Scott Galloway's Blog, page 14

Guardrails

Last week we learned about a significant leak of classified material that exposed key details of the Ukrainian war effort and America’s security apparatus. The perpetrator? Not an extremist group or criminal network, but someone we’re more familiar with. A young man who spends too much time online.

Technology and our inability to regulate it have again made things worse. Much worse. The leaker’s preferred platform was Discord, which has been used to share child pornography and coordinate the white supremacist riots in Charlottesville. Discord is not alone. Recently, Instagram assisted the suicide of a young British girl by serving her images of nooses and razor blades. Facebook fueled a mob riot in Myanmar. The list goes on: Teen depression, viral misinformation, widespread distrust of national institutions, polarization, algorithms optimized for rage and radicalization … We’ve discussed this before.

What’s startling about this latest scandal is the banality. A reckless young man trying to gain social status online accidentally shapes world events. Steve Jobs called computers “bicycles for the mind” because they amplify our capabilities dramatically. It’s a nice image. A more apt analogy for many young men, however, is a Kawasaki H2 Mach IV, a motorcycle that possessed far too much power and had a rear-biased weight balance that made it an accident waiting to happen. Too much power, not enough balance, and injury is inevitable. Tech has become a bullet bike, a reliable source of disturbing accidents and organ donations.

Stupid Proof

People have always been stupid, and everyone is stupid some of the time. (Note: Professor Cipolla’s definition is people whose actions are destructive to themselves and to others.) One of society’s functions is to prevent a tragedy of the commons by building safeguards to protect us from our own stupidity. We usually call this “regulation,” a word Reagan and Thatcher made synonymous with bureaucrats and red tape. Yes, Air Traffic Control delays and the DMV are super annoying, but not crashing into another A-350 on approach to Heathrow, not suffocating as your throat swells from an allergic reaction, and being able to access the funds in your FTX account are all really awesome.

Sixty years ago the U.S. registered more than 50,000 car crash deaths annually. So we created the National Highway Traffic Safety Administration and charged it with making the roads safer. If you’re under 60, this may be hard to imagine, but not that long ago, many Americans saw seat belts as an assault on their personal liberty — some cut them out of their cars. Democracy bested stupidity, however, and between 1966 and 2021, vehicular death rates in America were halved.

The NHTSA is one of the many boring state and federal agencies critical to a healthy society. Before the Food and Drug Administration, the sale and distribution of food and pharmaceuticals was a free-for-all. The Federal Aviation Administration is the reason your chances of dying in a plane crash are 1 in 3.37 billion. Next time someone tells you they don’t trust government, ask them if they trust cars, food, pain killers, buildings, or airplanes.

The limits on innovation imposed by these agencies — their red tape — are real, and worth it. Millions of us are alive and prospering because we had the foresight and discipline to blunt the sharp end of industrial progress with the guardrails of democratic oversight. Until you open your phone …

Exempt

The greatest anomaly in the history of U.S. regulation is the place more and more of us spend most of our time: online. A lethal cocktail of complexity, lobbying, cultural worship of tech leaders, and anti-government libertarian screed has rendered tech immune to the basic standards of safety and protection. Lethal is the correct term. Tech comes into the purview of other agencies on occasion. (Though it’s always bitching it’s special and shouldn’t be restrained by the olds at the FTC and DOJ.) And the industry’s blocking efforts have been effective. There is no FDA or SEC for tech, which is America’s largest sector by market capitalization and growing.

The justification for this was the go-to new-economy get-out-of-jail-free word: “innovation.” When tech was nascent and niche, we were smart to err on the side of growth vs. regulation. That movie ended a decade ago. Phones aren’t toys for early adopters, and search and social have moved beyond campuses. We don’t require a license to drive a Big Wheel, but if a Big Wheel 5G went 750 miles per hour we might restrict access, or at least demand airbags.

The go-to narrative for these platforms after every new disaster is the delusion of complexity. And that the Internet is just another communications technology (e.g., the phone, a letter), a reflection of society, and it would be near-impossible to put guardrails in place. Also, sprinkle in some blather re free speech. This is all bullshit. AI can write a Seinfeld script in the voice of Shakespeare. It can scan platforms for words and images  associated with risks — they’re already doing it for signals you might be shopping for Crocs. But what’s the incentive for a platform to make the investment in any editorial review? Other than decency and regard for others, that is?

We’ve done a good job stupid-proofing the offline world, but that’s increasingly not where we live, especially younger people who now spend roughly the same amount of time online as they do sleeping. They (we) pass the majority of our waking hours riding in a vehicle with no airbags, licenses, or traffic lights. Plus, there are millions of autonomous vehicles on the road controlled by unknown actors, and they’re prone to running over pedestrians.

Operation Pause

Tech is embarking on its next big adventure: artificial intelligence. Which likely means rapid innovation, increased productivity, and another tsunami of unforeseen societal harms. Predicting how AI will tear the fabric of civilization is the new bingo. Humanoid phishing scams that access bank accounts, AI-generated “camera footage” and headlines that make the truth increasingly opaque, rogue AI gods determined to eradicate humanity. Experts agree: All of this is possible.

What’s telling is the technologists’ collective reaction to their own creation. For the first time, they want to slow down. A few weeks ago they wrote a petition calling on AI labs to “immediately pause” all training of the most powerful AI models for six months — hundreds of tech leaders signed the letter. The CEO of OpenAI, Sam Altman, who started the hype spiral with ChatGPT, says he is “scared” of his company’s own algorithms. One AI expert said the six-month moratorium isn’t harsh enough; instead, he says, “shut it all down.” What undermined the veracity of the letter was one signatory, Elon Musk, who’s asked others to pause as he fast-tracks his own AI programs. (As usual, he’s full of shit.)

Both Hands

We should grab this opportunity with both hands. Specifically, both hands on the wheel. Not a “pause,” which, in my view, is a bad idea. (China, Russia, and North Korea won’t pause.) If the guy who just disappeared my blue check hadn’t been kicked out of OpenAI, and controlled it instead, do you believe he’d be advocating for a pause?  Better idea: The 78 podcasts that garner more downloads than the Prof G Pod should suspend their programming. You know … just to get our arms around this new, and potentially dangerous, podcast medium.

But we do need to seize this moment, likely brief, when some tech leaders have remembered the virtues of government oversight. We need a serious, sustained, and centralized effort at the federal level, perhaps a new cabinet-level agency, to take the lead in regulating … we can call it AI, because pretty soon AI will be everywhere in tech.

There have been efforts at comprehensive technology regulation we can pick up and carry across the finish line. For example, last year Senator Michael Bennet proposed the Digital Platform Commission Act, which would create a federal body to “provide reasonable oversight and regulation of digital platforms.” In other words: Exactly what we’re talking about. But it’s still stuck at the “introduced” stage. As with any political issue, it needs public support.

What won’t work is fake regulation — when the government issues broad, vague statements about what companies should generally do. That’s what Biden did with crypto, and he’s doing it again with AI. Specifically, his “Blueprint for an AI Bill of Rights,” which is filled with truisms, platitudes, and no laws. Similarly, the NIST published its “AI Risk Management Framework.” Again, not laws.

Psychotics and the Homeless

Earlier this month, a tech executive was tragically stabbed and died. Outspoken members of the tech industry immediately speculated the killer was a “psychotic homeless person.” A few days later, an acquaintance of the victim (also a tech entrepreneur) was arrested and charged. Note: The homeless are more likely to be victims of crime than perpetrators.

The above is another variation on a story told repeatedly across an innovation economy where we have incorrectly conflated wealth and innovation with character. A growing vein of the tech community (Venture Catastrophists) deploy weapons of mass distraction and fear to wallpaper over an inconvenient truth: The menace unleashed on America the past two decades isn’t psychotic homeless people or a crime wave, but a tech community whose products depress our teens, polarize our public and render our discourse more coarse … making it less likely we come together and address issues including homelessness and crime. Our failure to regulate this sector, as we have done with every other sector, is stupid.

Life is so rich,

P.S. This week on the Prof G Pod I spoke with Stephen Dubner, host of the Freakonomics Radio podcast. We talked Adam Smith, private equity, and the seven deadly sins — tune in.

P.P.S. Want to innovate in a way that doesn’t destroy the world? Join me for free on May 16 to discuss How to Have a Breakthrough. Come with questions.

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Scarcity

Stabbings, state secrets, whores masquerading as Supreme Court justices — it’s been an especially depressing week in the news. So I’d rather focus on scarves. Specifically, Hermès, the iconic luxury brand. With $12 billion in annual revenue, Hermès now has a larger market capitalization than … Nike, which boasts $47 billion in annual revenue. I see this as a slow, yet tectonic, shift in consumer values (cue dramatic music) as awareness cedes ground to artisanship.

Awareness, via social platforms, has created a generation of empty-calorie brands — Kylie Cosmetics, Dollar Shave Club, Andrew Tate — built on sand. Over the past five years, the three biggest consumer packaged goods companies (P&G, Nestlé, and Unilever) whose competence is (building) awareness, have averaged annual stock gains of 9%, vs. 15% for the three largest luxury firms (LVMH, Kering, and Estée Lauder).

The decline of linear TV is a function of cable TV losing its oligopoly on awareness and awareness beginning to lose value as brands famous for being famous are less enduring. This trend highlights what has got to be a first-ballot-hall-of-fame strategic head-up-your-ass decision: Do away with one of the great artisanal brands of the 20th century, HBO. But that’s not what this post is about.

Key to artisanship is there being few artisans. Specifically, the existence of scarcity. Or, as is often the case, the illusion of scarcity. The strongest brands in the world — MIT, Apple, Hermès, the U.S. — are built on the artificial choking of supply via rejectionist admissions, pricing strategies, production, and visas.

Thirteen years ago I started a business intelligence firm that advised luxury (then CPG) brands. It was a successful company, predicated on a simple premise: Luxury brands would trade at higher multiples of revenue due to increasing income inequality and their ability to manufacture scarcity. That was the sermon I preached to every executive we met. We sold the company in 2017 for 8x revenue. Mirroring our client base, we were disciplined about pricing and said no to a lot of potential clients’ procurement departments (BTW, awful job). My first consulting firm, Prophet, had said yes to every client with a checkbook, and it sold for 2.8x revenue. It was the right decision at the time, as I didn’t have the capital to utter the sexiest word in the English language: no.

Want vs. Need

The richest man in the world doesn’t make cars, rockets, or enterprise software — he makes handbags. Bernard Arnault, the CEO of LVMH, is now worth more than Warren Buffett and Mark Zuckerberg combined. He’s made his fortune not selling things people need, but things they want. LVMH controls the most prestigious luxury brands in the world, from Tiffany & Co. to Loro Piana to Louis Vuitton.

When you assemble artisans and create scarcity that results in a supply/demand imbalance, you generate a cash volcano that you can cap the same way you do an oil well — and turn on/off as needed. Businesses are either supply-constrained (e.g., rare earth minerals, 1945 Château Mouton wine, etc.) or demand-constrained (pretty much everything else). The companies that trade at the greatest multiples are those that are artificially supply-constrained, where the supply/demand imbalance puts a dial on the spigot the managers control. Imagine the decision to have more revenue is just a function of when you’d like more revenue (see above: Hermès).

