Author: Joseph Gilligan

The Black Swan and the Emperor’s New Clothes

Why are “experts” unable to predict most of history’s greatest events?

Not too long ago, an emperor was so exceedingly fond of new clothes he spent his money on being well dressed. Two swindlers came to town pretending to be the world’s best weavers and claimed they developed a wardrobe so fine it was believed only the intelligent could see it. The Emperor debuted his new clothes to the town folk, who showered the Emperor with kind words. Out of fear of looking stupid, nobody confessed that the emperor was naked. However, a little child yelled, “He is nude!” Yet, the Emperor walked more boldly than ever, as his noblemen held high his fake cloak and train that weren’t there at all.

Today’s elite, intellectuals, the mainstream media, Hollywood, and academics, have been sold a new set of clothes that have left them blind and naked to world events. Through their “infallible” knowledge from faulty inductive reasoning, these experts have developed theories that have become a new secular theology. Their arguments of “settled science” mean the educated faithful must accept scientific theory, even though science should never consider anything settled. Scientific theories are meant to be met with a skeptical mind, not blind acceptance. The perceived “infallibility” of the social sciences is even worse. Economics, political theory, investing, and psychology are becoming increasingly formula based in order to impose a simple meaning to an intricate world. When these polished formulas meet the messy reality of the real world, they can cause damage and suffering to the rest of the population who do not live in the insulated cloisters of the elites super zip code towns. According to philosopher Nassim Taleb, when making decisions that affect all people, elites “mistake the map for the territory.” Their closed minded decisions cannot factor major historic shifts. Major historic changes such as the American Revolution, World War I, Martin Luther King Jr., and recently Brexit and Donald Trump’s presidential victory were not predicted by these elite. Taleb calls these improbable and disruptive events, “Black Swan events.”

The phrase “black swan” originates from Roman times where the elite thought of black swans like unicorns; they did not exist. When someone questioned the time’s popular science or political theory, people laughed and said, “Sure and black swans exist!” Then in 1697, a Dutch explorer discovered black swans in Australia which shocked the western world. The discovery wasn’t that significant except for the fact something believed to be a fantasy was now proven to exist. Essentially, Fake News wasn’t Fake News anymore.

Today, we live in an era of lost economic growth created by a Black Swan event called the 2008 Financial Crisis which is now nearly a decade old. All the “experts” at the Federal Reserve, U.S. Treasury, U.S. Congress, the White House, and the major Wall Street Banks were unable to predict the crisis. For years, Americans were told that homeownership was part of the American Dream. Government officials forced banks to loan to people with little or no money down, and Wall Street embraced it by developing financial innovations such as Mortgage Backed Securities and Collateralized Debt Obligations. These financial innovations are deemed risky today, but in 2007 these innovations were often given a AAA rating. AAA ratings are given only to the safest assets in the financial system. No one thought the housing crisis would occur because it had never occurred in American history. It seemed to be a safe bet.

Instead of learning a lesson from the Financial Crisis, the political elite passed the Dodd-Frank Act of 2010. Dodd Frank completely misunderstands the symptoms of the crisis. It was not Wall Street’s greed to take on risk that caused the crisis. Rather, it was the naked arrogance of Wall Street, credit agencies, and government regulators that created a risk assessment theory that wrongly assumed it mitigated any risk. Dodd-Frank replaces one faulty theory for another, and has destroyed small banks and small businesses that are the engine of the economy.

In the 1960s, the hippie generation proclaimed, “don’t trust anyone over 30.” Today, that generation has grown up to be a part of the elite. They think we must trust only their worldview, their theories, their formulas, and their news. For the class of 2017, my suggestion is to be skeptical and adaptable. We must look up from our books and boldly experience the world in its true rugged essence.

Joseph is a senior majoring in accounting and business administration with a minor in economics.

Let’s face it, Apple is cool, Starbucks is cool and Uber is cool. So is being a young hipster.  When we think of conservatives, we think of old-fashioned people clinging to dated ideas. When we think of liberal progressives, we think of forward thinking idealists who embrace the future. Yet it is becoming apparent the technology revolution is exposing progressive ideology as antiquated and unfit for today’s economy.

