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.

Taxassination

Posted on by David Wright

In my emerging view, Americans have a high standard of living because things are cheap here. Putting sin goods (alcohol and tobacco) and rent to one side, NYC is cheaper than Toronto, London, Sydney and Hong Kong.

Economists, bless them, would destroy this.

You see, taxes are distorting. And any increase in a particular tax is more distorting than the last. Since taxes are necessary, how does one minimize the distortion?

Keep the rates low but have lots of taxes is the answer. Low rate, broad base.

Now, I’m not sure why things are cheap here, but let’s say I’m convinced it’s due to low consumption taxes (fuel, VAT, etc). Add in high income taxes and the quick answer for most efficient tax at this margin is: ‘on stuff we buy’

The prospect of this worries me a bit:

There’s an amazing swarm of low-paid workers who get paid in cash and can live cheaply (in apartments with a dozen other people, probably). These workers supply inexpensive services to everyone here: delivery, shoe-shines, restaurant service. Luxuries for the well off, to be sure. Is that so bad?

The services in New York are incredibly diverse. And I worry that a consumption tax will destroy this part of the economy. In econ-speak, I’d say that economists are horribly underestimating the deadweight loss.

I’d also say that this underground economy breathes life into a city that, in my opinion, is shockingly controlled and regulated.

Perhaps taxes must be raised, as they all say. If so, I’ll get fewer shoe shines and no more deliveries. Goodness knows what happens to those who once supplied those services. As I said: deadweight loss.

Maybe the kind of low-level service economy I’m witnessing here is a relic. If so, I’m thrilled to have seen it.

As we move toward a mild socialism (I don’t mean that in the pejorative), this kind of fly-by-night service economy will be crushed.

Making Waves

Posted on by David Wright

I like having pet ‘theories’ that I find useful for thinking about the world but are exaggerations or ‘caricatures’, as I typically call them. Reading Arnold Kling and Robin Hanson freed me from the need to feel like people should ‘kinda agree with me all around‘ about things.

Here comes another one: “people and politics never matter”

Barry Cunliffe’s Europe Between the Oceans discusses Fernand Braudel‘s division of history into three concepts of time:

(oh, yes, I’m using the french!)

1. l’histoire evenmentielle (“events insitgated by individuals”);

2. conjontures (“collective forces, impersonal and restricted in time to no more than a century”); and,

3. the longue duree (“geographical time”).

Ok, some examples to help explain.

Scott Sumner’s had what I’m sure he would say was a provocative idea:

I seem to be the only person in the world who thinks Al Gore would have led us into Iraq.

I’d rephrase what Scott’s saying as: everyone thinks that the invasion of Iraq was a #1 event (attributable to GWB or Rumsfeld or something), but it was really a #2 event (driven by the will of the people in reaction to 9/11).

Controversial example, to be sure. But it helps illustrate the point that humans have a deep need to attribute actions and consequences to individuals. We aren’t built to think on a societal scale, we’re built to think in terms of tribal units, a mental model that evolved waaaay before societies were of any size.

Now, my caricature of this idea is that NO heroic historical figure is relevant for understanding any historical process: Plato, Aristotle, Alexander the Great, Jesus, Charlemagne, Copernicus, Martin Luther, Newton, Geroge Washington, Napoleon, Abe Lincoln, Darwin, Einstein, Hitler, Stalin, Martin Luther King Jr, Jackie Robinson, Ronald Regan, Bill Clinton, George W Bush, Sarah Palin or Joe the Plumber.

All extraordinary individuals, to be sure. But I’d say that all of their acts (good or bad) were fundamentally products of their culture. The WHO affects the WHEN (barely), but not the WHY.

The next lesson I take from this is that we attribute #3 effects to #2. Geography builds societies, not culture.

Why did Western Europe develop faster than North America, Africa or Australia? Geography. Why did the Middle East develop first and not Europe? Geography. Why was the Industrial Revolution in England? Geography.

GG&S was the first exposure I had to this idea and it blew me away. Cunliffe’s book is very much in this tradition.

When I hear some grand even attributed to a person, I think about the culture. When I hear something attributed to culture, I think about the geography.