Median MSA Incomes: 1949 vs 2022

Jeremy HorpedahlLeave a comment

Lately on Twitter this chart has been going around:

The chart comes from Bloomberg journalist Justin Fox, who always puts together interesting economic data. You can read his interpretation of the data at Bloomberg, but the folks posting it on Twitter all seem to have the same shock and awe: Detroit was the richest big city in 1949. And of course we all know that today it isn’t. Still, the Detroit MSA has done OK since 1949, even though it is no longer anywhere near the top.

How well has Detroit done? Despite industrial decline and many other major problems, median household income of the Detroit MSA was around $71,000 in 2022 according to the Census Bureau. How does this compare to the $3,627 median income in 1949? It’s about double in real terms: you can multiply it by about 10 using the Census’ preferred inflation adjustment for household incomes since 1949 (the C-CPI-U since 2000, and the R-CPI-U-RS before that).

Is a doubling in 73 years a good outcome?

Continue reading →

Recovering My Frozen Assets at BlockFi, Part1. How Sam Bankman-Fried’s Fraud Cost Me.

Scott Buchanan3 Comments

Back in 2021, interest rates had been so low for so long that that seemed to be the new normal. Yields on stable assets like money market funds were around 0.3% (essentially zero, and well below inflation), as I recall. As a yield addict, I scratched around for a way to earn higher interest, while sticking with an asset where (unlike bonds) the dollar value would stay fairly stable.

It was an era of crypto flourishing, and so I latched onto the notion of decentralized finance (DeFi) lending. I found what seemed to be a reputable, honest company called BlockFi, where I could buy stablecoin (constant dollar value) crypto assets which would sit on their platform. They would lend them out into the crypto world, and pay me something like 9 % interest. That was really, really good money back then, compared to 0.3%.

On this blog, I chronicled some of my steps in this journal. First, in signing up for BlockFi, I had to allow the intermediary company Plaid complete access to my bank account. Seriously, I had to give them my username and password, so they could log in as me, and not only be able to withdraw all my funds, but see all my banking transactions and history. That felt really violating, so I ended up setting up a small auxiliary bank account for Plaid to use and snoop to their heart’s content.

I did get up and running with BlockFi, and put in some funds and enjoyed the income, as I happily proclaimed (12/14/2021) on this blog, “ Earning Steady 9% Interest in My New Crypto Account “.

BlockFi assured me that they only loaned my assets out to “Trusted institutional counterparties” with a generous margin of collateral. What could possibly go wrong?

What went wrong is that BlockFi as a company got into some close relationship with Sam Bankman-Fried’s company, FTX.  Back in 2021-2022, twenty-something billionaire Sam Bankman-Fried (“SBF”) was the whiz kid, the visionary genius, the white knight savior of the crypto universe. In several cases, when some crypto enterprise was tottering, he would step in and invest funds to stabilize things. This reminded some of the role that J. P. Morgan had played in staving off the financial panics of 1893 and 1907. SBF was feted and lauded and quoted endlessly.

For reasons I never understood, BlockFi as a company was having a hard time turning a profit, so I think the plan was for FTX to acquire them. That process was partway along, when the great expose’ of SBF as a self-serving fraudster occurred at the end of 2022. He effectively gambled with his customers’ money. This would have made him even richer if his bets had paid off, but they went sour, which brought everything crashing down.

FTX quickly declared bankruptcy, which forced BlockFi to go BK as well. SBF was eventually locked up, but so were the funds I had put into BlockFi. The amount was not enough to threaten my lifestyle, but it was enough to be quite annoying.

Sam’s parents are both law professors at Stanford who are now resisting returning to FTX’s creditors the  $32 million (!!!) in assets (cash and real estate) that SBF had given them out of FTX’s operations. Some of that $32 million they are hoarding is mine, since BlockFi needs to recover its claims against FTX in order to make BlockFi clients whole. Sam’s mother has denounced the legal judgment against her son as “as “McCarthyite” and a “relentless pursuit of total destruction,” which is enabled by “a credulous public.” One wonders what little Sammy imbibed in the way of practical ethics in that household of idealistic Stanford law professors – the “effective altruism” that the Bankman-Fried family touts is perhaps a gratifying concept, until it actually costs you something you don’t want to part with. But I digress.

