Sunday, April 22, 2018

Connecting the Dots of Big Data, Soaring Corporate Profits and Trade Wars

It's self-evident that we cannot possibly understand trade, soaring corporate profits, Facebook's data collection or the economy without understanding the core role played by Big Data in reaping outsized profits and pushing narratives.
Let's connect the dots between these two comments from longtime correspondents: the first is on the model of collecting and selling data (Big Data), and the second on trade:
GFB:
"If I had a lot of money, would I want to do:
A) --invest in the exploration forbidding areas of the globe for oil reserves with a 50/50 chance of no results
--negotiate leases for the areas of the planet I want to extract oil in and have to negotiate with corrupt and unstable governments
--Pay for the oil extracting and transportation infrastructure
--deal with the fluctuating market values - which may make my whole investment worthless
OR
B) set up a low cost trap that has millions of people handing me for free, and with their acknowledged permission, their preferences, tastes, beliefs, and aspirations . . . which I can re-sell at almost no cost to a long list of buyers, with a price that I can set as I have the data.
Why I keep thinking we’ve moved past 'the sky is falling' to 'the sky fell' with this is that we haven’t yet seen what happens when next generation AI gets a hold of this data and starts using it.
That’s no concern of anyone in the data mining, acquisition, or aggregation business now - as their goal is very simple: get as much data as possible from any kind of source that you can beg borrow or steal from - as the AI and algorithms of the future will find more and more uses for this data.
Data will only become more valuable. I don’t think there is an equivalent 'substance' in our universe, that no matter what happens, the data holder will be wealthier and wealthier.
Data doesn’t expire, rust, need maintenance, go in or out of fashion, need to fed, require medical care . .
I thought it was very telling that there were numerous reports recently that the Senators grilling Supreme Leader Zuckerberg clearly, by the nature of their questions 1) did not understand what Facebook does and why this is and issue, and 2) didn’t want to piss Zuck off as they are going to need to use Facebook's data in their next campaign, as their opponents surely will."
Mark G.:
"Perhaps one way to underline this for readers (i.e. that corporations have benefited from "free trade" far more than consumers and workers) is to see what wasn't outsourced and offshored. This is control of the product marketing and distribution channels. This is the sector the "Free Traders" have maintained a death grip on.
Even with Alibaba in place the Chinese have still made almost no progress in market penetration in North America, Europe or Pacific Oceania.
If we totaled up the proverbial '80%' of retail value in any class of products I'm certain we'd be staring at a series of oligopolies that generally have fewer than ten members in any category, and often fewer than five."
Here's how I'm connecting the dots of data collection/data mining and the new model for maximizing profitability: the entire model of "capitalism" (maximizing return on capital and labor) has shifted from getting rich making stuff/providing services to distributing/marketing goods and services in a cartel structure.
In this economy, the essential role is played by big data/data mining. Wal-Mart, Amazon, Facebook, Google et al have no interest in where the goods and services are made/generated; the big profits are in the distribution/marketing (i.e. exploiting large data sets) and gathering and selling these large data sets.
Let's stipulate that those corporations whose entire value proposition is manufacturing expertise will continue to extract profits from manufacturing. But this doesn't mean that this manufacturing remains exclusively in the domestic economy, or that Big Data isn't increasingly a core value-generator for manufacturers.
Boeing is a good example. In terms of trade, it's noteworthy that Boeing is careful to have major airliner components manufactured in major markets for its aircraft: Japan and China come to mind.
Since Boeing's value is increasingly based on how well it meets the needs of its airline customers (setting aside its government defense contracts for the moment), then the value proposition shifts to Big Data /data mining and analysis of passengers, routes, etc. by the airlines. Thus Big Data informs what they want from Boeing, and Boeing is thus as reliant on data mining as any politico seeking to exploit large data sets mined by Facebook.
GFB made an important point in one of our many email exchanges on these topics: small data sets are a dime a dozen. What's truly valuable is data sets covering tens of millions or hundreds of millions of individuals.
There are of course beneficial uses for large data sets: pharmaceutical and healthcare R&D is informed by large data sets about patients and their responses to lifestyle changes, medications, etc.
To Mark's point: to identify what is most profitable, look at what isn't offshored, and what is most zealously guarded by political/regulatory moats.
Alternatively, to identify what's low-value and not very profitable, look at what's offshored. That would be manufacturing and assembly.
To GFB's point: given a choice between an intrinsically risky enterprise such as discovering and extracting oil in harsh landscapes and unstable nations (pretty much all that's left to explore/extract), and extracting the value from large data sets, which is more profitable and lower risk?
Mark invokes the 80/20 rule (Pareto Distribution) as a basic guideline to the concentration of wealth and power: 20% of the firms in any sector reap 80% of the profit. If we go one step further, and take 20% of the 20% and 80% of the 80%, we get the 64/4 Rule: 4% of enterprises/individuals reap 64% of the profits/income.
This extraordinary concentration of income and profits is reflected in the data on corporate profits and IRS income data.
This connects the dots linking trade, the value of Facebook's "business model," and the tremendous demand by corporations and political campaigns for large data sets that can be analyzed and exploited to market products, services and political narratives/candidates.
It's self-evident that we cannot possibly understand trade, soaring corporate profits, Facebook's data collection or the economy without understanding the core role played by Big Data in reaping outsized profits and pushing narratives--in Noam Chomsky's phrase, manufacturing consent.
Big Data, Big Government, Influencers / Marketers, Corporate America and politicos never had it so good. As for the rest of us--not so much.


