The Golden Age of Innovation Refuted

“By all appearances, we’re in a golden age of innovation. Every month sees new advances in artificial intelligence, gene therapy, robotics, and software apps. Research and development as a share of gross domestic product [of the U.S.] is near an all-time high. There are more scientists and engineers in the U.S. than ever before. None of this has translated into meaningful advances in Americans’ standard of living.”[1] The question I address here is why.

For one thing, a lag follows big ideas before which they translate into increases in productivity related to labor and capital. Breakthroughs in electricity, aviation, and antibiotics did not reach their maximum impact until the 1950s, when “total factor productivity” stood at 3.4% a year.[2] In contrast, the figure for the first half of the 2010s was a paltry 0.5% a year. “Outside of personal technology, improvements in everyday life” were “incremental, not revolutionary,” during this period.[3] Houses, appliances, and cars looked much the same as they did twenty years earlier. Airplanes flew no faster than in the 1960s. This “innovation slump” is, according to the Wall Street Journal, “a key reason the American standards of living have stagnated since 2000.”[4] What had been revolutionary breakthroughs in the last century were still carrying the day into the next by means of incremental change based on product improvements. It could take a few decades before the fruitful research in AI, gene therapy, robotics, and software apps reach marketability and thus can impact productivity and radically alter daily life.

To be sure, the computer-tech revolution had altered daily life even by 2010—the smart-phone is a case in point. Yet personal computers go back to the 1970s so even in this respect the marketable innovations by Steve Jobs and Bill Gates can be viewed as incremental rather than revolutionary in nature. Software apps are themselves responsible for incremental changes based on the smartphone, which in turn is based on the personal computer. Even amid all the high-tech glitter, the developed world in 2016 stood as if a surfer waiting between two giant waves for the next one to hit.

Artificial intelligence, gene therapy, robotics, and software apps were poised to give rise to the next wave—first one of revolutionary change and then, after a lag, another wave—one of raised living standards. Unfortunately, revolutionary innovation “comes through trial and error, but society has grown less tolerant of risk.”[5] Furthermore, regulations “have raised the bar for commercializing new ideas.”[6] Lastly, “a trend toward industry concentration may have made it harder for upstart innovators to gain a toehold.”[7] In other words, the concentration of private capital may forestall the switch from continued incrementalism to revolutionary change. Breaking up oligopolies as a matter of public policy thus has more to it than merely preventing monopoly.

To be sure, companies and entrepreneurs in 2016 were “making high-risk bets on cars, space travel, and drones.”[8] Add in advances in AI and medical research—which could make death no longer inevitable for human beings—and some serious changes in daily life and productivity can be predicted. Yet, as potentially momentous as these efforts at innovation are, decades could separate the inventions and impacts on daily life and productivity. I suspect the world in 2016 was truly between two waves—the first of electricity, the telephone, sound recording, the automobile, the computer, and the airplane—and the second of space/astronomy, medical research, and AI/computer technology. Colonizing Mars, rendering death not inevitable, and combining AI, robotics, and software apps could result in wave that would dwarf the one of the previous century. The advent of smartphones, having all the glitter of a revolutionary product yet being an adaptation of the personal computer, whets appetites to look for the “big one” coming up on the horizon. Indeed, we have little time to waste; that wave could bring with it technology capable of arresting and even reversing the accumulations of CO2 and methane in the Earth’s atmosphere. The interesting dynamic of being able to save this planet just as we are able to colonize another is like the related one of making death something less than inevitable—due to stem-cell research on organ replacement, genetic therapy, and advances on curing diseases—just as we make the Earth habitable for our species for the indefinite future. Meanwhile, we are like children who have outgrown their clothes, still playing with adaptations of twentieth-century toys.

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[1] Greg Ip, “Economic Drag: Few Big Ideas,” The Wall Street Journal, December 7, 2016.

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] Ibid.

[7] Ibid.

[8] Ibid.

Oil Supply: Problem or Panacea?

