So Long 2014, and No Thanks From All the Fish

I haven’t had the heart to put something in my blog since the elections. As Paul Krugman succinctly put it, the US elected a Congress that does not believe in climate change and will try to prevent anything being done about it.  Given the power of Congress to obstruct, that is a very bad sign for doing anything meaningful about climate change for the next few years – and that, to me, overshadows anything else that happened this year.

Still, I would like to take note of a few other things worth thinking about that happened this year.  In climate change, commentary on the issue in some print venues and some radio outlets, not to mention the cable-channel special Years of Living Dangerously, actually began to represent the facts of climate change and to treat them in a more serious manner. 

In computing, it seems to me that there was a bit of a technology-advancement slowdown this year.  Much of the impetus of the year was in things already pretty much in the works, like further exploration of hybrid clouds, wider application of IBM’s Watson, and the next generation of touch-screen smartphones and tablets.  I hope to do some searching for something, anything really new and potentially valuable come the New Year – yes, it’s a New Year’s Resolution.

If I had to give an epitaph for 2014, I would call it the year when people refused to admit that there were times when the needs of the future trump the needs of the present.  Playing games yet again with the full faith and credit of the US by holding the debt ceiling limit hostage to letting banks play games again with derivatives; cementing climate-change denial in our governance; attempts to stifle scientists in the US, Canada, and probably Australia, the so-called “free-speech democracies”; the EU shutting its ears to criticisms of austerity policies; Putin and his belief in realpolitik; Netanyahu and Israel’s onward push into what John Le Carre aptly called a “grubby little Spartan state”; the list goes on and on.

One of Douglas Adams’ Hitchhiker books was called So Long and Thanks for All the Fish – in which the dolphins decide they’ve had enough of suckering stupid humans into giving them free fish and leave this Earth, leaving behind that message.  I doubt very much we will get thanks from future generations of humans for 2014’s accomplishments, nor from the animals or fish who are already bearing the brunt of them, as evidenced by the accelerated rate of species extinction and the increased acidification and fertilizer pollution of the oceans.  Hence:  So long 2014, and no thanks from all the fish.

In a Barney Miller TV series episode, the Hasidim and African-Americans of Brooklyn get into a spat, and after it’s over the local rabbi drops by for a chat.  Maybe it’ll turn out to all be for the best, the rabbi says.  Maybe, says Barney, but I sincerely doubt it.  That’s good, says the rabbi:  too much hope makes you crazy.  I hope I can be more cheerful about 2015.  So far, looking ahead, I sincerely doubt it.

Data Virtualization Day 2: Looking Ahead

 

One of the most interesting questions raised during DV Day was asked by a speaker of the audience:  We have presented our vision of the future, now what would you think would be a visionary new idea for using data virtualization?  Pretty much on the spot, I came up with two interrelated ideas:

1.       Metadata mining, and

2.       Trend discovery via data-virtualization’s data-discovery features.

Metadata Mining

As data mining spreads increasingly outside the enterprise, via mining of social-media and sensor data, the value of a global metadata repository such as those provided by Cisco/Composite and other DV vendors lies not merely in the ability to coordinate and correct the inconsistencies in internal data, but also to see the connections between internal and external data – for example, when these represent information about the same person or thing – as well as to understand how certain metadata changes in frequency of use over time.  For example, if less data is video and more is texting, that set of facts, surfaced by access counts for video and text metadata, tells us about our customers’ changes in media use – and does so immediately, while being based on actual behavior rather than self-report surveys.

I conjecture that the main value of such metadata mining in the long run will lie in one of two areas: (a) providing new ways to slice the data underlying the metadata, and (b) offering new, broader, and more flexible ways of aggregating the data.  I see (a) happening because while new applications for BI tend today to be generated by new product ideas or new customer trends as publicized on the Web, new data-mining insights from metadata come from actual behavior and information that can’t be easily fit into existing categories.  I see (b) occurring due to metadata’s natural function of fitting data into broad categories and detecting connections between nominally different sets of data, constantly and semi-automatically.

Trend Discovery

In a similar way, the data-discovery features of data virtualization tools could be used to detect new trends relevant to the business by seeing their “footprint” on the Web.  That is, data discovery can constantly monitor the Web for new types of metadata that don’t fit easily into the old categories, and surface it to data scientists for alerting to new types of customer or prospect behavior.

This is particularly attractive because a survey I did 4 years ago indicated that at that time, business execs tended to learn about key new trends on the Web 6 months or more after they first arrived.  That’s a long time these days, in product-version lifecycle terms – and I see no clear signs of major speedup since then. 

Anyway, just some visionary thoughts, for fun …

Climate Change Odds and Ends

Recently, I have not been commenting on climate change news, mostly because either (a) developments and new research don’t change the overall picture significantly, or (b) because it wasn’t clear whether some developments did indeed constitute significant good or bad news.  At this point, I feel comfortable putting most of the news in category (a) – because for every piece of good news, there’s a piece of bad news.

So, in no particular order, here are some of the things worth noting as extending our knowledge but not changing the overall trend.

First, in the last two years Arctic sea ice minimum has seen a rebound from the awful 2012 season, to a point somewhere around the 2007 (initial plunge) state.  This appears to be a result of a prolonged negative North Atlantic Oscillation (NAO) during melting season, which has allowed ice volume in the Central Arctic to recover in 2013 and then stay the same in 2014.  The NAO, in turn, seems to be related to the lack of an el Nino event – of which, more later.

This would be good news except that it is counterbalanced by two pieces of bad news.  Second (that is, the second piece of news), it turns out that southern seas were undermeasured until now and the amount of heat they have absorbed is much greater than originally thought.  Thus, the “momentum” towards global warming already in the system is greater than we thought.  Third, it now appears that 2014 may well be the warmest year on record, if present trends hold, easily beating 1998, that old standby of climate change deniers. 

The fourth piece of news again is positive:  the el Nino event that seemed very likely to have unprecedented force (and therefore leading to a giant leap in temperature as in 1998 is now projected to be weak and to start between October and December.  Fifth, the bad news associated with that is that the weakening of el Nino is related to unprecedented warming in the waters off Asia that spawn el Ninos – warming that again adds “momentum” to the underlying global warming trend.

The sixth piece of news is that the slowdown in US carbon emissions does now appear to be real, and related to a significantly faster uptake of solar energy than anticipated.  The seventh bad piece of news is that this has had zero effect on overall emissions, due especially to China’s increases in use of coal, plus effective exporting of other countries’ emissions to China via outsourcing. 

Finally, we may note an interesting argument recently put forward in Daily Kos:  fracking is not really economical, since each source is much more rapidly exhausted than in the case of conventional oil.  However, it seems clear that, even were this so, we are still in for several years of carbon pollution from that source, as natural-gas fracking companies seek to hide their losses by sweetheart deals with state and local governments that reduce the cost of drilling for new sources and taking care of the side effects of the old exhausted ones. 

Meanwhile, the rate of carbon emissions rise apparently continues to increase.  Happy Halloween.

Data Virtualization Day: A New, Useful Way To Migrate Legacy Databases

Twenty-odd years ago I compared vendor databases to boat anchors:  they (and the business-critical apps depending on them) are very difficult to sunset, and they tend to act as a drag on needed performance improvements in everything data-related.  Moreover, the basic technologies for performing “database migration” seem to be much the same as they were fifteen years ago:  conversion of dependent apps to the new interface by SQL “veneers” plus modification, reverse engineering, or full rewrite of the underlying app, one by painful one.  You can imagine my happy surprise, therefore, when a customer at this year’s Cisco/Composite Software’s DV Day testified that they were beginning to use a new technique for legacy database migrations, one that should significantly speed up and improve the safety of these migrations.

