As I write, the U.S. Senate just scraped up barely enough votes to begin debate on a set of spending cuts combined with making permanent tax reductions, primarily for the wealthy. A coalition of senators concerned about reductions in Medicaid for the poor, Obamacare for the working poor, and hospital care in rural areas and senators troubled by how the Big Beautiful Bill will add $4 Trillion to the national debt over ten years caved and pushed the package through. Already, interest payments on the debt is the second biggest spending category, after social security, and shall be the largest category, approaching $1.5 trillion per year, within half a dozen years. It appears, though, that political threats can induce even the most principled senators to favor reduction in short term pain at the expense of long term national debt passed on to our children. This economic mismanagement is problematic in the medium and long term, but much of the financial media seems preoccupied on the short term. President Trump is trash-talking the Federal Reserve Chair, Jerome Powell, and trying to brow-beat the Fed into lowering interest rates to reduce the government’s interest payments and perhaps stimulate the economy. This unprecedented pressure shows a great deal of economic naivete, though. As we saw last fall when the Fed lowered the rate they lend to member banks by a full percentage point, even very large Fed discount rate reductions aren’t matched by similar reductions in the treasury rate that affects government borrowing. As you know from this blog and elsewhere, the Fed does not set interest rates, just the rate of short term borrowing by and between banks. Even if the Fed could magically lower interest rates, the historically gargantuan federal debt is usurping much of the domestic investment capital, so low interest rates won’t translate into increased domestic investment and productivity as it might when the economy is less fragile. Finally, the dramatic decline in US imports of late means that trade surplus countries no longer have the American dollars to reinvest in the U.S. economy. We track the interest rate to some degree in these blogs. They are a measure of a nation’s willingness to invest in itself, either because optimistic savers are willing to accept a low interest rate in return for long term industrial productivity improvements, or because the Fed is working hard to realize one of its dual mandates. These mandates are to keep inflation around 2% and to maintain healthy economic growth to draw in our growing labor force without significant unemployment. Every month we document inflation, are have been seeing that the measures on today’s graph are now converging toward the magical 2% point. Recall we focus on the annualized inflation rate from the last three months of data because we are most interested in what it might portend for the future, not what it did over the past year. The data do not really measure the effects of Trump’s tariff taxes as these higher import prices and shortages are only just now working their way through the supply chain. The Fed and most all economists don’t expect the upward pressure on prices to be measured in consumer prices for another month or two. Only now, at the end of June, the complete set of consumer and producer prices, and personal consumption expenditures for May. The Fed recently said they want to hold tight and not prematurely stimulate the economy until the data become clear. That will take another month at least. Today’s graph includes a couple more economic series so we can up our analytic game a bit. I have included the trend of the consumer sentiment index, a measure that typically ranges below a high of about 100 and a low of around 50. The CSI has only hit 50 a couple of times, most recently in April. Before that, we have to go back more than 75 years to find a similar low. The CSI rebounded slightly in the May data, but it is still very weak. This low is now causing consumers to pull back in spending quite dramatically, which portends to worsening Gross Domestic Product, given consumption is usually around 70% of national spending. This weak domestic spending may well compound itself into negative growth in the second quarter once real (inflation-adjusted) GDP figures come out on July 30. Last week they revised first quarter downward, which means our first negative growth quarter since COVID just got worse. A second consecutive negative growth datum will induce economists to officially call a recession. If prices begin to pop due to tariffs, this combination of higher prices and a recession may push us into stagflation. That is why we are including on today’s graph the big bold real GDP growth line and, on the right hand axis, the Consumer Sentiment Index. To understand the economy, economists watch inflation to avoid the inflation expectation disease, but also watch for consumer pessimism and for recessions. These are troubled economic times, and with the U.S. enjoying fewer allies with each passing weak. Too many allies are secretly harboring schadenfreude, a pleasure enjoyed by one nation when another nation faces economic misfortune. Critics of the Fed argue that Powell wants the economy to fail. I do not believe that for a moment. Members of the Fed are professionals who cherish their dual mandate. However, they are devoted to keep the economy on a steady long term path, even if politicians prefer to hijack the Fed’s powers for short term political gain.

This week the US Senate passed what they ironically call the Genius Act. A strong majority voted in favor of it, which makes the Act veto-proof. It now goes to the House, where it will likely pass with equivalent bipartisan support. Of course, there is also no possibility of veto, given how the president who once condemned cryptocurrencies is now a huge backer, issuer, and profiteer from the crypto industry, In fact, while Elon Musk may claim he got Trump elected and flipped the Senate, it is far more likely that the many hundreds of millions more pumped into the election (for both sides of the aisle) by the crypto industry was what determined the present political circumstance. The first major payback to the crypto industry for the dollars and crypto bros they brought along is the Genius Act. It will unleash a Wild West in monetary policy, shilling, financial system destabilization, the repeat of FTX-style meltdowns, and mega-wealth for some, along with mega-losses for far more. The U.S. has a history of monetary debasement that most other comparable countries managed to avoid. In the 1800s, there was no central currency nor a Federal Reserve designed to ensure monetary stability. Instead, individual banks issued their own notes, which were really no more than IOUs backed (presumably) by deposits at their branches. These IOUs could be exchanged as tender for purchases, at least for those who believed they could easily convert the IOIUs they accept to something more tangible. Throughout this wild and wooly era, the nation faced waves of bankruptcies, with thousands of banks disappearing, along with any sort of value that underpinned the IOUs trusting citizens held. Eventually, the nation realized that it needed a national currency backed by the full faith and credit of the United States Government rather than faith in the local bank of shaky solvency. This faith in the U.S. dollar underpinned the nation’s ascendancy as the premier economic superpower. Now, the Congress and President is