I wrote about scarcity six years ago. How to create it, how to sell it … why it’s so important. Today, scarcity is more important — and scarce — than ever. In sum, this post still resonates.

[The following was originally published on March 3, 2017.]

Scarcity is key to irrational prices. Beachfront property is scarce and, regardless of the economic cycle, always in demand. You can also manufacture scarcity with similar results (crazy-town prices). Spoiler alert: Hermès could produce more Birkin bags and yet decides not to. The choking of supply adds heft to the narrative that this is a special bag, and it adds credibility to the urgency — you may be shit out of luck next week if you don’t plunk down $14,000 now.

 

Snap Inc. stock began trading yesterday, and bankers did a masterful job of manufacturing scarcity. The triple threat of social/video/millennial is uber-fashionable, and the underwriters ensured that, after placing the bulk of shares with institutions, which implicitly commit to holding for a long(ish) time, the bankers let only 14% of the shares float (be available for trade).

So, even if a Birkin bag or Snap shares are not intrinsically worth $14,000 or $25/share, if scarcity supports the price then God bless them, no? No. Hermès can maintain scarcity. However, over the next 24 months, seven times the number of Snap shares could hit the market. The network’s artisanship/specialness is also about to become less scarce as Instagram Stories continues counterfeiting the “Snap bag.” I believe, in 2018, Snap shareholders will discover they don’t own a Birkin, not even a Kors or a Kate Spade, but an Esprit Black Brown Round Barrel Bag Purse Shoulder Small Hipster.

Object Orientation

We’ve been reading words for several hundred years, listening to words for thousands, and learning from images for millions. We, as a species, are great with images. We can interpret/absorb an image 50 times faster than words, as we’ve had a lot more practice with visuals. Just as music is cemented into our being in our late teens, the images of our early childhood become fixed into our gray matter.

When I was 7 we lived in a house near the beach in Laguna Niguel. My dad would come home early (he was a salesman), and we’d go bodysurfing and see seals and porpoises just offshore. When there was a storm, we’d go to Newport Beach. From the end of the pier we’d look several hundred feet out and alert each other when millions of gallons, barreling toward shore, morphed into a blue-gray hemi cylinder 8, maybe 10 feet high and wait for the pier to vibrate, even shake, as the rising sea floor thrust the cylinder up and the wave crashed down on the water.

On one of four consecutive nights, beginning on the full and new moons in spring, my mom would wake me at midnight, and, armed with flashlights, we’d go down to the beach and watch what looked like hot slices of metal dancing in the shallow surf. The grunion were running.

They weren’t all images from the title sequence of The O.C. I remember, on TV, a skinny guy wearing a ski mask on a hotel balcony interrupting awe-inspiring performances from Mark Spitz and Olga Korbut. The only reason it stuck is every time this guy came on screen, my parents stood in front of the TV, visibly uncomfortable.

When my father was going on a business trip, my mom and I would go with him to Orange County Airport. More than an airport, it felt like a restaurant where people pulled up, in the back, in commercial aircraft. There was a bar with a wraparound balcony on the second floor that you could access via stairs from the street. No security. My dad would take me out on the balcony and cover my ears as aircraft engines screamed in anticipation of the pilot releasing the brakes and beginning the 5,700-foot transformation from beached seal to soaring eagle.

He taught me the difference between a 727 and a DC-9 (three jets vs. two), and between the DC-10 and the L10-11 (third jet is part of the fuselage vs. finding residence halfway up the tail). The backyard of this restaurant was dominated by two brands, Air California and Pacific Southwest Airlines. Pacific planes had a smile painted on the nose, grinning at us through the big windows.

My parents were living the American Dream. Two immigrants with an 8th-grade education, they applied hard work and talent to the greatest force of good in history, the U.S. economy. We lived close to the beach. But they (mostly my dad) fucked up, and soon we were living in two houses, neither near the beach. After the divorce, my dad would pick me up after work every other Friday in his Gran Torino, from our 800-square-foot apartment in Encino. I had to wait outside, sometimes for an hour, far from our apartment, because my mom didn’t want to risk seeing my dad, or even his car, as she hated him. I became skilled at identifying cars, from a distance, by the shape and luminosity of their headlights. AMC Pacers were easiest.

Anytime I hear sound in the air, I still look up, and, most of the time, I can identify the plane and airline. Last weekend, in South Beach, my friends pretended to be impressed with my ability to distinguish the A-380 headed to Munich (Lufthansa) from the double-decker Airbus flying to Paris (Air France). Gazing upward and cataloging air traffic is an instinct for me — look up, identify an object, and think of when we were a family and lived near the beach.

Life is so rich,

P.S. I’ll be back on Monday with a fresh look at the Markets on the Prof G Pod.

P.P.S. Watch my five-minute lecture on scarcity here. What. A. Thrill.

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Office Hours

Our podcast, the Prof G Pod, now has four different weekly episodes: Monday is Markets, where we break down the financial news; Wednesday is Office Hours — listeners ask questions; Thursday is Conversations, where we speak with blue-flame thinkers in tech and business; and Saturday we publish an audio version of this newsletter. Phew … that was exciting.

Anyway, I’m in Tokyo this week with my boys. We’re doing a series of activities I don’t enjoy but know will age well. Venturing to the Imperial Palace is torturous. However, as we’re leaving I begin to enjoy it. Like serving in the Marines, I’ll be glad I “did” it. (Note: I did not serve.) We take a mess of pictures, and the only tangible benefit from AI I’ve registered, other than the next episode of The Last of Us starting in 3 … 2 … 1, is the Apple Memories feature, which strings together photos with cheesy music in the background. At the “end,” I plan to indulge in a shit-ton of heroin and watch these memories over and over. Pretty sure my deathbed scene is what Tim Cook had in mind when he greenlit the product. Also, the third leg of my exit stool will be a nurse with soft, loving hands … but that’s another post.

As it’s Thursday night and Tokyo Tower (don’t ask) and Yakitori are waiting, we’re going to highlight some of our favorite Office Hours questions. These queries focus on parenting, AI, and optimism.

Q. Hi, Prof G. My name is Ben, and I’m from Oakland, California. My question focuses on something you talk honestly about, fatherhood. My wife and I are expecting our first child next month. We’re both very excited and slightly terrified but looking forward to our new titles of parents. My question is: If you could do it all over again from the beginning, what would you do differently in regard to raising children, and what would you double down on?

A. Congratulations. One thing I would not do is be in the delivery room again. I found it disturbing and gross — they were more worried about me than her. I was so nauseated, I couldn’t stand. I don’t buy that men should be in the delivery room. I know, primitive. Sue me. Anyways … a few things you might feel:

First, I was worried I didn’t have enough money. I hadn’t been good at relationships and was worried that if I fucked up this one it would have an exponentially bigger impact. Specifically, I was now responsible for a kid, and it freaked me out — I think that’s natural. In many ways it was motivating and productive. My economic security has grown exponentially since the birth of my oldest. Was that a function of focus, or a raging bull market? The answer is yes.

I did not love this thing when it first showed up. People claim you’re instantly in love. I fell in love with my boys over time — but when the first one arrived, it felt similar to a science experiment. My job was to keep the thing alive, and the upside wasn’t readily apparent. If you hear angels singing and see bright lights, great. If not, don’t worry. It comes.

Your main job is to be supportive of your wife/partner. In the very early days, women are more important to the kid — you’re mostly useless. We pretend it’s fun the first year. It’s not, and dad doesn’t play a big role. Your job is to show up, do night feedings, make sure your wife gets some sleep and keeps her sanity, and do what you can to make the home feel secure and your wife loved. Be a ballast — a steadying force, focused, and disciplined/adult about money to avoid that stress infecting the household. Also, just be there.

If you have the flexibility and resources, I would have a second one sooner rather than later. Having two felt three or four times better than one. One is too much pressure/focus — on you and the kid. I was an only child and believe I missed a lot. The negotiation, arguments, balance, positive tension — the joy/stress/noise/motion two kids bring to a household feels like the difference between having an accessory and a family. I’m glad we did two. I wish we’d had another, but I was worried about money and felt we were pushing our luck. It’s a challenging world for kids, and I felt we should cash out with two wonderful boys. Looking back, I wish we’d had a daughter, but it wasn’t in the cards.

There is an arc to happiness. Across every culture, happiness looks like a smile — youth is (mostly) about Star Wars, football, and discovering limits with friends. And … slowly, then suddenly, you get less happy, as kids and careers are stressful. The realization you’re not going to be a senator or have a fragrance named after you is a bummer. Generally speaking, people are their least happy from the ages of 25 to 45. So, if you feel stressed, unhappy even, recognize you’re tracking — that’s part of the journey.
The only thing in my life that’s more important to me than me (I’m selfish) are my kids. It’s wonderful that you’re having a child. Before kids, for me, there was never enough … I was always hungry for more. More money, more fabulous experiences, more relationships, more impressive people, more relevance … more. There are moments with my sons when, for the first time, I think, “This is it, I’m good.”

Having a kid is also the ultimate expression of optimism and commitment to your partner: Whether you like it or not, you’re committing to stay in each other’s lives for 18-plus years. Keep in mind, your relationship with their mother/father will be the reference for how they will likely treat their adult partners. See above: Be there.

In sum, having kids was the best thing I’ve done that ruined my life.

Q. Hi, Prof G. This is Paul from Chicago. Here’s a thought: Could ChatGPT save us from social media and political rhetoric that’s become unencumbered by facts? It doesn’t seem like a technical stretch to deploy ChatGPT as a real-time fact-checker for social media posts. Perhaps instead of a blue check, Elon’s engineers could work on a Pinocchio icon whose nose length correlates with an AI accuracy test for each tweet. Is this a practical application of AI or a pipe dream?

A. A few stats: Fact-checking organizations are building AI-driven tools to help deal with the proliferation of online misinformation. This is a huge problem: 80% of U.S. adults say they’ve consumed fake news, and 38% say they’ve accidentally shared it. But in 2020, Newtral, the biggest fact-checking team in the EU, developed a multilingual AI language model called the Claim Hunter. The developers use thousands of statements to train the system to identify claims from social media accounts and political figures — which accelerates the fact-checking process. The AI only flags statements that aren’t questions or opinions for the fact-checkers to review, cutting the time fact-checking takes by 70% to 80%.

There’s now a lot of data demonstrating AI’s flaws, its tendency to generate misinformation. In January, researchers tested ChatGPT’s accuracy by giving it a hundred prompts relating to common false narratives around U.S. politics and health care. ChatGPT produced false information in 80% of its responses.

So far, the majority of data shows that ChatGPT will likely be weaponized — at least in the short run — to spread misinformation. You can tell ChatGPT, “Give me 15 statements written in the style of the CDC that say mRNA vaccines alter your DNA,” and the large language model will produce 15 snackable, tweetable, Instagrammable statements that feel real and are false.