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Thursday, April 19, 2018

The War between Public Pensioners and Tax Donkeys Is Heating Up

The migration is only beginning, but that's only half the story.
You know it's serious when the newspaper of record finally reports it: A $76,000 Monthly Pension: Why States and Cities Are Short on Cash (New York Times).
It's a long article but the summary is brief: corrupt politicos promised the moon to public employees, and now the fiscal chickens of insolvency are coming home to roost.
Public pension obligations are rising so fast that even repeated tax increases can't keep up.
This is setting up a second front in the war between entitled Baby Boomers and younger taxpayers who pay most of the federal and local taxes. Public pensioners are a subset of the entitled Baby Boomers, but their pensions can't be paid with borrowed money like Social Security and Medicare; public pension obligations come out of local and state taxes, and as those obligations soar then public services must be slashed and taxes jacked up by annual double-digit increases.
So there is a war brewing between public pensioners and the Tax Donkeys: the Unprotected who pay local property taxes on their homes, state and local taxes on their incomes, sales taxes on their purchases, junk fees on local government services, and so on.
Corrupt politicos created the war by over-promising benefits to public employees and ignoring fiscal realities. By the time the bill comes due, the politicos who rubber-stamped the unaffordable promises are themselves gorging at the public-pension retiree trough.
Not every public employee is receiving gold-plated pensions and benefits, of course, but that doesn't negate the reality that nationally, public pensions are increasing faster than government revenues and the returns earned by the pension programs.
If the stock and bond markets suffer multi-year declines, even modest declines, the pension war will move from skirmishes to open political combat.The 2008-09 Global Financial Meltdown was a taste of the reality facing public pension programs: once annual returns slip from +7% annually to -7% annually, the pension plans are soon insolvent.
Like virtually all wars, there are asymmetries between the two combatants: in the war between public pensioners and the Tax Donkeys, the pensioners can't switch pension programs, but the Tax Donkeys can move to lower-tax states.
Allow me to summarize for those who aren't too squeamish: a lot of cities and counties are going to go broke, slashing services and jacking up taxes, all to no avail. The promises made by corrupt politicos cannot possibly be kept, despite constant assurances to the contrary, and those expecting services and taxes to remain untouched will be shocked by the massive cuts in services and the equally massive tax increases that will be imposed in a misguided effort to "save" politically powerful constituencies and fiefdoms.
These dynamics will power a Great Migration of the Tax Donkeys from failing cities, counties and states to more frugal, well-managed and small business-friendly locales. I've sketched out the migration in this graphic: the move by those who can from incompetently managed and/or corrupt cities/counties/states to more innovative, open, frugal and better managed locales.
Unlike Communist regimes which strictly control who has permission to transfer residency, Americans are still free to move about the nation. This creates a very Darwinian competition between sclerotic, corrupt, overpriced one-party-dictatorship states whose hubris-soaked political class is convinced the insane housing prices, tech unicorns, abundant services, and a high-brow culture ruled by an artsy elite are irresistible to everyone, and locales that are low-cost, responsive to the Tax Donkey class, welcoming to new small businesses, employers and talent, unbeholden to a politically-correct dictatorship and conservatively managed, i.e. not headed for insolvency, are no match for their elitist fiefdoms.
Not everyone can move. Many people find it essentially impossible to move due to family roots and obligations, kids in school, and numerous other compelling reasons.
Many people who are able to move are the Tax Donkeys who are paying the most taxes: self-employed entrepreneurs, mobile creatives, those with scarce skills and those who earn substantial incomes from royalties, patents and other forms of capital.
These Tax Donkeys can live pretty much anywhere they please. They don't need to stay in NYC, Boston, L.A., San Francisco or Chicago.
This is the model for many half-farmer, half-X refugees: people who are moving to homesteads or small towns with the networks and skills needed to earn a part-time living in the digital economy. In a lower cost area, they only need to earn a third or even a fourth of their former income to live a much more fulfilling and rewarding life.
Not that hubris-soaked politicos and elites have noticed, but only the top few percent of households can afford to own a home in their bubble economies.Paying $4,000 a month in rent for a one-bedroom cubbyhole in San Francisco may strike the elites living in mansions as a splendid deal, but to the people who have surrendered all hope of ever owning anything of their own to call home--not so much.
Though this chart is based on national data, there are many regional variations. When it takes a year just to obtain a permit to open an ice cream shop (in San Francisco), how much will the insolvent "owner" have to charge per ice cream cone to make up a year in hyper-costly rent paid for nothing but the privilege of being a scorned peon in a city ruled by privilege and protected fiefdoms?
Not that hubris-soaked politicos and elites have noticed, but the Tax Donkeys are getting fed up: their local schools have been stripped of enrichment programs, the cash-strapped local governments are demanding taxpayers pass $100 million bonds to fill potholes and repair schools' leaking roofs, parking tickets now cost more than a restaurant meal for the entire family, and the increases in fees and taxes are coming fast and furious.
If the real estate and stock/bond bubbles pop, the pension bubble pops, too.Once property taxes start declining even as rates are jacked up, the public pensioners will lose the war. Once the stock and bond portfolios of the pension programs are shrinking rather than growing, the the public pensioners will lose the war. Which American Cities Will File Bankruptcy Next?
There is a feedback loop to raising taxes to pay for skyrocketing public pension obligations: the higher taxes rise, the more Tax Donkeys will migrate away from high-tax states and cities. As those paying the majority of the taxes leave, the high-tax states and municipalities have no choice but to raise taxes even more aggressively, which only accelerates the migration of high-income, entrepreneurial Tax Donkeys that are the engines of growth.
The migration is only beginning, but that's only half the story: those who can't leave for whatever reason can opt out: close their businesses, quit their high-stress, high-paying job, move back to the family home, retire and start living as close to the ground as possible.
Those who opt out are in effect moving from those contributing the most to those contributing the least.
Right now, hubris-soaked politicos and elites can entertain the fantasy that NYC, Boston, LA, San Francisco, Chicago, etc., are irresistible: they're not.They're great for those feeding at the trough but not so great for those filling the trough. As astonishing as it will be to hubris-soaked politicos and elites, the straws that will break the back of the Tax Donkeys' will to put up with the ever-increasing burdens are many.