willing to squander this success and threaten its monetary system by embracing cryptocurrencies that are designed to compete with the U.S. dollar. Surely, beyond the digital coins that have been shilled by wannabe crypto billionaires, we should expect many major retailers and financial houses creating their own corporate script. Of course, even a well-compensated (I mean grateful recipient of campaign donations) congressperson needs at least a plausible plan before they vote in favor of reverting back to 1800s monetary policy. The promise is that the new crypto enabled by the Genius Act must be stablecoins. That means for every dollar of crypto coin, there must be a dollar of hard currency (dollars, gold, bonds, perhaps) to ensure their value. Almost 200 years ago, a public skeptical of government encouraged President Jackson to disband the Bank of the United States and the federal currency it wished to administer. The public feared that large financial corporations would co-opt the central bank and instead believed that local banks, and the script they create, is far safer. Well, dozens of bank-failure-induced recessions eventually convinced even the banking industry that it could not be trusted to be the regulator and issuer of a domestic currency. But let’s not let history, nor the waves of bank failures and millions lost by ordinary citizens, get in our way. We are again embarking on a system in which anybody can start a stablecoin, including our President, of course. And, such a stablecoin that has backing of less than ten billion dollars will not even need to face federal oversight or regulation. To put that oversight threshold in perspective, only 3% of banks have assets more than $10 billion, but many times more are regulated by national agencies and insured by the Federal Depository Insurance Corporation. Yet, despite such a lax oversight regime, stablecoin will compete directly for the public’s deposits with the highly regulated domestic banking industry. Even the largest stablecoins, with the most potential to do damage if they fail like their predecessors, will be regulated far more lightly than the banks with which they compete. We have already seen spectacular collapses of stablecoins that promised to back each dollar of coin with a dollar of hard assets. Terra, Basis, Diem and others have failed, leaving those who subscribed to them to lose billions. We witnessed Silicon Valley Bank fail in 2023, with the American public paying the price by having to bail out depositors in a bank that chose to keep crypto on its books. These ventures are run by true believers who do not think that such financial carnage could ever happen to them. I’m sure the owners of Terra and Sam Bankman-Fried of FTX infamy also felt they were safe because they were so much smarter than the usual Wall Street types. What they fail to understand is what banks already know. You can’t earn a rate of return if you must collateralize 100% of your liabilities with low return assets. You can only make billions by taking chances, cooking books, or running Ponzi schemes, as we have witnessed. To now, though, we have let the crypto industry cannibalize itself, with little repercussions on those outside of the crypto bros world. But, with the President now sponsoring crypto, and with a grateful Congress endorsing the idea, (un)stablecoins are now going mainstream in competition for our deposits with the much more regulated banking industry. What could go wrong? It seems that we are determined to turn the clock back to economies of the 1800s, with tariff policies and now with competing currencies cloaked in corruption or incompetency. Greed ruled the Gilded Age, and greed is back. What could go wrong?

The U.S. House of Representatives has passed to the Senate a bill that will set the budget goals for the coming year. It is perhaps the most profound piece of legislation in a decade, but, to economists, perhaps not in good ways. Notice the distinction I made. I’m sure many people look at the provisions in the bill and say “It’s about time fraud and abuse is curbed” even though economists don’t believe there is significant fraud and abuse. It is certainly true that people have different preferences for what government programs and agencies do, and whether the money is well-spent. We are each somewhere on the spectrum grom a compassionate society with many protections to the other extreme in which people are self-reliant, do not believe government can help in any but a few narrow categories, and prefer to be able to keep earned income rather than have to share it with people perceived to not work so hard for it. Most economists have faith in a free market system, and a growing number are expressing concern that our system is anything but the competitive ideal espoused by Adam Smith a quarter millennium ago. Hence, most economists would agree that there is a role for government to ensure a level playing field. The Big Beautiful Bill does not address the concerns the market is departing too far from the competitive ideal. In fact, of late the economy seems more fragile, more manipulated by politics and oligarchs than any of us could have imagined until recently. These flashing red lights alarming even the traditionally conservative bond traders are increasing economic volatility and hence domestic investment. A budget is designed to accomplish two goals. One is to raise sufficient revenue to provide the level of services only government can fairly administer to ensure that our nation serves all people and keeps each of us engaged in the national dream. The other is to ensure that the burden of these functions is spread fairly among all residents based on our capacity to pay. Again, this notion of fairness ensures we all share in the burden in a way we all agree is fair. Those that benefit the most from the fruits of a productive society hence pay a greater share of their income because they have a greater capacity to pay without dramatically affecting their quality of life. Of course, we have noted in past blogs that while the middle class pays the lion's share of taxes, many of the wealthiest can use loopholes in the tax code to defer or eliminate much of their burden. This year we saw a return to tariffs that were used to raise much of the revenue up to the 1800s before the U.S. instituted a broad-based income tax. An uninformed belief that tariffs force foreigners to pay for our nation's programs has been debunked as we realize now that it's the consumers of imported goods that pay such taxes. Tariffs are a limited consumption tax paid mostly by those who depend on goods consumption because they don't have the income to consume the services (banking, legal, finance, medical, home services, massages, entertainment, maids, restaurant services, etc.) that better-healed households can afford. Hence tariffs are regressive, with the lowest income earners paying the greatest share of their incomes to cover this mercantilist cost to provide for government. In this blog we have discussed some subtleties of foreign trade markets. While all the tariff rhetoric has been about goods, which translates into commodities, agriculture, and manufacturing, this category is not what America does. The U.S. is indeed a goods net importer, but it is a vast services exporter. The U.S. become the economic superpower by shifting away from the low margin industry of goods production because such production either requires abundant excess natural resources