The problem is incentives. Currently, the incentives are to grab attention and find things that will get circulated. And, unfortunately, our species is drawn to the novel and to catastrophe. You’ll have AI-driven fact-checking, but I wonder if the people incentivized to spread misinformation will get out in front, while platforms look the other way. Because ultimately, saying mRNA vaccines alter your DNA will result in more engagement, more clicks, and more Nissan ads. The most optimistic thing about the development of AI, in my view, is that (so far) it’s subscription- vs. advertising-based, meaning the incentives are to add value to the consumer, instead of the advertiser.

If I could make just one prediction about AI: AI won’t take your job. Someone using AI will.

Q. Hey, Scott, this is Robin, calling from Copenhagen. I was chief marketing officer of WeWork and am a big fan of your show. There’s a lot of things to be worried about in the world right now, and you frequently rant about them, and I love it. But what are you hopeful about?

A. You’re right, we’re more cynical than we should be for a lot of reasons. One of them is the media, which needs to justify The Situation Room and constant news alerts pushed to your mobile. The media knows we are like a Tyrannosaurus rex — drawn to movement and violence. Much of it is cadence. News is a profit machine trying to capture and retain attention. However, if you pull the lens back and take a global perspective, it’s difficult to argue things haven’t improved. What headline doesn’t work? A: “Things Marginally Better Today.”

I teach big classes at Stern — around 300 young adults, average age 27. Every year they get smarter, faster, more socially conscious, and more facile with technology. We are producing  people who will do a better job running things. An emerging generation of thoughtful, talented leaders, coupled with recently passed climate legislation, should reduce America’s carbon emissions by 40% in about a decade. Still a lot of work to be done, but progress.

Also, more people (globally) are spending time helping someone they will never meet than ever before. People are planting more trees the shade of which they will never sit under. That is how societies grow great.

Finally, led by America, the West’s support of the brave people of Ukraine is an important moment we’ll look back on with pride. NATO has emerged from a brain coma and acquired new members, Europe is a Union again, and we have destroyed half of Russia’s kinetic power. We are showing the world that when democracies join hands they are an insurmountable force. Murderous autocrats are watching — and sleeping less well.

Tokyo Nights

As I write this, I’m staring at the Tokyo Tower from the 31st floor of an American hotel (The Edition) while drinking German beer. Tokyo is an amazing city, and Japanese culture defines the term “grace.” I woke up with a stiff neck this morning, so I walked to a wellness clinic where an acupuncturist used his iPhone’s translate feature to discern what was bothering me. My boys fell asleep watching Ted Lasso, so I crept to the hotel bar. I’m two drinks in and feel overwhelmed by what seems like an obvious, irrefutable truth: Our children will have wonderful lives. They and their generation will face huge problems, as we did. And, like their ancestors, they will address them with unprecedented character, skills, and tools we can’t even imagine today. Despite the catastrophizing and nihilism of media and tech leaders, respectively, the West’s prosperity will be similar to that of the market: a coin flip every day, but over the decades … up and to the right. On the same day this week, young people (en masse) protested state houses over gun control, Finland joined NATO, and my 12-year-old son purposefully left his phone at the hotel, saying he’d “had too much screen time this week.” I should come to Japan every month.

人生はとても豊かです,

P.S. If you want to submit your own Office Hours question, send a voice recording to: officehours@profgmedia.com

P.P.S. Speaking of ChatGPT: What happens when you put it into a two-week, MBA-level Section sprint and ask it to write a positioning strategy? Find out here.

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Fame

Until my forties, I was known … but not famous. Known in grad school at Berkeley, known in the e-commerce scene in the Bay Area, and, after having taught 5,000 students, known around NYU’s campus. Day 1 of “fame” came in 2016. The team at L2 (my business intelligence firm) was headed to our weekly team lunch when, from across the street, we heard: “Prof G … we love your videos!” Two Indian men in their twenties hurriedly crossed the street to tell me they never missed our “Winners & Losers” videos and that I had a following in India. Then they asked for a selfie. The whole team thought it was odd and amusing that people from several thousand miles away not only knew our work, but also that the work inspired affection and admiration.

Every day since then, it’s grown. Messengers swerve onto the sidewalk and high-five me. Women, visiting from Michigan, run out of restaurants to ask if I can wait a minute while they get their (horrified) son to take a selfie with me: “We listen to your pod together.” And today, I’ll receive dozens of emails and hundreds of comments from people I’ve never met or been in the same room with. Fame. Fred Allen said a celebrity is someone who works hard to become well known, then wears dark glasses to avoid being recognized. I have never donned dark glasses as … I love being recognized. I can’t think of a time when it didn’t make me feel good, even if I was in a hurry. It has, no joke, made me feel better about the world, and myself — people are so wonderful to me, and (almost) convince me we’re having an impact.

The real joy is people recognizing me when I’m with my kids or friends. Years ago, whenever anything good happened, I would call my mom and tell her first. She was inevitably more excited about my first mortgage or dog than I would ever be. The audible joy on the other end of the line made the achievement and the moment real. Even though she’s gone, my first instinct whenever anything good happens is still to call her. To make that good thing real. But she’s not around, so many great things feel as if they aren’t real, as if they didn’t really happen. People recognizing me, saying something nice, makes some of the nicer things in my life feel (once again) as if they actually happened. If I sound a bit fucked up, trust your instincts.

There is a dark lining to the silver cloud — one I try not to dwell on. I read recently that for every person who comes up to a celebrity and says something, 50 other people recognize the person but don’t approach. In crowded cities and locations, someone might say hi to me every 20 minutes. That converts to 150 additional people an hour who see me, though I don’t see them. The panopticon of fame. I understand why truly famous, A-list people feel they can’t leave the house.

Still, the saving grace is that, in person, people are wonderful. Online, they’re significantly less wonderful. A non-zero percentage of online recognition is really ugly. The inevitable corollary of success is that people feel the need to take you down, and online media has tapped into that instinct like nothing else. There seems to be a cottage industry for correcting or calling people out once they have (any) fame. I’d like to say it just rolls off of me, but it doesn’t. Some of it is just downright disturbing. Recently, I’ve been receiving emails from (purportedly) young men experiencing suicidal ideation who need help (i.e., money). Not just “a Nigerian prince needs your help” — these are closely tailored to my publicly stated views and concerns. They’re clearly fakes (possibly AI-generated), but still … disturbing. Fame has validated for me what almost every study shows: Anything that happens in real life is profoundly better, kinder, and more human than its online facsimile.

Innate

Fame is increasingly embedded in our economy and daily lives and thus garnering more research attention. One finding: it’s about our fear of death. Empirical studies confirm that our desire for fame increases with greater awareness of our mortality. Which makes sense: The only thing that can outlive your body is the memory of you.

That drive can inspire great achievements. Charles Dickens was famously obsessed with fame — and that obsession coursed through his characters. Ovid admitted his mission was for his “fame to live to eternity.” Some people, though, try to skip over the “great achievement” part. As Harry & Meghan subject us to their worldwide privacy tour, we’re not as much interested in them — both brighten up a room by leaving it — but in the hypocrisy of pursuing privacy on Instagram and Netflix. (Q: Is it wrong to wish they could be mowed down by a psychotic skier who makes vagina-scented candles?) Or maybe they wish for a more modern approach to fame: I hate fame. Look at me. Please. See how much I hate it? Look at me.

Regardless, these people know we only truly die when people stop knowing who we are.

Who

Despite what Instagram and the Daily Mail indicate, becoming famous is not most people’s No. 1 priority. In fact, only 1 in 10 Americans admit that fame is important to them.

Who are the 10% who want to be famous? Ambitious, attention-seeking, conceited, and psychologically vulnerable folks. Psychologically vulnerable, meaning they feel they have issues that fame will help them overcome. The other term for this is low self-esteem. I just read the previous paragraph and … feel seen.

This may explain why young people are especially interested in fame. Compared to 2% of boomers, more than a third of 18- to 24-year-olds say fame is important to them. Becoming a celebrity is akin to sitting at the cool kid’s table. It’s the “perfect balm for the sting of social exclusion.” The social media cocktail stirs into this follower counts and like buttons, escalating young people’s emotional tumult to dangerous levels.

Externalities

If fame is a treatment for feeling inadequate, it’s likely not a good one. It turns out fame, like power, is an addictive substance. Many famous people report feeling fearful they’ll lose their notoriety — and when they do, the transition out of the public eye creates a psychological burden. As with heroin, getting hooked is the easy part. Actors, singers, musicians, and athletes on average die younger. The upside? They cement their fame. Neither James Dean nor Marilyn Monroe was that talented. Kurt Cobain would still be famous. But I digress.

Fame is a drug increasingly laced with the fentanyl of fame itself. Almost any position or attribute is a positive if you can be famous for it. Whether it’s homemade porn, catastrophizing on Twitter, or mocking the disabled, if it makes news you’ve won. And in an attention economy you can monetize that. The wheel spins. BTW, it’s the dealer who wins.

Goldilocks

I have just the right amount of fame. On a regular basis, someone approaches me and says something nice about our work, and it’s rewarding. At the same time, I can eat at a restaurant bar alone and feel (mostly) anonymous. Knowing that some people likely do recognize me triggers the Hawthorne effect  — I am now more conscious of my actions, as I assume I am being observed. Probably a good thing.

I’m a high functioning fame-aholic. I love alcohol and THC but am not addicted. Neither gets in the way of my life, and I don’t crave them. I am, however, addicted to the affirmation of strangers. I hope that makes me more like Dickens, less like a Windsor. I’ve accepted I’ll never be a serious scholar, because as Zhuangzi noted, “He who pursues fame at the risk of losing himself is not a scholar.” I don’t do peer-reviewed research as (almost) nobody reads it. But I believe the work we do makes a difference in other ways.

The allure of fame takes some people to dark places, so it matters where the void that people try and fill with fame comes from. For me, I believe the void is that, growing up, I was invisible. Not a good or bad student, neither a loner nor especially social, athletic but not talented, funny but not hilarious. At big public schools it was pretty easy to blend into the ecosystem as a defense mechanism against predators who were more popular, mean, or even violent. An especially bad acne week? Rejection from a person/group beyond my social reach? No problem, just retreat and go invisible.

Our research on struggling young men largely distills to one determining factor: The presence, or lack thereof, of a male role model. I had one — my handsome, sharp-witted dad was the most impressive man I knew — but he moved away when I was 8 and (often) didn’t seem that interested in me. And why would he be? I was barely there. And if my dad didn’t see me, why would anybody else?

So my limited fame fills a hole, an old fear that I’d never amount to anything, I’d remain invisible and … alone. The hole leaks, though, so it never fills up. Recognition from strangers, as you age, feels increasingly like empty calories. The affection people have for you is for your public representative … it’s not really for you — they don’t know you. And if they did, they’d likely be disappointed. I believe the last sentence illustrates what people call impostor’s syndrome.