BlockFi Assets Begin to Thaw

I got emails from BlockFi every few months, assuring customers that they would do what they could to return our assets. Their bankruptcy proceedings kept things locked, but now they are starting to return some money. A judge ruled in early 2023 that assets held by users in their BlockFi “wallet” belonged to the users and could be withdrawn. However, assets in the interest-bearing account (which is where my stablecoin was) technically still belong to the bankrupt company’s estate, and were not necessarily available for withdrawal. But now, following another legal agreement,  BlockFi is returning funds from the interest accounts. The problem is that you will only get some fraction of what you put in. Some YouTube commenters have complained they only got 10-25% of their assets, and no one seems to know if they will ever get more. Ouch.

I got an email from BlockFi saying that I have assets to claim, but I need to set up an actual independent crypto wallet to receive them. BlockFi will only transfer the actual coin, not the dollar values. So, I am in the middle of this process. It’s one thing to open a wallet, where you can transfer crypto coins in and out. It is another to exchange or monetize your coin; for that you seem to need an exchange.

I have chosen to go with Coinbase. It is not the cheapest alternative, but it seems to be the most solid U.S. based crypto exchange. I have opened a Coinbase account now. As with BlockFi, I had to go through Plaid (ugh) for the connection to my bank account.

Next thing I need to do is to open a Coinbase wallet, and try to connect with BlockFi, and see what I get back. I will post later on what happens there.

Update: I got scammed in this process, see here. My bad for clicking on a link in an email, instead of going to the official website for the link…

Elder care, returns to scale, and club goods

mdmakowskyLeave a comment

My parents have moved into an elder community. Having a passing familiarity with nursing homes of decades past and elder care scams of decades current, my family spent considerable time researching options, reputations, and legal concerns. Now that it is done, however, I have sufficient peace of mind to make broader reflections.

The resulting institutions essentially looks like a hybrid college campus/country club, albeit less concerned with status projection than the different manners in which a human might lose their balance. More importantly, however, it is a small scale reminder of the powers of agglomeration and returns to scale. My middle class parents now enjoy greater total amenities than they ever have in their entire life, some for the first time ever. I assure you that it is the rare government engineer to who spends their prime earning years with a heated olympic swimming pool, jacuzzi, steam room, sauna, and modern gym equipment within 200 steps of their front door. A separate restaurant, cafeteria, and bakery sit on the campus. Community transit is available 12 hours a day to connect them to the broader region, but live culture, education, and entertain appear as daily options within each building. I won’t get into the myriad physical and mental healthcare options, but they’re there in spades.

Essentially my parents are living a city for the first time in 50 years. A small, niche catered, contract-chartered city, but a city nonetheless. It’s amazing how many amenities become affordable when you only have to pay for a 100th, 1000th, or 10,000th of the underlying cost of provision.

This raises some questions. First of all, why don’t more of us live like this? Which, with a little reflection, is simply asking why more people don’t live in cities, which in turn invites standard answers regarding preferences for more space and fewer neighbors while also further highlighting the immense costs of 40 years of construction and density obstructionism.

The more interesting question, I believe, is how many of us are going to live like this? When octogenerians peak as a fraction of the population, will we see a new golden age of agglomeration, but in private communities instead of cities? What sort of scales might these communities achieve? Will Boomers rediscover their affection for transit, but as a private club good rather than a government-provided public good? Will generations of rural and suburban Americans find themselves living in cluster micro-cities surrounding major cities, enjoying trips daytime trips into the very urban areas they’ve previously feared were overrun with imagined crimewaves? Who is going to run for mayor? What sort of power is constitutionally invested in the mayor of city whose citizens pay a flat tax i.e. community fees i.e. rent?

