Macroeconomics 118
Texas has started to reopen; here’s a breakdown of which states are in the early stages of ending their lockdowns. Michigan is still drawing the most attention for its governmental restrictions, as Governor Whitmer’s decision to extend their lockdown through May 28, prompting armed protestors to gather at the capitol. Michigan’s unemployment rate is being estimated as high as 25% right now.
It appears the number of new cases and daily deaths are plateauing and decreasing in most states, and current models estimate our healthcare infrastructure is not in danger of being overloaded, which is why governors are relaxing the guidelines. I already wrote about why it’s still so difficult to know anything about the virus, and why people with the same information are coming to opposite conclusions. As we tentatively re-open the economy, this thing is going to continue to spread, but the goal is to keep it at a manageable rate.
Coaches are notoriously afraid to “celebrate too soon”. Why do you see basketball coaches keep their starters in the game up 8 points with 35 seconds to go? Usually, it’s not because they are trying to show up their opponents, or extend the lead, but because the coach is thinking how horrible it would be to blow this lead. In many cases, they have seen or experienced comebacks and know first-hand what is possible. Just because it’s unlikely Tracy McGrady will score 13 points in 33 seconds, doesn’t mean it can’t happen.
I still get chills watching that.
The greater the comeback, the worse it is to be on the losing end. Once players start to think about how awful it would be to lose their large lead, they often tighten up and find themselves unable to perform at the same level. Here’s a link to Texas A&M erasing a 12-point deficit in 44 seconds. So, the bigger the lead, the scarier the idea of blowing it. Following so far? Teams with a large lead lose them all the time by changing the way they play while ahead. The key to maintaining a lead is to stay aggressive and in “attack” mode—you can’t take your foot off the gas or start being complacent. You can’t play not to lose; you have to play to win.
That’s the best way to explain where I’m at with this thing. We’re beating the virus, and it’s unclear how formidable of an opponent it is or ever was, but the worst thing that could happen at this point is for us to get overconfident and empty the bench too soon. Framed a different way, I’ve seen enough horror films to know it’s a mistake to assume the serial killer you’re trapped in the house with is incapacitated, and letting your guard down—you will regret it. Rule #2: Double Tap. If you haven’t looked at it yet, check out how deadly the second wave of the Spanish Flu was in 1918 after it mutated (something no mathematical model can predict, even now, for the record). I’m not going to change my opinion every time I read an article with a new statistic or biased conclusion; I’m basing my outlook on eternal principles and historical precedent.
Captain’s log, stardate 47634.44: cautious optimism best summarizes my current mindset.
It is going to be interesting to see how Texans respond to the re-opening. Just because businesses are allowed to re-open doesn’t mean they will, and we’re already seeing plenty of examples where the incentives don’t line up. Most movie theaters in Texas aren’t re-opening. About half of all U.S. workers can make more by collecting unemployment than from their current job. Besides that, the increasingly vocal group suggesting society was never in real danger is still a minority of consumers. As of April 13, only one in three Americans felt safe going to the grocery store, one in four staying in a hotel, one in five flying on a plane. How much has that changed in the last two weeks? We’re about to find out in real life, not just imaginary life (polls & surveys).
Whether it’s a good decision to re-open or not, this pandemic has been and continues to be devastating economically for small business owners and entrepreneurs. Based on how it’s covered in the news, I suspect most people think about Silicon Valley or Shark Tank when they hear the word “entrepreneur“, but it’s much more broadly applicable than that. It literally means “one who undertakes”, and applies to anyone starting a new business and taking on the role of residual claimant (responsible for profit or loss of the enterprise, once all contracts have been met). Entrepreneurship is one of the four factors of production in an economy, along with land, labor, and capital.
An economy that doesn’t support entrepreneurs is going to stagnate and stop growing, and a healthy spirit of entrepreneurship is one of the primary reasons the United States economy grew so fast for so long. Why is it so important; what role do entrepreneurs play?
