Category Archives for Economics

Saudi Arabia Inches Closer to Archduke Ferdinand


As I’ve mentioned before, Saudi Arabia trembles on the edge of disaster. Consider what I wrote on the subject less than a year and a half ago:

I’ve also already noted that oil has historically been overpriced. Middle eastern dictatorships have long relied on this for stability – Saudi Arabia most especially. Their entire nation essentially runs on a patronage system that begins at the top with the Saudi King. He buys loyalty from those directly beneath him – literally buys it – with oil money. And they buy loyalty from those beneath them with that same oil money. And so on. The entire system depends on the flow of oil money.

The recent plunges in oil prices have put this system in mortal peril. The money flow has slowed tremendously. In the past, Saudi Kings would have lowered output in order to push the price back up. But right now they can’t. The obvious reason that everyone is talking about these days is all the new oil sources coming into the market, specifically from fracking in the US, but also from other sources. On top of that, OPEC has lacked the discipline it’s had in the past. If they agreed to cut output, nobody would actually stick to the agreement.

But the other reason is the Saudis themselves. King Salman is caught in a huge catch-22 right now. On the one hand, if he doesn’t cut production and force prices back up it will bankrupt his country. On the other hand, if he cuts production he’ll run out of money to pay his cronies with in the short term. As I’ve noted previously, unlike his older brother King Abdullah, he has not yet had time to truly consolidate his power. He’s also eighty years old, and by all reports not in the best of mental health. And, as I noted in the piece last year, the succession path in the kingdom is currently shaky. It’s uncertain that his recently appointed heir would actually become the next king.

The situation has only deteriorated since then. Oil prices haven’t risen – they’ve dropped. The price drop comes despite Saudi Arabia’s cuts to oil productionl. The Saudis’ ability to define oil prices at will hasn’t just been damaged, it’s been utterly and completely destroyed. Increases in oil production, mostly from the United States, have fundamentally changed the market dynamics. The recent output cuts from the kingdom will have only two results: reduced market share and reduced revenue.

As I noted above, the Saudis cannot afford reduced revenue. They’ve already run themselves into a deep financial hole. And their country essentially runs on the royal family buying support from the peasants. When the money dries up, the powder keg explodes.

I’ve also noted the political instability in the country.

My very strong opinion is that whatever his actual intentions, King Salman has just laid the groundwork for a Saudi civil war.

In moves announced on Saudi state television, Salman replaced Crown Prince Muqrin bin Abdulaziz and named the powerful interior minister, Prince Mohammed bin Nayef, as next in line.

bin Nayef, on the other hand, is recently appointed to the position and hence will also not have had much time to consolidate his power. Again, however, he is of the Saudi royal family, so there will be some built in power base there. But he’s also unlikely to have the time to consolidate a power base. King Salman is 79. How many years before he, too passes? His predecessor, King Abdullah, lived to 90. So perhaps another decade? Maybe a few years after that?

Only two years later, I could write nearly the same article today. It turns out that King Salman has, once again, replaced the crown prince.

Saudi Arabia’s king has appointed his son Mohammed bin Salman as crown prince – replacing his nephew, Mohammed bin Nayef, as first in line to the throne.

King Salman’s decree also means Prince Mohammed bin Salman, 31, will become deputy prime minister while continuing as defence minister.

It looks like Prince Mohammed bin Nayef never had even less time to consolidate his power base than I expected. But he did manage to run down the clock, ensuring that Mohammed bin Salman has even less time than bin Nayef might have had he lasted. King Salman is now 81. How many years does he have left? His death is now even more likely to touch off a succession crisis.

Given the instability already inherent in the region and the critical strategic importance of Saudi Arabia’s oil, that crisis will have global implications. Will it be the next Archduke Ferdinand moment?

My money says yes.