Before I go into detail about this new technique, I should mention some of the other great and useful ideas that, as usual, surfaced at DV Day.  Among these I might number:

1.       Use of data virtualization to combine traditional Big Data and the streaming events typical of the sensor-driven Web;

2.       A “sandbox” to allow real-world testing of DV apps before rollout;

3.       Additional hybrid-cloud support.

I hope to go into more detail on these in a later post.  The legacy migration idea, however, is worth its own post – indeed, worth attention from all large enterprises jaded by legacy-migration solutions that advance incrementally while the database-dependent app “legacy problem” grows apace.

The Previous State of the Art

Briefly, the problem of database migration – especially across database vendors – is typically much more a problem of migrating the applications written to take advantage of it than of migrating the data itself.  The typical such application, whether it be written using the commands of IBM IMS, CCA MODEL 204, DATACOM DB, Pervasive SQL, Sybase SQL Server, or any other such database, is 10-30 years old and not always that well documented, is partly written using database-specific commands or “tricks” in order to maximize performance, and does not share code with the tens or hundreds of other apps on the same database.  Therefore, migration time will often be projected at more than a year, no matter how much person-power one throws at it.

Broadly speaking, until now each such app migration has involved one of three approaches:

1.       Rip and replace, in which the entire app is rewritten for the new database;

2.       Emulation, in which an “old-database” veneer is placed over the new database, with rewrites only applied where this fails;

3.       Reverse engineering, in which the function of the app is described and then a new, supposedly identical app is generated from this “model” for the new database.

None of these approaches is one-size-fits-all.  Rip and replace runs the risk of missing key functionality in the old application.  Emulation often produces performance problems, as the tricks used to maximize performance in the old database can have the opposite effect in the new one.  Because of the lack of documentation, reverse engineering may be impossible to do, and it also may miss key functionality – although it often pays for itself by “doing it right the first time” in the new environment.

The New Data Virtualization Approach

As Anderson of HSBC described it at DV Day, the data virtualization approach uses a DV tool both as an integral part of a “sandbox” for apps being migrated, but also as a “recorder” of transactions fired at the old database, which serves as a test scenario for the new app.  Separately, none of these “innovations” is new; it is the combination that makes the approach novel and more useful.

Specifically, I see the “data virtualization” legacy-migration approach as new in several ways:

·         Data virtualization already creates database portability for apps, if one writes all apps to its “veneer” API.  The new approach allows the migrating app to join this ultra-portable crowd – and, don’t forget, DV has had almost 15 years of “embedded” experience in providing such a common interface to all sorts of data types and data-management interfaces.

·         The new approach allows a more flexible, staged approach to migrating hundreds of apps.  That is, the DV tool semi-automates the process of creating an performance-considering emulation, and the test scenarios then allow rollout when they indicate the app is ready for prime time, rather than when a separate full-scale test is run with fingers crossed.

·         The DV-tool process of “metadata discovery” means that migration often comes with additional knowledge – in effect, better documentation -- of the apps.

The net of these novelties, I conjecture, is faster (more parallel and more automated) migration of legacy apps, with better performance (counterintuitively, using DV can actually improve app transactional performance), with better future portability, better documentation, and better ability to share data with other apps in the enterprise’s BI-app portfolio via a global metadata repository.  Not bad at all.

The Net-Net

Is short and sweet.  I urge all large enterprises with significant legacy-database concerns to consider this new DV approach and kick the tires.  It is early days yet, but its value-add can hardly help but be significant.

How Software Makes Nonsense of Ayn Rand

It amazes me, nowadays, just how many political and business figures – from Rand Paul in the U.S. Congress to Alan Greenspan, the former Fed chairman – cite Ayn Rand as an inspiration.  I first read The Fountainhead more than 50 years ago, and was interested until the climactic trial, in which the prosecution gave a speech unlike any real-life prosecutorial speech I have ever heard.  I have later heard excerpts from the climactic speech in Atlas Shrugged, which suggest that Ayn Rand’s themes in the two books are part of an overall effort to define “libertarianism” as an attempt to distinguish the “makers” from the “takers” in a typical society. 

Thus, for example, in The Fountainhead the “maker” is an architect who is put on trial because he destroys the corrupted version the contractor (apparently, local or state government) has made of his quality work.  In Atlas Shrugged, apparently, similar indignities drive Dagny Taggart and like-minded individuals to remove from the “takers” and their governments the “makers’” technical ability, needed to use modern machinery such as a radio, and to withdraw from society until it realizes its need for them.

Out of such writings, it seems, are political and economic philosophies made.  Let us also note that at the time Ayn Rand wrote, it was barely possible to see the work world and national economies much as Rand saw them:  inventors and hands-on builders who were also heads of larger enterprises, like Henry Ford and Thomas Edison.  Even in the post-war period, with the advent of the veteran CEO who knew how to get things done from executive training in the hands-on Army or Navy, there were possible examples of “makers” to cite as the ones who really made the world work, and made the world a better place.

Today, however, more and more of our products, our solutions, our processes, and our lives are infused with computer software.  And as a result, it is impossible to make Ayn Rand’s vision a reality.  In fact, today, computer software makes what Ayn Rand wrote complete nonsense.

Joining the Few Who Are Far Too Many

 An old British comedy routine spoofs WWII newsreels by intoning, “People flocked to join the few.”

“Please, sir, I want to join the few.”

“I’m sorry, there are far too many.”

That is the first bit of nonsense in Ayn Rand’s philosophy:  that relatively few “makers”, like Atlas lifting the world on his shoulders, run businesses, make things work, and keep progress moving forward.  No:  take any product, from a smartphone to an oil rig, and very few people actually build or design the new hardware.  On the other hand, many programmers over the years have built the software that connects the smartphone to the Web and to others (just like radio!) or monitors the performance of the oil rig, reporting that performance to remote sites looking for promising well sites and prepared for reaction in the case of disaster.  We need hardly add that a vanishingly small percentage of this software was made by executives. 

In other words, over the last fifty years, programmers (and make no mistake, programmers are creative and do their own thing) that are more and more prevalent have taken over more and more of what makes the world run and “progress.”  Take a vacation from making the world run?  How would you contact all those programmers, all over the world, much less get them to agree?  And where would they go to take a vacation until the world needs them?

That leads on to the second bit of nonsense from Ayn Rand:  That “makers” work harder, while “takers” seek to parasitically feed for their own benefit off “makers’” work.  Hedge fund executives work hard, and think creatively about investments; but do they work harder than anyone else?  Heck, no.  Programmers work just as long hours (as do, say, some police or construction workers, to cite a few examples), are just as creative, and their creativity has far more to do with how well the world runs than the creativity of the private equity firm. 

The key point is that if anyone is parasitically feeding off anyone, it’s the CEO or the program-trading hedge fund manager feeding off the programmer.  Moreover, if we remove the manager from the equation, it is relatively easy to substitute other wannabe rich folk for them, while if we remove all programmers, things would indeed slow down quite a bit.  And yet, in Ayn Rand’s definition, programmers are not “makers”, because they don’t know how the underlying hardware works, nor how to run a business.  Summary:  if programmers aren’t “makers”, then all those execs she was glorifying (a) don’t work harder (and aren’t more creative or more impactful on moving the world forward) than programmer “takers”; and if programmers are “makers” and execs are also (according to Rand) “makers”, then the main people feeding off programmers to the tune of billions in cash are other “makers” (i.e., execs).

That leads to the third bit of nonsense:  that government of all stripes is on the side of the “takers.”  We have seen plenty of examples of “maker” programmers inside and outside of government – or, for that matter, hackers.  We should also note the “open source” movement, that seeks to ensure the free availability of software outside of both business and government, and which both government and business are now “parasiting.”  We could cite further examples ad nauseam; but this Randism, today, just doesn’t come close to being true. 

It’s Okay, Honey, You Fulfill a Vital Function

So why don’t the Alan Greenspans and Rand Pauls of the world recognize how completely Ayn Rand fails to fit today’s software world?  My dark suspicion is that they want to believe that somehow they are doing something that makes the world run better, and “the gummint” (due credit to Walt Kelley’s Pogo) is the faceless entity that represents those who want to take well-earned money gained from hard, creative work away. 

