Ray Dalio on reforming capitalism

This Ray Dalio piece on the problems and solutions for modern capitalism is an important piece of insight. It builds on his work on inequality and populism.

It is important as (1) he is a billionaire with considerable weight and clout

(2) it highlights the problems of both growing the (economic) pie and splitting the pie fairly

(Me: He omits natural/environmental capital in his primary analysis as a weakness)

(3) he observes social democratic/socialism ideas are better at (or at least focused on) pie splitting but free market type ideas have been better at (or at least focused on) pie growing

He pulls this together with a few other observations (amongst others) that

• the left and right have never been further apart since the 1930s - they are entrenched and polarised

• Technology (and other forces of capitalism) is continuing to disproportionately benefit the “haves”/rich ie owners of capital, automation will continue to displace workers

• The US and China are at loggerheads with unknown outcomes

He has strong focus on the education inequality in the US amongst other insightful data (particularly on the bottom 60% and other data on the poor) and some insightful data on food poverty

(The childhood poverty rate in the US is now 17.5% and has not meaningfully improved for decades. In the US in 2017, around 17% of children lived in food-insecure homes where at least one family member was unable to acquire adequate food due to insufficient money or other resources.Unicef reports that the US is worse than average in the percent of children living in a food-insecure household (with the US faring worse than Poland, Greece, and Chile).

He then draws the important insight that it is systems problem:

“Contrary to what populists of the left and populists of the right are saying, these unacceptable outcomes aren’t due to either a) evil rich people doing bad things to poor people or b) lazy poor people and bureaucratic inefficiencies, as much as they are due to how the capitalist system is now working.”

He sketches out some solutions to work on including:

-i  Leadership from the top

-ii  Bipartisan working groups (ie left and right together)

-iii Co-ordination of fiscal and monetary policy together

-iv Clear metrics for success and accountability

-v  Redistribution of resources that will improve both the well-beings and the productivities of the vast majority of people.

And within that a focus on good “double bottom line outcomes”

Ie outcomes that have good economic return and good social return

(for instance education fits that well)

(Again he misses out environment unfortunately, although many double bottom line ideas could be triple bottom line as well)

He proposes:

Create private-public partnerships (including governments, philanthropists, and companies) that would jointly vet and invest in double bottom line projects that would be judged on the basis of their social and economic performance results relative to clear metrics. That would both increase the funding for and the quality of projects because people who have to put their own money on the line would be responsible for them.

Raise money in ways that both improve conditions and improve the economy’s productivity by taking into consideration the all-in costs for the society (e.g., I’d tax pollution and various causes of bad health that have sizable economic costs for the society).

Raise more from the top via taxes that would be engineered to not have disruptive effects on productivity and that would be earmarked to help those in the middle and the bottom primarily in ways that also improve the economy’s overall level of productivity, so that the spending on these programs is largely paid for by the cost savings and income improvements that they create. Having said that, I also believe that the society has to establish minimum standards of healthcare and education that are provided to those who are unable to take care of themselves.

While you can argue about the diagnosis and cause of the problem, the data is insightful, and the solutions are food for thought.

Unfortunately, I am fairly pessimistic about most of those solutions given what I can see about the politics of the UK and US (and others) although some countries may fare better (eg New Zealand which I feel is working on i and iv)

But there are elements of v. I can see working although this may only come through if our leaders can take a longer view and whole-view lens (for instance, increasing educational and social resources in areas of poverty brings long term returns but is short term costly and painful; carbon taxes are hard to fall progressively on society)).

And in theory there’s no reason why i - iv couldn’t happen but it would take a moment or time of social cohesion and cultural change to get there. We don’t have that. But it could happen as I talk about in my performance-lecture Thinking Bigly.

Full Essay by Dalio here:

https://www.economicprinciples.org/Why-and-How-Capitalism-Needs-To-Be-Reformed/

A blog on his populism work:

https://www.thendobetter.com/investing/2019/1/5/ray-dalio-on-cycles-populism-trade-wars

https://www.thendobetter.com/investing/2017/8/21/divides

Jobs, Stories of energy transition

They Grew Up Around Fossil Fuels.
Now, Their Jobs Are in Renewables. / NY times 

“Chris Riley comes from a coal town and a coal family, but he founded a company that could hasten coal’s decline. Lee Van Horn, whose father worked underground in the mines, spends some days more than 300 feet in the air atop a wind turbine. They, and the other people in this story, represent a shift, not just in power generation but in generations of workers as well.