15:15

I’m 15 seconds past my 15 minutes and still trying to determine how — regardless what demons inspired my pursuit of fame — to turn chicken shit into chicken salad. So we highlight the work of other academics; catalyze the conversation on important issues; help people feel more connected to each other and the country; and (most important) call attention to others’ achievements. Fame, like compassion, is not a zero-sum game. It’s so easy to share and means so much to people.

Fame and atheism go well together because the only thing that survives death is living people’s memory of you and if/how it influences their actions. In 50 years, I’ll be gone. When I think about that (which is often) I am reminded that I don’t need the recognition of strangers to make me immortal. There are two men who’ll then be 62 and 65, who lived with me the first 18-plus years of their life, who will remember me. They’ll remember how intense, yet goofy, I was. I’d also like to believe they’ll be more kind and secure than I was, as, every day, their father confirmed they were wonderful and immensely loved. They won’t remember my books, the TV networks I helped kill, or any other accomplishments. They will feel me, though. They’ll tell stories about me, I’m certain of it. I’ll be famous.

Life is so rich,

P.S. This week on The Prof G Pod I spoke with California Representative Ro Khanna about TikTok, SVB, and a vision for America.

P.P.S. To celebrate Section’s rebrand, we’re offering 100 class passes to take an upcoming workshop for free. Enroll here.

 

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Quitters

Sixty years ago, Ayn Rand wrote Atlas Shrugged. The book is set in a dystopian United States on the brink of economic collapse. Exhausted by a corrupt government, the hero, John Galt, packs his things and starts a self-sufficient community in an isolated valley, hidden — and separate — from the U.S. He recruits the nation’s business leaders to quit their jobs and populate his utopia.

The book was a hit, especially among disaffected people who felt the U.S. was on the wrong track. Sales spike whenever America experiences a downturn. In 2009, following the Great Financial Crisis, half a million copies were sold. Ayn Rand’s message: Government is rigged, America is broken, and you should quit. She eventually became a conservative icon, and Atlas Shrugged, the quitter’s bible.

Options

Quitting used to mean being anti-government. But social media has morphed the message into something larger. There are now multiple ways to quit — and multiple gurus, communities, and schools of thought to guide you.

Libertarianism is one path: an entire political party dedicated to going it alone. Or you can take more extreme measures. One Republican representative recently suggested a “national divorce.” That we quit on this whole “United” States thing and split the country across political lines. Some of our most influential media personalities support the idea, and an increasing share of Americans are flirting with it.

Others are resigned to all-out apocalypse. Four in 10 Americans are either actively prepping for a Doomsday scenario or have plans to. Among 18- to 24-year-olds, that number is 6 in 10. For tech billionaires, the quitting menu is more expansive. Peter Thiel, the co-founder of PayPal, bought a 477-acre bunker in New Zealand in preparation for a U.S. apocalypse, and was given citizenship after spending 12 days in the country. Sam Altman, the CEO of OpenAI, made a pact with Thiel that they’d fly to New Zealand together when the collapse arrives. If that falls through, Sam will be fine: “I have guns, gold, potassium iodide, antibiotics, batteries, water, gas masks from the Israeli Defense Forces, and a big patch of land in Big Sur I can fly to.” This is what it means to quit — on the eve of the apocalypse, load up the Gulfstream with guns, and leave.

Technostate

When did things get so extreme? How did we go from anti-government Reaganism to apocalyptic secessionism? The movement has roots in the Valley.

In 2013 a former general partner of Andreessen Horowitz named Balaji Srinivasan gave a talk at Y-Combinator, the nation’s premier accelerator for tech startups. The talk was titled “Silicon Valley’s Ultimate Exit.” Srinivasan opened with a question: “Is the United States the Microsoft of nations?” The thesis was the U.S. had become outdated, brittle, and slow. He offered two solutions. “You can try to reform” — change the system from within — or, his preferred option: “You can leave.”

In Balaji’s view, this was Silicon Valley’s destiny: to secede from the U.S. and form a techno-utopian state, free from government regulation and any duty to serve the needs and interests of the rest of the country — the “ultimate exit.” It was also, he divulged, the dream of many other prominent tech leaders. Balaji cited Larry Page’s interest in “setting aside a part of the world” for unregulated experimentation, Marc Andreessen’s prediction that the world would see “an explosion of countries in the years ahead,” and, of course, Elon’s mission to colonize Mars.

Balaji predicted that when that time comes, there will be pushback from the “Paper Belt,” a term used to describe America’s less technologically advanced cities — D.C., New York, Boston, and so on. But he believed Silicon Valley would persevere. “We’re putting a horse head in all of their beds,” he said. “We’re becoming stronger than all of them combined.” Technology would be the tool that would let the elite secede from the union without having to pick up a gun.

The speech was an enormous hit, and a precursor to a movement among Valley elite to begin seceding from America via shitposting government, financing MAGA campaigns, catastrophizing on Fox News / Twitter, and demonstrating a general disdain for our country. Several tech startups have emerged dedicated to the secessionist dream. The Seasteading Institute, co-founded by Thiel and Milton Friedman’s grandson, is building politically autonomous floating cities. Prospera bought a plot of land on Honduras’s Roatan Island where you can pay to be an “e-resident.” Nation3 is working on an “online-first, zero-tax nation with its own jurisdiction, court, and system of law.” The list goes on.

Doomcoin

It’s no coincidence that the guy who feels Silicon Valley will secede is also pushing crypto. Last week, Balaji made headlines after he bet $1 million that Bitcoin would reach $1 million within the next 90 days. Sort of. The real wager is that the U.S. will enter a period of “hyperinflation” within 90 days — his proxy for that scenario is Bitcoin breaching $1 million. Consider what that means: In his view, the price of Bitcoin is directly proportional to the likelihood that America will experience a catastrophe. Put another way, he’s long Doomsday … via Bitcoin.

People have capitalized on catastrophes before — political coups, short selling, etc. — but in the history of humanity, there’s never been an asset class whose value is predicated on collapse. Bitcoin has risen 30% since Silicon Valley Bank’s crisis threatened the banking system. The cryptocurrency has historically been marketed as a “hedge against inflation,” but it’s really a hedge against catastrophe. Which is to say, a bet on catastrophe. Crypto is becoming the ultimate libertarian scheme — the world’s first asset class that encourages you to stop investing in America, and quit.

The Dots

Guns, bunkers, private islands, crypto, secession … connect the dots. The venture catastrophists now have a vested interest in the nation’s decline. They’ve invested too much in Doomsday not to root for it — maybe even catalyze it. Balaji has a million dollars on the line;  Andreessen Horowitz has $8 billion.

Much of their catastrophizing is in response to elements of U.S. society that are legitimately broken. The first block of Bitcoin ever mined is encoded with a message that reads, “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks” — a reminder that Bitcoin was born in response to the failures of our banking system during the Great Financial Crisis. Post-Dodd-Frank, we still have issues. Silicon Valley Bank was mismanaged, and many banks are fragile. The government is gridlocked, parties polarized, teens depressed. There’s a lot wrong with America, and we have reason to be upset about it.

The question is: What do we do about it? For too many, the answer is quit: Instead of fixing the Fed, start a different currency. Instead of healing our divides, split the nation in two. Instead of making this planet more habitable, colonize other planets or put a headset on that takes you to a meta (better) universe. But here’s the thing: We’re stuck here, and with each other.

Reformers

History’s greatest leaders aren’t quitters, but reformers. Abraham Lincoln felt it was his “duty to preserve the Union,” not to accept its division and cauterize the wound. Despite the headlines, and all the work to be done, our nation’s arc still bends toward bringing groups together. From Civil Rights to gay marriage, America still strives to bring people closer under the auspices of a shared belief in a union that offers liberty and the pursuit of happines. We have lost sight of our achievements. The U.S. is responsible for more than half of the world’s Nobel science laureates and has provided more than a trillion dollars in non-military foreign aid. Inflation is high, but not as high as our developed peers, and our economy continues to grow. We can and will be the first society in history to be a truly multicultural democracy. It comes down to this: Do we invest in Mars or Michigan? Are our most fortunate business and elected leaders citizens or survivalists?

When I was in elementary school, we performed Duck and Cover drills to prepare for a nuclear attack by the Russians. A flash of light from the detonation of a thermonuclear device? No problem, just duck and cover, and you’ll be fine. Spoiler alert: No matter how many rough-cut gems you can shove up your ass or how plush your bunker, there is no escaping the fallout of our democracies failing. Because our democracies are largely capitalist and accept, if not idolize, people who aggregate the wealth of small nations. If shit gets real — I mean real — bunkers will likely become easy targets in the recalibration of society. The previous sentence is a pedantic way of saying the best bet (by far) is to double down on a society that already has Netflix, Nespresso, and Girl Scouts. Citizenship is not just an obligation; it’s also a trade. In the case of America, the best trade is to invest in each other and what MLK called our “beloved community.” We need reformers, not quitters.

Villagers

The 2003 M. Night Shyamalan film The Village is about a group of people who secede and develop an alliance with creatures who keep villagers in line by terrorizing them. Spoiler alert: The creatures are just villagers in costume. The threat is still real, but it’s exaggerated in order to serve powerful people’s objectives. In the U.S., our threats are also real, but powerful people are dressing them up to suit their own nihilism and self-interest. These anti-citizens do not see dead people (a much better film), but tear at the fabric of what is, and continues to be, the great experiment that is the U.S. They should be called out for what they are: cowards.

Life is so rich,

P.S. Last week on the Prof G Pod, I spoke with Bill Burnett, co-author of the New York Times bestseller “Designing Your Life” and co-director of the Life Design Lab at Stanford University. We discussed how to understand your talent and what to do when you feel stuck. Listen here.

P.P.S. Make your team more strategic — sprint together with Section. In April we’re teaching Problem Solving, Platform Strategy, Writing for Impact, Inclusive Leadership, and Investor Mindset. Ask for a demo now.

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Venture Catastrophists

In 1907, amidst rising interest rates and a declining stock market, two New York bankers attempted to corner the stock of a copper company. Their scheme collapsed, and depositors at the banks that backed them pulled their money. One bank, Knickerbocker Trust, lacked the capital to withstand the bank run and, four days later, shut down. The rout was on.

J.P. Morgan, the nation’s preeminent banker and business leader, saw obligation and opportunity. He gathered the heads of New York’s banks at his Madison Avenue mansion and, the story goes, locked the doors and pocketed the key. “This is the place,” Morgan proclaimed, “to stop the trouble.” First he addressed his obligation: to save the system in which he’d built his wealth. He pledged an $8 million loan ($255 million in today’s dollars) to the next domino after Knickerbocker, the Trust Company of America. Then he convinced a dozen other banks and the U.S. Treasury to deposit $70 million into other vulnerable banks. The “Panic of 1907” subsided. Morgan saved the financial system. Fourteen years earlier, he’d done the same thing.

