We’re Not Doing Much, But We’re Nice About it

Posted on by David Wright

The blogosphere has been alight with discussion of ‘rising inequality’ (yes, scare quotes!) in the US and elsewhere.

What legitimizes the debate, to me, is the strong possibility that changes in income are capturing less and less of the social benefit of innovation.

I’ve linked to Tyler Cowen’s essay and kindle single before, but I don’t think I’ve gone in any depth.

Society underwent some ridiculous changes between, say, 1900 (horse  & buggy, no refrigeration, little electricity) and 1960 (cars, airplanes, antibiotics, microwaves, mechanized farming).

Since the 60s? Computers and the Internet. Apparently, median incomes mimicked the earlier transformations and subsequent quiet.

Moreover, the Internet economy is about employing a few very highly skilled folks and very cheap scaling (free things?!). But its impact on our lives is immense. Measurements of income growth miss this.

That’s Tyler’s story.

Here’s another thing calculations of income growth misses: psychological health.

Dan Carlin’s got this podcast that poses the question: “what were the parents of history like?” The answer (I’ll paraphrase): there may not be a single parent in history that wouldn’t, today, be put in jail for child abuse.

Infanticide, emotional abuse, physical abuse and sexual abuse… all common. And damaged kids some day become damaged adults who then, in turn, damage kids of their own. Nasty stuff.

Compare this to things people worry about today. Now, some of this is the ‘Kids These Days!’ phenomenon, of course, but I wonder how ancient parents would be able to condemn such acts as well as take their kids out to watch the local executions.

I watched a documentary recently (it was up for an oscar!) that followed an Iraq vet who suffered from PTSD. Man, that does not look like fun. And might not the vast majority of historical societies suffer from similar conditions?

Anyway, the incidence of such psychological trauma has surely abated, if only because there are fewer wars screwing up entire generations at a time. Why are we becoming nicer?

In a Russ Roberts podcast, George Will considers one aspect of this phenomenon (civil rights) and credits our fortune for MLK being born.

I don’t buy it.

I have little doubt that we’re probably the most psychologically healthy humans to ever have lived, but who knows why?

 

The Earthquake

Posted on by David Wright

Much has been said about this.

I’d say the most notable take-away from this disaster is the awesome achievement of the preparedness of the Japanese for this kind of thing. I read somewhere that earthquakes you can FEEL happen almost every day down there.

If any country can take a right hook from Planet Earth, it’s Japan.

Professionally, I do very little Japanese business, so I don’t have an awesome intuitive feel for the market reaction here. The quake was a monster, possibly as high as third all time, depending how how the measurement revisions go.

And that’s the most important point, I suppose. Quakes are notoriously hard to get a handle on quickly. The property damage can take literally years to uncover (think cracked foundations and leaky pipes).

Throw in a wonky nuclear plant and extant flooding from the tsunami and it’s a big fat question mark.

But these people don’t buy too much EQ insurance (it’s pricey and they feel pretty prepared), so I’m pessimistic about the damage to the marketplace. April 1st is a big renewal date, particularly for the Japanese covers.

It won’t take too much internal finangling for the ex-US folks to wrestle some capital away from the dead-in-the-water US casualty market.

Insider City

Posted on by David Wright

One thing about New York is that it’s not a user friendly place, surprising given the “Aren’t Grid Cities Great!” ejaculation of newbies and tourists wrestling with the implications of numbered streets and avenues.

1. I’ve never seen a place so poorly signed. I learned the hard way that subway entrances are very carefully placed: if you want to go north, you enter the subway station on the side of the street with the traffic going north. Get in on the wrong side and you’re out a fare and the time it takes you to realize your mistake (x2, of course, for backtracking).

Before I figured this out, I used to go down to the booth and ask the guy: “does this go towards [insert destination]” with him staring back at me like I’m out of my mind and responding with an incredulous “well, yeah!” or “what!? (and pointing back the way I came)”.

2. Public workers, particularly in the transit gigs, see their job as an opportunity to power down all brain function save the tiny little corner that keeps their eyelids open. Bestir them from this slumber and be ready for contorted looks of horror and wild gesturing. Their jaws work impressively, but to what end who can know with a soundproof glass wall between us?

3. The infrastructure was built in the 30s-60s and looks every minute its age. I was once turned off by the post-apocalyptic film noir sheen to everything, but when you finally figure out “the energy” of the place, you get past it pretty fast. How do I know? Mary did. I’ll be recovering from the shock of that for a while still.

4. Construction. In most places, the decision to build or modify something probably goes something like this: “Boy, this could look/work better. So we’ll need to make it a construction site for a bit, but it’ll all pay off in the end”. Here? “Boy, this would look/work better as a construction site”. The pyramids aren’t this permanent.

