Jeff’s Newsletter #12

Jeff’s Newsletter, Volume 12

1. I got the shotgun, you got the briefcase…
I think I first became aware of a ‘heroin crisis’ in early 2014 when Vermont Governor Peter Shumlin devoted his entire State of the State speech to the topic. Like most people not directly affected, I was almost a decade behind the times. Dreamland by Sam Quinones is a riveting, meticulously reported investigation of exactly how heroin and prescription painkiller abuse took root, became America’s foremost drug epidemic, and rebranded addiction as a white, middle-class phenomenon. The book’s main framing device is two tides, one from each coast, meeting in the middle of America. From the west, the young men of a single Mexican town, Xalisco, branch out in hundreds of self-organizing teams, selling black tar heroin with the finest customer service American drug users had ever seen. Suburban kids who might never have ventured into a ‘bad neighborhood’ could get heroin delivered on-demand. The ‘Xalisco boys’ abjured violence, skirted cities with established gang infrastructure, and relied on just-in-time logistics to avoid ever carrying enough heroin to attract serious police attention. They were the Domino’s of drug dealers. From the east, meanwhile, Purdue Pharma released OxyContin, an opioid painkiller that was (a) easier to crush and inject than any of its predecessors and (b) aggressively pushed on doctors by a newly minted army of sales reps. A flimsy, one-paragraph research note claimed that opioid painkillers were addictive in only 1% of patients; Purdue seized on this claim and hammered it into the minds of any doctor who would listen. Nakedly criminal ‘pill mills’ sprouted up to sell OxyContin prescriptions on a conveyor belt, but even regular, well-meaning doctors routinely escalated pain treatment to pills, simply upping the dosage when patients needed more. These two waves met somewhere around Ohio and Kentucky, a region that provides the most lurid scenes of the book, including a town economy transacted entirely in denominations of OxyContin and shoplifted goods. The ‘Xalisco boys’ learned to follow the OxyContin epidemic, providing free samples outside methadone clinics and doctors offices. Over 25,000 Americans now die each year from opioid (pills + heroin) overdoses, and drug overdoses as a whole recently passed car accidents and guns as the country’s leading accidental cause of death (some helpful numbers here).

One of the main takeaways from this book was the astonishing power of human ingenuity, especially in the face of addiction or desperation. Addicts go to ridiculous lengths to steal from Wal-Mart; dealers work 14-hour days, ready to swallow a mouthful of wrapped heroin balloons if a cop approaches. Entrepreneurial ambition is in ample supply. There are some incentives we can’t do much about: the morphine molecule has transfixed humans for thousands of years and probably always will. But our medical system should use it as a last resort (oxycodone was once used primarily in cancer treatment), not an opening gambit for lower back pain and athletic aches (see Steve Kerr’s recent comments on Vicodin vs marijuana). The book is also a marvel of old-school reporting. Quinones tracked down some of the most influential heroin entrepreneurs, longtime addicts, families of the dead, and the police and public health officials who first cracked what was going on.

2. Corporate raider
It’s a real shame Ralph Nader pulled the Ralph Nader, because otherwise he might remembered, deservingly, as one of the bravest democratic populists of the 20th century. Presumably you know he’s the reason we have airbags and seatbelts in our cars. He’s also the author of Cutting Corporate Welfareone of the most efficient, important little books you can read in not much more than an hour. The book came out in October 2000, and his clear disappointment with the Clinton administration’s lack of populist teeth helps me understand why he ran that year (I’m not defending the choice…). The book is a catalogue of the many ways in which state, local, and federal governments give handouts to big corporations, in turn disadvantaging small businesses, consumers, and the political process. Indeed, Nader is often referred to as a “consumer advocate” but the book suggests small businesses (and, of course, the public interest) are foremost among the screwed. I’ll share a few examples of the kinds of handouts we’re talking about. Local relocation blackmail, where in exchange for not moving a factory, a corporation will exact tax exemptions, eminent domain claims on homes they’d like to bulldoze, and exemptions from environmental liabilities. In 1996, for example, Toledo exacted $300 million in benefits for keeping a few thousand jobs in town (after reading a few of these stories, you realize the current Carrier ordeal is par for the course, not some unprecedented travesty). The 1872 Mining Act allows companies (including foreign ones) to mine gold, silver, and other metals from public lands without paying the U.S. government anything close to market value for mining rights. It is protected by a handful of Senators from Western states at the expense of public coffers, their own local tourism revenue, and the environment. The Pentagon’s merger subsidy program pays defense contractors to merge with one another, reducing competition for government bids and increasing the lobbying power of the resulting mega-firms. Federal patent transfer programs award corporations exclusive rights to inventions created under public research auspices, without competitive bidding. A long tradition of bailing out Wall Street for speculative lending (e.g. after the Mexican peso crisis in 1994 or the South Korean crisis in 1997) is the textbook definition of moral hazard. And then there are unambiguous tax carve-outs, like $19 million in the 1997 tax bill for Amway soon after founder Richard DeVos (yup) gave $500,000 to the RNC. Nice ROI. No-nonsense as always, Nader has pages of specific legislative solutions to corporate welfare, most of which would have no chance of passing even when Democrats run Congress. But at least he knew how to name the problem.

