Why so many banks?

Inhabitants of downtown Everett (Wash.) cannot escape the proliferation of banks, which dominate entire intersections. Instead of establishments providing retail goods and services, we have financial institutions on nearly every corner. (I wrote about this phenomenon in a previous post.)

A few weeks ago I sat down with an economist. I had walked past several banks on my way to the restaurant. So I posed this question: Isn’t banking a racket? With no pause, he replied quickly in the affirmative, adding “the fractional reserve system.”

As the linked article describes, banks are required to keep only a fraction of the dollars they lend in reserve. The article gives an example of a person depositing $100,000 in a bank. Assuming a 10-percent reserve requirement, the bank can then lend out $90,000. In turn, the lent money is deposited in the same or another bank—and so on.

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Did you catch that last figure? It’s $1 million!

Now you, dear depositor, realize paltry interest on your money. But your bank extracts huge returns.

The lesson here may be obvious. If you want to get rich quick, start a bank.

Labor speaks

The former head of the British Labour Party, Ed Miliband, offers a few thoughts on inequality for the London Review of Books. He cites statistics and studies, including those of the International Monetary Fund and the Organization of Economic Cooperation and Development, which confirm what many of us feel: that the rich are growing richer and the Rest of Us are either treading water or sinking fast.

But one takeaway from the article, among many, intrigues. Inequality is not just bad for those who miss out on economic prosperity. The entire economy itself struggles when so many have so little while a relative few have so much.

One solution is redistribution. Impose more taxes on the wealthy then transfer benefits to those in need. However, this will not cut it, argues Miliband. Citing Joseph Stiglitz, there is something fundamentally wrong in a system that lavishly rewards a small minority as it denies economic security for everyone else. Raising tax rates will get us only so far. There must be pre-distribution initiatives. Miliband:

…tackling inequality demands that we act on all fronts. When I was the leader of the Labour Party, I said that we needed to talk not just about redistribution but also about ‘predistribution’. The word is ugly, but the idea was right. You can only do so much with tax and transfers: the more wildly imbalanced the economy and earnings, the harder it is, especially in a globalised economy, to do anything about inequality. And the more unbalanced the initial distribution of income, the harder it will be to win political support for progressive taxation, given the strength of the forces opposed to change. The living wage and the introduction of proper rules on executive pay are at least as important as rates of income tax. We need, too, a much more open discussion about the top 1 per cent. We should acknowledge the contribution they make as well as the burden they place on everyone else. The entrepreneurs, inventors and software designers who reap big rewards often make a big contribution to the creation and sustaining of jobs, but what balance should be struck between how much they are rewarded – and how much more than others in their companies – and how much they are taxed? Until quite recently, people would ask why it mattered that those at the top were doing so well, as long as everyone else was prospering too. But it can’t any longer be denied that the scale of the rewards reaped by the 1 per cent has the effect of denying others. The scale of the effect is, of course, particularly visible in the London housing market, with wealthy buyers, many of them from outside the UK, pushing up prices and putting London out of reach for a great many people.

Miliband begins his essay mentioning Seattle’s own Nick Hanauer. He is wealthy, though he attributes his wealth to luck, picking the right parents, and both “consequences” and “timing.” Hanauer visibly and financially supports the growing efforts to increase the minimum wage, a pre-distributional strategy, because he knows that his position has little to do with his own efforts. This attitude places him outside prevailing sentiments.

We Americans persistently cling to the fiction that we, too, can become the next Bill Gates, if only we work hard and smart. Against all evidence to the contrary, we believe that we live in a land of upward social mobility, and that whether we climb or fall has everything to do with us, as individuals, than with good fortune and good parentage. Such beliefs prevent us from seeing a much starker reality: the decks are stacked against the Rest of Us.

As much as we, or certainly I, loathe politics, we are forced to accept the truism that only through political action, at whatever level, can we arrest rising inequality and promote the Rest of Us. What a difficult challenge, to be sure. I regret that we’re not up to the task. Whether or not I’m being overly pessimistic, the task begins with opening our eyes.

Confounding Apple

So, Apple just recorded the largest quarterly profit of any company in history. It realized $18.4 billion profit on $76 billion of revenues. That is, it made a quarter of net income on every dollar of sales. Wall Street’s reaction? Meh. Here’s a breakdown of top technology companies, comparing third quarter 2015 profits:

 

net income tech 2015 3rd qtr

Now, I always thought that the measure of a company, in financial terms, was how much money it makes. Apple makes more than anyone else, and it’s not even close. (Also, keep in mind that Samsung, number two in the above chart, seems to sell everything, from televisions to toys, while Apple produces only a few different devices.) Yet, investors focused on what’s next with the company, as they always do. So, they bid the share price down. But since Apple outperforms every other company by a wide margin, it’s really competing against itself on Wall Street. It is a stock market victim of its own success.