Like it or Not, Mexico Will Pay for Trump’s Wall


Mexico likely will pay for Trump’s wall. The mechanism has been bloody obvious ever since the idea was raised. Instapundit sums it up in one sentence:

DUDE, ALL IT TAKES IS A TAX ON REMITTANCES: Vicente Fox to Trump: When will you understand that I’m not paying for that f***ing wall? And you think there’s a political downside to taxing money sent from the U.S. to Mexico?

Mexicans working abroad sent $24.8 billion home in remittances in 2015. That’s more than their oil industry earned in the same year – an industry that once generated 80% of the Mexican economy. Let’s be honest: we all know that most of that comes from the United States. Slap a 10% tax on that and it’s more than $2 billion dollars a year. That’s plenty of money to pay for a wall – a big wall. And Mexico can’t do a thing about it, no matter what Vicente Fox says.

As Instapundit notes, it’s hardly going to be an unpopular tax. And when it’s done paying for the wall, American citizens (you know, the ones who can actually vote) will continue to find it popular. Why? The only reason anybody ever likes any tax: because it will tax someone else.

Interestingly, from a policy standpoint, the tax also helps with another issue. It discourages illegal immigrants. Remove the incentives and you reduce the behavior. Forget for a moment whether you agree with the policy or not. In terms of implementation, this kills two birds with one stone.

The new Congress has already found a legal mechanism to build the wall. The tax to pay for it is coming soon – mark my words.

Automation Is Coming… For Your Job


As I’ve been warning for some time, automation of everything is coming.

Most of the attention around automation focuses on how factory robots and self-driving cars may fundamentally change our workforce, potentially eliminating millions of jobs. But AI that can handle knowledge-based, white-collar work are also becoming increasingly competent.

One Japanese insurance company, Fukoku Mutual Life Insurance, is reportedly replacing 34 human insurance claim workers with “IBM Watson Explorer,” starting by January 2017.

Emphasis is mine.

We think of many white collar, knowledge tasks as being the kinds of tasks that computers aren’t good at. Historically that’s been true. That understanding is rapidly becoming obsolete. Computers are becoming very good at these kinds of tasks after all.

We’ve long since relegated blue collar, factory work to robots. The most menial of office tasks have already been delegated to computing hardware. Who has a real personal assistant anymore? Only the richest of the rich. Everyone else uses a electronic device to handle all of the work the human would have once done.

Even the term “computer” itself tells us of a white-collar job replaced by the machine. The word once described a human employee who crunched numbers all day – often for accountants or engineers who oversaw them and told them what math to do. The machines have long since destroyed those jobs in the name of productivity.

Your job isn’t safe, either. It’s only a matter of time. The software keep getting better and better. But the key point is how fast it’s getting better. In the next few years we’re going to see software replace humans in more and more jobs. Some are obvious. Fast food workers are going the way of the dodo – especially in an era of $15 an hour minimum wages. Truck drivers are going away, soon to be replaced by automated vehicles.

This will come much faster than critics like Megan McArdle predict. To be clear, she’s absolutely right about the hurdles the technology faces. What she misses is just how far along the tech already is – and how rapidly it’s advancing. There is one simple factor that will drive rapid adoption of self driving vehicles: deaths. Tens of thousands of Americans die every year on our roads. It’s the fourth highest killer in modern America. Self driving vehicles will virtually eliminate those deaths. The public will clamor for them, with torches and pitchforks if they have to.

But I digress. We all know self driving cars are coming because Google, Apple, Tesla and BMW want to be sure that we know. Don’t think that your job is safe because you happen to do intellectual work. It’s not. Software programming other software? It’s coming. Computers teaching your kids? It’s coming. Programs writing books and scripting movies? They’re already here. The time is rapidly approaching when we can even eliminate the actors.

Money Can’t Buy Happiness – But Status Can


money-can-t-buy-happinessWe’ve all heard the old saying that money can’t buy happiness. Interestingly, science backs this up. Kind of.