What’s going to happen when the Boomers pass on and subsequent Generation X members show up with greater urban affinities, but smaller numbers and fewer children to support them? Will some elder communities collapse and be absorbed into a smaller number of larger elder cities, breeding greater scale returns, but within the economic security of a generation of grown children to foot the bill if the money runs out? Will there be an Orange Julius and Tower Records for me to hang out at? Will chain wallets come back?

Come to think of it, why are we waiting until our 80s? What’s stopping us from living in tightly-knit condominium communities filled to the brim with the social and community public goods that increasingly lonely Americans seem to be in desperate need of? Why can’t I go on reddit and find the apartment complex whose emergent culture of tenants caters to my households specific interests in games, art, and sports?

I started this worried about how my parents were going to live and finished trying to figure out how to live more like them. What I’m saying is the YIMBYs need to win and make it snappy so my household can live its dream of living in a 3 bedroom condo on the 5th floor of a building built on top of the Startcourt mall.

Addendum: I am not the first person to think along these lines.

What the Superintelligence can do for us

Joy Buchanan6 Comments

These days, when I blog-rant about my everyday life, I have increasingly ended on the thought “AGI fixes this.”

Yesterday, I mused whether AGI would be my personal chef? : Where Can You Still Buy a Great Dinner in the US?

Would AGI help me match my clothes that I no longer want to humans who can use them, to cut down on pollution?: Joy’s Fashion Globalization Article with Cato

Would AGI make no mistakes about weather-related school closure?: Intelligence for School Closing

Can AGI book summer camp for me?

As a millennial woman working through my 30’s, I increasingly see social media posts from my friends like this one:

One of the difficult things about infertility, for my friends going through it, is the uncertainty. Modern medicine seems legitimately short on information and predictive analytics for this issue. So… AGI to the rescue, someday?

All I’m writing about tonight is that I have created a growing to-do list, over roughly the past year, for the AGI. Would something smart enough to do all of the above be dangerous? I wouldn’t rule it out. As pure speculation, it feels safer to have an AI that is specifically devoted to being a personal chef but which strictly cannot do anything else beside manage food. An AI that could actually do all of those things… would be quite powerful.

Here’s me musing about the AGI rising up against us, written after watching the TV show Severance: Artificial Intelligence in the Basement of Lumon Industries

Where Can You Still Buy a Great Dinner in the US?

Joy Buchanan1 Comment

Last year, Jeremy wrote “Where Can You Still Buy an Affordable Home in the US?” He pointed out a few metro areas in the US that are not classified as “unaffordable”. All of the biggest cities have nice amenities such as great restaurants but are very expensive.

There is such a thing as an American town that is too small to find a good restaurant. But you don’t have to go all the way to the middle of New York or Chicago to find interesting menus. If you love food and good creative restaurants, there are some smaller cities that can deliver. Parking and hotels should be cheaper, so you can spend more of your money on food. (I don’t have any data on hand with regard to how menu prices in Birmingham compare to menu prices in NYC. Presumably they are lower here where labor is relatively cheaper.)

This list of cities was compiled in 2022. Birmingham, AL is on the list.  “10 Unexpected U.S. Cities With a Surprisingly Good Food Scene” 

I can recommend the following: “The 30 Best Restaurants In Birmingham, Alabama” (Southern Living, 2023)

To get a bit more recent national data: “Surging restaurant prices are making dining out a luxury” (CNN, 2024)

I think I care more about food quality than “service.” Nothing has bothered me about the gradual nation-wide shift away from table service toward placing my order at the counter or from a computer screen.

I don’t do much with them, but Jeremy is an advocate for restaurant apps. If you track deals and order directly through the app, you might save around 10% on low-to-mid quality restaurant food.

On a side note, I’m wondering if and when AI will approach the service level of a personal chef. I wish I could outsource all family meals to someone else. I have experimented with grocery delivery and “meal kits” and recipe apps. Nothing ever feels like a personal chef, although some of those services are nice to have. I feel like a superintelligence could encompass all of the restaurant apps, and grocery delivery and family meal planning together. I wish I could just enter a list of taste and health preferences and then not think about it anymore.