What do you call modifications without construction? Baffling. Bunch of pylons blocking an exit with a few powered-down workers standing around. But there’s a new sign that contradicts the two or three you saw earlier dashing your and Google’s carefully laid out plans. Or the six or seven lanes of highway collapsing down to a two-lane, eighty-year-old (honest estimate) moonscape of a pathway too critical to ever close down.

The first dozen or so times you encounter all this is absolutely bewildering. Things are so packed in (it’s an island!), ‘progress’ so sclerotic, security so paranoid and ‘temporary’ measures so permanent that it’s an honest miracle that this thing works.

Once you ‘get it’? (I’ve racked my brain trying to describe the upside without sounding like a drug-addled flower child). You’re in the club.

Suddenly ‘charming’ and ‘quirky’ brushes aside our natural desire for ‘clean’ and ‘functional’.

Light Bulb!

Posted on by David Wright

Felix Salmon explains how Managment Consulting works:

The reason you hire McKinsey is that its consultants have seen strategic business issues like yours before, and therefore might have developed good insights into how to approach them.

Wait, this sounds familiar…

Get a Fancy Business Card and Impress Your Friends!

Posted on by David Wright

If you ask an old-timer about the biggest changes in the insurance industry during his career (as I did recently), you get some variation on the answer I got: MBAs and lawyers and actuaries.

I see two sides to this complaint, actually.

First, the industry has taken the underwriting role and split it out into specialized functions.

Second, these various specialists pretend that they’re doing something different than their ancient predecessors and have introduced a steaming pile of jargon.

I’d say the first is actually good (sorry, Bob!), but the second is terrible.

Ok, specialization first. When you educate people, they specialize: lawyers do the legals, actuaries do the maths and MBAs do the MGT.

The trick is that these people think they’re doing something new when they’re not. It’s really hard to prove this empirically, but I’d argue that specialization improves the overhead part of the expense ledger and not the claims cost part. That is, they’re not doing any better of a job, but they’re doing it more cheaply.

But boy, you’d be hard pressed to figure that out if you listened to these people talk.

I’ll focus on actuaries since that’s the part I know best. They come up with the most impressive models: truncating this beta function, integrating that pricing curve. All to try and figure out whether the market price makes sense. And still their work boils down to 1) an inflation assumption; and, 2) a vague assumption about the relationship between reported and outstanding claims.

Now, I don’t believe for a second that an underwriter in the 50s knew any more or less about whether a piece of business would make them money than an underwriter does today, or will in a hundred thousand years.

More importantly, though, the ability for people to actually wade through the misleading math is an order of magnitude rarer than the ability to understand the driving assumptions.

They erect this fortress of jargon to keep people out and make themselves feel better about spending a decade or more in post-secondary education before they really get on with their careers.*

I’ve recently come across an interview with Freeman Dyson, famous mathematician, author, physicist, etc. No PhD here and it hardly stopped him. I found it amusing that in his day, the PhD was considered a ‘German thing’ and not as important as it is now.

Behold credentialism: a force for people to, in the words of a good friend of mine, “add value to themselves”.

*Actually these people are, individually, friendly, smart and hard working folks with not a drop of self-aggrandizing intent.

Eskimos Need Ice Cubes, Too

Posted on by David Wright

I think it’s worth following up on this.

Over time, a poor grasp of macro trends will doom any business strategy, of course. But in the short term, success is more closely linked to incumbent competitive advantages.

What really intrigues me is that part of the economy so resistant to automation: social interaction.

It’s probably not an unfair simplification to say that economic growth is all about uncovering ways to routinize tasks. So it’s important that a routine task is not necessarily a simple task, at least to a human mind.

As legions of kids struggling through math class have realized, humans are not logic machines, we’re social machines. Computer brains were built to process logic while human brains were built (and trained!) to process social signals.

That we can do any logic at all is pretty cool. But mostly our processing routines are veiled, messy, parallel and unbelievably complex.

But wait, you say: computers have been around for, what, 50 years? And they’re already deriving the laws of physics! Took us millennia!

Perhaps, but the complexity of the the calculations involved in social interaction will baffle the most powerful computers for a long time still; like it or not, the highest form of intelligence is social intelligence. And it cannot be routinized.

Some professionals, like salesmen, are entirely concerned with social interaction. In these cases, the social intellect is king, of course.

I work in a sales business and we think nothing of the most skilled and experienced minds in my company gathering round to debate the implications of a few sentences in a client’s email. Like, literally for an hour or more. Business context, personality, politics, mood, the fucking weather that day. All have an effect.

Now THAT’s complex.

That’s why producers get paid more than actuaries in my biz. They may not have the fancy math, but they’re still smarter.

In any context in which you need to convince other humans of your quality, social intelligence is how you do it.

And that’s every context.

Superhero Bubble

Posted on by David Wright

The Economist has an article about the Chinese property market. The Chinese government is worried about a property bubble, understandable when you have a colossal savings rate, relatively young population and everyone who remembers the last private property crash died 20 here ago.