First of all, we have to acknowledge the obvious. If you lack the barest necessities in life, money can buy a large increase in happiness. In other words, if you don’t have a roof over your head, clothing to protect you from the elements, clean water to drink, or enough food to eat, then money will definitely make you happier. Of course, in modern terms you don’t need all that much money to buy these things. Those of us fortunate enough to live in the modern western world essentially never have this issue. Even the very poorest of our poor manage to meet these basic needs.

But what happens after that point? Happiness research shows us that increases in absolute wealth (a raise, a bonus, a nice sized gift) make us happier… for a brief time. After that, we return very quickly to our baseline levels of happiness. Even very large increases in absolute wealth – such as winning the lottery – only increase happiness temporarily.

But research and psychology also reveal a darker truth about humanity. Changes in relative wealth bring about lasting effects on happiness – even if absolute wealth remains unchanged. The ugly reality is that money isn’t the driver – status is. When we are richer than our peers, we are held in higher status by the group. And human beings like status. Higher status, as a rule, makes us happier. Lower status makes us less happy. This rule is especially true for women. Call me sexist all you want, the science backs that. But it’s true for men, too.

People feel good when they feel like they’re doing better than their peers. Status succeeds where money fails – it can buy happiness.

So what can you do about it? Making more money gives you higher status, right? Not necessarily. If you get a raise but so do all of your peers, your happiness level is unlikely to change. If you win the lottery, your social status isn’t actually likely to go up very much. It might even go down. People tend to look down on those who didn’t earn their wealth.

The socialist paradise of equal income for all is impossible. But even if it were possible, it would be a social disaster. We’d have more depression and unhappiness than any other system we can imagine would provide. People are not rational, and they are not perfectly altruistic. If all are equal, all will be unhappy. This ironclad law is hardwired into our base psychology.

But part of its impossibility returns to that same psychology. The more equal people are in income, the more they will elevate the stupidest shit to the level of status symbol. I’ve watched retail workers decide they’re “too good” to hang out with other retail workers now… just because their shop moved to a “higher class” shopping center. Same employees at both shops, nobody’s salary changed. They’re both still working menial jobs that aren’t really enough to live on. But now one person considers herself better than the other. If we take away money as the driver, people will find other ways to compete for status.

Human beings aren’t pretty. Don’t expect it of them. This isn’t a pleasant truth. But it is truth.

#Brexit Bet


GBP-BrexitBritain won’t be the last to exit the EU – and the next one won’t be overly long in coming, either. Most likely nobody else will exit before Britain’s two year withdrawal period is up. Everyone else will want to watch and see what happens to Britain. But when it turns out not to be the global catastrophe that many have predicted, there are several European nations that have strong incentive to leave.

The PIIGS – Portugal, Italy, Ireland, Greece and Spain are the obvious candidates. In fact, I’m personally surprised that Greece wasn’t the first to go. But with their current economic conditions, they have a good reason to be next. Getting out of the Euro and defaulting on their loans would remove their crippling debt and let them devalue their currency. Both would be painful – extremely painful – in the short run. But in the medium term, that combination would let them get their feet under them again. They can’t do it while they remain in the EU. The other PIIGS are in similar, though less severe, circumstances. If one of them is first, it’ll probably be Greece.

France is another strong contender. Marine Le Pen and the National Front have been gaining ground in France for years already. Brexit is likely to put wind in their sails and strengthen their cause. On top of that, France is… well, it’s French. They’re the ones who withdrew from NATO in 1966… basically because they just didn’t feel like being part of it anymore. It would not be a surprise for them to taunt Europe a second time. As a coworker suggested, they’re likely to wait for the absolute most chaotic possible time to do it – just because they’re French.

The counterintuitive but very plausible contender is Germany. France and Germany were already pulling more than their share to keep the EU afloat. The fifth largest economy in the world just voted to leave the EU. That isn’t going to make it easier for Germany. Merkel is already in trouble. Her popularity is dipping, and a lot of it is anti-EU sentiment. The German nationalists probably don’t have enough vote to claim her chancellorship… this round. But they’re growing just about as fast as the National Front in France.

