy.

That is all ye know on earth,
And all ye need to know.

Trump: Making China great again

November 27, 2016

unknownThanks to president-elect Trump’s opposition, the Trans-Pacific Partnership (TPP) trade deal is dead. And considering all his China-bashing in the campaign, it’s a supreme irony that they’re high-fiving each other in Beijing – because Trump has handed China one gigantic geopolitical triumph.

This is America forfeiting – to China – Pacific region trade leadership. The TPP, painstakingly negotiated over many years, was our way to unite the other regional nations with us to resist Chinese bullying. unknown-2With America pulling back, now they’re left to fend for themselves, which will mean accommodating to China as the region’s big Kahuna.

But the words “trade deal” have become so politically toxic here. Shame on Democrats for their cowardly unwillingness to defend one of President Obama’s key initiatives. He himself was forced to give up on it. Not to mention Republicans, who until recently knew better on this issue too.

America’s share of global manufacturing has not been falling. Manufacturing jobs have been disappearing — but due more to technological advancement than trade. And trade-related job losses are overwhelmed by the benefits to U.S. consumers when prices we pay are lower. That savings translates into more consumer spending, which creates jobs, making up for any lost. Furthermore, if trade makes countries like China and Mexico richer, that’s good for us — they can buy more from us. And anyhow, the TPP would not actually have given other countries much added ability to sell us stuff – our tariffs were already quite low. unknown-1But it would have required those other nations to reduce their trade barriers, enabling U.S. businesses to sell more to them. For us, it was a no-brainer. But I guess we have no brains now.

The Debate

September 27, 2016

images-2I sat down with a sense of dread; and a bowl of popcorn to medicate the pain. Conventional wisdom said Clinton had to tread a lot of fine lines, some mutually incompatible. Whereas all Trump had to do was not appear deranged.

Half an hour in, I was gaping in horror. He seemed to be having his way with her.

Of course I knew everything he said was ridiculous, but tried to see it from the eyes of a voter still (amazingly) undecided – uninformed, unengaged, impressionable. And I recalled bin Laden’s aphorism that when people see a strong horse and a weak horse, they like the strong one. unknown-1Trump was all bold colors, forcefulness, conviction; full of soundbites to which the yahoo will shout, “Yeah, that’s right!” While Clinton was full of standard left-liberal politician boilerplate droning that puts one to sleep.

But I also remembered a commentator’s suggestion to watch the debate with the sound off – TV being, after all, primarily a visual medium. I had told Clinton to smile, but I thought she overdid it, with an often sappy-looking clown-grin. unknownHowever, Trump’s facial dynamics were much worse. Not at all the visage of a serious public man. He almost flunked the non-derangement test.

Still, I was surprised by the consensus verdict of polls* and pundits that Clinton won big (or “bigly” in Trumpanese). I’d feared more people would fall for his alpha-male shtick and snake oil. If not, that’s reassuring.

He did seem to kill her on trade. Clinton basically had no come-back because she’d compromised herself by pandering to her party’s anti-trade left. Too bad Gary Johnson (the Libertarian nominee) wasn’t there to point out that importing goods made cheaper overseas than we can make them here benefits consumers through lower prices; enabling them to spend more on other things; which creates jobs, making up for those lost. And Trump’s condemnation of trade deals like NAFTA is utter rubbish. There’s scant evidence it cost us jobs – but it sure helped Mexico – and richer Mexicans can buy more from us, again adding to U.S. jobs. How tragic that free trade is undergoing a brainless political lynching.

But happily Clinton nailed Trump on his despicable business practices, though she could have been more forceful. The thousands of lawsuits deserved mention. She did note his multiple bankruptcies but failed to explain that a bankruptcy has victims – all those whose bills go unpaid, and whose investments are wiped out. His whole fortune comes from stiffing, ripping off , screwing people.

images-1And why no mention of Trump University? Here we have the extraordinary, odious circumstance of a presidential candidate on trial for fraud. And this doesn’t even come up?

Then there’s his refusal to reveal his tax returns. It’s a lie that being audited prevents this; the IRS itself refutes it. Today’s paper says Trump has never actually shown evidence that he is in fact being audited! And what of his boast that not paying income taxes was “smart?” Who ever imagined a candidate saying such a thing? If that’s not a gaffe, I don’t know what a gaffe is.