Between June 2014 and January 14, 2015, crude oil prices fell by 57 percent. Between November 1985 and March 1986, the prices had fallen by 67 percent.[1] That time, it took nearly two decades for oil prices to rebound. Would it take that long again? The answer has implications for how efficient the market mechanism itself is, and in turn for public policy on energy and global warming.

According to The Wall Street Journal, the discovery of oil in shale rock makes all the difference. The difficult question involves what that difference might be. With less time entailed from discovery to extraction, and less cost relative to the more traditional sources such as off-shore oil, the supply of oil on the market should be able to adjust downward much quicker, resulting in higher crude prices, other things equal. For example, wildcatters in Texas discovered the Eagle Ford Shale in 2008; within only five years, a million barrels a day were going to market.[2] “Faster-reacting shale production could help cut supply more quickly than in the past, restoring market balance without a decadeslong wait.”[3] This assumes the efficient market hypothesis—that suppliers quickly reduce their respective contributions to the market as a result of lower prices.

So it is surprising that the Journal cautions that the faster-reacting shale production does not necessarily “mean prices will rebound soon, or return to the triple-digit levels . . . Price pressure may need to remain on the U.S. oil industry and its lenders for months to rein in supply.”[4] Andrew Hall, who runs a $3 billion energy derivatives hedge fund, wrote to investors that it is unclear how long it would take for American suppliers to cut back due to the lower prices and even what the new price-equilibrium would be.[5]

For one thing, oil producers sunk into contracts would rather get as much revenue as they can, even if they will still lose money. Although shale producers have a shorter timeframe, the short life of a given well means that the producers are under pressure to start new wells in order to cover as much of the initial investment as possible. Put another way, keeping production up is the better of two bad options.

With the tap expected to remain open, the supply of oil from shale was predicted to peak in 2020, after which the annual decrease in oil from liquid sources would be less and less made up by oil from shale. By 2030, the production from liquid sources could be only half of its level in 2014, with no oil left from shale. In short, the lack of a drastic downturn in supply during the last half of 2014 suggests that the American economy might suffer shocks in the 2020s as oil prices skyrocket from dramatically reduced supplies. With alternative energy representing only about 3% of the total in 2014, even increased investment in wind and solar facilities would not counter the anticipated drop in oil supplies.

Had the oil market in 2014 been more in keeping with the efficient market hypothesis—with supplies dropping drastically as the prices of crude drop likewise until the reduced supply pushes the prices back, up at least partially—the anticipated “cliff” in the early 2020s could be either flatter or delayed. Policy makers would have more time to get the economic “up to steam” on alternative sources of energy. Already in 2014, when I was driving across the Midwest, I was stunned by the number (and size) of “wind fields.” Even so, considering that carbon emissions were at the time going in the wrong direction—up instead of down—the continued supply of oil in spite of the lower prices must have been relieving pressure on policy makers to reduce the reliance on fossil fuels. Meanwhile, the lower gas prices gave American consumers the misperception that oil supplies are just fine and a lack of incentive to obviate global warming above the 2C degree threshold.

In short, the lack of an efficient market was forestalling vital public policies concerning both the American economy and climate change. It is not that an efficient market would obviate government action. In fact, just the opposite.

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[1] Russell Gold, “Back to the Future? Oil Replays 1980s,” The Wall Street Journal, January 14, 2015.

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] Ibid.

Homelessness in the U.S.: A Reflection of American Values

According to a report by the National Center on Family Homelessness in 2014, nearly 2.5 million American children were homeless at some point in 2013.[1] The U.S. Department of Education had reported that 1.3 million homeless children were going to school. California, which accounted for one-eighth of the U.S. population at the time, had one-fifth of the 2.5 million, which comes out to nearly 527,000. The relatively high cost of living and shortage of low-income housing, along with a largely stagnant minimum wage, are the more visible factors behind the gap.