First, entrepreneurs engage in “arbitrage“, aka “buying low and selling high”. This reduces market efficiencies and ensures if there is a significant difference in prices for the same product in different places, there is a real reason for it. For example, if someone visits Vermont and notices that maple syrup is $3 per bottle, but it’s $8 per bottle in their home state, they may research the cost of bulk purchase and transport and find they can make a $2 profit per bottle, after all costs have been paid. With enough people looking for opportunities like this, prices converge and stay near the lowest possible cost for consumers.
Second, entrepreneurs innovate. The difference between invention and innovation is subtle, and I’m not going to parse definitions right now—this is the result of the massive reward waiting for anyone in a capitalist economy who can successfully think of, produce, and market a good or service that is otherwise unavailable. The incentive structure leads to a high number of failed inventions and unsuccessful inventors, but as long as a hit innovation is lucrative, there will also be plenty of attempts and regular breakthroughs. Economics teaches that the best gift you can give someone is something they didn’t know they wanted, and this is the challenge innovators/inventors face.
Finally, entrepreneurs imitate. This is the ever-present challenge to take a successful idea and copy it (legally, which gets complicated, especially intellectually—recent estimates concluded Chinese companies steal hundreds of billions of dollars worth of intellectual property from the U.S. yearly), and what leads to ever-increasing affordability of consumer products. TVs are example A, right now, it is wild how quickly those have decreased in price while increasing in features and technology. And you don’t have to think about tech, either, this could be someone deciding to open a Mexican restaurant and run it better than the nationwide chain down the street.
Ludwig von Mises wrote “the luxury of today is the necessity of tomorrow”, and entrepreneurs are what makes it true. The average poor family in the United States has air conditioning, TV, internet and multiple cars, each of which were reserved for the upper class in the not-to-distant-past, and non-existent before that. The same is true for smartphones, indoor plumbing, and—going a bit further into history—forks. Entrepreneurship is one of the most dynamic factors in our society; unfortunately, it has been stagnating in America years before this virus.
Here’s a story from the Dallas Morning News, almost exactly one year old: Americans are starting fewer companies. It asserts the U.S. is ranked 53rd in “ease of starting a new business”, and the percentage of business owners under the age of 30 has decreased by 65% since the 1980’s.
Ross Douthat takes this a step further in his new book and asserts the decline in entrepreneurship is a symptom of a larger problem—we have entered an age of decadence. He has been making the marketing rounds the past few months, starting with this opinion piece in the New York Times on February 7th.
“We are aging, comfortable and stuck, cut off from the past and no longer optimistic about the future, spurning both memory and ambition while we await some saving innovation or revelation, growing old unhappily together in the light of tiny screens.”
Ross Douthat, The Age of Decadence
This brings me to my podcast of the week. The Art of Manliness is one of my favorites, and Brett McKay interviews Ross Douthat in episode #604: The Boring Decadence of Modern Society. I admit, it may not be what the average high schooler considers captivating content, but the whole point is that we have to be aware of the signs of decadence so we can fight against it, and this podcast episode is probably the easiest way to learn. The fact the average high schooler who goes to the movie theater is watching the same film re-made over and over is itself one of the four signs of decadence (repetition, aka “cultural exhaustion”). The other three are stagnation (technological and economic mediocrity), sterility (declining birth rates), sclerosis (institutional failure).
Do any of you know who Peter Thiel is? One of those 585 billionaires we have in the U.S.; I only learned about him while watching Silicon Valley on HBO a few years ago. He just wrote an opinion piece in First Things endorsing Douthat’s view of modern society, and concluding this way:
It is a paradox of our time that the path to radical progress begins with moderation. Extreme optimism and fatalistic pessimism may seem to be stark opposites, but they both end in apathy. If things were sure to improve or bound to collapse, then our actions would not matter one way or the other. Not only do our actions matter, I believe they matter eternally.”
Peter Thiel, Back to the Future
See? Cautious optimism. Moderation. Calculated risks.
Do you know how a society reaches decadence? By a sustained stretch of success, too much winning, too big of a lead and no sense of urgency. Decadence happens when you stop playing to win and start playing not to lose.
