Everything you need to know about economics in 400 words, Part 3

It seems I only write on this topic while flying. So I guess you can expect this series to wrap up sometime in 2015.

But to recap, last time I told you that productivity is prosperity. So all increases in per capita wealth come from increases in the amount of economic goods a single worker can produce in an hour.[1]

So how does productivity increase? Let’s start with the obvious. We get the stuff we have by making complicated stuff out of simpler stuff. We start with iron and chemicals, apply some process over a period of time, and end up with steel. Visually:

(1 unit of Time + 1 unit of Iron + 1 unit of Chemicals) => 1 unit Steel

The productivity of this process is simply the ratio of inputs to outputs. If we rejiggered the above process to produce 2 units of steel from the same input, we would have doubled productivity.  Ditto if we halved the amount of time.

Physical productive processes are closely analogous to computer algorithms. We could just as easily talk about the “productivity” of a bitcoin mining operation in terms of how many BC a computer can generate per hour.

So how do we get more productivity out of our processes (which, to reiterate, is the only way we get richer overall)? Well, just like with computer algorithms we have two options:

Do the same thing faster (e.g. get a faster CPU)

Swap in a better algorithm (e.g. use quick sort instead of bubble sort)

“Do more faster” is an appealing tagline, but unfortunately human land-speed doesn’t follow Moore’s law. So our best option is to find better algorithms for our productive processes.

So transitively, the best way for society to get richer is to devise and select better processes. By and large, we call process improvements technology. The cotton gin and the Bessemer process were technologies that allowed radically more efficient transformation of a raw commodity into a finished product.

One of the most important stories of the last 30 years has been the way that computers have inserted themselves deeply into our economy’s various productive processes. But most of what we’ve seen so far are “do the same thing faster” improvements. The real productivity revolution will come once computers consistently help us choose better algorithms for our processes and for our lives.


[1] Okay, all increases except one-off “gold strikes” that shower us with random natural riches.

A simple plan to avoid the fiscal cliff, fix the deficit, boost the economy, and end partisan gridlock.

Here are two things about me you may not know: 

1)   I’ve pretty seriously addicted to armchair political strategy.

2)  I spent nearly two years professionally analyzing the minutiae of U.S. fiscal policy at Bridgewater Associates (the world’s largest hedge fund.) [1]

In the aftermath of the election, I’ve noticed that for the first time in years, political conditions may actually be right to allow a simultaneous solution to many of America’s serious economic and fiscal problems. So I’d like to throw out a modest proposal.

First, some context:

Everyone has heard that the U.S. has a deficit problem. But that’s not quite true. We actually have two deficit problems. Our long-term deficit is unsustainably large. Over long periods of time, we simply cannot spend more money than we earn. But our short-term deficit is actually too small. Put simply, the economy is bad because the U.S. private sector is still heavily in debt. The only way to fix that (other than muddling through for twenty years like Japan) is to have the government inject enough money into our economy to let people earn their way out of debt. That means lower taxes and/or investing in infrastructure, education, and research. (That’s what the stimulus did, and it worked. It just wasn’t enough.)

At the same time, we have two political problems. On November 6th, the American people voted for the status quo. So just like before, we have a GOP house committed to avoiding tax hikes. And we have a president committed to raising taxes on the rich while avoiding spending cuts that hurt the poor.

All these problems are imminently coming to a head as enough tax cuts expire and spending cuts take effect on Jan 1st to drive the economy back into recession.

Luckily, everything has a pretty simple solution.

First, forget about renewing the Bush tax cuts and throw out the cuts-or-sequestration compromise. Let’s wash our hands of that entire mess. Obama can fulfill his campaign promise of not extending cuts for the rich, and Republicans can fulfill their promise of not extending anything without cuts for the rich.

That whole issue circumvented, we’ll replace the Bush tax cuts with a bill that does four things: 

1)   Boost growth by cutting taxes – As Romney proposed, cut income tax rates ~20%  across the board. But only cut them by ~5% for income over $250,000. [2]

2)   Make the rich pay more by simplifying the tax code – Eliminate virtually all tax breaks and loopholes for the rich. Make the next multimillionaire candidate for president unafraid to release his tax returns by making it impossible for them to contain anything embarrassing. Perhaps simply say that people with assets over $1 million must pay 35% of their net yearly increase in total wealth. Simple. 