or low labor costs. Henry Ford realized that domestic manufacturing cannot be competitive if it can’t afford to pay a wage sufficient for its workers to purchase its products. Domestic manufacturing of inexpensive goods will not support sufficiently low goods prices American consumers demand or wages American workers require. Let Bangladesh and Vietnam make our t-shirts. We’d rather have our children working as professors, doctors, scientists and engineers, and, sometimes, lawyers. The problem is that America adheres to a faith in the private sector only when it is convenient. President Reagan was renowned for his free market principles, but manufacturing began to disappear on his watch because he put little thought into what to do with throngs of people who lose jobs when t-shirt production moves from South Carolina to South Korea. Despite the huge displacements and the generations excluded from the American Dream as a result, there still seems to be little appetite to retrain redundant workers in 21st century skills. The Big Beautiful Bill does not correct this fatal lack of a national economic policy. Indeed, as today’s graph shows, it bleeds the increasingly unemployable even more, while it showers the wealthiest with the biggest income largesse in perhaps ever. The poorest 10% of the population will see resources decline by $1,600 according to Congress’ own estimates, while the wealthiest 10% will see their annual resources grow by $15,000 in the Big, Beautiful Bill. If these manufacturing jobs lost by the poorest Americans are simply not going to return, despite the silly AI- and robotics-denying realities we all know is inevitable, then what are we doing to seed future productivity and affluence? Simply allowing more wealthy people to keep their money does little to promote the middle class dream. President Trump’s personal philosophy of beggar-thy-neighbor policies is fatally flawed, even if some find it satisfying to poke friends and foes, domestic and international, in their eyes with hot sticks. These are not economic wars, as most economists agree. These are culture wars, a focus on decreasing the size of the economic pie but receiving a bigger share, rather than the universal economic goal of increasing the economic pie in the belief that a rising tide lifts all boats. Our allies have somewhat given up on the U.S. and realize they must go it together, without the U.S. The G7 economic superpowers group is now being called the G6+1 in recognition that the U.S. no longer shares the rising tide theory. NATO countries are organizing a European coalition (and Canada) due to lack of faith in American leadership and principles. The improving American trade deficit is fueled by trade among one another rather than with the U.S. This also means that fewer countries rely on the dollar as the global currency, and nations are left with fewer such dollars that they would then reinvest in the U.S. or in its treasury bonds. It is also now U.S. policy to not invest in itself either. More than 80 years ago, America embarked on an experiment never before witnessed that created untold wealth for Americans and cemented its position as the leading global economy. The innovation was the Manhattan Project, ironically enough. It was a project that was so grand, so demanding of every bit of American scientific intellect, and so massive that no oligarch, not even an Elon Musk, could have possibly pulled off. Instead, it was a partnership with society and universities, and heralded an era in which the public invests in basic research, the universities produce innovations that improve our quality of life (well, except maybe the atomic bomb, if you lived in Hiroshima or Nagasaki), and these innovations are spun off into patents that benefit myriad new corporations that would not have existed but for the investments we all made. This system, well-protected by our patent system, worked well until now. For some reason, again related to culture wars, has caused this pipeline of basic research money to dry up at our major research universities. Meanwhile, China is doubling- and trebling-up in their investments in Science, Technology, Engineering, and Mathematics (STEM) infrastructure, and are being rewarded with more patents and products than their American counterparts. This drying up of foreign and domestic investment, instead redirected to the purchase of more and more U.S. bonds at higher and higher interest rates to support ever-growing federal budget deficits, is sucking the vitality out of the U.S. economy when it needs revitalization the most. Meanwhile, federal deficits and debt continue to grow dramatically to afford even greater tax breaks for the wealthy. The economy is not an energizer bunny. It grows in fits and starts. I liken it to training for long distance bicycle racing. A popular training regimen is to take a long ride, perhaps 50 miles, with hard slogging punctuated with sprints for a telephone pole or two. The economy is like that too. We succeed when we push very hard as a united nation, and then regroup for a while before the next investment and innovation wave. We are willing to sacrifice consumption today for more current investment in the promise that we will all share in greater quality of life tomorrow. That is the American promise that held us all together, at least until the culture wars turned our gaze to our differences rather than all we have in common. Now, it’s natural for nations to compete with each other, even if nations recognized and fostered their mutual dependence ever since World War II. This is why free trade is such an embodiment of the rising tide economic theory. But, never in my lifetime have I witnessed Americans looking so askance at each other. While Americans scream domestically, our adversaries are laughing and “tapping us along”. I still harbor some hope that we will recognize the great bounty of working together to produce that better mousetrap, cure cancer, harness AI in a way that helps us all, not just the oligarchs, and demonstrate pride in our respective countries without trying to diminish each other. It begins by showing we care for each other, differences aside, warts and all. Those who don’t want America to succeed will tap us along, poison our social media, sow discontent, and challenge our democracies. They won’t succeed if we think of each other as ourselves rather than others. I know it is possible. Canada had to face an existential threat from President Trump of late, but it created their Manhattan moment. Canada is rebuilding its domestic economy, renewing its relationships with Europe and Asia, and reinvesting in basic research to attract disaffected American academics. Canada is so busy uniting itself that old quarrels between provinces are dissolving away. The Cold War was America’s existential reason to reinvent itself. President Trump is Canada’s reason. I’ll be watching closely Canada’s progress. Meanwhile, what can America do to reestablish its eminence in patentable innovations? It should redouble efforts and investment in basic research at universities for projects that could lead to commercial superiority. These include AI, medical research, next generation semiconductors, quantum computing, and sustainable energy sources. It should not spend money for the sake of investment. Instead, investment must be part of a thoughtful industrial policy with the clear goal of technological innovation and greater economic efficiency through sustainability.