I like the way Douglas Adams puts it in one of the Hitchhiker books.  One of his characters, on the run, bumps into a prostitute in a back alley.  Only she isn’t selling sex; she’s selling making businessmen feel better about themselves.  “It’s OK, honey,” she croons to a possible depressed-businessman John , “You’re really needed; you fulfill a vital function; our economy wouldn’t work without you.”

However, because of software, CEOs and investment firms are less and less vital to the functioning of an economy.   Yes, as we’ve seen, their “creativity” can screw things up; but it is less and less important to moving the technology forward.  Yes, they work hard and can be creative; but they simply don’t have the positive impact that they used to.  And so, I wonder if much of the buzz, past and present, about really earning outsized salaries and stock options, sweetheart deals after you leave the political arena with lobbyists, paeans to the “free market” and “laissez-faire” (according to economic theory, these don’t exist in the real world, by definition, because real-world markets don’t have perfect information equally shared), and the like are the output just as much of the prostitute seeking some share of the billionaire’s billions as of the income-unequal CEO himself or herself.

And so, thanks to software, Ayn Rand’s philosophical justification has become real-world nonsense.  In fact, I wonder if what’s going on isn’t the ultimate irony: to see Rand used to justify “taking” by non-governmental CEOs and the like?

But then, I still haven’t forgiven her for that prosecutorial speech.   I hope she’s being forced to code in FORTRAN down in the nether regions.

Why the Rich Get Richer – and Why Even Most Economists Don’t Seem to Get It

I was recently pleased to note that a Frontline program from last year (“The Retirement Gamble”) had finally begun to note the virtues of low-expense-ratio large-market-index index funds.  This year, we have Piketty and Saez, who have finally noticed the importance of wealth rather than merely income in creating and maintaining the ranks of the rich.  They echo what I wrote in an (unpublished) book on money management for the rest of us 15 years ago:  that while over the long term (20 years or more) stocks are the best bet, there are two sets of people who will guarantee that your stock investments will under-perform:  other people (most advisers and fund managers) and yourself.  Index funds are on auto-pilot; they avoid both sins.

However, what I really had not thought deeply about 15 years ago was that simply putting half of your money available to invest in a reasonably diversified stock portfolio (the rest, say, in bonds), above a certain level of investment “wealth”, will effectively guarantee that you will get richer and richer relative to everyone else.  In other words, unless you manage to spend so outrageously that you go below that minimum amount (despite what you think, it’s not easy), your net worth will over any 20-year period grow at such a rate, on average, that it will double every 8-15 years.  $5 million today?  If you go for an S&P 500 index fund from Vanguard with a 0.1% expense ratio, it will be $10 million in 2022, $20 million in 2030, and $40 million in 2038, or about when you’re ready to pack it in if you’re 60 now – and that’s after inflation. 

And those who don’t invest in stocks (reasonably diversified) and are lucky enough to avoid a shark like Bernie Madoff (as the late Robin Williams remarked, “Was the name not a clue?”) – i.e., those who aren’t rich – will find it much harder to get rich, at the least.  Bonds?  1-2% above inflation, often less than enough to cover living expenses. Houses?  2% above inflation at best, because all those fancy sales figures don’t show the large amount you must spend on upkeep to keep them usable.  Anything else?  Historically, either worse, or the equivalent of hoping to “win the lottery”. 

Rich Person’s Game

So here’s how it works, for a particular rich person – one, say, starting with $3 million in the Vanguard index fund referenced above, and with a net wage income of, say, $57,000.  That index fund, on average (actually, something called the geometric mean), generates about 10.85% per year before inflation, about 8.6% after.  About 2.25% of this comes from dividends, or $67,500, on which you pay 15% tax, or about $10,000, leaving you with $57,000 (net return about 8.3%).  Now let’s assume that you live on your income for the first year.  The next year, you have about $3.25 million.  What about capital gains?  The S& P fund is superb for avoiding most of those – the smallest stocks in the index are the ones that get bought and sold (enter or leave the S&P 500). And you’re still paying only 15-20% in taxes on those.

8 years from when you start (when you’ve doubled your money), your take from your dividends has reached $114,000.  However, you’re still getting a net of about 8.3% from your investment, year after year.  Over time, the amount of capital gains gets slightly larger, but – here’s the shocking kicker – after you die, the “cost basis” from which capital gains get computed goes to the stocks’ current value, which means that capital gains of anything that gets sold after that goes back to about $0 again.  How could Mitt Romney pay 10% of his income in taxes?  1/3 of the income was dividends, and 2/3 was sale of stocks with effectively 0% capital gains tax. I don’t know if that’s what happened, but that’s how it could be done.

The most amazing thing about this is that you can up the taxes, assume that the rich person is sub-optimally investing by a large amount, and still, the net worth will keep marching on up – by less, but still by enough to handle a lot of wasted spending.  At $6 million, you can spend money on four $100,000 cars per year and your net worth will still march on upwards.  At $12 million, you can afford an $800,000 second house, cash up front, and you will still be gaining.  You can give away 3% to an active manager of a fund in a 401(k), and still be doing well.  You could be taxed on your wage income at 90%, or your dividends and capital gains at 50%, and you’re still doing excellently, increasing your net worth more and more. 

In fact, many rich people do invest poorly.  They go for active funds, investment advisors, hedge funds (performs less well than index funds over time, latest figures show, and the fund is taking perhaps 80% of the profit), far too much in the way of bonds (by some figures, about 50%), and plenty of fads.  Piketty’s figures seem to suggest that they’re no better than the few non-rich who have to use 401(k)s with their rigid menu of non-index funds and high fees up and down the line (estimates are it costs us 2-4 %).  The difference is, the not rich are trying to reach that magic $3 million, and using some of the investments for living expenses, because they have to.  Even at $500,000 in investment wealth, you’re still in real danger of getting poorer.  But the rich get richer.

And the higher you go, the less job income matters.  Don’t like the CEO’s $10-million-per-year package, 400 times the corporate median wage?  If that CEO is a billionaire, he or she is earning $80 million a year just from investments (if it’s our index fund example), or $40 million if he or she is the typical lousy investor.

And so, what the CEO earns (most of the rich are CEOs, including CEOs of financial firms) is not a case of the rich getting richer; it’s a case of the head of the firm finding a way to enter the charmed circle of the rich, quickly.  Controlling inequality is not a matter of controlling income from work; it’s primarily a matter of controlling the amount the invested rich reap from their stock investments compared to the non-rich.

Why Even the Best Don’t Seem to Fully Get It

Most commentary about today’s increasing imbalances in income and wealth seems to fall into three categories.  The first category is those who justify these imbalances as somehow reflecting the value of the individual who is becoming richer and richer.  Of what added value to society is an individual who simply sits on an investment and watches it grow (remember, that’s how today’s rich are increasing their wealth)?  Anyone can do that.  No, to me those who justify the imbalances are the equivalents of the prostitute in one of Douglas Adams’ Hitchhiker books, whose sole source of income is assuring the rich that they really do deserve all that money, and those who criticize them are just meanies.

The second class of commentators are aware that there’s a problem, but seem to think that income taxes are the solution.  Rather, high income taxes slow the flow of new rich into the charmed circle, but have very little effect on those who have already joined – they get most of their money through dividends and stock appreciation. 

The third set of commentators – I would include Paul Krugman and Piketty and Saez in this class – realize that there’s a problem, and that it’s connected to wealth.  However, the same sophistication in economics and understanding of data collected about the aggregate within a nation that allows them to see the results of the rich getting richer right now, seems to fail them when they actually consider the connection between national trends and the individual case.