Oh, and I must chuckle at “analyst” projections. Self-described experts study tea leaves to  divine sales figures. Then if Apple exceeds “expectations,” the stock price rises. If it dips below, shares tumble. Nevertheless, such projections are almost always wrong, since they are mere guesses based on tea.

John Maynard Keynes thought of stock markets as beauty pageants. It was not who you thought would win the contest, but who you thought others thought would win. This notion helps explain the irrational herd instinct that fuels money matters.

I attach zero credibility to people who bet other people’s money, which fairly describes Wall Street, don’t you think? And, given the financial collapse of 2008, why should anyone believe in these guys? Given the volatility of the market, it seems that the experts themselves have little faith in what they’re doing.

Case in point. Before Amazon announced its 4th quarter financial numbers this afternoon, the stock rose by nearly nine percent. Then came the figures, and they were not pretty. In after-hour trading, the share price fell by nearly 15 percent.

One more thing. Google—or should we say ‘Alphabet’?—is poised to overtake Apple as the world’s largest company by market cap. And how does Google make its money? Selling all those goddam ads on websites. Do no evil, my ass.

The smoke of whistleblowing

Aided and abetted by the Everett Herald‘s thirst for sensation, a PUD employee alleged crimes and misdemeanors against current and former employees of the utility. The whistleblower cast a wide net, seeking to also entrap state government officials and private firms. Despite the headlines and smoke, investigators have detected no fires, exonerating the PUD and the Department of Commerce of wrongdoing, save for an extremely minor infraction of a utility directive (“appearance of conflict”).

Lost in the smoke and headlines is a very remarkable story, some really good news. I’m talking about energy storage technology, what I’ve called “the holy grail” of distribution utilities in search of a post-carbon future.

We at the PUD take climate change seriously. How could we not, given the overwhelming evidence of global warming and its effects? Fortunately, over 80 percent of the electricity PUD customers consume is in the form of hydroelectric power, a non-polluting, renewable resource.

Although the PUD had committed to acquiring all cost-effective conservation and securing only green energy to fill the utility’s supply portfolio before voters approved Initiative 937, which mandated such strategy for the state’s larger utilities, PUD staff and commission realized the challenge of relying on intermittent resources. After all, the sun doesn’t always shine and the wind often blows when the utility needs it least.

What to do? How could the PUD more effectively use wind, solar, and hydro resources to meed the electricity needs of its customers? The answer, utility officials believe, lies in energy storage. The trick is to store the output of intermittent generation then release it into the grid when needed.

After investigating pumped-hydro storage possibilities and other options (e.g., compressed air), the PUD determined that a more promising and least costly alternative existed in the form of batteries. Batteries, of course, are plentiful, so the technology is mature and widespread. However, no one had seriously explored using batteries on a utility-sized scale.

As it happened, the PUD’s then-general manager, Steve Klein, an electrical engineer in his own right, shared a passion for new technology with David Kaplan, a computer scientist with degrees from Berkeley and Stanford. Kaplan had already researched potential uses of battery storage. Why not electric utilities?

But Kaplan lacked the working knowledge of electric grids. How would batteries fit into the day-to-day, even second-to-second, operations of electricity distribution?

Kaplan, Klein, and others recognized two challenges. The first was to develop the necessary software to automate the storage and discharge of electricity using batteries. The second was to establish industry-wide standards to augment plug-and-play components.

Klein, after numerous conversations with Kaplan, imagined a win-win proposition: hire Kaplan to consult with the utility on its needs-improvement technology architecture, for which Kaplan was extremely qualified. While at the PUD, Kaplan would also gain that working knowledge of electric grids and how batteries could be incorporated. Meanwhile, Kaplan developed algorithms, the necessary automation software.

The cooperative efforts yielded MESA, the Modular Energy Storage Architecture standards. As of this writing, over 20 entities, including the nation’s largest electric utility, Duke Energy, have joined (see chart below). The PUD has already installed large batteries at substations. Kaplan’s software provides the crucial control interface. Vendors of component products (e.g., Alstom and Parker) are working with other utilities in Puget Sound and across the country.