The progressive top down economic approach might have been cool during the 1930s when our great grandparents listened to fireside chats on their Zenith Stratosphere, a “compact” radio the size of a small book shelf.  Yet this sort of New Deal economic scheme is obsolete since it is unable to adjust to our flexible and dynamic economy that is now at our finger tips with our iPhones. This progressivism of impeding economic progress could not be more blatantly observed then through the attack on Uber and our generation’s “sharing economy.” The new sharing economy represents the democratizing of capitalism where we all have power to be entrepreneurs with little or no capital and without government licensing to stop our God given right of entry into the market place.      

It is clear to Hillary Clinton; the frontrunner of the progressives, that Uber and the sharing economy is a real threat to their political power.  In the sharing economy, the government loses control over collecting licensing fees and the power to regulate commerce in order to pick their own winners and losers.  In order to mask their power grab and revenue loss, the Progressive playbook is to issue concerns over public safety. However most industries the government regulates are subject to superficial audits for filings of registrations and payment of licenses fees. Rather most safety audits are self-administered by the company itself. Only when there is gross negligence in safety does the government shutdown operators.Companies like Uber ensure safety through interaction and rating of their customers of which driver is good or not. This system self corrects itself by punishing the bad drivers and rewarding the good drivers. Government does not do this.

Clinton feels Uber is not likely to “go away” but the general public should be “worried” because our new sharing economy is polarizing and creates disruption by “displacing or downgrading blue-collar jobs.”   Jobs would not disappear, but the progressive’s constituency might as these blue collar jobs would become jobs for entrepreneurs who may turn to the conservative party.    

The current regulated system benefits the rich taxicab owners and workers who are mostly older male drivers. The Uber sharing system is employing over 13 times more female workers and tends to hire many unemployed people and millennials with little job experience. Uber jobs are also great for those who like the flexibility in work hours. 

This summer Progressive New York Mayor, Bill DeBlasio, started a war with Uber but immediately called a temporary cease fire when Uber shot back by releasing a successful advertisement campaign. Two years ago when the mayor was running for office, the city taxicab associations poured money into his coffers for the promise to keep competition out of New York City.  The city had lost millions of dollars in medallion fees as Uber gained more market share. Although Uber is cheaper, some say provides a better service, and is more efficient than the current taxi system; the progressives have fought to keep Uber out. The irony is DeBlasio ran on a platform against income inequality. Uber can help win this war of income inequality by finding good paying jobs and providing cheaper means of transportation for the city’s diminishing middle class.  DeBlasio also ran a campaign against racism, yet the taxi businesses he supports has a long history of not picking up minorities in Manhattan and not servicing poor areas of the outer boroughs. Uber and sharing economy is filling these voids and picking up where many Yellow cabs will not. 

The progressive’s reactionary position on Uber and the sharing economy demonstrates how out of touch they are with our generation who want independence and economic freedom. Clinton noted the “so-called ‘gig’ economy” is “raising hard questions about workplace protections and what a good job will look like in the future.”  Technological advances, Clinton concluded, must not “determine our destiny.” Does our generation want to vote for a progressive that sounds more like an Amish elder? Do we want our destiny in the hands of government?

Thomas Jefferson once wrote that “Every government degenerates when trusted to the rulers. The people themselves are its only safe depositories.” I challenge all millennials to determine our destiny and not concede our sharing economy to the will and power of the Progressives in Washington.

The Disappearance of Ninety-Three Million American Workers and Business Startups.

“Who is John Galt?” and why is the US economy experiencing a large loss of job participation coupled with the lowest numbers of new business start-ups in decades?   John Galt was a fictional character in the novel Atlas Shrugged by Ayn Rand.  Rand emigrated from the Soviet Union in the 1920s and was tainted by her own experience in a communist system.  Rand demonstrates how a mixed economy ushered in by Roosevelt’s New Deal would become like the system she fled.

In Atlas Shrugged, John Galt is an inventor of a self-sustainable engine that can run without fuel.  Galt knows his new invention will either be confiscated by the government for the “good of society” (because no man should profit off of his ideas) or possibly the invention will be heavily regulated (because it would displace workers at engine factories and energy producers).