Borrowing, Beef, and Break-even

Zachary Bartsch2 Comments

Interest rates communicate the value of resources over time. For example, if you take out a loan, then the interest rate tells you how much you must to pay in order to keep that money over the life of the loan. The interest rate also reflects how much the lender will be compensated in exchange for parting with their funds. On the consumer side, the interest rate reflects the price that the borrower is willing to pay in order to avoid delaying a purchase.

When a business borrows, the interest rate reflects the minimal amount of value that they would need to create in order to make an accounting profit. For example, if a business borrows $100 for one year at an interest rate of 5%, then they need to earn $105 by the time that they repay the loan in order to break even with zero profit. The business would need to earn more than 5% in order to earn a profit on their borrowing and investment venture.

The longer the business takes to repay their loan, the more interest that accrues. And, the higher the interest rate, the more they need to earn in order to repay their loan.

This logic applies to all production because all production takes time. If production takes very little time, then the impact of the interest cost is miniscule. But, if production takes longer, then interest rates become increasingly relevant. These kinds of products include trees, cheese, wine, livestock, etc. Anything that ages, ferments, or has a lengthy production process will be more sensitive to the cost of borrowing.

How?

The growth pattern for most (all?) goods looks similar. Below-left is a growth chart for dairy cows . Notice that calves grow quickly at first, and their growth slows over time. For the sake of argument, let’s say that the change in value of a cow mimics the change in weight (Yes, I know that dairy and beef cows are different, but the principle is the same).  Below-right is the monthly percent change. Even at an age of 25 months a cow is still growing in value at 2.4% per month or 33% per year.

Of course, there is a risk that some cows don’t survive to slaughter, lowering the expected growth rate. Since most cattle are slaughtered between 18 and 24 months of age, their growth rate at the time of slaughter is 4.4%-2.7% per month. As the interest rate at which farmers borrow rises, the optimal age at slaughter falls. Otherwise, the spread between the growth rate and the interest rate could go negative. Even so, what an investment! If you can borrow at, say, 8% per year, then you’ll make money hand-over-fist on the spread.

Except… Cows cost money to raise, and most of that cost is feed. According to the production indicators and estimated returns published by the USDA, the cost of feed in February of 2023 was $158.11 per hundred pounds of beef. The selling price of beef was $161.07. That leaves $2.96 or a profit of 1.87% earned over the course of 1.5-1.75 years. That investment is starting to look a lot less good, especially since it doesn’t include the cost of maintaining facilities, insurance, etc. It’s no wonder that farmers and ranchers are serious about their subsidies. Clearly, with such tight margins, farmers and ranchers are going to look good and hard at the interest rates that they pay on their debt. And, they do have debt.

However, the recent increase in beef prices is not caused by higher interest rates.

That 1.87% profit margin is at prices and costs from February 2023. Since 2020, the price of cattle feed ingredients (grain, bean, and oil) peaked in the summer of 2022 and are still substantially more expensive than pre-Covid (see below). That means that cows getting slaughtered right now were raised on more expensive feed. This February 2024, the cost of feed per 100lb. of cattle was $191.80. But the cattle selling price was only $180.75. That’s a $11.05 loss for cattle raising. Wholesale prices of cattle might be up recently, but the cost of feed is up by more. It’s not the cattle farmers who are benefiting from the high beef prices. In fact, they’re getting squeezed hard.

There is good news. The cost of feed ingredients has been falling recently, which means that beef farmers should begin to see some relief if the recent trend continues. For Consumers, the price of beef is already down from its 2023 peak.

Abnormal Times Call for Abnormal Policies

James Bailey2 Comments

The Fed made two mistakes during the Great Recession of 2007-2009: being too slow and weak in their initial reaction to the financial crisis, and being too hurried in their attempts to return to a ‘normal’ policy stance. The first mistake turned what could have been a minor road bump into the worst recession in decades, and the second mistake meant it took a full decade from the start of the crisis in 2007 for unemployment to return to pre-crisis levels.