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Read the first section for free in PDF format.


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Tuesday, April 17, 2018

Our Strange Attraction to Self-Destructive Behaviors, Choices and Incentives

Self-destruction isn't a bug, it's a feature of our socio-economic system.
The gravitational pull of self-destructive behaviors, choices and incentives is scale-invariant, meaning that we can discern the strange attraction to self-destruction in the entire scale of human experience, from individuals to families to groups to entire societies.
The proliferation of self-destructive behaviors, choices and incentives in our socio-economic system is profoundly troubling. Exhibit 1 is the opioid epidemic (charts below). How did we reach this level of individual and social self-destruction?
There are culprits aplenty: a "healthcare" (sickcare) system that incentivizes maximizing profits by whatever means are available (for example, claiming addictive medications aren't addictive); a system that encourages the consumption of costly prescriptive medications without regard to their interactions; a system that establishes a "standard of care" that relies on prescribing pills of one kind or another; a system that treats psychological-physical pain with painkillers rather than treat the source of the pain; a system that cannot recognize spiritual pain (from losing sources of meaning, purpose and positive social roles) much less address it; a workers compensation system that incentivizes vague pain-related injuries as a way of getting a vacation from work; a pharmaceutical industry hard-wired to seek and promote "the next billion-dollar drug" regardless of the long-term consequences of the wonder-drug, and a culture that worships convenience and the illusion that instant remedies to chronic conditions are available or should be available.
That is of course only a partial list.
Dependencies are one of the many self-destructive attractors in our society.Dependencies on addictive substances is one manifestation of self-destructive behavior, but dependency on an institution that leads to a loss of self-reliance is also a subtle form of self-destruction.
Strange attractors are mathematical structures within fractal systems that are extremely sensitive to initial conditions within the system. Strange attractors are not a perfect analogy for the many self-destructive dynamics in our socio-economic system, but they do help us understand how the initial conditions established within the system end up defining the incentive structure that then rewards or punishes various behaviors and choices.
So if we "reward" doctors for prescribing painkillers and patients for taking them, an opioid epidemic was essentially built into the system by these initial conditions. The same can be said of our financialized economic system that rewards speculative gambles backstopped by the central bank or state: once those are the initial conditions of the financial system, it's literally "crazy" not to borrow billions to gamble or buy back your own corporation's shares.
Then there's our foreign policy, which is dominated by strange attractors for self-destructive policies such as wars of choiceNew Cold Warswe came, we saw, he died "interventions" and so on.
Notice the recent sharp rise in opioid deaths distributed by our "healthcare" system. After the addict has been exploited for profit, heroin becomes the next attractor.
Do you reckon a system whose initial conditions reward those at the top of the wealth-power pyramid to the exclusion of the bottom 95% might have something to do with our social-economic self-destruction?
Here's a chart of employment trends: aging workers can't afford to retire, while the under-55 work force has been treading water. Might this have some negative effect on the well-being of the populace?
The Japanese term describing a life of meaning, purpose and positive social roles--ikigai-- has caught on in certain policy circles. A life of meaning, purpose and positive social roles is the core reason (along with a diet of plant-based real food) that Okinawans are remarkably healthy and long-lived.
If you designed a system that had zero incentives via its initial conditions for the nurturing of ikigai, you'd have the status quo. Self-destruction isn't a bug, it's a feature of our socio-economic system, built into the system's initial conditions.