Trust

What J.P. Morgan understood was that banking, and by extension the economy, is not built on gold, labor, machinery, or spreadsheets, but on trust. Trust that deposits will be there when needed. That trust ruptured when the Knickerbocker Trust Company said, “We can’t.” Trust was restored when J.P. Morgan said, “We’ll ensure they can.” Once people trusted the banks again, the monetary crisis was solved. Fast forward to today: Can you imagine any part-time libertarian billionaire in the Valley pledging 5%, much less 50%, of their wealth to cauterize an emerging banking crisis?

Banks need your trust because they don’t actually have your money. When you deposit cash at the bank, it loans it to someone else. In fact, banks loan out more than they take in. It is a miracle and the cornerstone of our economy — turning short-term deposits into long-term loans. This is a good thing: Money sitting dormant does not fund startups, expand existing companies, or encourage consumers to … consume. It’s not useful.

Every bank is vulnerable to a run if enough people ask for their money on the same day. If Bank of America’s 67 million customers simultaneously withdrew their funds, in the same day/week/month, it would fail.

Together

But Bank of America doesn’t stand alone. It’s backed by a safety net of federal agencies — the Treasury, the Fed, the FDIC. Regulators, risk managers, and bank management are supposed to calibrate a sufficient level of liquidity to prevent insolvency — to “stress test” the bank. The Fed serves as a lender of last resort to troubled banks. Regulation moderates risk but can’t eliminate it.

This federal backstop exists, in substantial part, because J.P. Morgan didn’t see just obligation back in 1907. He saw opportunity. In the aftermath of the panic, Morgan called in the loans he’d made and went shopping for distressed assets: He acquired six banks, including the Trust Company of America, a steamship line, and the second-largest steel company in America (he already owned the largest). By 1913 officers of J.P. Morgan & Co. sat on the board of 112 public companies, representing 80% of the public market capitalization in the country.

We learned two lessons from 1907. The first was that the banking system needs a backstop. The second was that we shouldn’t rely on billionaires to be that backstop. In 1913, Congress passed the Federal Reserve Act, which created the central bank as we know it today. (The FDIC came along in 1933.) It’s no coincidence that the generations that followed 1907 made historic investments in the collective strength of America, from Social Security to the G.I. Bill to the Interstate Highway System. They understood their obligation to be part of a broader solution and rest it on the shoulders of democracy.

However, prosperity has a poor memory. By the 1980s, Morgan’s obligation was forgotten, and his opportunism became our model. Reagan and Thatcher branded the new (old) era: “There is no such thing as society,” said the Iron Lady. “There are individual men and women, and there are families.” Reagan added: “Government is not the solution to our problem; government is the problem.” Libertarianism, the political philosophy of a 19-year-old who’s just discovered Ayn Rand, became the governing ethos. Regulators were no longer backstops but impediments to be defunded or ignored.

By the 2010s, trust itself was seen as an inefficiency. Crypto rose to prominence with the core promise of “trustless transactions.” There’s no such thing.

SVB

Last week, Santa Clara had its own Knickerbocker moment. As the name suggests, Silicon Valley Bank was the bank of choice for venture capitalists and their portfolio companies, holding funds for nearly half of U.S. venture-backed companies. On Wednesday, March 8, SVB announced it had sold securities at a loss and was trying to raise more cash. A small number of VCs panicked and encouraged their portfolio companies to pull their funds, and on Thursday they withdrew $42 billion — breaching SVB’s liquidity cushion. On Friday the FDIC seized the bank.

Any complex event has multiple causes. The direct cause here is obvious: Too many of the banks’ customers tried to withdraw too much cash at once. The proximate causes were numerous:

SVB committed the same sins that bring down most financial firms: mismatched durations and poor risk management. It invested long in mortgage loans and Treasury bonds, and borrowed short from startups that needed cash to fund operations.SVB lobbied the Trump administration (successfully) to raise the asset limit for tighter regulation.Interest rates rose, at a historic rate, decreasing the value of its long-term investments.SVB bungled its communications and strategy of trying to plug the hole in its balance sheet by selling equity, triggering the run it was trying to prevent.SVB’s customer base of startups is uniquely twitchy: They have cash balances well over the FDIC insurance limit of $250,000, and they’re interconnected through a handful of VC firms, which increases the risk of a bank stampede.

By Friday morning it was over, and the feds had arrived to turn on the lights and close the bar. While they were working over the weekend to ring-fence the contagion and make SVB’s depositors whole, a new species of venture capitalist was born on Twitter: the Venture Catastrophist. The fear mongering’s stated intention was to drum up support for a federal bailout of SVB depositors — many of whom were the Catastrophists themselves.

There are no libertarians in foxholes.

After SVB

In the immediate aftermath, observers are doing what they do after a complex catastrophe — cherry-picking the proximate cause that suits their politics and priors. It wasn’t rising interest rates, poor risk management, the concentration of the depositor base, or Venture Catastrophists on social media. It was all of it.

A more interesting question: What could have prevented the collapse? What is obvious is there does not appear to be a J.P. Morgan figure in the Valley with the leadership, citizenship, and sense of sacrifice to cauterize a contagion. There was, however, a group of venture capitalists working behind the scenes, quietly with our leaders, to figure out a solution. No all caps, no posing for the algorithms — just responsible people working around the clock because they saw themselves as part of the solution. Several hundred VC firms signed a letter committing to keeping their business with SVB, intended to make the asset more attractive to an acquirer.

More interesting than who signed the letter was who didn’t. In sum, venture capital firms that have a vested interest in destabilizing the banking system and the dollar, via crypto investments, have morphed from Americans to agents of chaos. I believe Marc Andreessen or Peter Thiel could have stopped the run with one tweet. They chose not to. This week, on the other side of the country, big banks, including the one J.P. founded, are following in his footsteps, depositing $30 billion in First Republic, after close coordination with Treasury Secretary Yellen.

I am a founder, director, or investor at four firms that have approximately $20 million in deposits at SVB. We did not pull out a dollar. (Note: One of the companies tried on Friday and was unsuccessful.) We didn’t keep our deposits at SVB because we’re moral or felt an obligation to save the bank, but because I went to the FDIC site and found that 73 banks have failed in the last 10 years, and all had their deposits backstopped. I didn’t lose a minute of sleep. Why?

My backers, and the backers of the firms I’m an investor in, assured us they’d do whatever was required to make payroll, etc.; andNothing is ever as good or as bad as it seems.“This Is the Place”

It’s no surprise a community of increasingly atomized individuals chose survivalism over citizenship. Now, many Americans are disgusted with the backstopping, despite it being standard operating procedure, as they are wary of bailouts. More specifically, they are exhausted by a tech community that captures the upsides of risk but expects other Americans to bear the inevitable downsides.

Thanks to its ubiquitous apps — which create billions for management and investors but addict and depress our teens and make our discourse more coarse — the brand “Silicon Valley” has fallen farther faster than any brand other than “Musk.” If the failed bank had been “First Bank of Iowa Agriculture,” there would have been no reticence by the feds or public to backstop its depositors. Fortunately, the wisdom of prior generations to establish the FDIC and the steady hand of the U.S. Government has endured.

It comes down to this. What type of leader, business person, and (quite frankly) man do you want to be? When shit gets real, do you want to be the steady hand who stays calm and works with others, with purpose and skill, to figure out a solution? Or are you in the foxhole screaming, only giving your position away and making things worse? The real man here, the real American, is in Washington, and his name is Janet Yellen. The Venture Catastrophists are the other guys.

Life is so rich,

P.S. We did a special episode on Silicon Valley Bank for the Prof G Markets podcast this week. We’ll be discussing it more on Monday — tune in.

P.P.S. Speaking of investors … our newest sprint, Investor Mindset, is enrolling now. Learn to make smarter decisions with your time and money. Sign up here.

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Emissions

The universe is a product of the collision of materials and gases that added value to one another. Humanity’s ascent to the world’s apex predator is also a function of our ability to add value, converting one substance into another. We learned to morph wood into fire, and walnut oil into ink and then into information. We turn sand into windows, computer chips, and water filters. Conversion often produces byproducts, sometimes a bonus: Converting fat into soap produces glycerin, useful in everything from moisturizers to explosives.

More often, those byproducts are a problem. Roasting coffee beans emits compounds linked to lung disease. The vapors that escape aging whiskey feed a black fungus that’s eating whole towns in Kentucky. One hugely inefficient conversion is plants into meat. It takes 25 pounds of feed to produce a pound of beef; 40 times more energy goes into beef than comes out of it as food. Livestock account for 14% of all carbon emissions — equal to all modes of transportation combined.

Carbon emissions are believed to be the mother of all negative byproducts. The conversion of fossil fuels (themselves the product of a conversion) into energy has been the boon and burden of the past century. But there’s something worse:

Converting attention into profit.

It’s made a very few very wealthy and left the rest of us choking on the fumes: rage and polarization. The discharge of the attention economy weakens our immune system, rendering us vulnerable to other emissions, as polarization paralyzes our ability to respond to other externalities: inequality, autocracy, gun deaths, depression, addiction, obesity, and the OG itself, carbon.

The Attention Economy

The media business was built on the back of the attention-to-profits arbitrage, but for centuries the conversion technology was rudimentary, and its emissions were tolerable. Mass media had issues, but free media made us more informed, entertained, and connected. When we released ad-supported reticulated pythons into the online ecosystem, however, they became an invasive species.Converting attention into profit has become the world’s best business. Between 2002 and 2022, Google generated over $1 trillion in ad revenue. Amazon, a retailer, makes $38 billion a year selling ads. Thanks to rising oil prices, 2022 was a historically profitable year for Chevron, up 127% from 2021; Google, which had a terrible year, registered double Chevron’s profits. In 1980, 7 of the 10 most valuable businesses in America were oil companies. Today, 7 of the top 10 profit from refined attention. An eighth, Tesla, built the world’s most valuable automaker by mastering the attention-harvesting channels of social media.

The emissions have matched the profits. Pre-digital media cast the broadest net possible. The internet is spearfishing at scale. Your New York Times home page is different from mine. Our TikTok For You pages are likely from different planets.

Alignment Problem

Facebook, Twitter, YouTube, and anything else with a “feed” employ teraflops of processing power to register signals and calibrate their messages to keep us scrolling. Even if that content makes us angrier or drives us into more and more narrow tribal identities. Old media is populated with beautiful people, usually in sleeveless dresses, as sex sells. It turns out, rage and tribalism sell better.

This is not the first time I’ve raised this alarm, nor am I the only one raising it. Hungry for novelty, though, the chattering classes have moved on, and artificial intelligence is now at peak hype cycle. AI skeptics (and many supporters) fear that powerful AI will pursue goals divergent from our own. This is known as the “alignment problem.” The classic example is Nick Bostrum’s Paper Clip Maximizer. Tell an advanced AI to produce as many paper clips as possible, and it may stop at nothing to fulfill its mission, including killing off humans and turning our entire solar system into a giant paper clip machine. Only here’s the thing: Powerful AI is already here, and it’s already doing this. It’s called Instagram. Advertising is optimizing media — and by extension, optimizing us — not for paper clips, but for fear and polarization.