They come from places where fossil fuels like coal provided lifelong employment for their parents, grandparents and neighbors. They found a different path, but not necessarily out of a deep environmental commitment. In America today there is more employment in wind and solar power than in mining and burning coal. And a job’s a job....”

Me: fascinating accounts of how the economics of wind and solar and the direction of energy markets is convincing a new generation to work in wind and solar over coal and oil  

link here: 

 https://www.nytimes.com/interactive/2019/03/26/climate/wind-solar-energy-workers.html

IQ not useful for much...

Nassim Taleb criticises most IQ research.  

““IQ” is a stale test meant to measure mental capacity but in fact mostly measures extreme unintelligence (learning difficulties), as well as, to a lesser extent (with a lot of noise), a form of intelligence, stripped of 2nd order effects.

Designed for learning disabilities, and given that it is not too needed there [ ] it ends up selecting for exam-takers, paper shufflers … The concept is poorly thought out mathematically by the field (commits a severe flaw in correlation under fat tails; fails to properly deal with dimensionality; treats the mind as an instrument not a complex system), and seems to be promoted by

• racists/eugenists…

• psychometrics peddlers looking for suckers …

• It is at the bottom an immoral measure that, while not working, can put people (and, worse, groups) in boxes for the rest of their lives.

• There is no significant correlation (or any robust statistical association) between IQ and hard measures such as wealth. Most “achievements” linked to IQ are measured in circular stuff s.a. bureaucratic or academic success, things for test takers and salary earners in structured jobs that resemble the tests. 

• Some argue that IQ measures intellectual capacity — real world results come from, in addition, “wisdom” or patience, or “conscientiousness”, or decision-making or something of the sort. No. It does not even measure intellectual capacity/mental powers.

The whole discourse is worth reading if you are interested in the area.

In summary: IQ is useful to pick up learning disabilities - although there are many other ways to do that. It is not helpful for addressing many real world problems and challenges. On top of that, it is abused by racists making it problematic.

The full discourse by Taleb linked here.

On climate change risks: https://www.thendobetter.com/investing/2017/9/18/nassim-taleb-climate-change-risk

Taleb commencement address. And on the ethics of stuffing.

Small teams vs large teams and innovation effects

Large teams develop and small teams disrupt science and technology |  Nature

Analyses of the output produced by large versus small teams of researchers and innovators demonstrate that their work differs systematically in the extent to which it disrupts or develops existing science and technology.

Me: Large teams do more incremental innovation. Small teams do more break-through innovations (which last further into the future, when it works…). Ties in anecdotally to what we know about large company innovation vs smaller tech and biotech innovation (and the high risk, high reward nature of smaller teams / companies). But you need both for a healthy innovation ecosystem.  It seems to be that small teams (less than 8, and say, solo or duo teams) look at older, promising ideas that weren’t developed and take those forward, but also that combining ideas from several fields is effective between 1 and 8 team members, but then falls.

Nature letter here: https://www.nature.com/articles/s41586-019-0941-9

Full paper accessible here:  https://arxiv.org/ftp/arxiv/papers/1709/1709.02445.pdf

Univeral Basic Income, Finland experiment

A trio of articles looking at the Universal Basic Income idea and recent trial in Finland. Plus link to the Finiland page.

Tiny Indian state wants to pay its citizens a universal basic income | South China Morning Post / WaPo

If successful, the experiment by Sikkim, one of India’s most progressive states, would help alleviate poverty and address the challenge of job automation

https://www.scmp.com/news/asia/south-asia/article/2182595/tiny-state-india-wants-pay-its-610500-citizens-universal-basic

Universal basic income in India is a tantalisingly close prospect

Biometric ID cards and the squeeze on the rural poor are propelling the idea forward | Financial Times  

https://www.ft.com/content/a7ef07ec-2a00-11e9-9222-7024d72222bc

Finland's grand universal basic income experiment raises more questions than it answers | WIRED

Universal basic income might make people feel less stressed but doesn't necessarily fix unemployment

https://www.wired.co.uk/article/universal-basic-income-policy-universal-credit

Me: Along with a “job guarantee” idea, UBI started off as a fairly radical idea with now some significant small scale experiments behind it. I’m cautious as to how much other places can extrapolate from Finland, but overall it neither seems to help nor hinder your job prospects, but makes you feel happier. Maybe that’s enough given the highly admin intensive and relatively poor long-term outcomes for the current “job seeker” type benefits/sanctions, despite policy-maker backing.  