This is a remarkable week. The debt clock displayed prominently in Manhattan, on the Bank of America Tower between 6th and 7th Ave. and 42nd and 43rd St., is within days of clicking over to $37,000,000,000,000. That’s a lot of zeroes. But it means nothing to many, perhaps most people. Its relevance is only revealed when one divides it by the population of the United States, 341,817,979 residents or 112,888,022 taxpayers, to understand that we each owe $108,275 as our individual share of the national debt, while each taxpayer owes $327,758. Many people have zero-aversion. I don’t get through the week without hearing some announcer or reporter confusing millions, billions and trillions. After all, that’s too many zeroes. Physicists deal with numbers large and small in a very simple way. $37 trillion is just 3.7 times 10,000,000,000,000. And that very large number 10,000,000,000,000 is just 1 followed by 13 zeroes. Same with the U.S. population. That’s just 3.4 times 100,000,000, or 3.4 times 1 followed by 8 zeroes. People would be less confused if we stopped talking millions, billions, and trillions, and talked zeroes. I can easily divide 3.7 by 3.4 to get 1.08, and I can then subtract 8 zeroes from 13 zeroes to get 5 zeroes. That’s how I know the per-capita share of debt is 1.08 times 1 followed by 5 zeroes, or $108,000. That's the way we used to calculate when we relied on slide rules rather than calculators. Ever since then, we have dummied-down by relying first on four-function calculators, then on PCs, and now on AI. Technology has encouraged the Great Dumbing Down, ironically enough. We don't do math anymore because few of us have to. I know, understanding numbers very large and very small is tedious, but it is very simple once we understand a number followed by 13 zeroes or 8 zeroes or 5 zeroes is a big number. And while only Elon Musk can relate to a wealth of $300,000,000,000, we can all relate to a national debt per person of $108,000, for some the price of a house, and for others the price of a car. So, it bothers me when I see commentators joke that they were never good at math, or it makes their head hurt, or they failed high school algebra. To me, that says they are bored or confused by the world around them, in all its immenseness, or the scale of wealth or poverty, human aspiration or destruction. Numbers mean something, and while we all aspire to avoid being illiterate, few harbor such qualms about being innumerate. The problem is that even one who is illiterate can get the gist of a relevant discussion, but one who is innumerate simply gives up any attempt to understand large numbers. The innumerate among us simply trust those on television to interpret the scale of numbers for them, in what sometimes becomes the innumerate leading the innumerate. It’s scary stuff when we give up on understanding the depth of our national debt, the number dying of starvation in Haiti, Mali, South Sudan, Sudan, and the Occupied Palestinian Territories, or that flying in a commercial jet is 200 times safer than taking the same journey by car. We can’t make sense of the world around us without basic competency in math, regardless of how proficient we may be with the English language. We can’t convey to others relevant numbers or statistics if our mind shuts down from zero disease. The quality of our public discourse is not the only reason why we must overcome our fear of mathematics. Our economic future depends on it. The 25 best-paying college majors are all STEM - based on Science, Technology, Engineering, and Mathematics. And yet, there is a growing shortage of graduates in the areas that have traditionally fueled economic growth. Professors Hanushek and Wößmann of the University of Munich, in a recent paper entitled. "Education and economic growth," the authors show the dramatic effect of an improvement in K-12 test scores, especially in mathematics. Even a modest improvement in test scores, through additional investment in K-12 education and an increase in expectations, results in profound improvements in national GDP that is almost double the necessary educational investments. They show that a single generation (20-year) education reform package produces lasting benefits and increases a nation’s GDP by 36% over the remainder of the century. Given that China’s GDP is about a third lower than that of the US, such a difference in growth is the difference between which nation will hold the mantle of the largest economy in the world. And yet, since Hanushek and Wößmann’s study was performed, math test scores have dropped dramatically in the U.S., especially following COVID. Meanwhile, the U.S. Department of Education is being disbanded, with a commensurate drop in billions of dollars of annual education investment. This is when every dollar of education investment produces two dollars of economic growth. Now is the time to destigmatize mathematics, and turn our nerds into superheroes, much like the attitude that prevailed in the 1950s and 1960s when the West was shocked by the success of Russian engineers in first sending satellites and humans into space. Even today, Russia produces four times the engineering grads, while China produces eight times more than the U.S. Don't get me wrong, though. Our citizenry must be literate, just as we must be comfortable with at least basic algebra. Nobody would admit they are comfortable with illiteracy. Nor should we be content to leave the understanding of numbers to others. Literacy allows us to communicate and exchange ideas. Mathematics allows us to comprehend the physical, medical, political, and economic world around us. Both qualities are essential for a well-informed society, and neither should be devalued. By the way, what country scores the highest in the internationally administered K-12 math scores? China. No surprise. We don’t need to look much further than math attainment to imagine which economies will grow the quickest. Education investment worked well when the U.S. was in its period of ascendancy, but not so much for our disinvestment in its period of descendancy.

In the 1980s, the great America’s Cup skipper Dennis Conner earned an unprecedented string of victories piloting the most advanced America’s Cup sailboats. Back then, and ever since Queen Victoria exclaimed “It’s America’s Cup Now,” U.S. sailing teams won the cup repeatedly by designing the best boats, assembling the best crews, developing the best strategies, and running the best races in the history of 12-meter sailboat racing. When asked to summarize his winning strategy, Conner offered a simple motto. “There’s No Excuse to Lose.” To not win meant one did not plan enough, work hard enough, execute well enough, or bring to the game every last bit of competitive spirit. Excellence was in Conner’s control, and he was not prepared to relinquish his success to the hands of others. And if he did not prevail in a race, no excuse to lose means there is no explanation, no finger pointing or blame. There was simply an acknowledgement that he was bested and he’d have to be better next time. That is the second stage of success. Of course, the first stage is simply acknowledging that winning is within the realm of the possible. At sixty-five years of age, I’m not going to earn a spot on the Olympic downhill ski team or swim team. But, there are younger, highly skilled and motivated, and ambitious enough athletes to vie to win at the highest level. They have ascended to the second stage, the realm in which winning is possible. Conner knew what all elite athletes embrace. Winning is within their control, and depends on their conditioning, will to win, endurance, and competitiveness. That’s the amazing thing about the competitive model of economics. If each participant strives to be the best, the energy and innovation of each ends up motivating all others. Conner grew up in the period of American exceptionalism when an entire nation believed just about anything was possible. Following the First World War, also known as the war to end all wars, the U.S. built up a military industrial complex that supplied its allies before the U.S. itself joined the war in its latter months. With oceans distancing it from its adversaries, the U.S. was left intact. As the last nation still standing, it enjoyed more than most the opportunity to capitalize on civilian uses for military innovations - factories to design and build new cars, new airplanes, new armaments, and new innovations in radio, television, electricity, and mass production. The U.S. immediately surpassed Great Britain as the economic superpower. Its position was cemented when it repeated the exercise a