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Perhaps the most significant entrant to battery storage technology is Tesla. The company has developed both utility-sized and home-sized battery solutions, Powerpack and Powerwall, respectively. Tesla has driven the cost of batteries down, down, and down. Here’s a slide from a recent presentation to the PUD board of commissioners on battery costs:

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Those of us in the utility business (I’m a PUD board member) are understandably excited about battery storage. It should not surprise anyone that it has become the magnet attracting energy nerds from all over. Puget Sound, in particular the PUD, begins as ground zero. Governor Inslee is excited about the technology, and so are many members of the state legislature. It’s understandable that green-energy aficionados share a passion and commitment to pursuing “the holy grail.”

I think it terribly unfortunate that this good-news story has been overshadowed by spurious allegations that have been magnified by a scandal-mongering press. Reputations have been besmirched, without cause or justification.

Perhaps one day the local paper of record will find a way to expose the PUD’s battery-storage initiative—in a good way. The utility and its employees deserve as much.

Inflation ghosts, Republicans, and depression

Many economists, who should know better, have predicted rising, if not runaway, inflation since the Great Recession. They sounded the alarms with Obama’s stimulus package, the Feds keeping rates near zero, and the expansion of the money supply. Yet, despite their fear-mongering, the consumer price index has barely budged from year to year.

Given the steady drumbeat by inflationistas the Federal Reserve finally capitulated late last year, raising interest rates. The Fed did so because its committee members believed that unemployment had sufficiently decreased while economic output continued to rise, albeit modestly. Several prominent economists disagreed with the Fed’s action, including Paul Krugman, Brad DeLong, and Larry Summers. They believe that low inflation, depressed wages, declining labor force participation rates, and a sluggish GDP argue against raising interest rates.

Let’s look at two metrics: annual change in CPI and the civilian labor force participation rate.

cpi and labor force participation

Labor force participation rates rose steadily from the mid-60s to the end of Bill Clinton’s presidential terms. Inflation also rose, until peaking in 1980. The rate then fell sharply, and has remained far below five percent from 1990 onwards, even landing in negative territory during the Great Recession.

Republican orthodoxy views inflation as Enemy Number One. Conservative ideology equates the federal budget with those of individual households. Debt is therefore bad, regardless of circumstances; governments should never spend more than they receive. This stubbornness prevents a Keynesian solution, which is to stimulate consumer demand via government expenditures.

Way back in the 1930s Keynes argued that in a depressed economy only the central government could be effective. Private industry will not invest if consumers lack the means to buy goods and services. For Keynes, the more depressed the economy the greater the stimulus warranted. As it happened following the Great Depression, it took a world war and its associated massive federal spending to finally spur the economy.

Some economists hold that the central government should have acted more robustly in response to the Great Recession. While almost all economists agree that the stimulus package prevented worse damage, it was hardly sufficient to restore economic vitality. That so many people are still out of work, underemployed, or trying to live on stagnant wages attests to fundamental problems with the economy, which continues to sputter.

real gdp since 1980

As for government spending, there has been no better time than over the last decade to invest in public goods, those things that the private sector can’t or won’t provide. Among these are transportation and common schools. The tragedy of such neglect is that those investments would have enabled the economy to grow faster and sustainably for decades to come.

transportation spending

We note the effect of the stimulus package, that blip in 2012. But then spending contracted. The added shame is that during this time from 2008 money has been very cheap, given the near-zero interest rates. Also, for every dollar the government spends, there is a great-than-one return on the investment (Keynesian multiplier).

I’ve said previously that the Republican Party is injurious to all of us. It stands in the way of progress, its defining characteristic. And that progress would be improved lives for all and not just the top one percent.

This vision of a better world is not simply pie-in-the-sky thinking. We know that other countries have ventured much closer to realizing more equitable and just societies than America’s.

Democratic establishment worries

I’ve always believed that Bill Clinton irreparably damaged the Democratic Party by taking it further and further to the right, gradually submerging those ideals and policies that were the stuff of the New Deal and progressivism. I have in mind “ending welfare as we know it,” NAFTA, the repeal of Glass-Steagall, and the formal embrace of Wall Street at the expense of the Rest of Us. His personal peccadilloes cemented his notoriety, in my view.

Then there was Hillary, the good wife throughout all his indiscretions with a lot of ‘splainin’ to do. That she stood by her man suggests that political ambition and shared principles, such as they are, were deemed more important than personal respectability.

Yet, despite this past, Ms. Clinton assuredly assumed the mantle of frontrunner for the Democratic nomination. She had the credentials and the experience.

Then came Bernie.

Mr. Sanders beckons us to wash away Clintonism and recall, if not resume, the New Deal. He insists that we can have a decent society in the manner of Scandinavia, with universal health care, free education, minimal poverty, more economic equality, a diminished financial sector, and a government that works. Put away cynicism and burnish idealism.