In the case of Piketty and his better critics, the question focused on is whether “r-g” will continue – at a guess, whether the rich can continue to gain a larger piece of the pie indefinitely.  But that’s a question with an easy answer:  as long as stock markets continue to deliver outsized returns over the long term, as they have done for at least the last 95 years, and taxes and very severe depressions do not shrink wealth to the point where many fall out of the charmed circle (as seems to have happened in the forty years during and after the Great Depression), then the rich will indeed get richer.  And yet, looking at things from the perspective of national economies, the idea that the rich can have a bigger slice of the pie for a very long time seems counterintuitive.  And so, the idea of higher income taxes and estate taxes is the focus, while a wealth tax such as the one in France is barely mentioned and assumed not to be an effective path to reversing wealth and hence income inequality.

To my mind, one of the main reasons for this “difficulty in getting it” is the fact that we don’t see most of the appreciation of stock in the data – it shows up only as capital gains when the stock is sold, and even those are far less than the real income appreciation.  Remember, you first pay out of dividends, and then take a little capital gains when the index fund has to rebalance, and when you die the cost basis is reset and when your inheritor sells it seems as if there has been little increase in the stock.  So, over 30 years your wealth may multiply by 8 times and yet, going by dividend and capital gains figures, it has not yet doubled.

There is, by the way, one really strange way that we also underestimate the wealth underlying capital gains reporting.  Let us suppose that we arbitrarily decide to sell 0.8% of our stocks every year.  Remember, each year the value of the stocks goes up by 8+ %, so for the first ten years, we are paying capital gains on our first year’s gain in stocks, and by the end of the 20^th year, we are still paying capital gains on the second year’s gain.  However, during the 20 years, we have seen inflation that has effectively reduced the value of the money we are paying.  So, at about 3.5% inflation, that payment in the 20^th year, in real terms, is about ½ of what it would have been if we had paid at the end of the first year.  This, by the way, is another way that the rich reduce their taxes in real terms.

Now, if at the time of your death you had to sell all your stocks, all those capital gains savings on delayed capital gains tax payment would be reversed.  But you don’t – you will probably have to sell relatively little of the stock.  And so, the real cost of the capital gains to your heir keeps getting smaller, and smaller, and the amount of actual wealth relative to the amount of capital gains reported keeps getting larger and larger …   

The Personal and Global Bottom Line

I see two take-aways from this analysis of the investment rich getting richer.  The first is personal:  whoever you are, if you aren’t rich by my definition, get somehow to a net worth of at least $1.5-$3 million that includes at least $1.5-$3 million in diversified stocks.  Then, by the method I’ve outlined, you should be set for life.  Note that this doesn’t include expenses from your support for other people, such as a spouse and children – ideally, they too at some point in their lives should reach equivalent wealth, so they are set no matter what happens to you.  Yes, I realize that for most this is very hard to do, and that the kind of fees we see out there when you do a 401(k) or an actively-managed fund or get investment advice or try to do stock investing yourself make it much, much harder.  All of this discussion of how to optimize your investments is in my unpublished book of 15 years ago.

My second take-away applies in the area of global economic policy.  Piketty and Saez have masterfully shown how, with the exception of the period after the Great Depression, income and wealth inequality have grown steadily over at least the last 150 years.  Unless policy deals with the underlying reason, as I’ve laid it out, that the rich can indeed get richer in relation to the rest of the world, then policy is very likely to be ineffective.  That means serious consideration of a wealth tax such as the 2% one in France, as long as it applies to stock investments.  Personally, I’d make it a 3% tax targeted at the rich – those who are smart enough to weight their investments heavily in index funds will continue to grow in wealth, but the majority, whose yield is much less, should see an almost flat net worth trend.

Of course, you still have to deal with the problem of making such a tax global, else the rich will just domicile elsewhere.  Still, as with other taxes, there are ways of dealing with this to some extent.  If we wish to get a handle on a problem that makes the global and US economy underperform and also has very bad effects on the non-rich, we need to target just exactly why the rich are getting richer, and target our solutions to that understanding.  Here’s hoping we won’t take decades to do this.

In Shocking Praise of Cisco’s Hadoop-Using Data Warehouse

In the past, I have been quite critical both of some Cisco forays into the server space and and of user over-use of Hadoop. I find, however, to my own surprise, that Cisco’s new Hadoop-using approach to data warehousing is potentially very useful in Big Data warehouses.  Here is a short thought piece as to why this might be so.

First, a brief description of some of the key aspects of the solution, as I see them.  The Cisco approach is to view both a traditional data warehouse and the rest of the Big Data needed to provide fairly quick answers to business-critical data-scientist questions as one “virtual warehouse”, with Cisco’s data virtualization solution (based on Composite Software’s solution) as the veneer/umbrella.  Once you view all of these piece parts as part of a data-warehouse whole, it becomes possible to use not only lower-cost storage for “less-used” Big Data, but also different databases, including access to operational OLTP data stores and “mixed” query/update enterprise-app data stores.  These, however, can traditionally handle queries on much smaller data stores, because of their dual purpose and competition from updates. Even master-data-management systems, because it can be too constraining to rigidly copy to a central data store, suffer from this type of dual-purpose limitation.

The potential of a Hadoop database as a kind of “overload” locus, it seems to me, is that one takes a database optimized for querying data that is so Big that relational approaches alone cannot process it, and use it as “overflow” space for handling data that is so Big that a traditional data warehouse cannot handle it.  A potential side benefit is that, these days, much of the massive “overflow” data may very well be social-media information – the type of information on which Hadoop, MapReduce, and Hive cut their teeth.  And, of course, however inefficient in-house Hadoop has been, here at least is one area in which IT Hadoop experience allows better optimization of the Hadoop side of the virtual data warehouse.

Likewise, I am prepared to cut Cisco some slack when it says it intends to use its scale-out UCS servers in Hadoop “clusters”.  Despite the hype, it appears that no scale-out solution is coming close to the cost efficiency of scale-up servers in either public or private clouds, but if you’re going to go the scale-out route, UCS servers don’t stick out as especially cost-ineffective, and they have the benefit of Cisco’s networking strengths in their clustering. 

Above all, Cisco’s solution is nice because it adds a major new option to the information architecture.  When that has happened before, savvy users have usually found a way to make it work for their needs better than the old set of choices.  Again, I say to my surprise – check out Cisco’s new Hadoop-using approach to data warehousing.  I believe it’s worth a close look.

A Climate Change Story: Israel Hastens the Death of the Holy Land

An American teenager sees the Jordan River (nearer the Dead Sea) for the first time.  His reaction, paraphrased, is:  “Is that all?  What’s the big deal?”

A hiker around the world passes the village of Nabil and suddenly is in Israeli-occupied territory.  His reaction, paraphrased, is:  “I felt as if I was in California”, i.e., a land of high-water-use large-scale agriculture.

So what do these two snapshots have to do with climate change?

Let’s start with the available water in the region – essentially, that related to the Jordan River (according to an environmental “case study”.  This involves the river itself, running from the border of Syria (where it is fed by four streams) to its terminus in the Dead Sea, and the four aquifers between the Jordan River and the Mediterranean, all fed by the water around the upper parts of the Jordan River, and all except a small fraction of this aquifer water running through what is now Israeli-controlled territory..  The Jordan River and its aquifers, pretty much, have been most of the water available in the Holy Land.  Right now, and for at least the last 44 years, it has been under the effective control of Israel.

In fact, this water has been a significant reason for some of Israel’s actions over the last 67 years, since 1947.  The Jordan River itself is a major part of Israel’s “water supply”, and as such was a priority for the initial Israeli state.  In 1967, Israel carried out a short “war” to annex part of Syria’s territory because of a perceived plan by Syria to place a dam on the Jordan within its territory.  The 1967 war secured a large portion of the Jordan’s “watershed” on the Golan Heights, and reduced the water available from other sources (such as the feeder streams) to provide water to Syria.  More recently, Israeli West Bank settlements apparently draw on one of the aquifers.  Over the last 15 years, Israel has chosen at times to withhold water from Palestinian West Bank and Gaza locations.  [note:  I am not going into detail about the Israeli Jordan-water-sharing agreement, primarily with Jordan, because it doesn’t affect this analysis]

Now we come to the first anecdote.  Israeli water use has drawn down the major aquifers far below their “carrying capacity”.  Meanwhile, the Jordan River itself has been siphoned off to the point where the Dead Sea, the River’s terminus, is shrinking to almost nothing, and the lower stretches of the Jordan contain less than 10% of the water it had at its start – hence the teenager’s remark. 