generation later in World War II. While other nations had to rebuild after WWII, the U.S. could further consolidate its manufacturing base into another wave of economic superiority. It had no peers, or at least that is what America thought. This is the world of Conner’s formative years. Born in 1942, he was a business school student when America had its Sputnik moment. It was not the first to orbit a satellite nor the first to send someone to space. Yet, America did not claim the USSR was competing unfairly, using trickery, or stealing its ideas. Instead, it redoubled its efforts, with President Kennedy proclaiming "We choose to go to the Moon in this decade and do the other things, not because they are easy, but because they are hard." With the same sort of no excuse to lose spirit that motivated Conner, Kennedy vaulted the U.S. into space, and secured its economic superpower status for another generation. With America undoubtedly at the apex of economic superiority well into the 1970s, and with President Reagan aspiring to keep America “the shining city on the hill,” American exceptionalism was at its apex as well. What comes next seems almost inevitable. As I described in my 2010 book “The Rise and Fall of an Economic Empire,” the third stage of economic success transcends from innovation into consolidation. Success breeds complacency and entitlement. With Machiavellian enthusiasm, the winners get to make the rules, and these rules are destined to preserve rather than advance the status quo. More energy is devoted to preventing others from innovating than from innovating ourselves. In the antithesis of “No Excuse to Lose,” others are blamed for the economic regression by the apex nation. To prevent those competitors wishing to someday reach the apex themselves, in sailboat racing or in nation-building, the apex entity enlists its allies to help hold back its enemies. Even in America’s Cup racing, victors attempting to hold onto the cup were accused of tipping the playing field in their own favor rather than building a better boat. And if one’s allies are unwilling to play unfairly, the apex entity may even turn on them and try to translate their fleeting might into concessions from all, designed solely to savor victory and ascendancy for just a moment longer. That third phase of consolidation cannot last long though. While ascendancy can prevail for decades, other competitors grow weary of other’s consolidation of power rather quickly. This may induce a victor to commit ever greater efforts to tip the playing field in their favor to the point others don’t want to compete with them anymore and instead cooperate to compete amongst themselves instead. People tire of hitmen kneecapping Nancy Kerrigan, elite athletes doping, a rival runner recently hitting a competitor with a baton, or Ayrton Senna taking out Alain Prost to ensure the title of the 1980 Formula One Championship. Competition should always bring out the best of us, not the worst. Now, one can always cry foul and claim they are on the verge of losing their apex position because someone else cheated. Such arguments might hold sway for awhile, but as hard as one tries to penalize another, humankind cannot hold back innovation and will not long tolerate consolidation. That is why the third phase of success can’t last long, even as it becomes increasingly desperate. Either it generates into the fourth phase, one of complete irrelevancy, or it reverts back to a renewed competitive drive that led to its successes in the first place. Even Dennis Conner eventually lost his competitive edge. The difference between a sailboat racer and a nation, though, is that a nation can produce another wave of innovators every generation. The key is to continue to look inward to discover the best of ourselves rather than constantly cry foul outward and attempt to punish others for their better mousetraps. In other words, there is no excuse to lose.

Since the onset of the Industrial Revolution, economies have enjoyed spurts of innovation and dramatic growth that rapidly transformed agrarian economies of the previous thirty millennia into economic engines of growth unparalleled in human history. Large power sources such as steam or water, urban assembly lines, internal combustion engines, electronics, the digital world and the Internet, and biochemistry have all revolutionized global economies. What’s next to continue the innovation revolutions? I distinguish here between evolution and revolution. For instance, some evolutions allow us to do the same things more efficiently. Others completely revolutionize how we do things. The microwave oven, solar panels, electric cars, personal computers, the jet airplane, color televisions and streaming services, smartphones, and other such innovations certainly made our lives easier. But they only improved what we had done previously with lower technology solutions. They are not transformational in the same ways as mass power, factories, automobiles, and other economic innovations that changed entirely what we do, where we live, and how we earn a living. There are many evolutions ahead, in the areas of better medical procedures, enhanced agricultural production, electric vehicles with improved range, faster Internet, and more efficient supply chains. These innovations will not change the pattern of human enjoyment, but may well reduce our toil and increase prosperity, at least for a few generations, unless we find a more sustainable economic path. Many of these innovations originated in the labs and minds of academic researchers, most often employed by major research universities and institutions. These institutions are waning as the seed investment by taxpayers is drying up rapidly and as some major universities are under siege for political reasons. As the mammoth American research engine wanes, so does one of the greatest exports in our history. These exports are in products for which the U.S. once dominated, or for the ideas that originate in the minds of researchers and benefit people everywhere. This week I ask whether the model of such economic innovation is outdated. It certainly provided for unparalleled growth in economic activity in the U.S. and worldwide, but that growth may have been because there was equivalent organized effort of a size that could compete with American innovation. The American model has a few basic aspects. Ideas originate among scientists and engineers employed at places like Harvard, MIT, and Caltech. These ideas, for new semiconductors, drugs, industrial processes, and the like, are then spun off into new speculative ventures and patents. The private sector then capitalizes on our public investment as we are prepared to pay more for better drugs and products to line their pockets. This system has conferred huge profits for firms who bring innovations to market, and no country has benefited from this process than the U.S. This system is losing steam though, as diminishing returns and the cost of new innovations is becoming much more expensive. Is there another economic model that may replace one we’ve enjoyed for over a century? Let us first ask what will be the next wave of innovations that will transform human economic existence. They are innovations in medicine, efficient and cheaper batteries, more capable robotics and automation, and artificial intelligence. The first, innovations in medicine, may impose strains on our economy as they will mostly aid those who are retired and hence no longer take part in production. Such innovations worsen our dependency ratio, an economic measure of those who consume society’s production but are too young or old to contribute to production relative to those who produce. Hence, innovations that enhance longevity actually amplify economic strains rather than alleviate them, unless of course we begin to require healthy eighty year olds to go back to work. Even so, there is tremendous research in new pharmaceuticals. Much of this work and these patents are now earned in China as part of a four-prong wave of public investment and global patents in critical innovation arenas. China is now the major drug manufacturer and is advancing rapidly in other areas of medical research. The second prong of China’s investment is in battery technology. Their dramatic innovations of late are filling the gap that has held back solar and wind power. Batteries must be affordable and sufficiently efficient and powerful to allow sustainable energy to outcompete fossil fuels. Innovations in organic flow and sodium ion batteries are now coming to market and will over the next decade revolutionize any economy willing to adopt new ways of