So far, that leaves us with a larger deficit but with more money in the hands of the middle class. That’s good. We need larger deficits in the short term. But to deal with the longer term issues, the bill will also:

3)   Fix the long-term deficit – Index tax rates to economic growth. Make it so that once the economy improves, taxes automatically rise each year until the deficit is zero. By definition, closing the deficit this way doesn’t prolong the recession.

4)   Fix long-term entitlement growth – For people under 45, gradually increase the retirement age until outlays on Medicare and Social Security are equal to total payroll tax intake, and then index the retirement age to life expectancy going forward. To mitigate the impact on manual laborers and lower-income groups (whose life expectancy is increasing more slowly) allow people to apply for “retirement” disability benefits starting at age 60.

Overall, this plan stimulates the economy now while also fixing the long-term deficit.

It’s palatable to the Republicans: it incorporates elements of the Romney tax plan they’ve already publicly supported, it doesn’t raise tax rates, and it fixes entitlement spending.

It’s also palatable to the President: it leaves the rich paying more, it helps the economy, it does nothing to hurt the poor or middle class, it breaks none of his campaign promises, and it lets him appear magnanimous in victory.

Both parties advance their interests while claiming a victory for the spirit of bipartisanship (which is the only way anything will happen in Washington before 2014). And hopefully the bonhomie can carry into compromise on other issues.

It’s been pretty rare lately that the sensible economics line up with plausible politics. But now is one of those moments. This extremely simple plan would go a long way to fixing the major issues that have paralyzed Washington and the country for years.

[1] I no longer work at Bridgewater, and these opinions are entirely my own. 

[2] The numbers in this post are all very rough approximations. But with some calculation I’m pretty sure everything can be made to add up.

Future of the Economy #2(a) – Rich Hypothetical Society, Poor Hypothetical Society

Earlier today, I was on a plane without wifi. Trading one type of cloud for another freed me to continue my gradual explication of our economic future.

Last time, I argued that “the economy” is the total sum of everything useful to human life, and that “prosperity” is the sum of all those resources divided by the number of people enjoying them.

Today, I’ll cover why and how the prosperity of a society changes through time.

We’ll need three more concepts:

1) Production

2) Consumption

3) Wasting (e.g. rotting of fruit)

Tautologically, everything man-made was produced at some point. So:

Total amount of stuff we have (i.e. “Wealth”)


( Natural Resources plus Everything Ever Produced )


( Everything Ever Consumed plus Everything Ever Wasted )

Prosperity changes because of relative changes in the rate of production vs. consumption. Societies get richer when they produce more than they consume, and get poorer when the consume more than they produce. This may seem obvious, but all the crucial parts of macroeconomics spring from this notion.

Why do these rates change? Three reasons:

1) Exogenous

2) Cyclical

3) Secular

Exogenous reasons are usually-random, usually-one-off events like wars or gold strikes. Cleary, being sacked by Mongol hordes makes you poorer, and I won’t cover these types of events here.

Cyclical reasons are what underlie normal recessions and expansions, and (by-and-large) are caused by changes in the amount of money people borrow to consume or invest. When people borrow and buy a lot, we have an expansion. When they borrow less, we get a recession. The most important factor in consumer borrowing is the interest rate (how much do I have to pay tomorrow for the $10,000 car I bought today?) People who can explain exactly what determines the prevailing interest rate tend to spend more time on mega-yachts than in coach class on US Air, but basically: the interest rate is set by the Federal Reserve based on (a much more complicated version of) an equation called “the Taylor Rule”. Cyclical factors get a lot of attention because their effects are easily and immediately noticeable (and crucial to trading financial markets), but ironically, cyclical factors usually matter very little to long-term prosperity (for the same reason that most waves don’t affect the sea level.)

I’ve hit my self-imposed word limit, but next time I’ll discuss secular reasons, which – forgive the pun – are where the money is

Future of the Economy #1 – What is An Economy?