These neighbors, in turn, find themselves needing to expand their own water use, primarily because of refugees from Israel, Iraq due to an Israel-urged US war, and, most recently, Syria because of climate-change-caused western-province drought leading to warfare, which greater supplies of water probably would have delayed.

What is Israel using that water for?  It is providing far more water for drinking and for agriculture – anecdote two -- than its neighbors.   These use Jordan-River water inefficiently, but in the service of far less water-intensive traditional agriculture.  There seems little doubt that, had they been the only regimes in the Holy Land, then, like Egypt, they would have muddled along at a much lower water-use level than the region presently exhibits.

Finally, we may note the arrival in Israel of desalinization plants as an alternative source of water – up to 35% of Israel’s supply for some purposes, which has finally apparently seen the light of day after being promised for more than 50 years.  However, there is no apparent sign that Israel is decreasing its use of Jordan/aquifer water.  Moreover, the plants themselves take 10% of Israel’s total electricity, which in turn means a 10% increase rather than decrease in carbon-emissions-causing coal and natural gas.

Climate change says we may expect that over the next 35 years, the upper stretches of the Jordan River will join the lower ones in becoming an “arid desert” with high heat.  At some point in next 135 years, it is likely that this heat will bake the soil so that rain bounces off rather than feeding the aquifers, and the flow of water feeding the Jordan will decrease in a major way.  At that point, a major decrease in population in the area will result, and the desert will return throughout the Holy Land – death of ecosystems, major shrinkage in habitable areas due to heat and lack of water. 

However, Israel’s use of the water resources it controls has resulted in hastening that day.  It now requires very little added heat and drought to make today’s California-style agriculture unsustainable if not immediately dangerous.  Any increase in heat will only increase the pressure to use more water, and would draw down the Jordan and aquifers more, either through Israeli use or via creation of more “starvation refugees” from immediately affected zones.  At the same time, decreasing water use creates more strain on the Israeli agricultural and tourist sectors of the economy, as well as among Israeli disadvantaged.  There is, apparently, no sign that Israel is especially proactive in switching massively to solar and wind to supply the energy for increased electricity for air conditioning and for the desalinization plans.  In other words, we aren’t talking the next 135 years now, we are talking the next 35 years.

I realize that the actors in this story had their reasons.  Climate change doesn’t care about the reasons; it simply notes the results of not understanding that combating human-caused climate change matters more.  Israel has had effective control of water-resource usage over this period; this has been the result.  And there are very good reasons to say that things would have been in a lot better shape if there had not been these Israeli actions.

You can cite many similar climate-change stories around the world.  This one, of course, has particular resonance because of the connection with three of the world’s major religions.  It was once remarked of a military effort that it had to destroy the objective in order to save it.  With the same sense of irony, I suspect that we may well say that the Israelis had to hasten the death of the Holy Land in order to live in it.

Data Virtualization: Sorry, Forrester, It Seems I Disagree

According to Barry Brunelli of Techtarget, a recent Forrester Research report places IBM and Informatica at the top of the heap, ahead of Composite Software and Denodo – and I disagree.  I do, in fact, have a lot more respect for the data management folks at Forrester than I do for their development folks, who produced a  report a couple of years back with a very poor (imho) understanding of the nature of agile development.  And I do believe that Forrester deserves credit, compared apparently to Gartner, for recognizing both the increasing importance and the ongoing potential for business benefits of data virtualization.  However, I would continue to put Composite Software (now under Cisco) and Denodo ahead of IBM and Informatica in functionality, fit to customer need, and ongoing value-add in the immediate future.  Why?

The Importance Of Paying One’s Dues In Data Virtualization

The understanding of Composite’s and Denodo’s advantages begins with the fact that since the beginning, it has often been confused with a technology originally called EAI, or Enterprise Application Integration.  Both integrate data; but they start from a foundation that aims data integration at very different purposes.  EAI originally aimed (and still does, in some cases), to pass data between two or more enterprise applications, such as SAP and Oracle Apps.  As a result, they created gateways that converted this (usually bulk) data to a common format, and then retranslated as necessary to pass to the target enterprise app.  As it turned out, this conversion to a common format is exactly what is needed to provide a front end to handle data streaming to a data warehouse – and thus, EAI and ETL (extract, transform, load) tools share a fair amount of functionality.  However, there is no sense of urgency about this conversion; it is for populating a database, not for immediately providing an answer to a query.

By contrast, data virtualization from the start aimed to provide querying (and, eventually, updates) across multiple databases and data management tools.  That, in turn, meant leaving most of the data on the device on which it already resided, and converting and combining only those parts of the data needed for a result – and so, high-performance querying became part of the package from the get-go.  Moreover, figuring out how to optimize queries in this way effectively takes quite a while, and new data types (e.g., social media, Hadoop) and data stores (e.g., data from multiple clouds) keep coming along and must be handled.

As I recall, Composite Software have been continually refining their software since at least 2003.  IBM originally had a matching product (now apparently part of InfoSphere).  However, in the mid-2000s, IBM chose to focus on the newly-acquired Ascential (more of an EAI-type product) instead, and only recently have they begun to re-focus on data virtualization technologies, with the acquisition of an unstructured-data virtualization company and with increased (and welcome!) attention paid, notably during the recent Information Management conference.  Based on my last conversations with IBM, I suspect that they have a fair amount of work still to do to upgrade the unstructured-data acquisition’s cross-database querying with many more use cases, from cloud data to object, streaming/sensor, data-warehouse, and IMS/Informix data types – not to mention integrating it with Master Data Management, operational-data querying needs, and features such as information governance.  And, of course, I’ve left out such newer functionality as cross-database updates, cross-database access control, developer support, and administrator support.

Informatica, apparently, is starting from behind what IBM has.  For most of the last decade, it has been playing in the EAI and “data integration” (including ETL) space, but only over the last two or three years has it publicized its “data virtualization” capabilities – nor it is clear where it got its cross-database querying chops.  Certainly, most of the smaller players from 10 years ago are already acquired, and suffering under the negligent hand of their masters – Oracle, for example, acquiring an already-neglected AquaLogic product with its buyout of BEA.  In similar fashion, SAP has wound up with a Sybase-acquired product, and Red Hat with the granddaddy of data virtualization, MetaMatrix.  In any case, large marketing claims do not substitute for a demonstrated pedigree of functional development.

Lessons For Users

So where do I view Forrester as having gone wrong, and how can IT buyers avoid buying less than the needed functionality?  I don’t know for sure, but I suspect that underlying the Forrester take was (a) confusion between EAI-type and data-virtualization-type “data integration” as well as a misunderstanding of what “data virtualization” really means, and (b) a subconscious belief that when a large and a small company say they have something, typically the large company wins because of breadth of features and support.

Let’s take the confusion first.  I am one who wonders if “data virtualization” hasn’t caused as much confusion as attention. Originally, the technology was called Enterprise Information Integration, which at least gets across the idea that the technology delivers value-add (timely, cross-data-type-contexted “information”).  “Data virtualization”, however, suggests that the main value of the technology, like that of storage and server virtualization, is to provide a single view that allows better load balancing.  On the contrary, data virtualization products also provide the basis for global metadata repositories, distributed master data management data-store query optimization, cross-the-hybrid-cloud data discovery, developer data abstraction for longer-lasting code, single-key cross-database administration, and semi-automated data governance, not to mention cross-cloud querying.  Given these additional features, users, unlike Forrester, must carefully probe whether vendors aside from Composite Software and Denodo are really walking the walk.