“In Britain, intensifying the use of sanctions and introducing harsher penalties associated with being sanctioned has been largely ineffective  at increasing flows from JSA into sustainable employment.” doi:10.1093/cje/bex088 Job Seeker’s Allowance (JSA) benefit sanctions and labour market outcomes in Britain, 2001–2014 Martin Taulbu et al. (2018)  https://academic.oup.com/cje/article/42/5/1417/4827894

Link to the Finland experiment here: https://www.kela.fi/web/en/basic-income-experiment-2017-2018

New Zealand looking at non-financial capitals, more than GDP

The NZ PM talking about the problems with GDP and suggesting NZ should look at a broader set of indicators and changing the way it should make decisions, including a well-being budget in 2019.

Living standards | New Zealand Treasury

“Our vision is focused on higher living standards for New Zealanders. Achieving this requires growing the country's human, social, natural, and financial/physical capitals which together represent New Zealand's economic capital. Our vision is to be a world-class Treasury working for higher living standards for New Zealanders.”

Me: NZ (along with others) has been looking at a broader framework than GDP for a while now. The NZ PM is now pushing further ahead in asking the Treasury to think about other non-financial capitals such as human, social, natural etc. It’s an intriguing and possibly a positive development. It ties into many recent blogs on intangible capitals, Cowen’s idea of GDP+ and the idea companies have a lot of other capitals to draw upon.

https://treasury.govt.nz/information-and-services/nz-economy/living-standards

https://www.budget.govt.nz/budget/2018/economic-fiscal-outlook/budget-2019-focus-on-wellbeing.htm

Blog on Intangible Capitals here

Blog on GDP+ amongst other Tyler Cowen ideas here: https://www.thendobetter.com/investing/2018/11/21/tyler-cowen-vision-of-free-prosperous-and-responsible-individuals

Significant Major cross-discipline EAT-Lancet Commission paper on Sustainable Food

Major cross-discipline EAT-Lancet Commission on Sustainable Food has published its findings (Jan 2019). I give a summary review. With a fairly broad scientific consensus, the report establishes 3 significant items.

The major items the paper establishes are

• A healthy reference diet

This diet is considered to sustainably feed likely world populations from 2050 and beyond, and give a broadly correct amount of nutrition. The paper evidences that there would like be

• Health benefits from this diet

In rich nations, this would be from better nutrition helping obesity and cardiovascular disease and the second order benefits of this. And in poorer nations, this would be from decreasing malnutrition.

The diet mainly due to a extremely large pivot away from red meat also establishes

• a sustainable agriculture supports this diet

Where the environmental impacts of such a proposed diet are kept within likely carbon budgets and other planetary considerations.

While the report mentions several cultures that eat within the reference diet, in my view, a major weakness is little acknowledgment of the scale of socio-cultural change this diet suggests. To me, a cross-disciplinary socio-anthropologist or cultural philosopher would have made a great addition as a major component of why we eat what we eat is conditioned by social and cultural value.

-The reference diet is high in vegetables and low in red meat, sugar, potatoes and processed foods.

This healthy reference diet largely  consists of:

• vegetables,   fruits, whole   grains, legumes,  nuts, and unsaturated  oils,

• includes  a low to  moderate amount of seafood and poultry,

• includes no or a low quantity of red meat, processed meat, added sugar, refined grains, and starchy vegetables.

Summary values are in table above.

If you look at the carbon impacts of various foods, you can see below that the move to vegetables over red meat is very positive for the environment. This is also because of the second order effects of growing grain to feed beef or other animals, which is environmentally intense both in land use and energy use. (See Fig. 4 below)

Source: Eat-Lancet (2019)

The “Business as usual” modelling shows the huge impact from animals on greenhouse gases.