producing and distributing power. It is here that the U.S. has a disadvantage, even if some of the earliest work that enabled such innovations came from U.S. labs. The U.S. has made a policy of late of moving away from sustainable energy and doubling up on fossil fuels and antiquated electrical grids. After all, since the U.S. first developed these sources of power, it has more invested than other nations in preserving this obsolete status quo. California is an exception, but even there it must buck resistance from the federal government to further invest in battery technology that allows wind and solar to work even when the wind dies and the sun goes down. China is the unambiguous world leader in battery technology, and we will see them earn huge efficiency improvements and dividends as a consequence. The U.S. may not enjoy such benefits because of tariffs imposed on their innovations, but China and the rest of the world will benefit from this transformational battery technology. China is also investing more than any other nation in automation. Already, its factories are far more modern and automated than their American counterparts, and they continue to develop even further. If industry in China is brought to the U.S. in the recent reshoring effort, we should expect lots of new robots crossing the Pacific, but very few jobs generated. Automation is what makes things these days, not laborers and our clumsy fingers. Again, China is leading the way. Finally, China is determined to lead the world in artificial intelligence, and already invests more, publishes more, and receives more patents in AI than any other nation. As the US slows such investments, China is redoubling theirs. They know the economic potential of AI, as well as the ability to use AI as a political tool, and they are willing to invest in it. China’s model disrupts the prevailing American approach that relies much more on the private sector to mobilize investment and bring products to market. While American politicians abhor public investment, China embraces a large public role in enterprise. Americans may cry foul, but China and those who wish to hook their buggy to China’s horse are willing to embrace the benefits that follow. Perhaps it is time for us to reevaluate whether it is unfair or brilliant for great nations to invest directly in their economies through public/private partnerships rather than expect the private sector to broaden their approach beyond quick payback of investments and short term profits. Gone are the days of innovation from 1% inspiration and 99% perspiration. Now, innovation is risky and expensive, and is only middlingly pursued by the risk-averse private sector. Call them all the names we want, but those nations who invest in the next big thing through taxpayer dollars to benefit their taxpayers will increasingly dominate 21st century commerce, as disturbing to the old world order as that may be. We can stomp our feet all we want. If we don't like change, how do we think irrelevancy will work for us?

(graph from https://www.cbpp.org/blog/how-house-republican-agenda-boosts-the-wealthy-does-little-or-worse-for-low-income-families) I read the funniest article today. You may have seen similar reporting lately. Income tax cuts seem to be politically popular these days, on both sides of the US-Canada border. The U.S. cuts are the most laughable because U.S. government debt is far worse than the more manageable debt accumulated in Canada. The impact of proposed tax cuts in the U.S. is negligible for the lowest 20% of American households. “Savings” of $90 won’t even cover a cup of coffee once a week for the bottom quintile of income earners. Savings for the next quintile will save them about $540, enough for a few cups of coffee each week. Middle income households fare a bit better. Those in the middle quintile will save about $1,290 per year for a reduction in their tax rate of 1.9%. That might cover a couple of car payments. Those who live comfortably, better than 60% of households but not as well as the top quintile, will save $4,500 a year. These “savings” are nothing compared to the top 1%, who take home $64,770 from a 4.3% reduction in their tax rates, while all in the top ten percent except for the wealthiest 1% bank $10,960 more on average from a reduction in their tax rate of 4.2%. As you can see, almost all the benefits, in dollar terms and in tax rate reductions, go to the wealthiest Americans. That should not be too surprising. After all, the wealthiest Americans also made the largest bribes, I mean political donations, to ensure those elected will return the favor in the form of lower taxes for them. Now, I don’t think I’ve ever met anybody who claimed they enjoy paying taxes. But, many of us recognize that we are purchasing government service, with those more able to pay covering a greater share of such services as police and the court system. After all, the wealthiest have the most to protect, and also benefit the most from the rule of law, patent and corporate protections, a well-ordered society, and defence. We are all more comfortable sharing these burdens if we feel government services are efficiently provided. That might be one of the only things that unite Americans right now. Government must be run more efficiently. But, let’s get back to the notion of tax “savings”. We all recognize that our elected officials seem to separate raising of their revenue with spending. We rarely hear questions of where the money will come from if government expands spending. More than 200 years ago, perhaps the most brilliant amateur economist ever, David Ricardo asked in 1820 if war should be funded from government revenue or by issuing government bonds. Ricardo was a successful businessman who bought a seat in the British Parliament for £4,000 in 1818, equivalent to about $500,000 today. He entered parliament as an economic reformer. He’d hoped to translate his extensive business experience and his leadership over the London Stock Exchange to educate his newfound political colleagues. His Ricardian Equivalence concept was just one of many profound insights he made. Ricardo reasoned that if we were to raise the tax rate to pay for government spending, that would merely take away from household savings, or force households to borrow more to pay for the tax burden. Alternately, if government issues bonds to pay for spending, households will have to pay those loans back with interest. In other words, no matter how government pays for their spending, households are ultimately obliged to pay. If government faces the same interest rate as households, either forms of funding are equivalent. This works in reverse as well. If government spending is a decision separate from the tax rate, a reduction in the tax rate simply shifts the burden from now to the future, with interest. If I buy a car, I don’t save money by taking out a car loan. In fact, if I borrow, it will cost me more. And nor does anybody save money because of a tax rate reduction. Just like the old Midas Muffler commercials, you can pay me now or you can pay me (more) later. Of course, if a future does not exist beyond the next election cycle, our representatives seem quite willing to kick the can down the road with such giveaways as reductions in taxes that force government to ratchet up the national debt. Or, perhaps it is the taxpayer’s hope that they will die before the debt is ever repaid, and that our children and grandchildren will pay for our folly instead. Either scenario does not reflect well for humanity and economic responsibility. I might be asking too much to expect politicians and journalists to banish the word “saving” when discussing tax rates. Even used car dealers don’t argue with a straight face that financing a purchase instead of pay-as-you-go is somehow a savings. But, as you know, my hope springs eternal that economic education makes for better public policy. So, I won’t be sad. I’ll just laugh at the P.T. Barnum school of public policy. There’s a fool born every minute. Of course, we can't fool the markets though. The third shoe just dropped. Moody's did not follow the lead of Fitch and Standard and Poor's in lowering the rating for U.S. Treasury bonds, until now. For the first time, no longer is U.S. debt given the highest rating. The agencies explained that simplistic and self-serving economic policies, mounting debt, and political dysfunction meant that U.S. government borrowing no longer deserves the world's highest rating, an honor it held since 1919. Fortunately, Canada still maintains its AAA rating, as does ten other nations with borrowing considered less risky than that of the U.S.