For the same reason, (b) doesn't apply:  you can’t simply feel comfortable with the large company’s features and support, because the features and support may very well not cover the types of things that data virtualization does well out of the box.  To put it another way, at present, IBM and Informatica have excellent and extensive data-integration and EAI features; but trying to do flexible data management, Web data discovery and ad-hoc querying, near-realtime data warehousing, and global metadata repositories for data governance without a well-optimized data virtualization product is like trying to fight with one hand tied behind one’s back. 

Data virtualization now matters more than ever to you, the IT buyer.  Forrester admits it, IBM admits it, and it seems that folks like Microsoft are now beginning to admit it.  If you don’t get 90% of the potential benefit because someone told you to use flawed criteria, you will therefore be missing out on the things that make companies like Qualcomm achieve real value-add, not just now but well into the future.  Whether I’m right about Forrester or not, the important thing is not to sell data virtualization short. Now, go out and kick those tires – the right way.

Climate Change: The Winter of Our Discontent

Usually, I try to get right to the point in these blog posts, but in this case I’d like to take a side trip into the phrase “the winter of our discontent.”  Trust me, it relates to climate change.

The phrase comes from the very beginning of Shakespeare’s play Richard III, in which Richard himself sets the theme of the entire play – the denouement of the entire cycle of history plays – by saying:

“Now is the winter of our discontent/Made glorious summer by this sun of York.”

Richard then goes on to reveal that he does not share this happiness, cannot share it, and intends to destroy it.

I have always felt that interpretations of this have failed to consider one reasonably likely interpretation.  Over and over throughout the history cycle, once the rightful king (Richard lII) is deposed, people choose to start wars instead of trying to reestablish peaceful order.  As a final result, this produces a Richard III – a war hero with PTSD; a man whose “withered [right] arm” could just as easily be seen as a massively over-developed left arm, which in England then would have made him an especially effective fighter but also made him a sinister (Latin for left-handed), distorted monster to others; a man whose sense of humor is a desperate and failing attempt to overcome these demons.  Now let’s re-read:  “Now is the winter of our discontent [true, for Shakespeare] made glorious summer by this sun [untrue, for Shakespeare] OF YORK.”  Utterly sarcastic, that the son of one of the chief war-makers, a son whose job as king seems to be living it up, should solve the whole problem of disordered war.

By the way, the interpretation goes on all the way to just about the end, as this embodiment of English war destroys or wounds everyone around him, until even the kingship of England is less important to him than simply going on destroying – but with a sense of the absurdity of it all:  “A horse [to escape and fight again], a horse, MY KINGDOM [despairing irony] for a horse.” This, perhaps Shakespeare is saying, is the tragic solution to an unnecessary attempt to solve the original problem by deposition of the rightful king – to let those who have made a living from perpetual war destroy each other, and clear the path for a new peacemaker and a reversion to order.  Also by the way, Alison Weir estimates iirc that most of the nobility of England was killed in the Wars of the Roses, paving the way for Tudor upstarts to utterly dominate the peerage.

So what does this have to do with climate change?

Media Summer

OK, try this rephrasing of Shakespeare:  “Now is the winter of our discontent/Made glorious summer by the sun OF MEDIA COVERAGE.”  I trust you can hear my sarcasm.

Over the last few months, suddenly the media coverage of the news seems to be taking climate change seriously and producing many hopeful signs, where it rarely did before.  We have Years of Living Dangerously on Showtime garnering attention, sustainability being connected to the climate change movement, Bill McKibben being heard with greater attention, a spate of dire reports with notes that mitigation will be far cheaper from the IPCC, a greater focus on solar and wind technology, reports of isolated successes such as Germany’s ability one day to supply 74% of its needs from renewables, and on and on.  Where media coverage of climate change science last year, especially, was atrocious winter, now it seems as if hopeful signs of upcoming media-reported technological-fix summer abound.

And yet, if we look at the facts on the ground, things continue to get worse.  In yearly average, the rate of CO2 atmospheric growth is steadily going up, with the second largest rate of growth since measurements started in the 1950s.  China, now the largest carbon polluter (although not per capita – that’s still the US) promises massive solar investments and actually ramps up coal use to the point of unbelievable air pollution in major cities.  In the US, business talks sustainability and solar/wind technological-fix projects abound, but any decrease in US carbon pollution, data suggest, is counterbalanced by business investments that effectively export that pollution abroad.  Meanwhile, an el Nino “Kelvin wave” greater even than the one in 1998 that produced a previous spike in global temperatures is probably heralding weather patterns starting around July that give a heavy push to Arctic sea ice and permafrost melt, which in turn would mean more violent weather, warmth, and ocean level rise sooner than now expected.

Above all, the machinery of business and infrastructure, like the machinery of war in Shakespeare’s day, continues to grind on and produce a heavy counter-pressure to any significant change.  Businesses and hence nations continue to talk about developing Arctic oil and gas resources.  Despite serious questions about fracking’s effects and studies indicating that its improvement over oil and coal in carbon pollution is much more minimal than originally thought, fracking and natural-gas infrastructure continue to proliferate.

No, I’m not a Richard III.  But I can recognize the similarities between Shakespeare’s play and this situation.  Now is the winter of our discontent/Made glorious summer – no, it isn’t. 

Vocal Spring

At this point, inevitably, a reaction to these points says, you can’t just be negative; you have to encourage people in positive efforts.  That is true; but it’s just as true that if we do not clearly say that these positive efforts are nowhere near having significant impacts, at the same time as we applaud the positive effort, people suffer “compassion fatigue” – encouraging the next project, and the next, but getting tired of pouring their energies into things and still having little impact on the problem.

But there’s another reason to pair encouragement and honest realism.  I don’t have the exact quote from Keynes handy, but many are familiar with his saying, “In the long run, we are all dead.”  Few, however, understand what he meant.  Here’s my translation:  We [economists] set ourselves too easy a task if we say [however truthfully] that in the long run, these troubles will pass, the sun will shine again [and the economy will be back to functioning normally].  In the long run, we are all dead.  [In the meanwhile, we will all have unnecessarily suffered, because the economist did not identify a better solution and push the government to implement it.]

In other words, if we all simply say, these efforts are enough, rather than honestly facing the fact that as of yet they aren’t, we will unnecessarily be condemning ourselves and our grandchildren to greater suffering before we are dead, and we will be inevitably condemning our great- and great-great-grandchildren to far greater suffering and death, well before their “long run” arrives.

I do not want a real-world Hellish summer with High Water (Joe Romm’s phrase).  I do not want a Silent Spring with few or no species left, even human.  But if we are to get to a real Spring of hope, much less minimizing the disastrous impact of climate change, we must tackle how we are failing; we must not set ourselves too easy a task. 

Now should the winter of our discontent/Be yet made glorious spring, by toil, by honesty.  What do you know, I think it scans.

Has Anyone Actually Bothered to Read Feldstein???

The debate over the accuracy of Thomas Piketty’s book on wealth inequality now often cites Martin Feldstein’s Wall Street Journal piece – but commentary on Feldstein’s statements seems to me not to analyze what Feldstein wrote, to the point where I question whether anyone actually has read carefully what Feldstein said.  I have – and, frankly, my jaw dropped at both the apparently poor quality of the analysis and the seemingly huge disconnect with what things are like in the real world.

So, since no one else per Google seems to be doing so, let me set forth Feldstein’s core argument and why it seems not only flawed but wrong-headed.  Feldstein says that (a) wealth disparities in the US are much less than in Piketty’s analysis, and (b) there has been no increase in these disparities over the last 35 years.  Let’s take each of Feldstein’s core supporting arguments in turn.