The model works so well that it’s no longer limited to customized feeds. Traditional media is getting in on the action. Rupert Murdoch primes the rage machine at Fox News, The Wall Street Journal’s editorial page, and the New York Post. If there was any doubt that it’s all an exercise in conversion, ignoring emissions, Murdoch dispelled them under oath when he testified that Fox was pushing bullshit stories about Dominion voting machines, even though he and his biggest hosts knew the theories were “insane” and “shockingly reckless.” “It is not red or blue, it is green,” he admitted. Wall-to-wall coverage of transgender youth athletes and “immigrant caravans” are to Fox News what the Safaniya Oil Field is to Saudi Aramco.

It’s not just companies — individuals are also climate terrorists. How did a failed businessman take over the GOP and ascend to the White House? Simple: ratings via rage. And not just on Fox; CNN couldn’t tear itself away, and neither could we. The richest person in the world is so addicted to the rage machine that he paid $44 billion to make it his own. Misogynist Andrew Tate made millions gaming the social algorithm by feeding it vile content. His team determined the optimal ratio of positive to negative comments on videos is 60/40 — he wanted nearly half his viewers to be angry. Machiavelli asked if it was better to be loved or feared. Turns out, neither. You want to piss people off. In the new economy, attention is oil, and whoever refines it most efficiently into rage and polarization.

A fair question: “Scott, aren’t you in the business of ad-supported media and active on ad-supported platforms?” We are, but we don’t shape content to inflame, enrage and pose for algorithms.  Also, to the best of our ability, we fact-check our content.

Gasping for Air

There are first- and second-order effects from these emissions. The first-order effects are bad. The second-order effects are worse.

The first-order effects: Between 2009 and 2019, teen depression rates doubled. Last year, 1 in 3 teen girls seriously considered suicide and 1 in 5 LGBTQ teens attempted suicide. Over the past decade in the U.K., self-harm among young girls and boys has increased 78% and 134%, respectively. Teens now spend an average of 8.2 hours per day on their devices — many log double that time: 35% of American teens report using one of YouTube, TikTok, Instagram, Snapchat, or Facebook “almost constantly.”

How to prove causation and not correlation? A: Use common sense and eliminate every other cause. The academic term to describe social media’s impact on society is … awful. Its corrosive harms are myriad, from undermining dating and relationship formation to degrading our ability to process information.Even with this rapid corrosion, is the attention crisis really worse than climate change? I think it is. Because the impact of those emissions on our discourse isn’t just to make it coarse, but to make it nonfunctional. It’s not HIV that kills, but the opportunistic infections the patient is helpless to fight. On Twitter, lies spread six times faster than truth. The Twitter engineer who created the retweet button regrets it — as he put it: “We might have just handed a 4-year-old a loaded weapon.”

It reaches beyond lies. Research shows the most viral news articles are those that elicit anger. The combination of misinformation and rage online has led to a general distrust in mainstream media. Fewer than 6 in 10 Americans trust information that comes from national news organizations, an all-time low. That distrust is amplified across party lines, and we’ve now reached a point where half of Democrats and a third of Republicans aren’t comfortable with their child marrying someone of the opposite party — in 1960, those numbers were around 5% for both.

Atomized

The path to collapse is atomization, and we are fraying every day. The problems are significant: climate change, rogue states, the fraught China-U.S. relationship, pandemics. Yet it’s difficult to have a dialogue, much less develop consensus on solutions and action. The rage machine sorts us into camps that are increasingly distrustful of one another and very difficult to escape. During the pandemic, there was urgent interest in finding the source of Covid. Since illness had originated in the same Chinese city as a major research center that studied coronaviruses, a lab leak was an obvious theory. Yet once voices on the right endorsed this explanation, the left became suspicious of its veracity, and the algorithms spun up. On the left, raising the lab leak theory was labeled racist.None of us is immune to our biases — that’s the nature of bias. You can’t read the label from inside the bottle. And the excretions of the Attention Economy are steroids for bias. In addition, it’s easier to fool Americans than convince us we’ve been fooled. As a result, most of us believe we’re part of a small cohort that sees the real issue and isn’t subject to bias fueled by the rage machine.

Taking the Temperature Down

Climate scientists have proven rising temperatures are causing widespread damage, and if we don’t reduce emissions, things will get worse. That will take collective action, and collective action requires civil discourse. So, how do we debilitate the rage machine? How do we take the temperature down?

Building the consumer internet on advertising was the original sin. Serving ads next to our search bars and on our homepages gave us a free internet via layaway, but the payments have become untenable.

Separating the consumer and the customer creates an alignment problem. We need to reconnect them. Paid content is to an ad-supported model what renewables are to internal combustion. Subscriptions connect end users to content providers directly, in that they are customers, vs. products being harvested for the ad model’s true customer, the advertiser. It’s a basic observation, but still holds that Fox and Meta have levied a great deal more damage than Netflix or LinkedIn (most of its revenue comes from recruitment services), neither of which is depressing our teens or being weaponized by the GRU.

Subscriptions are not the only payment model — micropayments are the most rational way to connect value with price. However, micropayments continue to be the missing piece, the fission of media: promise vs. practical performance. One of the downsides of moving away from free media is that we’ll further bifurcate into a world of Android (ad supported) vs. iOS (premium). I’ve always felt the assumption that “people can’t afford” subscription content was a bit hyperbolic, as almost two-thirds of U.S. households are Netflix consumers. With robust micropayments technology, businesses could differentiate and price discriminate (i.e. base charges, in part, on ability to pay).

An AI generated, textual news summary might cost a digital penny, while the same content with a layer of design, charts, and an audio option goes for 25¢. There is scant transportation that is free, but trains, planes, automobiles, buses, and bikes put faster-than-walking travel within reach for nearly all Americans.

Hooligans

I’ve been in the U.K. for eight months now. The weather sucks (really awful), and there isn’t as much opportunity here. However, there appear to be greater emissions standards. People, generally speaking, are more civil to one another. I’ve been to a football match almost every week, and the only hooligans I’ve seen are U.S. media notifications on my phone.

In the U.S., our last president and the wealthiest man openly mock the disabled, and we tolerate it. We let domestic and foreign platforms run unchecked, even as their algorithms elevate imprisoned misogynists into global celebrities and email images of nooses and razor blades to preteen girls contemplating self-harm. Our new heroes hawk EVs and metaverses while generating more emissions than a coal-fired plant. America is still the biggest, most prosperous house on the global block. But it’s dysfunctional and depressed, and anybody who walks by hears the inhabitants screaming at each other. Parents and leaders need to turn down the temperature, align incentives, and avoid EVs, platforms, and public figures that run on coal.

Life is so rich,

P.S. Join us for Office Hours on Wednesdays on the Prof G Pod, where Scott answers your questions.

P.S. Can you build a billion-dollar product that doesn’t destroy our mental health and/or the planet? It’s worth a shot. Our new Product Strategy Sprint closes enrollment next Wednesday. Sign up now.

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Taking Affection Back

On Saturday I went on CNN with Michael Smerconish to talk about the challenges young men face in America. The headline: 63% of men aged 18-29 in America are single (neither married nor in a committed relationship) — up from 51% just four years ago. Among women, that number is 34%.

In sum, we’re not bringing up enough economically and emotionally viable young men. Male college enrollment in America has declined 10% since 2019, and men now make up just 41% of undergrads. Adjusted for inflation, the average single man makes less today than in 1990; single women are earning roughly the same. One result will be a lack of household formation. Seventy-one percent of women say it’s very important for a male partner to support his family; only 25% of men say the same about women.

Put another way, we’re raising a generation of men who are unviable mates. Marriage rates are in decline — so is sex. The net of these trends is a steady erosion in the West’s greatest innovation, the middle class, whose foundation rests on two people pursuing the grist of a rewarding life: a deep, meaningful relationship. I suggested a few solutions on CNN, such as expanding the number of freshman seats at colleges, investing in vocational training, bringing down the cost of housing with looser housing permit policies, and building more third places — destinations in between home and work where young people can meet.

There’s another side, though — the emotional side. Too many men lack the emotional skills necessary to form meaningful relationships. This has long been the case, but our digital world, where human-to-human contact is scant, magnifies those inadequacies. Affection, both emotional and physical, is what it means to be a mammal, to be human. In fact, research shows that cultures that practice minimal physical affection experience significantly higher rates of violence. That’s just one downside. A strong, healthy man is one who gives, and receives, affection. I wrote about this in 2017; I believe it’s even more relevant today.

[The following was originally published on September 29, 2017.]

As boys, we’re trained that affection is either a means of progressing to sex (seduction) or a signal of homosexuality — which was, when and where I grew up, a bad thing. Because of bad behavior, our touch is not trusted. So most males are robbed of affection. It’s lost from our arsenal to express friendship, fondness, or love.

Touch is truly fundamental to human communication, bonding, and health. Touch activates the brain’s orbitofrontal cortex, which is linked to feelings of reward and compassion. Touch signals safety and trust, it soothes.

— Dacher Keltner, Professor of Psychology, UC Berkeley

As I get older, which is happening faster and faster recently, I’ve made a conscious effort to take affection back, especially as it relates to my boys. It bonds us, and I’m fairly certain it will add confidence to their lives, and years to mine.

Kissing

One of my closest friends, Lee, comes from an Italian family. His dad owned furniture stores and looked like Burt Reynolds’s younger brother. Lee Sr. had come up to San Francisco to visit Lee, after he’d moved up to join me at my first firm, Prophet. Lee was diagnosed with a wicked kidney stone and asked me to spend the day with his dad. Easy duty, as I liked Lee Sr., and it provided an excuse to go see the USS Pampanito submarine docked at Fisherman’s Wharf. What dad wouldn’t want to tour a submarine?

A couple memories from that day:

Being stuck in a tin can, 800 meters below the surface of the ocean, on the wrong end of innovation (sonar), and registering your likely demise (of the 50,000 young men in the German U-boat corps, only 10,000 survived) makes you realize you are a function of where and when you’re born. But that’s another post.

The thing I remember most about that day was when Lee Sr. first showed up. He walked into the apartment, and he and Lee Jr. kissed … on the lips, as if they were shaking hands. I had never seen two grown men kiss before. Twenty years later my other touchstone for Italian culture, The Sopranos, confirmed this is common practice. I remember, after the initial shock, thinking it was nice.

I kiss my boys, a lot. The act itself is nice, but the real reward is the respect my boys have for the moment. They can be watching TV, fighting, complaining (they complain a shit-ton), but when I signal the kiss (I lean in and pucker), they stop everything, angle their chin upward, and kiss me on the lips … and then go back to what they were doing. It’s as if they know: This has meaning — the other stuff can wait a few seconds.