It’s this last point that gets me. People avoid bubbling assets because they’re worried about the sting of big capital losses. If the collective memory of the last such pain is too faint, people take it less seriously.

And the government response? Dampen demand.

The Chinese government has unveiled a series of measures since April 2010 to mute house-price inflation. They include raising the minimum downpayment for first-time buyers to 30% of a home’s value, up from 20% before, and a stop on mortgages for people buying a third or subsequent home.

Ok, but bubbles are about perception, not about actual transactions. What if people think this dampened demand is actually delayed demand?

Well, then they’ll think that all these people forced to sit out are just waiting to get back in. The bull market will last forever!

What if bubble killing policy actually just makes it stronger?!

It Is What It Is… Until It’s Now

Posted on by David Wright

Krugman won the Nobel Prize for, in part, describing how industries cluster in some areas, something called Economic Geography.

Now, what’s interesting to me about this is that, as he discusses in his Nobel Lecture, he was able to describe this only as its effects were ending! Today, the speculation goes, the power of industry concentration to enhance returns is waning.

There’s a long history of people describing trends only as they are ending.

The Malthusian theory of the economy probably did a good job of describing how things worked right up until the thing was published, following which the Industrial Revolution changed everything.

That’s how I like to think of Cowen’s TGS. He describes a world of declining innovation growth rates, but perhaps just as they are about to really pick up?

And remember, real technological innovation takes years and years from eureka to IPO. I stand by my view of the medium term.

Um, Which Way is Downstream?

Posted on by David Wright

My boss sometimes laments that we’re in a declining industry and, to be honest, the statistics do show the absolute level of employment in Reinsurance on a steady downward trend.

That doesn’t mean the industry is declining, though. Quite the opposite: it grows with the economy.  Insurance is a business that passes the ‘grandmother test’ because “there will always be insurance”.

So what’s happening?

Here’s Paul Krugman, commenting on an old article of his:

[I argued that] information technology would end up reducing, not increasing, the demand for highly educated workers, because a lot of what highly educated workers do could actually be replaced by sophisticated information processing

And again, citing the work of Autor:

[they] argued that the crucial difference in terms of possible replacement of humans by machines was one of routine versus non-routine, rather than white-collar versus blue-collar

So, to the degree that the insurance business is a collection of routine processes, folks get replaced by flops and the balance slowly moves from labour to capital.

I’m rather obsessed by this macro trend, as a quick flick through this blog would plainly show.

But it’s bigger than insurance, of course. And ain’t no recent thing.

I like to think of economic progress as the decline of the share of our income spent on food, water, shelter and other ‘necessities’. As they get cheaper, we get richer.

Here’s Arnold Kling:

As the cost of food and durable goods falls, what are you going to do? You only consume more health care services if you think you are sick and that the doctor can do something for you. So you either consume more education or more leisure.

These trends matter. The strongest businesses don’t fight the current, they ride the crest.

So, at the margin I expect three types of businesses to grow in the near term. The first is the medical industry (easy).

The second supply things people do in for leisure and/or education. The Silicon Valley social media types are all over this, along with self-help gurus and tv producers.

The third business joins the chorus crushing the costs out of the the rest of life’s pursuits. Think commodity producers (insurance!) and the news media. Over time, their quantities supplied grow with the (world) economy, but their share must fall.

To my boss, then, I say: “watch your margins, insurers grow by adding capital in innovative ways”.

If he’s still worried, I say: “write a book and go on CNBC: become a media darling and guru”.

Still upset? Go to med school.

“Some Day I’m Going to Start My Own Company” – Douchebag

Posted on by David Wright

Perhaps surprisingly, there is a vibrant startup community in the insurance world. In any sales-driven industry, those who can start a business that locks in a distribution channel get rich.

In insurance, these businesses are called Managing General agents (MGAs). They are to insurers what hedge funds are to pension managers.

Anyway, the part about successful MGA owners making big money isn’t lost on many. Predictably, there’s a multitude of frustrated middle managers harboring a deep desire to put their shingle out and strike it rich.

Easier said than done, of course, but it can serve to salve a beaten down ego for a while.

Obviously, I eagerly count myself among these despondent douchebags.

Interestingly, most MGAs are only barely viable. They typically identify some market micro-segment with only enough scale to make a little money; the rest is hopes and dreams stuff that never comes true (but proven by hockey stick growth targets!). Economists would say price equals marginal cost here, and go to bed happy with the state of the world.

At scale, the insurance market is a commodity business, but at the local level it’s a relationship business. Different skills.

Those with the best view of the big picture are the corporate types and they just aren’t entrepreneur material. Too secure, too much to lose. They overthink and do things like write blogs about entrepreneurs while having started nothing at all in their lives.

The local shark is often a champion salesman but runs out of gas when he runs out of hours in the day to sell. No scale.

When lightning strikes and you get the natural entrepreneur with a solid grasp of the whole thing?

That dude gets rich.