The rapid recovery from the Covid recession shows that the Fed learned from its first mistake in 2007. In 2020, the Fed acted quickly and decisively, so that despite the worst pandemic in a century the US experienced a recession that lasted only months, and it took unemployment barely 2 years to return to pre-Covid levels. But the Fed’s talk about cutting rates this year makes me worry they did not learn the second lesson. Despite all their talk of being “data driven”, I don’t see how a dispassionate look at current inflation, labor market, or financial data could lead them to be considering rate cuts; if anything it currently suggests rate hikes.

Why then is the Fed talking rate cuts? Of course you can dig and find a few data points to support cuts, but I think the driving factor is simply a feeling that interest rates are currently above “normal”. They are digging to find data points to support cuts because they want to return rates to “normal”, just as in the early to mid 2010’s they were digging for reasons to raise rates to “normal”. Rather than being consistently too hawkish or too dovish, they are consistently too eager to return rates to “normal” when circumstances are still abnormal.

This is not simply out of a social and political desire to avoid appearing “weird”, though that is definitely a factor. There is also a long academic tradition of measuring the stance of monetary policy by comparing current interest rates to a neutral, “natural” rate of interest, r*. But this tradition has problems. The “natural” rate of interest is always changing, and at any given time we can’t really know for sure what it is. The current Fed Funds rate may be higher than it has been in recent years, but that doesn’t necessarily mean it is above the current natural rate of interest; the natural rate itself could have risen too. This is why interest rates aren’t a great way to measure the stance of monetary policy. At times Chair Powell himself has made the same point, saying that trying to set policy by comparing to the “natural” rate of interest r* is like “navigating by the stars under cloudy skies”.

Lacking such celestial guidance, I can only hope the Fed will make good on their promise to be data-driven and navigate by the guideposts they can see around them: measures like current inflation and unemployment, or market-based forecasts of such measures.

How Long Does It Take Prices to Double?

Jeremy Horpedahl2 Comments

Let me start by saying high rates of inflation, especially unexpected inflation, is bad. Still, it is useful to have some historical context. We’ve experienced the highest inflation rates in a generation lately, especially in 2022, but past generations experienced inflation too. How to compare?

Here’s one approach. Using the latest CPI-U data, we can see that prices on average approximately doubled between March 1996 and February 2024. That’s 335 months to double, or just shy of 28 years. How long did it take prices to double if we keep moving backward in time from March 1996?

It only took 194 months for prices to double from January 1980 until March 1996, just a little over 16 years. Prior to January 1980, prices doubled even quicker, this time taking less than 10 years! Prior to that, it took 24 years for prices to double between WW2 and 1970, and before that you have to go back 31 years to 1915 for another doubling. Judged by this, our recent history doesn’t look so bad.

That doesn’t mean everything is OK. As I said above, unexpected inflation is the worst kind, since individuals and businesses aren’t planning for it. And we’ve had 20% inflation in the past 4 years — something not seen since 1991 over a 4-year time period. A 20%+ inflation rate is unusual to us today, but it certainly wasn’t in the past: basically all of the 1970s and 1980s had 20%+ inflation every 4 years, sometimes more than 40% or even 50%.

Finally, while unexpected inflation is bad, we also care about the relationship between wage increases and price increases. We can rightfully bemoan rapid, unexpected price inflation, but if wages are increasing faster than inflation, we are still better off (on average). The BLS average hourly wage series for production and non-supervisory workers only goes back to 1964, so we can’t do a full comparison with the CPI-U, but we can compare the three most recent doublings of prices.

Keep in mind with the chart above that prices (as measured by the CPI-U) increased by 100% for each of these time periods. So, for the 1970s and 1980-1996 periods, wages actually rose by less than rate of inflation — wage stagnation! If we used the PCE price index instead, those time periods still don’t look good: PCE prices increased by 88% for 1970-1980, 85% from 1980-1996, and 78% since 1996. With either price index, the 1996-2024 period is clearly the best of these three, and it’s not even really close.