Holding Hands

I never enjoyed holding hands until I had kids. The things we do for our kids — soccer practices, the worry, the carpools, the bad movies, setting up remote controls, working to give them a better life than ours. In isolation, each of these things is OK — tolerable, but nothing anybody who doesn’t have kids would ever do. Have you seen The Emoji Movie? However, the sum of these parts forms and checks an instinctive box. It gives you the sense you’re serving a larger purpose — the whole evolution thing.

Few things encapsulate this reward and distill it into a single action more than holding your child’s hand. Every kid’s hand fits perfectly into his or her parent’s. It’s one of those moments where you feel if you were to drop dead, it would be bad, but far less tragic than if you hadn’t marked the universe with purpose and success. You’re a parent, and your kid is holding your hand.

My oldest is holding my hand less, as he’s 10 and feeling his independence. At least he doesn’t freak out and scream “Stop it!” like the 14-year-old girl I overheard on the soccer field tonight, whose mom had committed the crime against humanity of grabbing her teenage daughter’s hand. My guess is later the daughter felt bad.

My youngest, 7, still instinctively grabs my hand whenever we’re walking outside, and it’s magical. He’s a barbarian at home, terrorizing us all. But out in the wild he’s a bit intimidated and wants the security of touch from someone he knows will protect him. He goes for his mom’s hand first; I’m runner-up … but that’s OK.

I started registering the individuality of my parents at 6 or 7. Parents are like consumer brands in that, as kids, we remember only two or three key things about them, missing the nuances you only appreciate as you get older and realize people are complicated. My mom was smart, loved me, and was no-nonsense. My dad was intense and quiet around us as a family, but über-charming and outgoing around strangers.

Hard to speculate what your kids will remember about you when they’re older. I’ve inherited some of the anger and intensity of my father, which makes our home less light than it could be. But I’m committed to ensuring one of my kids’ associations with me is “always kissing us, always extending his hand.” If men who look like Burt Reynolds can kiss other men, so can I. I’m taking affection back.

Life is so rich,

P.S. For more on the challenges young men face in America check out my interview on the Prof G Pod with author Richard Reeves on Why the Modern Male Is Struggling, Why It Matters, and What to Do About It.

P.P.S. We’re launching a brand-new Product Strategy Sprint this month with Gibson Biddle, the Netflix veteran who pioneered personalized streaming recommendations. Want to build the next Netflix? Don’t miss this one.

The post Taking Affection Back appeared first on No Mercy / No Malice.

Post Post Corona

Three years ago today there were 53 known cases of Covid-19 in the United States. The first U.S. death was recorded five days later at the EvergreenHealth Medical Center in Kirkland, Washington. At that point, the only lockdown was in a city that would become the most famous on Earth: Wuhan.

Within weeks the world came off its axis. As we grappled with a new societal playbook of masks, social distancing, lockdowns, and death, markets tanked and then … ripped. Wall Street set new expectations of an economy in which Peloton would supplant Nike and Bitcoin the dollar. For a moment, Zoom was more valuable than Exxon.

For the first time in 30 years, I wasn’t spending 10-plus days per month on the road, and, with my newfound time, I decided to write a book about the world. More specifically, what the world might look like once the dust settled. Anniversaries are useful, as they prompt reflection, and this is an opportune juncture to look back at how we thought today would look then. Even the title of the book stirs nostalgia: Post Corona, as we all called the illness corona back then.

E-Commerce

The opening chapter, “The Great Acceleration,” was a summation of what Lenin said: “Nothing can happen in decades, and then decades can happen in weeks.” (Actually, it wasn’t Lenin, but Scottish MP George Galloway — no relation. Lenin sounds more gangster.) Put another way, Covid’s changes, considered strange or irregular at the time, were in fact preexisting shifts unfolding on an expedited timeline.

The exemplar of “The Great Acceleration” was supposed to be e-commerce. Between 2000 and 2020, e-commerce penetration had grown half a percentage point each year. Then Covid hit, and overnight e-commerce exploded by a third. In the U.S., 16% of all sales were being conducted online.

Then, just as the book hit the shelves, the e-commerce rocket ship did a U-turn and burnt off a point and a half before flattening at around 14.5%. Where it stayed until completing its regression to the pre-Covid trend. The Covid bump was a blip. Something we didn’t foresee intervened — a global supply chain gunk-up that contributed to a global inflationary cycle. It’s worth noting: One supply chain that endured, largely uninterrupted, was the internet. There were no significant outages, and people were able to get Tiger King, video conferences, and (available) groceries delivered into their homes pretty seamlessly.

One Covid-prompted shift within e-commerce may prove structural: food. Grocery and meal delivery had both been startup graveyards — nobody had been able to get to the required scale. A multitrillion-dollar opportunity left to the family pizza shop and the corner grocery (RIP, Webvan). Then, in 2020, the food delivery market doubled. Unlike e-commerce though, it kept growing. Today grocery delivery vans are ubiquitous and Chick-fil-a is opening break rooms specifically built for couriers.

WFH

Post Corona, page 18: “​​Of everything wrought by the pandemic, perhaps the most visible and widespread trend acceleration is the radical transition to working from home. The dispersal of work has arrived …. Post corona, working from home on Friday (or Monday, Wednesday, and Friday) will be a new normal.”

We got this right. In the third grade, I was once so sick I threw up on Debbie Brubaker and passed out. The nurse called my Mom … and my Mom wasn’t allowed to leave work to come get me. My first job was at Morgan Stanley at 1251 Avenue of the Americas in Manhattan. The firm had many commandments, but first among them: I had to be in the office before anybody senior to me, and not leave until they were all gone.

Today, foot traffic at 1251 is down 50%, as is office occupancy elsewhere across the largest U.S. metros. New construction is down 38%. Some commercial landlords are offering free rent. Remote work in Tokyo has jumped from 3% to 14%, and peak-hour demand for the London Underground (the tube) is down 30% from 2019. Manhattan workers are spending $12.4 billion less per year in the city ($4,661 per person), thanks to working 30% fewer days in the office.

This, too, was an acceleration. Peter Drucker, the most important business theorist of the twentieth century, said office buildings would be similar to the pyramids: We’d come to marvel at them, but they’d serve no functional purpose. The tectonic shift in the plates of labor and corporations has unleashed an earthquake whose aftershocks we can’t yet register.

Something I missed in Post Corona is how leverage would shift to labor, which would exercise that leverage by refusing back-to-work orders/mandates/requests/pleas. WFH is now viewed as an inalienable right. There’s upside, but there’s also a lot the younger generation is missing out on: mentorships, greater chances for promotion, learning how to act in groups, friendships, and romantic relationships — 15% of Americans met their partner at work.

Higher Ed

Thirty pages of the book discuss higher education. My position: Higher ed is a product whose value proposition would stop making sense in a post-Covid world, and colleges would overhaul their business models in response. That is, dramatically expand enrollment, offer robust online accreditation, raise acceptance rates, and build satellite campuses in less wealthy parts of America (i.e., in Jackson, Mississippi, not Beijing or Dubai).

It was a nice idea that received a lot of media attention, and for a moment I thought I’d broken through. But the price-fixing cartel that is higher education, and their brands, proved more enduring than my vision. Colleges doubled down on exclusivity. 2021 was the toughest year in history to get into an Ivy League school; the average acceptance rate went from 7.3% to 5.7%. Meanwhile, the average private college tuition (which has grown at triple the rate of inflation over the past five decades) reached nearly $40,000 per year.

Red/Blue

One of my more niche Post Corona predictions: Twitter would switch to a premium subscription model. I felt Twitter didn’t have the scale to compete on an ad model, and its ad tools were substandard. I tried to get the company to make this change myself, advocating as a shareholder and as a writer, to no avail. I was even putting together an activist investor team to put capital behind my ideas when … this bullshit broke out. I doubt any prediction I’ve made will prove correct in a more unpredictable way. Elon’s antics dealt Twitter’s advertising-based model its fatal blow, but it was a mercy killing — the platform’s only hope has always been subscriptions. Musk’s vision for subscription will be realized … at Meta, which has likely learned from Musk’s disastrous roll-out that offering subscriptions with identification verification can have real benefits. Smart.

Subscription vs advertising, iOS vs Android, Red vs Blue, it’s a divide that’s deepening elsewhere. Twitter and Meta’s subscription products give users perks that include greater reach and visibility online — in other words, pay-to-play speech. Dating apps are testing offerings that reserve the “best” potential mates for paying subscribers — with some entry prices reaching as high as $500 per month. Since Covid we’ve seen the arrivals of Snapchat+, Uber One, Netflix Premium, Instacart Express … the list goes on.

Telehealth

This is another enduring feature of the pandemic that could yield huge societal benefits. The percentage of virtual visits exploded tenfold during the crisis. And while they’ve come down, they are still much more common than pre-crisis. This week, Amazon closed its acquisition of One Medical and devoted its homepage to promoting the company’s dispersion of health care to smartphones and delivery vans. This writ large could be an enormous unlock: Evolve health care from a defensive, disease-driven industry to (wait for it) health care.

Observations of a Bystander

The worst thing about the world is that it is unpredictable and harsh. The best thing about the world is that it is unpredictable and joyous. There were examples of each few saw coming.

Financialization/Politicization of Everything

Though we misread some of the implications, I believe acceleration was the macro effect of the pandemic. America becomes more like itself every day. Our media complex runs increasingly on the capitalism of enraging and catastrophizing, and we’ve become colorblind to nuance, seeing only green (money), red (conservative), or blue (progressive). Zoom and Moderna brought innovations to maintain productivity and reduce death. But they were also, maybe moreso, opportunities to make money. The last refuge from politics should be science. Argue about ideas and, once the data is in, coalesce. No longer. Somehow masks and vaccines became the deep state and a progressive plot. We ignored whichever data ill-fit our agenda, either facts about the transmission of the virus or the evidence in front of us of the toll our preventive measures were taking on kids’ emotional and mental health. The Guardians of Gotcha still haven’t acknowledged that obesity won’t help you find an inner truth, but an ICU.

None of the top hundred television channels are focused on health (the Food Network doesn’t count), but CNBC, Fox News, and MSNBC enjoy robust ratings fueling our green, red, and blue obsessions. In America, more than a million people perishing is bad, but the Nasdaq declining or not taking a principled stand against the other “side” is a tragedy. And where we once exported Mickey Mouse and Levi’s to the globe, extreme factionalism and election denialism now top our export rolls, seemingly trying to make the world more like America every day.

Team USA

As insane as things got — remember banging on pots and washing our mail? — America cemented its position as the premier superpower. The most important product of the century thus far was not an app or a rocket ship, but the vaccine. And, as with phones and chips, we make the best. Nobody is lining up for Chinese or Russian vaccines. Despite our own inability to recognize our strengths, or even one another, the performance of our government, companies, and supply chain is the strongest buy signal for USA, Inc.

We are still processing the loss of 1.1 million Americans — the population of Las Vegas and Tucson combined. One of them was my cousin, Andrew Levene. On any list of people vulnerable to the virus, Andy would have been at the bottom — young, strapping, slim. The U.K. and U.S. branches of my family haven’t been together in two decades, but we’re gathering next month. Thousands of people had to say goodbye to their loved ones in the ICU over Facetime — it’s not a bad practice to imagine such a call and use that image as a reminder that the longer you go without seeing each other, the more you risk no longer having the option.