First, “Ever-increasing inequality –true if people lived forever; but they don’t.  Cumulative effect diluted by estate taxes and sharing among children/grandchildren”.  To a first approximation, 40-50% of the US has negative or zero net worth, 49.9% has positive net worth (wealth) primarily in housing, and 0.1% has wealth primarily in stocks and bonds – those being the wealthy. As the last few years have shown, the trend has been towards a slightly greater percentage of the US having zero or negative net worth over the last 35 years, while housing over that period (if we recognize that for most of the 49.9%, housing is also for shelter, and hence has major expenses) has little net return, and per Piketty the wealthy are seeing 7% return on investment – while if they had invested in Vanguard S & P 500 index funds during that period, they would have seen about 8.5% return on investment. 

So let’s assume (reasonably), on average, that the megarich earn this return for 40 years before they die.  At, let’s say, a 6% investment advantage over the rest of us, the megarich have 10.2 times the net worth ratio at the end as they have at the beginning.  Now slice this by 35% under the old estate tax formulas, adjusted to reflect tax-avoidance strategies, or 25% under the new ones.  You’re still up by 6.7 or 7.7 times after those forty years compared to the rest of us.  Even with dilution by (on average) 2.2 beneficiaries, each beneficiary starts at 3 or 3.5 times where his or her predecessor did relative to the non-wealthy – the only thing that changes is a slow expansion of the “very rich” category, from, say, 0.09% over that 40 years to 0.11%. 

Think about it:  all that “dilution” simply means that every year, 1/40 of the total rich get a 70 % penalty if you worry about multiple beneficiaries, or 30% if not (which makes more sense), meaning that the rich get less than 25 % of their relative increase lopped off by estate-tax effects.  In other words, dilution doesn’t get close to affecting the fact of ever-increasing inequality.

Second, “total wealth grows over time roughly in proportion to total income [3.2% per year].” Feldstein cites problematic evidence:  Federal-Reserve-calculated flow-of-funds since 1960.  He doesn’t cite any details, so I have to guess at the best scenario for his argument, but clearly using Federal Reserve data meant for an entirely different purpose and not vetted against Census wealth figures is really questionable. 

More importantly, this says nothing about the relative share of that supposed increase going to the wealthy.  Consider, for example, the median wage ($30,000) versus reported dividend income from $100 million in an index fund -- $2.4 million.  We know that for the bottom 80%, over the last 35 years, real income has been flat or lower, and for the top 0.1%, it has increased more than 10 times.  We also know that 90% of the increase in productivity in the last 35 years has effectively accrued to the wealthy.  Either way, it says that even if the Fed is right about the rate of growth of wealth and income, 90-120% of that growth is going to the wealthy.  Again, increasing inequality, and apparently ever-increasing inequality.

And note that since the figures are since 1960, 30% of Feldstein’s analysis takes place in a world where inequality is not increasing – stacking the deck, as it were.  Finally, note that if the super-rich were investing in stocks, and therefore reported only dividends as income (until end of life, if not later), and dominated the wealth distribution, then you would see total income and wealth increase in tandem in the same way.

Third, Feldstein gets to the part where he is arguing that the appearance of increasing inequality is an artifact of the wealthy reporting more of their income – not wealth, income.  He says, more or less, that  with the passage of changes around 1980 plus tax reform in 1986 there was a strong incentive to shift investments from low-yielding tax-exempt investments to higher-yielding taxable investments.  This is ridiculous:  bonds were and are priced to yield the same net return on taxed and tax-exempt investments for the wealthy who buy them, and so we can be sure that something like ½ of the bond income was already reported – and, of course, this was a smaller proportion than stocks.  In fact, for the wealthy, over time, it makes no sense except for diversification to go for (taxable or otherwise) bonds instead of stock index funds.  And so, by any stretch of the imagination, the effect would apply to no more than 15% of the wealthy’s investments – a one-time effect over thirty-five years, for a net bump of 0.42%.   And, of course, what about what’s happened since then?

Fourth, Feldstein cites the income tax rate being lowered from 50% to 28%:  result, more taxable income reported (I guess, from the wealthy, although why this doesn’t apply in the same proportion to the rest of the top 10% I haven’t a clue).  This greater taxable income, claims Feldstein, comes from more work incentive, more payment as salaries, and reducing deductions. 

Oh, really?  On what planet is this guy living?  Over the last 30 years, we have seen more payment as stock options, continued heavy use of deductions, and (here we go again with the flawed “raise the income, they work less” income effect on labor) that lowering of tax rates had no effect on either the work incentives of the wealthy or, for that matter, those with subzero net wealth (40-50% of the whole).  If anyone was affected, it was the rest of the top 10%.

Fifth (again with the taxable income), Feldstein sees a “shift from business income to subchapter S” – i.e., what was reported before as business profits is now being reported as income to the wealthy from new subchapter S corporations.  Is Feldstein seriously pretending that most CEOs are the owners of their businesses, or that most wealth involves small corporations suitable for subchapter S?  Even if he isn’t, he again conflates wannabe wealthy who are getting high income to get into the charmed circle with those who are already wealthy and are getting most of their income from stocks.  And, of course, this is a one-shot effect, even if it existed. 

Sixth, Feldstein gets back partially to wealth.  “Calculations of income [and, I have to guess, wealth]  exclude Social Security [actuarial value], health benefits, and food stamps”, says Feldstein, resulting in much more in the way of relative income gains (and, apparently, relative wealth gains) to the non-wealthy, and much less to the wealthy.  By all means, Feldstein, undercut your previous argument about income rising at the same rate as wealth.  But don’t count Social Security, health benefits, and food stamps as wealth.  These mainly accrue to the bottom 50%, and have done so since the 1930s and 1960s, respectively.  Negative wealth is not the same as positive wealth.  With negative wealth, you spend all of the benefits you get when you get them, leaving you still in the general category of “negative to zero wealth”.  So trying to create a giant sum and saying, well, by decreasing negative wealth, this increases the relative share of the wealth of the bottom 50%, is not even close to a good way of calculating net worth.

Let’s run this one into the ground.  What happens if you take away SS, food stamps, and health benefits?  A lot of those people die – as they did before 1933.  In that case, they aren’t counted as part of total wealth and total income.  A reasonable figure might be a 50% difference, when these benefits are used, i.e., primarily after retirement – remember, only 1 in 10 potential SS beneficiaries lived to retirement age in 1933.  And yet, at that point, the negative-net-worth folks were still apparently around 40-50%.  And so, the maximum 25% reduction in the debt of the negative-wealth non-wealthy is partially to wholly counterbalanced by a 10% increase in the retired negative-to-zero-net-worth percentage of the population.  We may also note that the use of an overall actuarial value almost certainly ignores that the poor die much younger than the wealthy.

Then Feldstein makes the jaw-dropping undocumented assertion that this putting of SS and health benefits into the income column results in a much smaller rise in relative income of the wealthy.  Let’s go back to our previous example:  Adding on today’s median yearly (actuarial) Social Security (and probably health benefits), and factoring in the fact that this would be received by 1 in 2 of today’s median workers who survive to retirement age and in old age are not receiving other income, would result in income in today’s terms of a maximum of $60K instead of $30K.  So now, we are talking about comparing $2.4 million in income from the $100-millionaire to $60K instead of $30K.  That’s a smaller ratio, but certainly not a smaller rise.  And it is by no means significant. 

[extended note:  health benefits includes benefits during work days (through much of this period, available only to ½ of Americans, and decreasing over time) and Medicare after retirement – which is not guaranteed to rise with inflation.  Thus, translating this into money, especially without factoring in the 1/3 share of company health insurance that the large corporations are asking workers to pony up, means that health benefits run around $7,000 per year or less before retirement, and more later – but probably not the equivalent of $7,000 more per year.  Then we have “pensions”, apparently including 401(k)s and IRAs. Obviously, company pensions these days are worth far less as an annuity than promised, and both IRAs and 401(k)s suffer from both eventual income-tax application for those who actually have significant amounts in them.  Moreover, IRAs and 401(k)s have had 2 ½ % fees and poor diversification choices, leading to a 3.5-4 % investment penalty relative to a Vanguard fund, or perhaps a 2% return in real terms, if you’re lucky, over an average of about 20 years.  In effect, this allows a withdrawal of maybe $10,000 a year over your 10 years of life after retirement – and that’s optimistic.  Total: $14,000 plus $7,000 plus $9,000, or $30,000 on top of your median wage.  Again, we are moving after-retirement income to working days, and comparing it to rich whose investment income operates at the same pace before and after retirement.]