( graph courtesy of https://polarportal.dk/en/sea-ice-and-icebergs/sea-ice-thickness-and-volume/ ) It’s been a few months since we had a climate change check-in. An overwhelming series of events have happened of late, to the point that life has overshadowed more existential issues. Yet, the climate continues to move in the same unfortunate direction. Part of our lack of attention is that we, and most of humanity, live in the Northern Hemisphere. It has been winter in most of the world lately (I don’t mean that metaphorically) for one simple reason. Most of the Earth’s land is in the Northern hemisphere, and hence that’s where most of us live. This geological fact explains why there are more humans in the northern half of the globe. On the other hand, there is more ocean in the Southern Hemisphere. This simple observation matters a lot. Land is green or brown, and it is insulated. These colors don’t absorb quite as much solar energy as does ocean blue, and the insulating effect of soil means that the sun’s energy absorbed doesn’t have very far to go. During the day, land surfaces warm, and in the dark of the evening, those high temperatures are at least partly radiated away into space. The atmosphere moderates this reradiation, with such greenhouse gases as water vapor, carbon dioxide, and methane holding in some of this radiated heat. In fact, if there was more land on Earth, this dynamic would cause greater fluctuations in temperature than we experience. The Earth is 70% ocean, though, and most of that is in the Southern Hemisphere. Why this quirk of geology and geophysics is so significant is that our oceans are powerful energy absorbers. Blue water is a very efficient heat absorber. Oceans are also excellent heat batteries. All this solar energy is warming up one huge blue mass, with this energy mixing for miles of ocean depth. It requires an awful lot more solar energy to raise the temperature of the ocean even a degree Fahrenheit. The fact that our oceans are warming is ominous. This is not an El Nino year so we should not expect significantly higher ocean temperatures, but nonetheless our oceans’ temperatures are the second highest ever, only slightly below the El Nino of last year, and far higher than any other year. We see this most profoundly in the Arctic. For most of the year the Arctic Ocean has been somewhat immune to the dynamics discussed above. Ice and snow cover its blue ocean for much of the year, and snow is an excellent insulator. Its white color is also an excellent reflector. These qualities of snow combine to produce the Albedo Effect. If this snow and ice cover diminishes, the Arctic Ocean, bathed with 24-hour sun for a few months of the year, has the potential to become a huge solar battery (no pun intended). Fortunately, this Albedo Effect has not taken off, until lately. Even though El Nino is well behind ice, nobody told the Arctic. In fact, it has been unusually warm this winter, and its ice cover has become historically shallow. Today’s graph shows that the volume of ice and snow on the Arctic Ocean this spring has never been lower. Not only does the arctic contain less ice than ever before by a very wide margin, but it is also more than a month ahead in melting. Get out your sailboats. I predict one will be able to easily sail ice-free to the North Pole this August or September (in case you are looking for good dates to go). Historically, the Arctic Ocean has been dominated by old ice. This is ice that never quite melts in the summer, and hence grows and grows every year. This summer will see the end to almost all the old ice, which mostly lingers along Canada’s farthest north coast. This means ocean ice will also be much thinner on average, more fragile, easier to melt away completely, and prone to really significant Albedo Effect warming as the Arctic Ocean will become almost entirely blue this summer. Then, in the Fall, this marginalized ocean will resist freezing over, which will allow the arctic to absorb more atmospheric and solar energy for longer. This is what sustainability scientists call a positive feedback loop. The warmer the arctic gets, the more receptive it becomes to even greater warming. Some might argue that such warming won’t affect any but a few Alaskans (hey, I resemble that remark). But, actually, it will profoundly affect us all. While a loss of ocean ice does not raise ocean levels for the same reason melting ice cubes don’t cause a glass to overflow, warmer arctic temperatures accelerates Greenland glacier melting. While resource developers may be licking their chops over prospects of a less iceclad Greenland, melting glaciers do raise ocean levels in places such as Miami and New York City. In addition, all that melting fresh water disrupts the Atlantic Meridional Overturning Circulation (AMOC) current that we call the Gulf Stream. The AMOC is driven by dense salty arctic water which is shuttled south, warmed, and then returns a lot of equatorial heat to the East Coast of North America and to Europe. More fresh water coming off Greenland clogs up this momentum and is on the verge of arresting a current that moderates East Coast temperatures and keeps Europe much warmer than it should be given that everything north of Paris, France is actually farther north than where most Canadians live. Europeans have been spared Canadian winters primarily due to the AMOC, but perhaps not for much longer. Some may prefer to avoid these inconvenient truths by noting that one warm winter in the arctic does not a catastrophe make. However, while days this non-El Nino year are not breaking records every day, this year is overall still the second warmest year on record - after last year. These observations are not random. That is why we call them trends. These warming trends are disturbing. We are reaching and exceeding a number of tipping points, beyond which trends accelerate, even if their root causes could be mitigated. We are probably well beyond mitigation. We may at least be able to slow the process down a bit, even if we can’t reverse it. That might buy us some time to figure out what to do. The problem is, though, that our dependence on fossil fuels that initiated this process is still waxing rather than waning. I can say quite definitively that our collective promises almost a decade ago to abate fossil fuel usage by 2030 will not be kept. Maybe a nation or two here or there might live up to their promises, but most won’t, and some have given up trying completely. I wish we did not live in such interesting times.