But Trump is a clever manipulator of factoids and verbiage – a true BS artist. This was displayed in his twisty answer on birtherism. Hillary’s response could have been stronger. I wanted to hear, “Donald, that’s just complete nonsense, that insults our intelligence. Everyone knows you were the leading promoter of birtherism. It was always a lie, you knew it, yet you kept at it, and now you’re still twisting the facts.”

I always felt that at the end of the day, while many voters seem up for a crazy roll of the dice with Trump, more would opt for the less exciting, uninspiring, more conventional, definitely compromised, yet steadier, saner, safer choice. Response to the debate suggests this outcome.

unknown-2Having that vile creep on a presidential debate stage is already a national degradation. Let us hope that this will mercifully end in November with Trump defeated.

Bigly.

* Forget the online polls, they mean nothing.

Ban the box?

September 20, 2016

unknown-1Since 2007, eleven states have enacted bans on checking a job applicant’s credit score. The aim is equality and fair hiring – since someone with low credit would more likely be black, poor, and/or young. Yet when two economists (Robert Clifford and Daniel Shoag) studied these bans, they found hiring more racially biased.

Why so? Another well-intentioned liberal utopian idea whacked by the law of unintended consequences. It seems that when employers cannot see applicants’ credit scores (often a good predictor of reliability on the job), they give added weight to factors like educational attainment and experience – on which young, poor, and black people do even worse.

imagesThe Americans with Disabilities Act similarly aimed to help a disadvantaged class, by giving them a litany of on the-job-protections — enforceable through litigation. Thusly turning disabled workers into lawsuit bombs, making employers wary of employing them at all.

Well, you may say, what’s wrong with requiring employers to treat disabled staff fairly, and penalizing them if they don’t? But even an employer with all the goodwill in the world would realize that what she considers fair, someone else might not, and in today’s litigious culture, that’s a big risk. unknown-2Some lawyer sharks make their livings by cooking up dubious ADA cases and shaking down businesses for settlements. (The ADA was a bigger boon for lawyers than for disabled people.)

It’s all part of a trend to see businesses as enemies of society. As if people should provide you with goods and services with no profit, selflessly, as a public service. A friend of mine constantly whines about supermarkets making profits, asking why they can’t just give up some profit and cut prices. But she likes being able choose among thousands of products in one store. Supermarket profit margins average around 1%.

Now we have the “ban the box” movement – referring to the job application checkbox, “have you ever been convicted of a crime?” As though it’s somehow unfair for an employer to know this about a job seeker. Applicants do have rights; but don’t businesses have some rights too? Isn’t it, indeed, unfair to require a business to hire someone without knowing their credit rating, or criminal record? Those tell something about the person. And while people with bad credit or jail time deserve some consideration, are they entitled to be treated as though those facts about them aren’t facts?

unknown-3And I’m dubious anyway that “ban the box” would actually help the intended beneficiaries – let’s face it, mainly young black men. Who, percentagewise, have a greater likelihood of criminal justice encounters. Businesses know that. If barred from learning whether a black applicant has a clean record, a common response would be wariness about hiring him – making it harder for black men to get jobs. Just like with credit scores.

Sometimes the “unintended consequences” are not even a surprise. Sometimes they stare you in the face. But that never seems to daunt liberal do-gooders in their effort to repeal reality.

After I wrote this up, an article in The Economist reported on another study, showing states with “ban the box” laws, sure enough, do experience lower black hiring.

unknown-4And now Massachusetts has banned employers from asking job applicants what their present salary is. Fairness to women is the stated aim.

Why not just go for total fairness and require businesses to hire workers knowing nothing about them at all?

Observing an Alaskan feeding frenzy

August 31, 2016

We did an Alaska cruise. Not our first, but it’s a way for my 95-year-old Californian mother to get the whole family together.

imagesShe enjoys the shipboard slot machines. I pointed out there’s a device right in her stateroom where she could similarly put in money, press a button, and flush it away. Unknown-1But she prefers the ones in the casino.

One of our wildlife experiences was to witness that phenomenon called feeding frenzy. In the middle of the ship, they’d set up a special jewelry sale, a big table piled with boxed sets of necklaces, bracelets, etc, priced from $19.95 to $39.95. There was not much variety. But the deal of the century: buy four, get one free! Holy cow!

images-1Now, I am no connoisseur of women’s jewelry; but this garish stuff looked to me like what a six-year-old would enjoy for dress-up. Yet the table was thronged with women, grabbing stacks of boxes up to their chins.