Best Thing

The best thing coming out of Covid is that people, in every part of the world, started spending more time helping people they will never meet. Planting trees the shade of which we will never sit in. This is how societies grow great.

Life is so rich,

P.S. Every Monday, get our insights on Markets. On Wednesdays, we’ll answer your questions in Office Hours. And Thursdays we’ll share a Conversation — this week I spoke with Morgan Housel on the psychology of money. All on The Prof G Pod. To resist is futile.

P.P.S. The Productivity & Performance Sprint closes enrollment in a few days. Figure out what matters to you, then work backwards to make it happen. Sign up now.

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Taxes

Politicians get elected by telling us we can have our cake and eat it, too. The only thing that’s passed for bipartisanship over the past four decades is reckless spending. Democrats want more social spending, Republicans want lower taxes. OK, let’s compromise — do both and fuck over our grandkids. The result is an accelerating and unsustainable increase in the national debt, with no slowdown in sight. Democrats say we need to raise tax rates, particularly on the top 1%, and Republicans say we need to reduce spending. As Yoda said, “There is another (way).” The good news: We don’t have to raise taxes (we may even be able to lower them). The bad news: Everyone has to pay what they owe.

Bipartisanship

How did we get here, and how bad is it? First off, let’s dispense with one of the most tired false dichotomies in American politics: that increased government spending is the exclusive product of the Democratic Party. Republicans spend as much as Democrats, often more; they just spend on different things. If D.C. were a new-economy startup, it would be a Buy Now, Pay Later SPAC.

Steadily increasing government spending is justified — a larger economy can support more spending, and a larger population requires it. In fact, except for the financial crisis and Covid bailouts, our spending as a percentage of GDP has grown only modestly since the 1960s, from about 17% to just over 20%. Certainly, we could spend less, but spending isn’t the problem. The problem is that we aren’t funding the spending we’ve agreed upon.

We’ve covered the difference with debt. Math doesn’t care about our preferences, however, and the result is that the U.S. government now owes what our economy produces in a year.

Government debt is not all bad: the government enjoys an extremely low cost of debt, and every dollar of spending we fund with cheap debt is a dollar we don’t have to pay in taxes today. Economists argue over what constitutes a healthy level of national debt, but 100% of GDP doesn’t seem great. The U.S. was born with a debt of 30% of GDP, and we kept it below that level for most of our history. The latest projections put it at 118% by 2033.

And so politicians promise to reduce spending. Which they aren’t going to do. That means if we want to stop the debt load from spiraling upward, we’re going to have to increase revenue. “Revenue” however, is government-speak for taxes, and raising taxes is neither politically palatable nor economically appealing. But we can make a major step toward closing the gap between our spending and our revenue. By actually collecting the taxes we’re owed. The distraction is tax rates; the focus should be the tax code and enforcement.

Mind the Gap

The CBO estimates the federal government will spend $6.2 trillion in 2023. How do you spend $6.2 trillion?

To pay for that spending, we’ll raise $4.8 trillion.

So how can we avoid adding an additional $1.4 trillion to our national debt this year? We can narrow the gap substantially by clamping down on two massive drains on revenue: tax evasion and tax avoidance.

Evasion

There are two ways to not pay taxes: illegally and legally. The illegal method is called “tax evasion.” This is where you understate or underpay how much you owe, or simply don’t pay at all. The laws forbidding this behavior are barely enforced. The IRS officially estimates we lost $470 billion to tax cheats in 2019, and in 2021 the head of the IRS told Congress that the figure is likely much higher, perhaps as high as $1 trillion per year. Somewhere around the entire U.S. defense budget is stolen by tax cheats.

The lion’s share of the problem lies in the tax returns of the wealthy, as that’s where the money is. The top 5% of households by income lay claim to over a third of all income; the top 25%, two-thirds. And their income tax obligations make up the bulk of income taxes owed. (Note: Payroll taxes and sales taxes consume a greater share of lower-income household earnings — the net tax burden is much closer across income levels.) One study by a team from the IRS and several leading universities found that 36% of evaded taxes are owed by just the top 1% of households.

The source of this problem is no mystery. We’ve defunded the tax police. Demonizing the IRS gets votes. Especially Republican votes. From Reagan to Trump, the federal budget’s relationship with the IRS has been an abusive one. The agency hasn’t had enough money to do its job for years, which is reflected in its audit rates, now at all-time lows. For the wealthy, this is a feature, not a bug. Cutting the IRS’s budget has effectively raised taxes on lower- and middle-income households, shifting the burden to fund the government from the wealthy to the less wealthy, even as debt stifles programs the less wealthy depend on.

Fixing this should be a bipartisan issue. How to do it? Give the IRS back the resources to enforce the law. Yet Biden’s revitalization of the IRS, the first in decades, was met with a torrent of falsehoods, including Speaker McCarthy’s claim that it would fund an “army of 87,000 IRS agents” (actual number: fewer than 200). In truth, Biden’s program is a start, though it likely won’t be enough to bring that $500-billion-plus-per-year number down to zero. We need to invest more.

Avoidance

Tax avoidance is legal, and from the taxpayer’s perspective, I would argue it’s moral. The government is not a charity, and nobody should cough up taxes they aren’t legally obligated to pay, or the entire system loses its democratic footing. Prisoners of war have an obligation to try to escape; citizens of capitalist countries have an obligation to pay the lowest legal tax.

What’s immoral, and costing us billions, is the system that permits tax avoidance schemes of the scale and complexity we have. Again, it’s the rich who benefit, because working-class people have neither the means to hire tax lawyers, nor the complexity of finances necessary to take advantage of all the loopholes in the law. And the biggest beneficiaries are the richest taxpayers of all, corporations. If you can navigate by starlight, you want to run boat races at night.

Corporate income tax revenue as a share of GDP has been slashed from 3.5% in the 1960s to 1% today. (Not entirely because of fancy tax avoidance: The Trump tax cuts lowered the corporate tax rate from 35% to 21%, the lowest it’s been since 1939.) The argument in favor of low corporate tax rates is that greater capital inflows and investment will get passed on, i.e., “trickle down,” to employees and consumers. There is no evidence this has ever worked. As in … ever.

The preferred means of tax avoidance by corporations is offshoring and profit-shifting. That is, setting up operations in low-to-zero-tax-rate domains such as Ireland and then reporting your income there. In 2015, U.S. companies booked $46 billion in profits in the Cayman Islands alone, 17 times the value of the entire Cayman economy. Today more than half of multinational corporate profits are booked in foreign tax havens. Read the last sentence again: The fruits of the American system are funding other nations’ prosperity in exchange for lower tax rates on corporations — which, again, transfer wealth from the poor to the rich. The top 10% of households own 89% of U.S. stocks, and register the gains from companies paying less tax.

The amount of money we’re losing to this practice and other corporate tax avoidance strategies is devastating. Amazon, one of the most valuable companies in the world, paid $162 million in taxes in 2019: 1% of its pre-tax income. Across the corporate landscape, it’s difficult to reach an exact number for what this costs us in lost revenue, and many different studies have tried, but the consensus appears to be somewhere in the ballpark of $200 billion per year.

We’ve tried to fix the problem. The same Trump tax cuts that reduced the corporate tax rate were supposed to address tax havens, but data has shown it didn’t work. We’ve also tried to fix things with a 15% global minimum tax on companies — that deal was signed by 136 countries in 2021, but it’s still a work in progress. And research suggests 15% isn’t high enough. It’s projected that a 15% minimum tax would generate roughly $50 billion more in revenue for the U.S. — compared to the $200 billion we’d get at a 25% rate.

Then there’s the tax avoidance of individuals, i.e., not corporations. The standard playbook among the ultrawealthy is to minimize your cash income — and instead, borrow money against your assets (stock, real estate, etc.). This is what allowed Jeff Bezos, Mike Bloomberg, Warren Buffett, Elon Musk, and others to pay zero dollars in taxes for several years. Of course, the media sensationalizes this to make it sound more nefarious than it is, as if they were illegally evading income tax, when in reality they were taking out loans against their holdings at ultralow interest rates. Rich people take out big loans, and loans aren’t taxable — another win for the rich. Senators barking at billionaires to “pay their taxes” are referees complaining about their own bad calls. Mssrs. Warren and Sanders, why do billionaires not pay their taxes? A: Because you let them. Do your damn job.

Tax havens are lucrative for individuals, too. According to one study, the top 1% of Americans avoid $175 billion per year using this strategy. In this case, the line between “avoidance” and “evasion” is blurry — per the researchers, it’s a “gray area.” Still, legal or illegal, that’s a shit-ton of money we’re choosing not to collect from the people best positioned to give.

Then there’s the unlock we’d get from reallocating talent. Some of the sharpest, hardest-working people I know are my tax advisers. No joke. I pay these people six figures, and they routinely save me seven. It’s a great ROI but a drain on society. We’re paying some of our best and brightest to solve problems of our own making — helping rich people navigate a maze other Americans can’t afford to enter. Am I a hypocrite for engaging in these strategies? Maybe. But I’m not going to disarm unilaterally … said every wealthy household.

Do the Math

Substantially reducing tax evasion and corporate tax avoidance could save us $1 trillion per year. That could go a long way toward closing the $1.4 trillion gap between our spending and revenue in 2023, without “raising” taxes at all. Indeed, it would more than pay for our current spending — it’s the $640 billion in interest costs on the debt that drags us back into the red.

Collecting the taxes we’re owed and aligning what’s owed to what’s paid is fundamental to building trust in the government and our institutions — something lacking in the U.S. Edmund Burke, a founding father of conservative thought, was deeply concerned about the stability and legitimacy of government. In his masterpiece, Reflections on the Revolution in France, he warned that the failure to collect taxes owed would be the downfall of the revolution. Failure to effectively impose a fair tax policy, he wrote, was akin to punishing the law-abiding and the productive for their virtue, and it would lead to tyranny. “Nothing turns out to be so oppressive and unjust as a feeble government.”

What could a strong and just government do with an additional trillion in revenue? The sensible thing to do would be to narrow the deficit. But if we’re comfortable with continued deficit spending (and that looks to be the case) imagine what else we could do merely by collecting the taxes we are owed.

It’s within our reach to eliminate the federal income tax burden of the lower 90% of all U.S. households. That’s right, if your family makes less than $200,000 per year, your federal income tax goes to zero.Or we could make the child tax credit permanent — and 5x it to $15,000 per year. Why not? An aging nation needs a growing population to support it.Or we could eliminate payroll taxes (i.e. Social Security and Medicare taxes) on the lower half of households by income, thus hugely relieving their tax burden.

Whatever you think about these as policy, aren’t they better than letting the wealthiest Americans and the corporations they own continue to evade and avoid their just tax obligations? Americans are a prosperous, generous people. Let’s start acting like it.

Life is so rich,

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