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Read the first section for free in PDF format.


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Sunday, April 15, 2018

What Do We Know About Syria? Next to Nothing

Anyone accepting "facts" or narratives from any interested party is being played.
About the only "fact" the public knows with any verifiable certainty about Syria is that much of that nation is in ruins. Virtually everything else presented as "fact" is propaganda intended to serve one of the competing narratives or discredit one or more competing narratives.
Consider a partial list of "interested parties" spinning their own narratives about events in Syria: (in no particular order)
1. The government of Syria
2. non-state groups in Syria
3. Turkey
4. Saudi Arabia
5. Iran
6. Jordan
7. The government of Iraq
8. non-state groups in Iraq
9. The Kurds
10. Hamas
11. Israel
12. Lebanon
13. The Gulf States
14. Russia
15. United States
16. European Union
17. United Kingdom
18. France
19. Germany
20. Italy
21. China
This doesn't exhaust the list of interested parties, of course, but it reflects the spectrum of competing parties pushing a narrative that supports their particular interests in Syria. These include neighboring countries, regional powers, global powers and consumers of Syrian energy exports.
Let's start by stating the obvious: the only way to gain any reasonably accurate contexts / assessments in Syria is to have intelligence-gathering assets on the ground. The situation is fluid and complex, and there is no one "truth."
The only way to get any sort of handle on the military, political and social dynamics in Syria is to have access to the intelligence assessments and analyses of all the major players' intelligence agencies.
In other words, the only way to get any sort of comprehensive understanding would be to have a WikiLeaks-type release of intelligence reports from all the players with assets on the ground and have a deep enough understanding of the history and culture of the region to make sense of the overlaps, conflicts, nuances and shades of "truth" presented in each of the intel reports.
Only by collating "raw" (unfiltered) intel gathered on the ground and high-level analysis by those directing the various interests' campaigns could a reasonably accurate assessment be assembled.
Short of that, we know next to nothing. What are presented as "facts" are narratives designed to persuade us of the fidelity of the "facts" being presented and the rightness of the narrative supported by the presented "facts."
If the "facts" aren't designed to support a specific narrative, then they're designed to undermine or discredit a competing narrative.
There are several ways to push a narrative: one is to present "evidence" that supposedly verifies the "facts," and the other is to limit the public's access to competing narratives amd claims.
In the good old days, the Soviet propaganda machine was famous for erasing public figures from photos once they ran afoul of the regime. In the photo published last week, Igor was standing next to a KGB apparatchik, and in the photo published this week, Igor has vanished, replaced by a snowy background--perhaps appropriate, given that Igor ould soon be enjoying the rigors of a Siberian gulag.
Nowadays, digital manipulation is much easier and more ubiquitous. Not just photos and videos can be edited--all sorts of digital fingerprints can be faked.
We know from various leaks about NSA/CIA capabilities that these agencies (and presumably others) engineer computer viruses so they appear to be the work of foreign intelligence agencies or hackers.
It's difficult to assess the "facts" in a world awash in digital manipulation and misdirection.
We know a few things, but they're not "news." We know oil and natural gas are still the primary energy sources of the industrialized global economy. So-called renewables (so-called because wind turbines and solar panels don't last forever and thus they are more correctly called replaceables rather than renewables) remain a tiny sliver of total global energy consumption.
We also know that Syria and Iraq are the geographic armature of the Mideast.
As I have noted in previous essays, sometimes the strategy isn't to control the assets being contested so much as disrupt competitors' enjoyment of the assets and send signals about future costs and consequences.
It is a grave mistake to take any narrative or set of "facts" presented by interested parties as being anything more than propaganda or signaling. Only those on the ground with intelligence on all the other players on the ground have anything close to a useful understanding of the situation, and they can only claim to have a useful understanding if they also possess a deep appreciation of the regional contexts, histories and dynamics that are in play.
In summary: anyone accepting "facts" or narratives from any interested party is being played. It's best to retain a healthy skepticism of all narratives and an equally healthy appreciation of how little we know or can ever know about the full spectrum of events and dynamics in Syria.

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