Then Feldstein completes the argument by saying “Count SS, health benefits, and pensions in wealth figures”.  I’m sorry, but this person is really clueless.  I just disposed of that one.

But really, we could have skipped the entire analysis above and applied some simple real-world observations.  This is one case where examples really are representative of the whole, because there are pretty few wealthy – I estimate 150,000 people (not households) with more than 8 million in net worth, and so looking at the top 10 or 100 billionaires gives a pretty good picture of that group.  So we have, in the top few, the Waltons, Trump, and the Koch brothers, all of whom inherited plenty of wealth, and increased it.  We also have the upper ranks  dominated by CEOs of major corporations and hedge fund upper management – and it should be clear that both have seen compensation including stocks (a large proportion, for CEOs) grow by 10-30 times over the last 35 years – in contrast to almost all of the rest of the population.  Or I can cite the experience of an acquaintance who is seeing far more income and a far faster increase in net worth from a multi-million-dollar inheritance converted to index funds than from previous periods of top-0.2% job income and little investment income.

The kindest thing I can say about Feldstein’s analysis is that it seems to take what he did as part of Reagan’s economic team, using unexamined assumptions and figures available at the time, and assume that these figures and assumptions can be extended beyond 1992.  The nature of the corporation, the types of and returns from investment, and government taxation (or lack thereof) were changing as he served, and have changed dramatically since then, and yet there is no real trace of these changes in his argument.  Instead, we have conservative shibboleths justified by 1980s statistical analysis that even then was not satisfactory.

So don’t, as Prof. deLong does, say that it’s a good analysis with a poor WSJ title.  Let’s lay the blame where it really is:  Martin Feldstein did it to himself.

The Insights of the New Inequality Reports Relevant to Personal Finance

Those of you who have skimmed my bio will have noted that a good while ago I wrote a (unpublished) book on personal finance.  In the book, I came to certain counterintuitive conclusions about the best way to manage your money; in the last few years, I have conjectured that my take on personal finance can be used to analyze wealth management and investment patterns at the macro level, i.e., at the country or global level.  However, up to now, the only evidence I had for the correctness of my views was anecdotal.

In recent publications, the acknowledged experts on income inequality – Piketty and Saez – turn their attention (and that of their co-authors) – to wealth.  In the process, they derive some insights which place on a solid statistical foundation most of my conjectures.  In this post, I summarize some of the insights of the reports that may seem counter-intuitive to many readers, but together form a picture that places wealth – not income – squarely at the forefront of personal finance and many aspects of today’s economics.

In no particular order, here are the insights, in grossly generalized form:

1.        Over the last 200 years, except for a period around the Great Depression, “capital” (really, stocks and bonds) has consistently performed better in terms of growth of wealth than income from “labor” (ranging from salaries to CEO “incentive pay”).

2.       As a result, again consistently, there is a line somewhere around $2-$4 million in invested (stocks and bonds, not real estate or venture capital-type investments) wealth below which the wealth of the individual does not grow significantly over time, and above which his or her wealth grows at about a 7% (in real terms) rate per year.

3.       Again consistently, 50% of the population has zero or negative wealth, 40% has minimal investment wealth, and for 8-9% much of the investment wealth comes from a pension or 401(k) whose yield income is typically less than that person’s labor income.  Only the top 1-2 percent have investment income greater than labor income.

4.       The very rich (top 1-0.1%, $20 million to $100 million in wealth, plus the top 0.1%, $100 million and above in wealth) are no better investors than the other 99% (actually, the other 49%, since 50% have zero or negative wealth) – despite sometimes having certain advantages in the treatment of capital income, and in connections to investment “opportunities”.  

5.       It appears that high estate taxes, fairly high income-tax rates, fairly high capital-gains rates, and fairly high dividend-taxation rates have had little effect on this “shift to capital income”, while the main reversal of trend (the Great Depression) may have occurred because the loss of stock value was so severe (perhaps 70% from peak to trough) that many of the 1% found themselves below $2-4 million in invested wealth, with habits of high spending that were difficult to break.  Also, the Great Depression effect may have lasted for 40-odd years because high marginal income tax rates and smaller markets and pay norms did not prevent those with more than $4 million from growing at 7% per year, but did prevent most would-be entrants (typically CEOs) from reaching the magic level over the course of a career.  Reductions in tax rates, globalization of markets that allowed more scope for high CEO salaries, and new norms of compensation that piled direct-to-investment stock options on top of large increases in salaries in the 1979-1990 time period probably broke the Great Depression mold.

Here are the initial conclusions I draw – or, more properly, move from “anecdotal evidence” to “firmly based in statistics”:

1.        The aim of personal finance should be to achieve $2-3 million in low-expense-ratio S&P 500 (or Russell 2000) index funds.   Note that Vanguard typically has a 0.1-0.2% expense ratio over time.  The tendency of the rich to invest instead in high-expense-ratio actively-managed funds, in bonds, in derivatives, in hedge funds, in real estate, in venture capital firms (assuming that the aim isn’t philanthropic), in listening to con men, in conspicuous consumption, and in political maneuvering to protect labor income from miniscule threats, explains why the average rich person is no better at investing than the less-well-off 401(k) owner who is forced to deal with lack of available index funds and 2% fees in the 401(k), as well as less opportunity to use capital-gains, dividend, and interest tax advantages.

2.       Overall, these wrong investing decisions cost the top 50% about 1.5% per year (based on a study that showed that in real terms, a Vanguard S&P 500 index fund or the like grows about 8.5% per year).  They also suggest that unless there is less than 15 years to go until retirement or one’s employer is also contributing significantly, investing directly in such an index fund may be better than putting that money in a high-expense-ratio 401(k) or IRA.

3.       It also follows that once one reaches the “safe rich” category as defined above, there is far less urgency about piling up more and more than is assumed.  What the rich buy in terms of power to protect their money with the extra cash is unneeded in the first place.  Economics, as many have said, is not a morality play; but if one reaches the “safe rich” category, it is perfectly reasonable to do the moral thing and not stretch desperately after more and more and more, and the person who does so will typically not suffer any real penalty.

4.       The first macro implication of these insights is that income tax and estate tax tweaking is strictly limited in its effect on this “investment rich get richer” trend.  It now appears unlikely that we can reverse the trend by limiting entry into the “$4 million and up” investment club – although we can prevent its spread to many of today’s CEO wannabes.  No, by far the most powerful tactic for preventing rapid wealth/income rich-share expansion (and, by the way, the top 1% now have 40% of the wealth and the top 0.1% 20-22% of it) is an investment-wealth tax.  France, I note, has a general-wealth tax of 2%, which has helped somewhat – one might consider putting it at 3.5%, to counter the effects of 2.5% inflation.  Note that this will simply take the rich’s yield down to 3.5%, still enough to ensure some wealth increase, but one-half the increase of the 49%.  I limit it to investment wealth, because the data suggest that if the super-rich shift to other forms of investment, not only will their own income suffer (stock options), but their own investment yields as well.  However, other distortionary economic effects may mean that one should echo France.

5.       The second macro implication, I believe, is that inequality and its follow-on economic effects is not primarily a problem of income inequality, or as Krugman conjectures in recent blog posts, a matter of inherited wealth – the Rockefellers and Vanderbilts are still doing quite well through stringent estate taxes and loosened ones.  It is, rather, a matter of regulating both entry into the “safe wealthy” category and the amount of wealth growth once one has reached that stage.  To have a hope of long-term success, in other words, inequality policy must deal with investment wealth above a certain level.