(graph courtesy of https://ssti.org/blog/overview-bachelors-and-stem-degrees-awarded-field-1970-2017) We live in a world that is certainly more complex than ever before, and, unfortunately, increasingly more divided. There’s a reason for the growing gap. Throughout my life, I've been inspired by science. In grade school I loved reading Encyclopedia Brown - The Boy Detective, who used science and logic to solve his cases. By the fifth or sixth grades I discovered Albert Einstein and Sigmund Freud. Already by then I had decided that someday I would be a scientist who would use logic and mathematics to understand the world around me. This was an era during the 1960s that was much simpler than the one we suffer today. We marveled at science, aspired to be engineers, and thought anything was possible and the future was bright. Our glorious optimism has since been replaced by a fear of new technologies such as Artificial Intelligence that may dramatically increase the risks we all face and reverse the fortunes of working-class families, while untolled riches are diverted to the wealthy. And, while scientists do not ultimately control what societies and economies do with their discoveries, science ambassadors increasingly suffer blame and hostility. Those who study sustainability and climate adaptation are accused of politics, and those who argue for such public health measures as vaccinations or disease prevention are fired or derided. The net result is that the virtues of a college education is waning and enrollment is declining, following its peak in 2010. At the same time, as today’s graph shows, most sciences, especially the hard sciences of physics and mathematics, have been wavering as a share of Science Technology, Engineering, and Mathematics (STEM) graduates. STEM overall as a share of college studies would also be declining if it were not for the incredible growth of computer science enrollment. Economics, also considered a STEM major, is likewise declining as a major, from its peak two decades ago. Meanwhile, students are increasingly studying law. These trends are telling and reflect a shift in societal values. We are abandoning economic and societal progress based on analytics, modeling, and discovery, and replacing the scientific method with the adversarial model that is the basis for the law and politics and, increasingly, the primary mode for human interaction. Science and economics are disciplines without equivocation. The scientific method does not rank discoveries or predictions based on popularity. I’ve met some arrogant scientists and policymakers before but that does not at all diminish their insights. Good science is not at all a popularity contest, and scientists do not make the ad-hominem attacks that have become de rigueur in politics. Theories are judged objectively. Among scientists, the only test is whether a theory is incorrect, and hence should be discarded, or correct for now, until a better theory comes along. It does not matter whether the purveyors of predictions are articulate or charismatic or not, or express popular views, or not. What only matters is the logic of one’s argument. Yet the logical studies are dwindling, based both on the number of graduates and their esteem in the public sphere. Replacing them are advocacy and the determination of relevancy by popular vote. We have moved into an era in which scientific discoveries have been degraded to mere opinions that have no more authority in our democracy than any other opinion, no matter how half-baked are the alternative viewpoints. Scientists have been reduced to one side of an adversarial debate, and public opinion now determines the truth. There are no more any truths based on scientific analysis, just more opinions, take them or leave them. That explains why the study of law continues to grow, and why elected officials are often lawyers. In science, superior science is relatively conclusive, but in courts of law and public opinion, science is merely persuasive. Unlike in science, right or wrong is less important than the powers of persuasion, strategy, and tactics in politics and the law. In these realms, it is win or lose, not correct or incorrect. The innocent with a poor defense can be convicted, the guilty can go free, and a populist politician can garner enough support to put any policy in place, regardless of whether policies make any analytic sense. Oh, and might makes right. Scientists draw conclusions, while justices issue opinions. In their winner-take-all world, participants are pacified as if the stakes are low. We increasingly focus on the drama rather than the outcome. Many people have given up on news broadcasts altogether to preserve their mental health. Public discourse is no longer a search for truth. It has become a game for some and war for others, rather than an effort to enhance our collective long-run interests. We seem to live in a world where we talk across each other rather than with each other, perhaps convinced that the stakes are low. If one loses one moment, well, maybe better luck next time. The media increasingly plays into this daytime soap opera in their failure to fully explore the ramifications of poor decisions. No longer is the populace educated. Instead, we are entertained. We don’t listen to the scientists. Instead, paraded around are advocates from both extremes of any special interest. We are left with the conclusion that either the side we like the most is right, or perhaps worse, the correct answer is precisely in the middle. I recall once when my daughter, who was about five years old at the time, was convinced to follow the lead of an older friend to go outside without permission. When I tracked them down outside, the older friend admitted it was her idea. Out of my misguided sense of equanimity, I punished them equally with identical time-outs. That was the easy Solomonic splitting of the baby that allowed me to avoid the hard work to actually determine right from wrong. I invoked careless justice, and I am reminded of that often, a quarter century later. The stakes are rarely so low as we pretend they are. We do the same with the dueling extremists paraded in front of us on many television analyses. We view their positions, carefully chosen because they are diametrically-opposed to each other, but neither we nor the journalists probe sufficiently to allow us to gain insights on who is correct. In our effort to be balanced, we forsake good science on climate change, health on vaccine strategies, and economics on tariffs when we don’t employ critical thinking to determine which position is correct. Such intellectual laziness, which often devolves into populism, makes for cynicism and poor decision-making. Our misguided equivocation when arguments on either side are not equally compelling has instead created divisiveness. Such lack of scientific probity affords us an easy out to side with those position consistent with our self-interest rather than society’s interest. Equanimity and inadequate rigor or analysis devolve into divisiveness and class warfare. We fall into camps rather than the interest of society as a whole. In the end, we all suffer as we disband good science and public policy that might threaten our increasingly simplistic view of a growingly complex world. Open discourse and open minds, as uncomfortable as they may be at times, is how learning and progress occurs. There is no learning in an echo chamber, and we can all benefit from better analytics, even if it makes my brain hurt at times. No pain, no gain. I personally prefer a more analytic world with a healthy respect for good science. But even good science can produce bad policy if politicians turn to populism. Democracy cannot determine scientific truths. Nor do scientists have ultimate control over how their discoveries are used or abused. For that we need a far healthier public discourse than we have suffered since the invention of - well - cable news and social media, perhaps. I long for the days when scientists were revered geniuses, not beleaguered technocrats. Give me Einstein over Orban any day.