I felt glad my wife wasn’t one of them. Then one friendly looking gal, holding a box, smiled wryly at me. images-2I said to her, “You don’t really need this.”

“I suppose,” she replied.

Emboldened, I added, “Looks like overpriced junk.”

“I suppose,” she said.

But I doubt this broke the spell or dissuaded her from buying.

The scene evoked that sneer word “consumerism,” which refers to your disapproval of someone else’s purchase choices. But I reminded myself of Pope Francis’s line: “Who am I to judge?”

Payday lending and lawyer extortionists

August 8, 2016

imagesPayday lending has been in the news again, with do-gooders seeking a crack-down. These are businesses making small short-term loans, to mostly poorer people in a fix for cash. Their charges, if calculated as annualized interest rates, might seem exorbitant. What would be reasonable? An 18% limit? On a one week $100 loan at 18%, the business would clear . . . thirty-five cents. Would you make such loans? With all the costs and overheads, rent, wages, etc., all the risks of running a business, handling a lot of cash, in what may be a crime-ridden neighborhood? Plus the risk of non-payment and all the hassles of trying to collect? Do these businesses actually make excessive profits? That we’re never told.

But well-intentioned liberals want to protect the poor from victimization by payday lenders. Put them out of business. So poor people needing quick cash will have no way to get it. Isn’t it great that affluent “progressives” stand up for the disadvantaged?

UnknownHowever, some businesses are predatory. Like Trump University. A total rip-off. And prominent among the predators are lawyers – whose predation mostly targets legitimate businesses. I’ve written about the class action lawsuit scam. You find some business that has done something maybe, arguably, a little bit wrong, no matter how trivial, and you sue their butt off, forcing them to settle to avoid ruinous litigation costs. The lawyers typically get six or seven figures, while the consumers they’re supposedly fighting for get peanuts.

Unknown-1One such case involved a restaurant’s alleged failure to honor a free meal coupon. A consumer, to get anything, would have to produce that old $3.99 coupon (good luck). The lawyers got $515,000. Who’s more guilty, them or the restaurant?

The Economist recently highlighted another such scam – lawsuits charging businesses with violation of the Americans with Disabilities Act. The ADA rulebook is hundreds of pages, so no business, however well-intentioned, can be in 100% compliance. And Congress, in its wisdom, instead of having a government agency police this, opened it up for private litigation. Maybe the lawyers’ lobbies had something to do with that.

UnknownAnd if you’re a business that’s sued — perhaps because a sign is not properly positioned – I’m not kidding – you might suppose you could simply fix it. Nope. No fun for lawyers in that. They get their pound of flesh just by showing a violation ever existed. And you have to pay their attorney fees too.

Not surprisingly, some lawyers have gone whole-hog into this ADA extortion racket – filing suits against every business in sight, shaking them down to settle rather than face even costlier litigation. Settlements typically run $3500-7500. But California has special rules even more skewed against businesses, so settlements there run $15,000-20,000. A California judge has ordered a Colorado retailer to pay legal fees likely to exceed $100,000 because its website didn’t accommodate screen-reading software for the blind. (There’s always something.) The Economist says some lawyers file dozens of these cases weekly.

So we target payday lenders, who provide a real service to needy people, but stack the deck in favor of predatory lawyers and against the legitimate businesses they victimize. And we wonder why small business growth in America is way down. Unknown-2All the yammering about “jobs, jobs, jobs” in political discourse seems disconnected from the fact that jobs come from businesses.

How to invest in stocks

July 9, 2016

imagesI’ve been investing in stocks for several decades. Here’s what I’ve learned.

In 2000, during the dot-com bubble, I owned AOL stock, going up and up and up. I thought it was crazy, but held on for the ride. Then came AOL’s buyout of Time-Warner. My rule of thumb is that mergers are bad for the acquiring company; the touted benefits rarely materialize. So I told my broker I wanted to sell my AOL stock. He tried to dissuade me, calling this merger the greatest thing ever.

UnknownIt was one of the greatest disasters ever. Turned out the AOL honchos knew their stock was way over-valued, and they were cashing in by using it to buy Time-Warner. The stock then collapsed.