Rather than subjugate his invention to the will of the bureaucrats, Galt scraps it. Then he secretly plans a strike against the government with an unlikely group of people consisting of innovators, entrepreneurs, inventors, talented professors, upper management, and gifted college students.  Instead of demonstrating or rioting, Galt simply makes these people “shrug” by vanishing, while the government levies a war against the innovators by coercion of excessive taxes and regulations. These policies enable the bureaucrats to confiscate wealth, seize control of companies and compel innovators to give up their intellectual property rights.  As the government takes control of industries it becomes incapable of running complex organizations in a safe and efficient way. The economy collapses and society slips into anarchy.

Today, John Galt seems to lurk inside the Bureau of Labor Statistics (BLS) participation rate numbers; in the last decade we have seen disturbing job participation rates. People not participating in the labor force have hit a record 93 million high. The BLS has shown that men’s participation rate has dropped from 87% in 1948 to 70% in 2013. Women, who have made great strides in the participation rate since 1948, have also faced participation rate declines.  In 1999, the participation rate of women reached its high of 60% now it is 57%.

While the retirement of the baby boomers accounts for some participation losses, the vast majority of age appropriate workers go unaccounted for. Also blue-collar work has dropped significantly in the two decades, but the number of Americans collecting disability benefits due to injury has more than doubled since 1995.  According to Scott Winship of the Manhattan Institute, the government “passed new reforms in 1984 that in time made it much easier to receive SSDI (Social Security Disability) benefits and keep receiving them until retirement.”

Workers seem to disappear and, at an alarming rate, businesses do as well.  New business startups have dropped significantly due to burdensome regulations.  The number of young firms going under within the first few years has increased. Consequently, according to the U.S. Census Bureau, for the first time in 30 years, business failures now outnumber business startups. The federal government has many outdated and contradictory regulations that hurt the entrepreneurial spirit.

Jonathan Ortmans of the Kauffman Foundation noted that “as new regulations are enacted on top of existing rules, businesses are faced with the challenge of navigating an increasingly complex regulatory regime.” Complex taxes have weakened the entrepreneurial spirit also. Ortmans said, “Tax complexity and uncertainty, like regulatory complexity and uncertainty, divert the time, attention, and energy of entrepreneurs away from the essential tasks required to successfully launch and grow their businesses amount to mortal threats to new businesses, particularly in the critical early years.” Regulations stifle startups in banking. For instance, there has only been one new bank created since the passing of Dodd-Frank–a bank regulation bill–in 2010.

When our current political leaders, such as our President, tell entrepreneurs that “you didn’t build that, somebody else made that happen”, one must question if Ayn Rand’s writings were a warning.  Lawmakers and regulators should remember government is funded by tax revenues from workers, owners, and companies.  Not the other way around.  American innovation and industrial strength were built by entrepreneurs who carry the weight of American job expansion upon their shoulders.

We need to stop passing laws, regulations, fees and taxes that injure our enterprise system.  If we do not stop, we are doomed to a similar plot found on the pages of Atlas Shrugged.  In 1942, to encourage hard work for the war effort, the Westinghouse Corporation created a poster later called “Rosie the Riveter.”   In the illustration, Rosie rolls up her arm sleeves, flexes her muscles and says, “We Can Do It”. We need that can-do; we can build that, American spirit in our own vocation and in our political leadership once again.

As I write this January 1st 2015, I am truly optimistic about this year’s economic outlook and unlike many experts and analysts, I am bullish America is poised for steady growth in 2015.  Many economists cite a slowing economy due to low energy prices.  It is probable that energy companies will suffer, but since when did we care so much about paying more at the gas pump?  Other economists cite as the economy grows, the Federal Reserve will start raising interest rates which will hurt the financial sector. Since when did we start caring for cheap money given to Wall Street?  In the last decade our currency has been devalued but recent events point to the dollar making a strong rebound despite the last two administration’s fiscal policies. Economist Larry Kudlow calls it the rebirth of “King Dollar” which will strengthen our currency and create more bang for the buck on all goods, services, and aids for the middle class who have not seen wealth gains in nearly a decade.  With a new pro-growth 114th Congress, American politics will shift from creating welfare incentives towards creating private sector jobs, which will drive more money back into the economy though repatriation of capital, hiring, and stronger revenues.  A consistent and durable US job growth will increase hours worked, job mobility, raises, and better paying jobs.  I predict the US will strengthen and the economy will grow a steady 3.3% because of low energy, a new political climate, a growing job market, and the rebirth of “King Dollar”.