3. Inequality all the way down
Lest you think there are no consequences to the above, Piketty, Saez, and Zucman are hot off the presses with the newest inequality numbers, drawing on a new method of combining overall national income data (note this includes capital income!) with household survey accounts. I’ll quote the main finding in full:

First, our data show that the bottom half of the income distribution in the United States has been completely shut off from economic growth since the 1970s. From 1980 to 2014, average national income per adult grew by 61 percent in the United States, yet the average pre-tax income of the bottom 50 percent of individual income earners stagnated at about $16,000 per adult after adjusting for inflation. In contrast, income skyrocketed at the top of the income distribution, rising 121 percent for the top 10 percent, 205 percent for the top 1 percent, and 636 percent for the top 0.001 percent.

Note that’s a share of total pre-tax income on the y-axis. They do find a small rise in post-tax income for the bottom 50%, but it’s all in-kind transfers, mostly healthcare. No increase in money you can spend.

It’s interesting to take these numbers as context for revisiting a Matt Bruenig post outlining his prefered ‘egalitarian program.’ Starting, as the French economists do, with total national income, he says the first plank of egalitarianism should be to reduce the market income share and increase the welfare benefit share. The logic, I think, is that once you get to market income, you still have to deal with capital income vs labor income, and even once you get to labor income, you have to deal with high earners’ share vs low earners’ share. It’s inequality all the way down. Given that, why not skip worrying about the market income system altogether and just push more money into redistribution? It’s an important question. My primary instinctual disagreement is that work and wages have more meaning than money alone. Mike Konczal astutely notes that Trump always talked about wages, not poverty. And wages have stronger built-in defenses than transfers:

One obstacle I hit is that while getting wages up is a hazy and complicated process, redistribution can be done and measured with clinical precision. It can also be taken away with that same precision. “Post-tax-and-transfer” inequality, the thing everyone was cheering as the way forward, is going to be a major causality in the next four years, probably the next 8 months even, conceptually as a Trump administration doesn’t think that way at all, and practically as the conservatives destroy transfers and progressive taxation.

4. The best of times, the worst of times
Related to inequality, Brad DeLong asks: what will future historians emphasize about the 20th century? He argues that it will be the first century where economic history is the most important history. This got me reflecting that, indeed, most history I learned in school was political history (with some social history sprinkled on). As I’ve gotten into economic history in the past few years (tip: it’s much more interesting and important than economics), I’ve wondered about this disconnect between what I learned and what I feel I should have learned. But maybe that was the proper balance for previous centuries. When our children and grandchildren learn about the 20th century, we should expect economic historiography to move into the mainstream. If so, DeLong thinks they’ll learn that: (1) material wealth exploded; (2) thanks to technological and organizational advances, tyrannies became much more brutal than ever before; (3) huge inequality gulfs grew; and (4) governments couldn’t figure out how to manage their economies, so crashes and depressions proliferated. He also acknowledges the Polanyian social disruption wrought by economic growth: the notion that “the only rights that really mattered were property rights ran into people’s very strong belief that they had rights to maintain their communities, receive their incomes, and work in their occupations.”