And people like what they hear, judging by the polls in Iowa and New Hampshire, which find him leading Ms. Clinton.

Now the Democratic establishment is worried. We know this because Clinton allies and operatives have sounded the negativity horn against Mr. Sanders, even stooping to red-baiting and hints of racism.

Corey Robin, writing for Crooked Timber, reminds us of the Clintons, past and present. They are not to be trusted and we should not be misled by their words. I encourage you to read his piece.

As for the red-baiting, consider this article in The Guardian.

The dossier, prepared by opponents of Sanders and passed on to the Guardian by a source who would only agree to be identified as “a Democrat”, alleges that Sanders “sympathized with the USSR during the Cold War” because he went on a trip there to visit a twinned city while he was mayor of Burlington.

Similar “associations with communism” in Cuba are catalogued alongside a list of quotes about countries ranging from China to Nicaragua in a way that supporters regard as bordering on the McCarthyite rather than fairly reflecting his views.

Sanders has insisted on many occasions this year that his own philosophy of democratic socialism is very different from that of authoritarian regimes, and much more in keeping with the tradition of American reformers such as Franklin D Roosevelt.

Nevertheless, should Ms. Clinton defeat Mr. Sanders, I will vote in her favor against any of the sordid Republican bunch.

Super intelligence and morality

Philosophers and scientists have long posited an artificial intelligence created by humans. The philosophers, more so than the scientists, perhaps, wonder if such an intelligence would necessarily be moral. Would it be kind and merciful or, like HAL in 2001, turn on the humans it was thought to protect?

It seems to me that this question has its origins in the heuristic nature of the algorithms developed by engineers or computer scientists. That is, the robot, shall we say, is programmed to discover and learn on its own.

We may recall Walt Disney’s illustrations of the Sorcerer’s Apprentice in the movie Fantasia. The apprentice is played by Mickey Mouse. (Who else?) He has observed the sorcerer performing magic. Mickey surmises that the magic resides in the sorcerer’s hat. In the sorcerer’s absence Mickey dons the hat, moves his arms, and, as if by magic, the mops and brooms clean the rooms, a task assigned to Mickey, the apprentice. Of course, things get out of hand, and before long the rooms flood and the apprentice comes close to drowning—until the sorcerer returns and puts a halt to Mickey’s shenanigans. There is clearly more to the sorcerer’s magic than his hat.

A Swedish philosopher, Nick Bostrom, posits a paper-clip maximizing robot, in his book Superintelligence: Paths, Dangers, Strategies. From the Wikipedia link:

Regardless of the initial timescale, once human-level machine intelligence is developed, a “superintelligent” system that “greatly exceeds the cognitive performance of humans in virtually all domains of interest” would follow surprisingly quickly, possibly even instantaneously. Such a superintelligence would be difficult to control or restrain.

Bostrom imagines an AI-robot programmed to build paper clips. Indeed, it is programmed to make as many paper clips as possible. It will need raw material. After exhausting readily available sources, it starts transforming human bodies into, well, paper clips. Oops.

But we need not stop with paper clips. Bostrom also suggested the possibility that we humans and everything around us are really the products of a computer simulation.

We know that computational power has grown exponentially (Moore’s Law) since the first computers. While scientists argue about physical limitations to unending growth (e.g., the materials used in integrated circuits constrain further increases), we can posit an infinite expansion of computing power, for the sake of argument.

How, then, can we be certain that we are not merely 1’s and 0’s in an incredibly elaborate computer simulation? I think of the strides made in computer-generated-imaging on movie and television screens. The stuff looks very real, so much so that the line between actors and their surroundings disappears.

In attempting to explain evolution and natural selection Richard Dawkins created a simple software program consisting of a few premises, rules, and randomness. After several cycles, the computer-generated structure becomes increasingly elaborate, expanding incrementally according to the basic algorithms.

Our universe is over a dozen billion years old. It began, we’ll assume, with a few initial conditions, gradually, or perhaps in fits and starts, yielding our current situation: an earth with several billion people, thousands of cities, electricity, scores of scientists working on artificial intelligence, and wars, famine, pestilence and widespread cruelty. There is no good reason to believe that the universe itself is inherently moral. It just is.

Or maybe the universe began with a video game for someone’s entertainment. If so, given humankind’s abominable acts, that super programmer did not include a code of ethics to limit our behaviors. He, she, or it was likely a masochist.

Whether we are real or simulated, the evidence seems clear: morality was not part of the equation.