Which one of these will be next? I’d guess Greece. On the other hand, France is the only one that just might do it before Britain finishes the process. Once again, it would be very French for them to cut a side deal with Britain as part of their mutual exit deals. In short, I think it’s most likely to be one of Greece, France or Germany – but I’m not ready to put money on it.

What I am ready to put money on is that it’s a matter of when and who – not if. Indeed, I already did put money on it. Earlier tonight I bet a steak dinner that ten years from now at least two more nations will have withdrawn from the EU. I’m officially documenting it here for the world to see. Why two? Nobody wants to be the first. But once the process starts, it will accelerate. It’s the nature of these things.

That’s Where The Money Is


I sparked off an interesting Twitter conversation yesterday when I made a wisecrack about Apple withdrawing from the Republican National Convention. Specifically, one of my friends wondered why Apple was involved in the first place. I found the question itself to be shocking.

Why was Apple involved in a political party’s convention? For the same reason that Willie Sutton robbed banks: Washington is where the money is.

Another friend of mine jumped into the fray defending Apple, with the following factoid:

To which I can only respond… so what?

For the record, I have not bothered to fact check these numbers. I know Michael well in real life, and I strongly suspect that he has a good source. Even so, the reality is that this is irrelevant.

First of all, that still means Apple spent over $4 million dollars on direct lobbying. That’s not a trivial sum. Even a company the size of Apple doesn’t throw that kind of money around without expecting a return.

Second, the fact that Apple is spending less than Google could mean that it’s getting a better return on the dollars it is spending. Or it could mean that it’s found that it’s not getting a great return, so it spends in other areas.

Third, this isn’t an apples-to-apples comparison (forgive the unintentional pun). Google has several products that it sells directly to government customers and/or government contractors: Google Maps Servers (recently discontinued, but I know firsthand that government was one of their big users), GMail and related apps (Google went to a lot of effort and expense to get GMail approved for use by government contractors) and more. They’ve also been the target of real and threatened anti-trust lawsuits. Apple, on the other hand, sells boutique products – high end devices at premium prices. That’s the exact opposite of the government’s typical spending patterns. In short, Google has more reason for direct lobbying than Apple does.

Fourth, never forget that direct lobbying is only part of the story. All of the major tech companies have been playing roles in the conventions of both political parties for the last several cycles, and those roles have been getting larger. Why? Because we live in the digital age, and conventions need tech to operate. Providing wi-fi for thousands of people is a logistical nightmare. Streaming video of all of the important speeches is a big deal. Getting an app together for convention goers is expected these days. And that’s just the big stuff. Some of those services are donated and classified as political contributions. Some of those services are paid contracting services. This is, after all, part of what these tech companies do. Providing these services as a paid contractor is influential all by itself, even if you haven’t offered any discounts.

Fifth, Apple is a highly unusual company. But it’s a highly unusual company that’s in the process of becoming a rather typical big company. The Apple of today is already not the same company that it was under Steve Jobs. Expect that change to become more pronounced over the next decade. That’s exactly what happened to Microsoft after Bill Gates stepped down, and I don’t know anybody who would argue that Jobs was less directly influential on his company than Gates was.

This last comparison is even more apt than it at first seems. Microsoft spent very little money on lobbying – very little… until the late 1990s. What changed? In 1998 Microsoft was hit with a massive anti-trust lawsuit. But it didn’t come out of the blue. Everybody had known it was coming for a few years before that. Bill Gates later expressed regret that he resisted spending money on lobbying in the early days of Microsoft’s history.