Last time, I laid out my roadmap for describing my vision for the future of the economy. Now, again awaiting an algorithm’s end, I take the first step.

Today’s topic is simple – “what is an economy?”

Whether you’ve studied economics or not, (and I never have in any academic setting), that is a tricky question.

To some, the economy is “the intersection of supply and demand.” To others, it’s what falls out of comically complex equation like these. To the dictionary, it’s:

3. the management of the resources of a community, country, etc., especially with a view to its productivity.

4. the prosperity or earnings of a place.

My more modest proposal – “the economy is everything.”

Or, less dramatically, everything (even potentially) useful to human life collectively constitutes “the economy.”

Some examples, in order of increasing controversy:


Gold coins


Rapper Mansions

Fighter Jets

Yellowstone National Park



Human Life

Not Economy:

Crab Nebula

As I’ll explain more clearly in subsequent posts, it’s significantly more cogent to include immaterial “objects” like interpersonal relationships, human knowledge, or natural beauty in our definition of “economy”.

Every useful thing, whether material or immaterial, can then be labeled a “resource”. The economy is merely the sum of all resources.

A brief aside – taking a broad view of the economy can be a dangerous game, and there are many very powerful ethical arguments to be made against viewing human relationships etc. through an economic lens. The core fear is that we will start treating human relationships with the sort of “non-ethical, anything-for-a-dollar” ethos that permeates the phrase “it’s not personal; it’s just business.” Instead, I am hopeful that we will instead do the reverse and allow human decency to seep back into traditional economics.

Now, one more step. The size of the whole economy is much less important than prosperity, which is the sum of all resources divided by the number of people utilizing those resources (i.e. Sweden is a very prosperous country, but if we divided the wealth of Sweden across the population of India, the resulting country would not be very rich at all.)

Good economic policy should have a single-minded focus on increasing prosperity (properly conceived, so that we aren’t bulldozing geysers to build factories.)

But how exactly do we increase prosperity? Tune in next time…

P.S. It makes me smile that “bulldozing geysers” formerly had no Google hits.

The future of the economy, in bite-sized chunks.

I’m stuck waiting for some programs to execute, so now seems like a good time to set down my theory of what the economy of the future is going to look like.

“Whoa, George, that sounds like a big task” says the imaginary critical imp on my shoulder. “Why would you want to do that, especially since much of what you say will turn out to be wrong?”

Well, critical imp, I’m glad you asked. There are two reasons I want to do this:

  1. A recent TED talk has convinced me that it’s important to compellingly and concisely explain to the people around me why I’m doing the things I’m doing with my life. So if you know me and you’re curious, you should find most of the answer here.

  2. Despite being a 26-year-old ignoramus, I think I actually have something interesting and useful to say about this topic.

So here begins a sporadic series of posts, each totaling 400 words or fewer, that will explain my vision of whither and whence the economy is going and why. It’s impossible to adequately treat this topic in anything close to 400 words, so I will modularize my thoughts into semi-self-standing blocks that should eventually build a lovely abstract castle.

Here’s a preview (highly subject to change):

  1. The economy is everything around us, added up. “Growth” basically just means there’s more stuff. Total stuff / number of people = average individual wealth.

  2. In the long run, income growth is just productivity growth. Tautologically, everything man-made must be created. When we can make more, we can have more.

  3. Productive process are algorithms. Algorithms (loosely speaking) are just recipes for achieving outcomes in the world. Productivity can be improved either by executing an algorithm faster, or by selecting a more efficient algorithm (“work smarter, not harder”)

  4. Computers allow people to outsource both execution and selection of algorithms (I call this “Cognitive Augmentation”, or “CogAug”)

  5. Execution-based CogAug is tied to processing speed which is (effectively) anchored to Moore’s law, but algorithmic selection can improve without bound (…or can it?).

  6. Ergo, selection-based CogAug is the next great frontier or economic development, because better CogAug–>better algorithms–>greater productivity–>greater per capita wealth.

  7. The first step on that path to selection-based CogAug is structured “semantic” data.

Sound cryptic, confusing, or wrong? Then tune in next time.