Let’s start with lower gas prices which began their dramatic descent in the second half of 2014.  The American innovative fracking revolution has led to a worldwide oil supply shock.  The oversupply of oil will continue in 2015 because the International Energy Agency projects that the US, now the world’s largest oil producer, will produce an additional 680,000 barrels next year.  However, the “bears” on Wall Street see the sky falling as lower energy prices will also kill America’s heavily leveraged energy industry and the financial firms that have loaned to them.  Yet most energy corporations are secured in fixed long term contracts and also have hedged against lower energy prices through the futures market.  Economist Larry Kudlow is emphatic that “lower oil prices are unambiguously good for the US economy.”  The extra discretionary income leads to more business saving and consumer spending, quite possibly $1500 in every working person’s pocket at the gas pump.

A second good indicator for me is the strengthening of the US dollar.  We have seen this before in the 1980s and 1990s leading to lower commodity prices such as gold.   The increase in the value of the dollar combined with steady U.S. economic growth as compared to the sluggish economies in the European Union, Japan and China makes the US attractive to foreign investors.  According to Cliff Droke of Kitco, the 1980s and 1990s was a “time the U.S. economy was white hot, stock prices were on a relentless upward march, energy prices were low and the U.S. was the undisputed leader in attracting foreign capital inflows.”  For the American middle class, a strong dollar couldn’t be more welcomed because a strong dollar is one of the best forms of stimulus. According to David Howden of the Von Mises Institute, “Consumers can continue to enjoy cheap access to foreign-made goods, and export-based industries can maintain their stature by shifting their cost base to take advantage of cheaper foreign inputs.”

With the 114th Congress, a new era of pro-growth legislation will be brought.  President Obama can choose the same route as President Clinton did and work with a Republican Congress with the same economic results seen in the 1990s.  As the majority party, the Republicans will first pass the long awaited Keystone XL pipeline bringing an influx of oil from Canada and the North Dakota’s Bakken oil fields.  Congress will also bring tax cuts to both the individual tax code and the corporate tax code, which will help to create more jobs as well as repeal the odious tax on money earned outside of the US which will could repatriate $2 trillion dollars so that capital is invested here in the US instead of abroad.  Congress will also try to severely weaken the negative effects of the Dodd-Frank bill which has crippled our small community banks and small business lending.  Legislation will try to clip parts of the Affordable Care Act (Obamacare) which is stifling job creation like a wet blanket does to a fire.  The intent of the new bills will be to push back deadlines and change the definition of a full time worker from 30 hours a week defined by the ACA to the traditional 40 hours.  As it stands right now, many companies have simply cut part time jobs or outsourced work so that they avoid benefits they cannot afford.

My only disappointment for 2015 is that I believe our economy could be growing at 5.5% to 7.5% as witnessed in the 1920s, 1960s, 1980s and 1990s.  However, we lack the key ingredients characterized by those decades such as pro-growth-political executive leadership, a strong suspicion of large institutions, deregulation, a tax code driven by incentives to work- save- risk, and an electorate with a strong reverence for liberty, individualism, and with a slight hostility towards taxation.

Possibly 2014 was just a 1979 redux and a very strong economy and political resolve is still just a few years away.  It is my sincere hope in 2015 America can do even better than my baseline economic recovery predictions of 3.3% growth. Our nation has the power to break this 1970s style economic malaise and the crisis of confidence we find our exceptional country in once again. Every January 1st, we make New Year’s resolutions because we believe we can change ourselves.  As a nation, our economic and political resolution should reflect the sentiments of Thomas Paine that, “we all have the power to begin the world again.”  May you have a healthy and prosperous New Year.

“NO Gas Here!” said printed signs hung at gas stations nationwide in 1973.  America faced a crippling oil crisis brought on by the Arab Embargo in response to the Yom Kippur War.  Imports of oil accounted for 35% of U.S. consumption when President Nixon declared America would be energy independent in a decade.  So did every president after him.  Unfortunately by 2005, America was importing 60% of its oil.