There are strong second order health effects deriving from this as well - many fewer deaths - although I suspect keeping within the energy intake limit and cutting out added sugar and processed foods would achieved a fair amount of this benefit.  Cutting out processed foods and added sugar and eating about the correct amount of calories is almost universally favoured in all diets (even low carb, high fat diets as fat is high satiety) Still the economic benefits of lower health costs, and a more productive workforce.

In terms of where we need to get to…There is a long way to go (See below). Rich nations eat too much red meat and potatoes. Parts of Africa are too reliant on low nutritional-value cassava (starchy vegetables).

The overall paper is a fascinating read as it takes in the intersectional nature of food and the environment and health and proposes concrete guidance that enables a growing population. As I mentioned earlier, its weakness is in not weighting the cultural change factors in a strong enough way. For instance, many Americans and Europeans know they eat too much to be healthy but there is a learnt cultural attitude and difficulty in enabling change. Still, at least a good road map has been laid out. In terms of behaviours everyone can play a part in, food waste is important no matter what diet or scenario is chosen (grpah below).

I end on the important summary messages below from the paper:

Unhealthy and unsustainably produced food poses a global risk to people and the planet. More than 820 million people have insufficient food and many more consume an unhealthy diet that contributes to premature death and morbidity. Moreover, global food production is the largest pressure caused by humans on Earth, threatening local ecosystems and the stability of the Earth system.

Current dietary trends, combined with projected population growth to about 10 billion by 2050, will exacerbate risks to people and planet. The global burden of non-communicable diseases is predicted to worsen and the effects of food production on greenhouse-gas emissions, nitrogen and phosphorus pollution, biodiversity loss, and water and land use will reduce the stability of the Earth system.

Transformation to healthy diets from sustainable food systems is necessary to achieve the UN Sustainable Development Goals and the Paris Agreement, and scientific targets for healthy diets and sustainable food production are needed to guide a Great Food Transformation.

Healthy diets have an appropriate caloric intake and consist of a diversity of plant-based foods, low amounts of animal source foods, unsaturated rather than saturated fats, and small amounts of refined grains, highly processed foods, and added sugars.

Transformation to healthy diets by 2050 will require substantial dietary shifts, including a greater than 50% reduction in global consumption of unhealthy foods, such as red meat and sugar, and a greater than 100% increase in consumption of healthy foods, such as nuts, fruits, vegetables, and legumes. However, the changes needed differ greatly by region.

Dietary changes from current diets to healthy diets are likely to substantially benefit human health, averting about 10·8–11·6 million deaths per year, a reduction of 19·0–23·6%.

With food production causing major global environmental risks, sustainable food production needs to operate within the safe operating space for food systems at all scales on Earth. Therefore, sustainable food production for about 10 billion people should use no additional land, safeguard existing biodiversity, reduce consumptive water use and manage water responsibly, substantially reduce nitrogen and phosphorus pollution, produce zero carbon dioxide emissions, and cause no further increase in methane and nitrous oxide emissions.

Transformation to sustainable food production by 2050 will require at least a 75% reduction of yield gaps, global redistribution of nitrogen and phosphorus fertiliser use, recycling of phosphorus, radical improvements in efficiency of fertiliser and water use, rapid implementation of agricultural mitigation options to reduce greenhouse-gas emissions, adoption of land management practices that shift agriculture from a carbon source to sink, and a fundamental shift in production priorities.

The scientific targets for healthy diets from sustainable food systems are intertwined with all UN Sustainable Development Goals. For example, achieving these targets will depend on providing high-quality primary health care that integrates family planning and education on healthy diets. These targets and the Sustainable Development Goals on freshwater, climate, land, oceans, and biodiversity will be achieved through strong commitment to global partnerships and actions.

Achieving healthy diets from sustainable food systems for everyone will require substantial shifts towards healthy dietary patterns, large reductions in food losses and waste, and major improvements in food production practices. This universal goal for all humans is within reach but will require adoption of scientific targets by all sectors to stimulate a range of actions from individuals and organisations working in all sectors and at all scales.