The simple fact of the matter is that Washington controls a tremendous amount of money. Government in the US collects 26% of GDP in tax revenue. Granted, that includes state and local governments. But the federal government’s $4 trillion budget is the lion’s share of it. That’s a hell of a lot of money. If you’re a major corporation like Microsoft, Google, or Apple, and you’re not making the effort to get at least some piece of that pie, you’re missing out. But that’s only part of the story. Government regulation plays a huge role in the economics of major companies: trade rules, tariffs, taxes, labor laws, environmental regulations, intellectual property rules, finance law – all of these things and more effect the bottom line of big companies. A small regulation change in any of these areas can literally cost – or save – a company like Apple millions of dollars. You’d better believe that they have their fingers in that pie.

apple_rncThis isn’t a diatribe against Apple. They’re not doing anything differently than any other huge corporation. But it is a simple reality: big government and big corporations feed and nourish each other by necessity. You cannot have one without the other.

But to finish with the thought that kicked off the whole discussion: don’t let yourself think for a minute that Apple gives a damn about gay rights or any other rights. If it did, then it would stop doing business with countries like Saudi Arabia that kill gay people – not just states that say you don’t have to bake them a wedding cake. Why does Apple do business with Saudi Arabia? Because it’s profitable. Why did it pull out of the RNC and stop doing business with South Carolina? Because that’s good PR for its core customer base: upper middle class coastal elites.

Like all big corporations, Apple doesn’t give a damn about your values or mine. It only cares about one value: the almighty dollar.

The Metamorphosis of Washington, D.C.



The following comment from Glenn Reynolds’s most recent column in USA Today gave me thought:

Over the past few decades, Washington has gone from a sleepy town with restaurants and real estate priced to fit a civil servant’s salary to a glittering city with prices that match a K street lobbyist’s salary.

This is just a tiny comment, almost throwaway in the larger article. As Mr. Reynolds himself would say, read the whole thing. But this is what I want to focus on – mostly because I can confirm it.

My grandparents – on both sides of the family – lived in the suburbs of D.C. In my very early childhood I lived in northern Virginia. Until about the mid 1980s I spent rather a lot of time in the city. The huge variety of museums, monuments and memorials – nearly all of which are free admission – made it an excellent place for a family to take children. Even after we moved to Alabama in 1985, we made regular trips back to the area. We spent almost every Christmas there, and more than once I spent a week or so visiting grandparents in the summer.

My maternal grandfather passed away in 1992 and my paternal grandmother passed away in 1995 (my paternal grandfather passed away before I was born). At around the same time, my cousins were rapidly graduating from high school, then college, then starting families of their own. As you can imagine, our trips became less frequent. But my maternal grandmother still lived in the area until she passed away last weekend, so we still made it up there.

Long story short: I can tell you from firsthand experience that Mr. Reynolds statement is absolutely true. In fact, we were in DC just this March for the first time in a couple of years. My wife and I distinctly noticed how the city had changed even in that short time. The city, even the touristy areas, are distinctly less family friendly than they used to be. Police are more common – far more common – and less friendly. Security theater is more omnipresent (I was denied entry into the Air & Space Museum over a MacGuyver/Boy Scout style Swiss Army Knife).

But these aren’t the only changes. As Mr. Reynolds notes, the city is considerably more expensive than it once was. This change is less recent. My own anecdotal experience says that the big increase came in the late 1990s and early 2000s – especially during the run-up to the housing crisis of 2008. Beyond my grandparents, I’ve had other family in the area. One relative recently sold their home, and I peeked at the listing price. It was mind-bogglingly high – yet not out of line, given where there house was. Yet I also know what kind of house the same price would get you here in North Alabama, and the difference is staggering.

I also know that there’s no way this particular family member could have paid that kind of price when the house was originally bought decades ago. In line with Mr. Reynolds’s comment, this was a dual-income family but both were civil servants. It’s a good house, and always was. Even when they bought it, it was probably a stretch on their income. But the new price simply isn’t one that a young civil-servant family could afford, even on dual income (an older civil service couple, nearing the top end of the pay scale, perhaps). The cost of living in the area has simply changed that much.