But could President Nixon’s prediction of energy independence, albeit a bit delayed, become reality? The answer may astound you. Last year Saudi billionaire Prince Alwaleed bin Talal spoke of fears of America’s energy and shale production as “an inevitable threat [to nations] entirely dependent on oil [exports],” and stated that “this reality is becoming a source of concern for all.”  In the last nine years, American ingenuity has reversed fifty years of importing billions of dollars of energy and has sparked an energy revolution in oil, natural gas, and coal, which was not possible just a decade ago.  In 1972, Wallace Pratt, a prophetic geologist stated “oil is in the minds of men.” This year America will become the biggest oil producer in the world surpassing Saudi Arabia and Russia. America continues to lead in the production of coal and natural gas and has been developing and maximizing alternative energies—wind, nuclear, solar, biofuels—and strengthening the conservation of energy with new innovations in insulation and fuel efficiency.  America now produces enough energy to meet 84% of its own demand and could meet 100% by the end of the decade.

U.S. energy companies have known about trapped gas in shale and tar sands since the 1940’s, but recovery was too expensive and the production yields were too low. Recent technology such as horizontal drilling and advanced geological planning have made hydraulic fracturing, herein known as fracking, less burdensome to manage and the yields have been produced on a grand scale all across the nation. The Marcellus Formation – a shale range – found under Western New York, Pennsylvania and West Virginia is producing 2 million gallons a day which is more than some individual nations in the Organization of the Petroleum Exporting Countries (OPEC). Unfortunately, Western New York gas production sits idle due to unsubstantiated safety concerns for drinking water as Pennsylvania border towns become boomtowns for jobs. The New York state moratorium continues in spite of a landmark study by the Environmental Protection Agency in 2004 which concluded fracking posed no threat to underground drinking water supplies.

The Green River Formation in Colorado is estimated to have three times more recoverable oil than Saudi Arabia’s top oil field according to energy expert Daniel Yergin.  Shale gas is expected to become 50% of America’s natural gas production by 2035 compared to only a 1% market share in 2000.  Energy experts consider the Gulf of Mexico part of the “Golden Triangle” of offshore drilling which extends to Brazil and Western Africa.  The British Petroleum deepwater spill slowed growth in the region, but “research confirmed that the microbes had eliminated much of the oil and gas that had leaked from the well,” according to PBS. Today, investment and drilling in the Gulf has rebounded.  WoodMac Energy forecasts more than $20 billion to be spent on drilling development wells alone in 2015 in the Gulf.  The U.S. Energy Department predicts that by 2035, offshore production will increase by over 80%.  The offshore renaissance is expected to account for a third of the U.S. budget and half a million workers by 2020 according to James Burgess of the energy news website Oil Price.

The lack of America’s external demand for energy has led to a shock around the world, threatening balance of power not only in Saudi Arabia, but especially in Russia. Energy strategist Daniel Yergin wrote that America’s rise as an energy producer “has a wide geopolitical impact, for it upsets a four decade old economic and political balance that has proved so durable that it even survived the upheaval that was set in motion from the collapse of the Soviet Union.”  Nearly half of Russia’s revenue comes from energy exports, so a reduction in price and a loss of a monopoly on Europe will hurt Russia.  Senator John McCain recently called Russia merely “a gas station masquerading as a country.” Energy has played a big role in Russia’s advances in Ukraine as these countries have had several energy disputes in the last decade.

Because of cheap domestic energy we could see another gilded age in manufacturing.  PricewaterhouseCoopers estimates over one million manufacturing jobs could be created in a decade due to low energy prices. The Shale Revolution has allowed the U.S. to become very competitive.  According to Bloomberg Business, “the difference in manufacturing costs between China and the U.S. has narrowed to such a degree that it’s almost negligible.” As Chinese wages increase and energy demand increases, China’s global economic and military ambitions will be thwarted by its dependence on coal, with America sitting on the world’s largest reserves.

In 1958, in a seminal moment, America’s energy dependence and geopolitical decisions were exposed when Nixon’s motorcade was chased out of Venezuela by a rock throwing mob.  Today, the Shale and Energy Revolution will propel an American renaissance that will not only secure our national interests but bring back manufacturing and jobs.  We must demand from our public officials to open up more opportunities for fracking locally in Western NY and nationally on federal lands.  If we don’t impede our own energy potential, America will not only be yesterday’s superpower, it will be tomorrow’s superpower.