Am I relating this to show how smart I was? Nope; I heeded my broker’s advice and didn’t sell. What is the lesson? I wasn’t so smart. My broker wasn’t either. Neither was Time-Warner. You can’t expect to outsmart the market or beat the market.

Everybody aims to pick stocks that will do better than average. Thousands of people are paid a lot of money for that. But the very fact that so many very smart people are trying is what makes it unachievable – they all cancel each other out.* Since they’re all so smart, with so many analytic tools at their disposal, so much information, computer programs and models, etc., no one can truly outperform the rest – except by mere luck.

Unknown-1That may be a bit overstated. It does happen. A good example is the housing bubble collapse that triggered the 2008 crisis. Most of the Wall Street herd didn’t see it coming, and continued drinking the Kool Aid right to the end. However, a few did see the true situation, and profited thereby. But that was a special case. More normally, if you’re smart enough to see something, a lot of others will be smart enough to see it too.

Now, since YOU surely aren’t smart enough to beat all that firepower in picking stocks, it might instead seem sensible to buy into a mutual fund, which employs hot-shots to do it for you. There are thousands of funds. Which to choose? Well, you can look at their track records and see which has performed best.

But here’s the thing about track records. Suppose all those mutual funds picked stocks by a random dartboard method. The results would form a standard bell-shaped curve – most performances would be middling, a few much above or below the average. If you choose the one that came top — what are the chances it will again be the best next year?

Unknown-2Of course mutual funds don’t use a dartboard method. They use, again, sophisticated analysis, computer models, etc. And because they all do, the results are the same – mostly bunched in the middle, some better, some worse. And remember, you can’t expect to beat the market, at least not consistently. So a mutual fund’s track record is not necessarily more predictive of future results than if they did shoot at dartboards.

Economists call this “reversion to the mean.” In a given year, out of a thousand mutual funds, inevitably one will clock the best performance. Does that indicate its guys are actually smarter than all the other very smart guys at all the other funds? Not likely! More likely it’s just natural random fluctuation around the mean (average) performance. So next year, its results will fall back to the average – “reversion to the mean.”**

Then too there’s “efficient market” theory. This says every piece of information relevant to valuing a stock is already folded into its price. You can’t really know something about a stock, affecting its future prospects, that the market doesn’t know (unless it’s “insider information,” illegal to trade on). Thus again it’s not normally possible to profit from trading stocks by being smarter than the market.

So you’d expect the entire universe of mutual funds to produce a return simply matching the market average. But actually it doesn’t. All that frenetic activity costs money, and they charge investors a percentage for their services, which makes the net return less than the market average.

imagesI recently read Nate Silver’s book, The Signal and the Noise, concerning all the problems of predictions. Wall Street is a major focus. Silver too notes that a lot of people are highly paid to try, and at the end of the day inevitably fail, to beat the market. Seems crazy. They all know about efficient market theory and that they can’t beat the market; or should know. But if they all actually followed the logical implications, no stock trading would occur at all. Yet having a functioning market serves a quite valuable purpose in the overall economy. The trillions worth of trades dwarfs the amounts “earned” by the investment industry (to essentially achieve nothing) – a small price to pay for having a financial market.

Every prospectus warns, “future results may not replicate the past.” Otherwise investing would be a snap and everyone would be a millionaire. The caveat is true on the largest scale. You’ve been told that in the long run, stocks do such-and-such; the market returns X%. And that may indeed be accurate concerning a very long past time span. But future results may not replicate the past. In fact, the future is quintessentially uncertain. The only certainty is that it will differ from the past.

Nevertheless, over the long term, stocks should provide a return for a simple reason. Their values are ultimately grounded in company earnings. And the typical company typically does earn profits. ***

Unknown-3If you ask people whether it’s a good time to buy stocks when they’ve been going up a lot, they’ll likely answer “yes;” and “no” when stocks have been falling. Those answers are – of course – wrong. In fact, this is really the most common investing mistake. When the market is high, stocks may well be over-valued; in a slump, they may be cheap. But optimism and pessimism are contagious. Many people plow in when stocks are up, while becoming demoralized and sell when they’re down.

A key consideration is the ratio between a company’s stock price and earnings. This P/E ratio for the whole market has, over the long term, averaged around 15 or perhaps somewhat more. If the market’s average P/E is much higher, stocks may be over-valued; and vice versa. Today’s P/E is above trend, at about 25.