And important strategies identified:

Three lessons can be learned from other examples of societal responses to global changes. First, no single actor or breakthrough is likely to catalyse systems change. Second, science and evidence-gathering are essential for change. Third, a full range of policy levers, from soft to hard, will be needed. ...we outline five specific and implementable strategies, which are supported by a strong evidence base….These strategies are:

(1) Seek international and national commitment to shift towards healthy diets. The scientific targets set by this Commission provide guidance for the necessary shift, which consists of increasing consumption of plant-based foods and substantially reducing consumption of animal source foods. Research has shown that this shift will reduce environmental effects and improve health outcomes. This concerted commitment can be achieved by investment in public health information and sustainability education, and improved coordination between departments of health and environment.

(2) Re-orient agricultural priorities from producing high quantities of food to producing healthy food. Production should focus on a diverse range of nutritious foods from biodiversity-enhancing food production systems rather than increased volume of a few crops, most of which are used for animal production.

(3) Sustainably intensify food production to increase high-quality output. The current global food system is unsustainable and requires an agricultural revolution that is based on sustainable intensification and driven by sustainability and system innovation. This change would entail reducing yield gaps on cropland, radical improvements in the efficiency of fertiliser and water use, recycling phosphorus, redistributing global use of nitrogen and phosphorus, implementing climate mitigation options, including changes in crop and feed management, and enhancing biodiversity within agricultural systems.

(4) Strong and coordinated governance of land and oceans. Such governance includes implementing a zero-expansion policy of new agricultural land into natural ecosystems and species-rich forests, management policies aimed at restoring and re-foresting degraded land, establishing mechanisms of international land-use governance, and adopting a Half Earth strategy for biodiversity conservation to safeguard resilience and productivity in food production. The world's oceans need to be effectively managed to ensure that fisheries do not negatively affect ecosystems, fish stocks are used responsibly, and global aquaculture production is expanded sustainably given its effect on and linkage to both land and ocean ecosystems.

(5) At least halve food losses and waste, in line with global sustainable development goals. Substantially reducing the amount of food lost and wasted across the food supply chain, from production to consumption, is essential for the global food system to stay within its safe operating space. Technological solutions will need to be applied along the food supply chain and public policies implemented to achieve a 50% reduction in food loss and waste.

Link to paper here in Lancet

https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(18)31788-4/fulltext

And a summary on the EAT site.

https://eatforum.org/eat-lancet-commission/

Blog on living longer through diet:  https://www.thendobetter.com/blog/2018/1/6/how-to-live-longer

AQR Quant paper on ESG

AQR quant paper using MSCI ESG scores and Barra factor model. “Stocks with worst ESG exposures have total and stock-specific volatility that is up to 10-15% higher, and betas up to 3% higher, than stocks with the best ESG exposures. This finding is strong overall, robust to a wide variety of controls, and clear globally as well as in individual regions (US, World ex US, or in emerging markets). We also find that ESG scores may help forecast future changes to risk estimates from a traditional risk model. Controlling for the contemporaneous risk model estimates, we show that poor ESG exposures predict increased future statistical risks. While the effect is modest in magnitude, it is consistent with ESG exposures conveying some information about risk that is not captured by traditional statistical risk models.”

“..we find that deterioration of ESG score from the 75th to the 25th percentile is associated with about a 1% increase in risk.  While this increase might seem small, it may simply reflect the fact that ESG captures risks that are long-run in nature and may not materialize in short to medium term. For example, a firm with poor governance may be more likely to experience a scandal, earnings misstatement, etc., but that does not mean that such an event will necessarily happen over the next few years and consequently be captured in a statistical risk model. Moreover, we are using a state of the art risk model that already reflects much of the information about a given stock’s risk, whether such risk is driven by ESG or any other type of exposure. Thus, it is by no means obvious that ESG information could help improve on this risk model’s forecast, even if it is by a modest amount. Overall, we conclude that investors might be able to utilize ESG information to glean additional insights about the riskiness of their investments…”

Me: (1) The “modest effect” on the future risk estimate might be considered by some to be small enough to dismiss. (2) The use of Barra and MSCI ESG gives an amount of standardisation and ability to replicate the work but is not “consensus ESG”. (3) The constant flow of ESG quant papers is notable. Most recent are neutral to modertately positive. (4) Short run data will be a problem for histroic validification but the forward looking situation tends to chime and never exactly rhyme.

Source from AQR: http://bitly.com/2GwShXT

More thoughts on ESG ratings: https://www.thendobetter.com/investing/2018/9/21/why-esg-ratings-will-never-agree-and-some-of-the-problems-of-ratings