Let me finish where I started: the recent inflation is bad. I don’t want to downplay that. But some historical perspective is also useful.

See also a similar post and calculation on inflation doubling that I wrote in June 2022, which includes some discussion of 19th century inflation too.

Business Development Companies: My Favorite Class of High Yield Investments

Scott Buchanan1 Comment

It is easy to find securities which pay over 10% yield. It is not so easy to find securities which pay over 10% yield AND which maintain their share price over time. Many funds, especially closed-end funds, follow the “melting ice cube model” – they pay high current yields by slowly liquidating the fund assets, since the generous distributions are not matched by actual money-making by the fund’s investments. Oh, and the fund managers charge a nice fee for slowly giving you back your money. The result is that over longish time periods (e.g. five years) the stock price and the dividends decline.

I have been burned numerous times by such “high yield traps” in my longtime exploration of high yielding securities. A glorious exception has been business development companies (BDCs). These companies operate much like banks, lending out money and collecting interest on those loans. They lend to smaller, shakier enterprises that cannot get loans from banks. BDCs get to charge these (desperate?) clients very high interest rates, often around 6-7% over SOFR, which is the replacement for the old LIBOR benchmark, and which is very close to the current Fed funds rate. So back when regular short-term rates were near zero, BDCs were charging around 6%, and now (with Fed funds at 5.3%) they lend out money at around 11%. BDC’s leverage up by about 1:1 by issuing bonds, which boosts net income; this cash inflow is offset by really big management fees. The net result for us equity shareholders is that BDCs are paying out around 10-12% per year in dividends. That varies, of course, from one BDC to the next.

(If you just look at the usual “Forward Yield” value in your brokerage account or Yahoo Finance, it might only show like 9% or so. The reason is that BDCs, in good times like now, often pay out significant “special” dividends, which supplement the regular dividends; but only the regular dividends show up in the standard yield reporting).

One of the largest and oldest BDCs is Ares Capital Corporation, ARCC. If you just look at share price, ARCC does not look too inspiring. In the past five years, its price is up only about 9%, which is way less that the S&P 500 standard fund SPY. (But at least it is not down, like the generic bond fund AGG).

But when you look at total returns, which includes reinvested dividends, ARCC actually beats out SPY (85.7 % vs. 83.9% total returns), which is a noteworthy feat. Another large BDC, HTGC (green line in the plot below) did even better, with roughly 1.8 times the yield of SPY:

The current yield of ARCC 9.3%. This is on the low side for BDCs; ARCC is regarded as very secure, and so its price gets bid up. The yield of HTGC is 10.6%, while relative newcomer TRIN is paying 14%.

Lending to small, sometimes starting-up companies sounds risky, but the risk is mitigated by being at the tip top of the company’s capital stack. The loans are typically secured first-lien, which means in event of bankruptcy, they would get paid off before anything else. If the client company goes totally belly-up, the recovery on these loans is historically about 80%. In practice, a good BDC will often work with the client to come to some arrangement where the recovery is close to 100%. (For unsecured bonds, recoveries in bankruptcy are about 40%, while preferred stockholders get a few crumbs like shares in the reorganized post-bankruptcy enterprise, and common shareholders get zip). If you invest in a small cap stock fund like the Russell 2000, you are owning common stock in some of the companies that BDCs lend to. As such, you are actually in a much riskier position than owning shares in a BDC. Just saying.

Sound interesting? My short list of BDC favorites includes ARCC, HTGC, TRIN, TSLX, and BXSL. For one-stop shopping there are funds which hold a basket of BDCs. BIZD is the venerable big gorilla in this category. It blindly holds the largest BDCs by market cap. A newer, much smaller ETF is PBDC, which uses active, hopefully smart management. Since inception about 18 months ago, PBDC has beat out BIZD by about 12% in total returns, which more than compensates for its higher management fees (0.75% for PBDC versus 0.4% for BIZD).

Disclaimer: As usual, nothing here represents advice to buy or sell any security.