Washington D.C. and it suburbs are now truly the home of elites – serious elites. Not the top 10%, not likely even the top 5%. The only people who can comfortably afford it are the top 3%, or maybe higher.

It’s not a good thing that our capital has turned into that. The residents of the city are decision makers for the entire nation, yet they live a life that is completely divorced from what the rest of the nation experiences. Brexit, Donald Trump and Bernie Sanders are all symptoms of a populace that’s tired of being ruled by people who don’t know and often don’t like us.

We don’t like you, either. And we’re more numerous, and we can vote.

Data Driven Journalism Fails to Live Up to the Hype

Data Driven Journalism

Data Driven Journalism

When Nate Silver’s weighted polling average model accurately predicted 49 of 50 states in the electoral college in 2008, he became a household name overnight. A few years later, he launched, and with it the new trend of “data driven journalism.”

In 2012, his critics charged that his models were wrong because the polls he relied on were skewed in favor of Democrats. The actual election proved that his critics were wrong. But it didn’t necessarily prove that Silver was right. The thing is, there were good reasons for the critics to believe that the polls were skewed. The put forth historical models showing how and why they probably were, and the models made sense. But making sense isn’t the same thing as being right, and when election day dawned, we learned that the model was broken.

The problem for Silver and other data driven journalists is that their models aren’t right, either. I wrote a few months ago that Silver’s modeling method would eventually fail, and fail spectacularly. By any honest measure, it has done so in this election cycle. His “polls plus” model, billed as the newer, better, more accurate model simply wasn’t. It actually performed worse in this cycle than his “polls only” model, worse than general weighted polling averages (such as the RCP average), and even did worse than a fictional pundit.

This destined to eventually happen.

Mr. Silver made three cardinal mistakes.

First, he confused the map for the territory. He built a model of the past. His model fits the past with high accuracy. But the past is not the future, and the model is not reality. He found variables with high correlation. Those variables seemed to have a logical causation effect that made sense. So he made a model out of them. But as we noted above, making sense isn’t enough to be right.

Second, statistical models of his sort simply can’t account for Black Swan events such as Donald Trump’s candidacy. Yet the one thing we can say with certainty about Black Swan events is that they will eventually happen. Donald Trump happened, and Silver’s model couldn’t account for it.

Third, Silver let his own opinions and feelings get in the way. He was accused of this in 2012, but the election results vindicated him. This time, Silver simply couldn’t accept that his own model was actually wrong. It happens to the best of us. But it hit Silver hard in 2016.

To be somewhat fair to Mr. Silver, he has acknowledged that this cycle threw his model off. On the other hand, his model is off by far more than he – or most – understand.

First of all, we have to accept that with good polling data, which we’ve mostly had, predicting an election the night before isn’t actually all that hard. The single exception to this is if the polls show a very close race. There are occasional upsets to this, but Nate Silver’s method (basically an advanced weighted polling average run through a Monte Carlo simulation) wouldn’t catch most of those. Still, Silver has done pretty well with this. His polls-plus method called 50 of 56 primaries this way. But his polls-only method, without his extra factors, still did better – 51 of 56.

But this isn’t even very interesting. You could have done just about as well by simply using the RCP polling average the day before the races and looking at who was ahead. Silver seems to be including a few more polls than RCP and weighting them based on past performance. Both techniques are useful and probably provide him with a small edge over RCP. But in both cases, you’re still essentially just looking at the polls the day before a race.

What about before a race? Predicting the race the day before just isn’t very useful. By then, most anybody can do it if they have good poll data available. How did Nate Silver’s polls do a week before each race? A month before each race?

I don’t have the data right at hand, but the answer is “very poorly.” I spent a lot of time checking his forecasts this cycle – which means I watched an awful lot of his predictions swing from “heavily favors someone who isn’t Trump” to “90%+ chances of Trump winning.” Sometimes these forecasts took a month or more to change. Sometimes it happened over the course of a few weeks.