5. A podcast about Vanguard wouldn’t be very exciting but…
As if I needed another podcast to add to the weekly rotation: I’ve been hooked on Patrick O’Shaughnessy’s blog and podcast, Invest Like the Best. It’s less self-helpy than it sounds! O’Shaughnessy is a prolific reader and thoughtful quant investor. The podcast brings on portfolio managers ostensibly to talk about public markets and investing strategy, but also about reading, learning, and decision-making. The investing talk is pretty rigorous; as someone who reads about finance occasionally but has no formal background, I feel like I understand 70% of it and am constantly learning. I especially enjoyed the second episode with Michael Mauboussin. His thoughts on value investing are compatible with a broader orientation toward truth-seeking that many of us value but don’t always associate with finance. Mauboussin is a prolific writer in his own right; I enjoyed perusing this research brief on how U.S. companies have allocated capital over the past 40 years. It’s a really impressive compendium of extant research on M&A, capital expenditures, divestitures, dividends, buybacks, and R&D. The funniest part of the interview was hearing Mauboussin, after an hour of erudite disquisition on active management strategies, admit that all of his personal money is in index funds. Hmmm…

6. Don’t ship the org chart
Any future essay on org charts will be bound by law to link to this epic treatment from Steven Sinofsky. The frame is the (admittedly false) dichotomy between unit orgs and functional orgs. A refresher: functional orgs (like Apple) are organized around divisions like Legal, HR, Engineering; unit orgs (like Amazon) are organized around products like Kindle, Logistics, AWS. Obsessing over org charts gets stale fast, but I think Sinofsky is correct in his conviction that, especially in knowledge industries where people are the main asset, how you organize those people in relation to one another is one of the few things you can control! Sinofsky worked at Microsoft for years and endured an apparently traumatic transition within the Windows team from unit to functional. That said, I found his evaluations relatively more favorable to the functional side, with a healthy heaping of “context matters.” One interesting pitfall of functional orgs is that it’s difficult for them to prioritize multiple products at once; for example some have criticized Apple for hardly paying attention to desktop Macs anymore. An interesting pitfall of unit orgs, on the other hand, is that they tend to produce redundancy. They promote a myth that each unit is the only place responsible for a given technology or market across the organization. They also twist apart from one another, seeking to escape their corporate bonds in pursuit of more intuitive, small organization autonomy. “I’ve seen units that say to be successful they need to recruit differently, need different beverages, need different performance appraisal, hire a different PR firm, different furniture, and more.” MBA students and consultants among you, soak up this article and spread the gospel that every org chart is wrong.

7. I might share this pleasure in being wrong…
I was pretty psyched to have Patrick Collison, by far my favorite Silicon Valley billionaire, on the Ezra Klein show this week. How this guy has time to run a unicorn (Stripe) and out-wonk the wonk on inequality, regulatory policy, and immigration reform is beyond me. My favorite part of the conversation dealt with a community of bloggers in the rationality/contrarianism space. Ezra had asked Patrick what voices he most values on the Internet, and Patrick named many of my own favorite writers and tweeters: Scott Alexander, Tyler Cowen, Julia Galef, Bryan Caplan. I’ve noticed that Ezra has become increasingly attentive to this subculture, whatever it is, and he asked Patrick to define what unites this group. It’s adjacent to rationality and effective altruism, but also distinct. They ended up calling it ‘crypto-rationalism’ but I enjoyed Patrick’s efforts to draw a common thread. It might be that these people all “take a subversive pleasure in discovering that they were wrong.” They’re also interested in rates and downstream effects where mainstream political discourse fixates on levels and direct ones. This conversation segued into one about truth-seeking. Ezra shared an incisive view that we tend to “biologize” the Enlightenment, concluding that the human brain is a truth-seeking machine because our society has learned to value the pursuit of knowledge. But this is almost certainly untrue: the brain seems to be if anything a tribal argument-winning machine, a “press secretary” rather than a “scientist.” The crypto-rationalists, ever wary of mood-affiliation, aspire to be the real scientists among us. Or is rationality, as Ezra suggests, a fancy way to dress up a tribalism all its own?

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