How to Train Your Artificial Economist

mdmakowsky2 Comments

Apparently Claude 3 Opus AI/LLM is a pretty decent economist:

As much as I appreciate the prospect of an AI economist, allow me to ask the most annoying and, in turn, most important, question an economist can ask of any proposition: “Compared to what?”

It seems to me any consideration of the quality of economic analysis produced by an AI/LLM model demands a series of comparison points. We need bad economic analysis. We need AIs that generate mediocre, decent, atrocious, acceptable, and perhaps if possible, brilliant economic analysis for comparison. Which, it seems to me, is entirely possible given that a large language model (LLM) is trained on reams of text. So, lets do it. Let’s see how many different artificial economists we can produce and observe. A digital zoo of economic Pokemon with less violence and more discussion of underlying elasticities.

What happens when we train Claude on every edition of Mankiw’s principles textbook? Cowen and Tabarrok’s textbook. All of the principles books. The most daunting book in all of graduate economics? What happens when we train it on sociology and anthropology textbooks? NYT and WSJ editorials? What happens when we let it consume nothing but Presidential State of the Union addresses? Campaign speeches? Every book in the Google digital library? Twitter? The economics subreddit? A perfectly respectable blog?

How should we evaluate the outcomes? Should it attempt to complete the prelimary exams to continue your PhD training at the University of Chicago? The final exams in Intermediate Micro and Macro Economics at the University of Virginia? At what price would it have sold shares of Gamestop? Perhaps it could write an explicit function that would advise a family when to buy instead of rent based on age, city, income, and number of children. Maybe it could manage to pull off a reverse-Sokal hoax, writing a paper making a genuine scholarly contribution worthy to pass through the review process at a top 25 peer-reviewed economic journal. Maybe it could convince your brother-in-law to stop asking for stock tips and just buy into index funds.

In the end, the market test for what stands as a valuable contribution from an AI is what will matter for most of us. But the time is quickly approaching when we will leave behind awe- and angsted-filled proclamations of whether an AI model is discretely good or bad, useful or dumb. The next step demands granularity of evaluation and consideration. Perhaps not false cardinal (continuous) values, but ordinal rankings aligned with useful and actionable assessments of their analysis. And in case you think this is dull or tedious, consider for a moment what it will mean to evaluate the analytical skills of AIs stratified by their training materials. It will stand for many as a meta-analysis of the broad merit of entire disciplines, literatures, and oeuvres. It will be coarse and efficient, messy and cruel. It will cultivate and distill the core messages of intellectual and social identities, many of which were previously latent, if not outright inert. Subtext will be made text, it’s merits evaluated and compared.

That last bit is perhaps the most terrifying. The entire culture of etiquette and politeness, of politics, is built around the institutions that ensure that too much is never said too directly. I have no doubt that this has some of you salivating. You are so very comfortable in your truth that it enrages you when you are implored not to call ideas silly, arguments wrong, people stupid. A utopia of the mind awaits us in this new world of AI-adjudicated debates and augmented salons. Be careful what you wish for. And don’t be so sure your imagined AI arbitrator is going to be remotely fair. Or on your side.

An AI is only as good as the material it is trained on. Genuine insights are found in economics journals by the thousands every year, but fallacies and sophistries are found by the billions in the endless sea of casual text that fills the internet, airwaves, and podcasts. We all (all) spend large parts of our day being casually wrong about things because it costs us precisely nothing to be wrong. The law of large numbers, in the parlance of statistics, will innoculate AIs from such intellectual food poisoning as the randomness of our errors cancel out. What that won’t save us from, however, is the raw populism underlying much of the casual text out there. Is it outlandish to say there are more people who receive rewards, pecuniary and non-pecuniary, for telling people what they want to hear rather than the truth? Have you ever consumed any media ever?

I’m not an AI doomer. I remain rather sanguine on the entire enterprise. But part of the human condition is never knowing for 100% sure what is right or wrong. We pass that on to all of our intellectual offspring, no matter how smart or artificial they are. Or least, we should.