In other words, his “forecasts” were completely and utterly useless more than a week or so ahead of any given race.

And here is where Silver – and data driven journalism as a whole – breaks down. Psychohistory simply isn’t a real science yet. That far in advance, “data driven journalism” doesn’t give any better answers than experienced pundits. It can’t. The science of data analytics simply isn’t good enough, especially in cases like presidential primaries where past data is sparse. Over time we can actually expect these forecasts to do somewhat worse than experienced pundits. Like their conventional brethren, the data driven journalists can’t help but let their biases step in. We saw this very clearly this cycle with Silver, who was certain that Trump couldn’t win the nomination. This is often worse for “data driven journalists” because they are so convinced that their approach is purely analytical. Furthermore, the data driven journalists, although excelling in statistical techniques, lack the experience with the political system to make intuitive calls. When the data isn’t good, or the model isn’t good, their fallback intuition simply isn’t there the way it can be with a seasoned pundit.

On the other hand, we just sat through an election cycle where all the seasoned pundits called it wrong, too. Because seasoned intuition also has trouble with Black Swan events. Except for one thing: many of the seasoned veterans, although predicting a different outcome, did acknowledge that something seemed to be “different” about this cycle. Experience can give you that feel in a way that data often simply can’t.

Data driven journalism is not useless. It has its place. But it will never be the revolution in news that Silver and others have tried to make it.

The Archduke Ferdinand Moment Will Occur in Saudi Arabia

King Salman of Saudi Arabia

King Salman of Saudi Arabia

As I have been stating for some time now, World War IV is upon us (there’s no logical case for not calling the Cold War World War III; 100 years hence historians will name it such). Many refuse to accept it, in large part because the great powers have yet to fully engage. Many are also under the mistaken impression that the war will ultimately be between the US and Russia, as if the Cold War never happened. It won’t be. It will be – and currently is – between the western world – nay, Christendom – and the Islamic world. Indeed, this is what’s already happening as we speak.

With that in mind, the following question arose on Twitter last night:

To which I immediately replied: Saudi Arabia.

A year ago I wrote about the uneasy situation in Saudi Arabia. Since then, the situation has not improved.

I’ve also already noted that oil has historically been overpriced. Middle eastern dictatorships have long relied on this for stability – Saudi Arabia most especially. Their entire nation essentially runs on a patronage system that begins at the top with the Saudi King. He buys loyalty from those directly beneath him – literally buys it – with oil money. And they buy loyalty from those beneath them with that same oil money. And so on. The entire system depends on the flow of oil money.

The recent plunges in oil prices have put this system in mortal peril. The money flow has slowed tremendously. In the past, Saudi Kings would have lowered output in order to push the price back up. But right now they can’t. The obvious reason that everyone is talking about these days is all the new oil sources coming into the market, specifically from fracking in the US, but also from other sources. On top of that, OPEC has lacked the discipline it’s had in the past. If they agreed to cut output, nobody would actually stick to the agreement.

But the other reason is the Saudis themselves. King Salman is caught in a huge catch-22 right now. On the one hand, if he doesn’t cut production and force prices back up it will bankrupt his country. On the other hand, if he cuts production he’ll run out of money to pay his cronies with in the short term. As I’ve noted previously, unlike his older brother King Abdullah, he has not yet had time to truly consolidate his power. He’s also eighty years old, and by all reports not in the best of mental health. And, as I noted in the piece last year, the succession path in the kingdom is currently shaky. It’s uncertain that his recently appointed heir would actually become the next king.

Archduke Franz Ferdinand of Austria

Archduke Franz Ferdinand of Austria

The Archduke Ferdinand moment in World War IV will come when King Salman dies. Worse, it will likely happen whether he is assassinated or simply dies peacefully in his sleep. Saudi Arabia itself is very likely to face internal civil war. At best it will have a period of serious instability. Its adversaries in the region will not hesitate to take advantage of it. And when that happens, all pretense of stability in the region will collapse.