If you want to just capture the market’s long-run tendency to produce a return through earnings, there’s a simple option: index funds that just track the performance of an index like the S&P 500. Since there’s no need for hot-shot analysis, fees to investors are typically quite low.

images-1So, how’ve I done, overall? Not bad. But I’ve had quite a few real disasters like AOL along the way. I’ve finally pretty much given up trying to be smart. That’s a sucker’s game.

* Remember that in general, whenever a share of stock is sold, somebody else is buying it.

** This was explained well in Leonard Mlodinow’s book, The Drunkard’s Walk.

 *** “Return” is the sum of dividends plus stock price appreciation. Earnings not paid out as dividends accumulate within the company and increase its net worth.

 

Trump’s trade trash talk

July 5, 2016

UnknownIf America is murdered, it will be in the Rustbelt Room, with the trade club. Pounding away with that club is Trump’s only chance of winning.

He exulted in Britain’s Brexit vote as a win for his anti-globalist line. Brits themselves are less celebratory, many already seeing their vote as an own-goal. Americans should not copy their economic suicide.

The Brexit vote spotlights breakdown of the old left-right political divide; now the more salient one is inward-looking versus outward-looking, open versus closed. UnknownThat has great resonance in America too. The Trump phenomenon is divorced from the conventional liberal/conservative dichotomy. The Republican party, long seen as a bastion of right-wing ideologues, has thrown that all overboard in embracing Trump, with his most telling anti-globalist symbol: a wall.

Alas, no important voices are refuting Trump’s trade tirade. Democrats, for most of their history, correctly saw free trade as good for the masses, with protectionism a means for business interests to screw consumers. But then, bent by the special interests of organized labor, they lost the plot. However, they found the snake oil politically saleable.

Unknown-1They never expected to be outflanked on the issue by a GOP candidate. Hillary, having bought the snake oil from the Bernie-ites, to placate them, dare not tell voters it’s poison. She’s reduced to merely mocking Trump’s hypocrisy in having profited from using foreign labor.

But if neither Republicans nor Democrats will expose Trump’s big lie, then I must.

Those good old industrial jobs, where with barely a high school education you could support a middle class family, are history. The main reason is advancing technology. We actually manufacture more than ever, but do it with ever less labor. Today’s economy no longer needs that much low or middle skilled labor.

This – making more with less – creates wealth and is why global living standards have risen dramatically. In the past century, worldwide average real-dollar incomes increased more than five-fold, and billions rose out of poverty.

And the other key factor, leveraging that benefit, is GLOBALIZED FREER TRADE. Freeing up trade enables nations to export more. They get richer, enabling them to import more, which means other nations can export more. Everybody gets richer; a virtuous circle.

imagesThis is the golden egg-laying goose Trump would kill. He assails the NAFTA free trade pact as a terrible deal that cost us jobs. In fact, the alleged U.S. job loss is very debatable . But NAFTA did cause huge job gains in Mexico, which became much more prosperous. Isn’t that something to our benefit? A richer Mexico buys more goods from us, increasing our exports, which creates U.S. jobs.

Anti-trade demagogues don’t mention that. Nor the real elephant in the room: that free trade, and importing cheaper goods from China and other countries, while admittedly entailing some job losses in the short run, saves U.S. consumers literally trillions of dollars. And when we spend those added trillions, that demand for other goods and services requires U.S. businesses to hire more workers to supply it. So in the big picture free trade really adds jobs.

What we need is not more barriers to trade, commerce, and enterprise, but fewer. People losing jobs to globalization won’t be helped by walling off America, but rather if they had more job prospects in a more open, dynamic economy. Ours has become sclerotic. We need to dismantle protections of all kinds enjoyed by special interests, restrictive practices, and roadblocks to open competition.

Slobovian widget

Slobovian widget

Here’s what anti-free-trade protectionists like Trump are really saying: that if Slobovia wants to sell us widgets cheaper than we can make them ourselves, we should refuse. Will that benefit us? Or Slobovia? It will benefit U.S. widget-makers at the expense of everyone else.

So Trump wants to impose tariffs – that is, import taxes – on Chinese goods, to keep them out. He doesn’t tell you this means you’ll pay more for much of what you buy. It won’t be a tax on China. It will be a tax on you. To protect business profits.

This is what some call populism.