In addition, a subtler underlying contributor—more paradigmatic—renders sustainable shelter insecure and even elusive for many people who go from paycheck to paycheck. What I have in mind here is the assumption that housing is and should be a commodity. That is to say, we use the market mechanism to allocate houses, condos, and apartments. To be sure, matching supply to demand is in itself helpful to low-income people, the assumption that the prices they pay—for example, more money due to speculators—must vary accordingly is problematic, as well as unnecessary. The Section Eight housing program, for example, separates the amounts that low-income people pay for rent from the rents that property-owners accept.

We can go even further and question whether the rents (and housing prices) determined by the market should be acceptable to society. For example, speculators bought up foreclosed properties in the U.S. during the housing slump that began in 2007. The cost of houses (and thus rents) in such markets was higher than would otherwise have been the case. Low-income families that might otherwise have had shelter may have gone homeless as a result. In the tradeoff here between speculators and homelessness, societal values can be seen. Put another way, tolerating homelessness so economic liberty can encompass residential housing reflects a value judgment.

In summary, the relatively large number of homeless children reflects a tacit societal judgment of priorities premised on the assumption that housing should be a commodity fully subject to the market mechanism. That speculators can take advantage of it to profit at the expense of people going homeless suggests that the American collective judgment may be too extreme—meaning that it accepts a high marginal pain at one pole (i.e., homelessness) in order to be able to hug the other pole. This can explain why shelter as a basic human right is virtually absent from the public discourse in the United States.

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[1] David Crary and Lisa Leff, “Number of Homeless Children in America Surges to All-Time High: Report,” The Associated Press, November 17, 2014.

Efficiency and Ethics: On the Fairness of High-Speed Trading

Two months into 2012, the SEC announced that it had been examining the trading activities of high-frequency trading firms.  According to the Wall Street Journal, the SEC was “examining, among other things, whether high-frequency firms benefit from delays in the dissemination of prices from various corners of the markets. . . . High-speed firms use direct feeds from exchanges that can give them a leg up on slower traders.” High-frequency traders “can access prices a split second faster through their access to direct feeds.” This is accomplished by placing the trading computers in the same data center that houses the exchange’s computer servers. Just over a year later, the Wall Street Journal reported that high-speed traders were using “a hidden facet” of the Chicago Mercantile Exchange’s computer system “to trade on the direction of the futures market before other investors get the same information.” Even getting the confirmation of a high-speed trade just one to ten milliseconds faster can enable a computer to know the direction a commodity is going and trade on it. According to the Wall Street Journal, the “ability to exploit such small time-gaps raises questions about transparency and fairness amid the computer-driven, rapid-fire trading that increasingly grips Wall Street and confounds regulators.” Both the increasing use of high-speed trading and the problem of accountability from a regulatory point of view raise the stakes in determining the ethics of the practice. 

Has the increasing role of high-speed trading rendered the individual investor a "second-class citizen" in the stock market?

The full essay is in Cases of Unethical Business, available in print and as an ebook at Amazon.com.  

Wall Street Banks: Price-Making and Law-Breaking?

The U.S. Senate Permanent Subcommittee on Investigations found in 2011 that “two Goldman employees, Deeb Salem and David Swenson, tried to manipulate prices of securities used to bet against mortgages. Both tried to help Goldman pile on larger bets against the mortgage market, and they wanted to be able to buy such negative bets more cheaply, the report said. Goldman, as a broker, was able to affect prices in the market through the bids and offers it gave out. Mr. Swenson wrote in May 2007 that the bank should try to ‘start killing’ prices on certain positions so that Goldman would be able to ‘pick some high quality stuff,’ according to the Senate report. The strategy, Mr. Swenson wrote, would ‘have people totally demoralized.’ The pair were unsuccessful in their attempt, and both denied making it to the Senate committee. Mr. van Praag said last week that the report had no evidence of manipulation. Still, the Senate report said that ‘trading with the intent to manipulate market prices, even if unsuccessful, is a violation of the federal securities laws.’”[1] I submit that it was also unethical. 


The full essay is in Cases of Unethical Business: A Malignant Mentality of Mendacity, available at Amazon.com.

1. Louise Story and Gretchen Morgenson, “S.E.C. Case Stands Out Because It Stands Alone,” The New York Times, May 31, 2011.