Why do you think the US government is so desperate to keep those 28 pages of the September 11 report classified? There are plenty of career folks in the State Department who are well aware of how tenuous the situation in Saudi is right now. But they’re fighting a losing battle. No matter what they do, this powder keg is going off.

The avalanche has already started. It’s too late for the pebbles to vote.

The Tractor Drives Itself


More and more people are starting to worry about something that’s trouble me for some time: Zero Marginal Product workers. The short definition: workers whose maximum output simply isn’t worth the minimum cost of employing them. They literally will lose you money if you employ them.

Every industry has these people, and always has. The beauty of the free market has been that these people eventually get pushed out and reshuffled until they find their way into a position where they have value to the employer and produce more than they consume.

But what if that is breaking down? What if we have a growing number of workers who aren’t just unemployable in good industries… they’re simply unemployable? What if we’re growing a new subpopulation that literally isn’t productive enough to be worth hiring in any industry?

Dan Holm warns against this exact thing. Forgive the lengthy excerpts below… but then, you really should read the whole thing anyway.

Few of the very bright have have ever had to make the unhappy calculation: Forty times a low minimum wage minus bus fare to work, rent, food, medical care, and cable. They have never had to choose between a winter coat and cable, their only entertainment. They don’t really know that many people do. Out of sight, out of mind.

Cognitive stratification has political consequences. It leads liberals to think that their client groups can go to college. It leads conservatives to think that with hard work and determination…..

It ain’t so. An economic system that works reasonably well when there are lots of simple jobs doesn’t when there aren’t. In particular, the large number of people at IQ 90 and below will increasingly be simply unnecessary. If you are, say, a decent, honest young woman of IQ 85, you probably read poorly, learn slowly and only simple things,. Being promoted, or even hired, requires abilities that you do not have.

By the definition of IQ and the normal distribution that it follows, half of the population will have an IQ below 100 and a full third of the population will have an IQ below 85. In other words, Mr. Holm is arguing that one third of our population is already becoming unemployable.

He ends his piece by getting to the real heart of the matter:

The question arises: What does the country do with the large and growing number of people whose labor is worth nothing? Or, perhaps more accurately, whose labor isn’t needed? We see this in the cities today. An illiterate kid in Detroit has no value at all in the market for labor. Assuming that he wants to work, a questionable assumption, what then? Endlessly expanding welfare? What about the literate, averagely intelligent kid for whom there are no jobs? If people working in McDonald’s can barely live on their wages, and strike, or the state institutes a higher minimum wage, McDonald’s will automate their jobs, is automating their jobs, and conservatives will exult—the commie bastards got what they asked for.

I don’t have an answer – only more bad news. The problem is far worse than even Mr. Holm’s dire picture, because we’re looking at a future of more and more automation. We’re far further from true AI than most people think – perhaps no closer than we were 30 years ago. But we’re far closer to automating your job than you probably think. Even most “knowledge worker” and “creative sector” jobs are approaching automation.

My fellow software engineers seem to believe that computers will never be able to do what we do. But they’re almost certainly wrong – even programming other computers will probably be automated 50 years from now. Our industry has already hit the point where 80% of “software engineers” are doing nothing more than putting a glorified GUI on top of a database that was already written years ago by Oracle, Microsoft, or a team of open source engineers.

OverallOn the far end of the scale, my oldest son flew out to Kansas last summer to visit some distant relatives. One of them still owns and operates a major farm. I remember traveling out there to visit them when I was the same age he was last spring. My fondest memory was of getting to drive the tractor. When my son came home, I asked him if he had fun driving the tractor. His response?

“The tractor drives itself, Dad.”

(H/T to Vox Day for the link)