Authored by Jeremy Grantham via GMO,
Give Me Only Good News!
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
(Attributed to Mark Twain)
It takes little experience in the investment business to realize that investors prefer good news. As a bear in the bull market of 1999 I was banned from an institution’s building as being “dangerously persuasive and totally wrong!” The investment industry also has a great incentive to encourage this optimistic bias, for little money would be made if the market ticked slowly upwards. Five steps forward and two back are far more profitable.
Similarly, we environmentalists were shocked to realize how profoundly the general public preferred to believe good news on our climate, even if it meant disregarding the National Academies of the world. The fossil fuel industry, not surprisingly, encouraged this positive attitude. They had billions of dollars to protect. If the realistic information were to be widely believed, most of their assets would be stranded.
When dealing with realistic limits to growth it is also obvious how reluctant everyone is to accept the natural mathematical limits: There simply cannot be compound growth in a finite world. A modest 1% growth compounded for the 3,000 years of Ancient Egypt’s population would have multiplied its economic output by nine trillion times!1 Yet, the improbability of feeding ten billion or so global inhabitants in 50 years is shrugged off with ease. And the entire economic and political system appears eager to encourage optimism on resources for it is completely wedded to the virtues of quantitative growth forever.
Hard realities in these three fields are inconvenient for vested interests and because the day of reckoning can always be seen as “later,” politicians can always find a way to postpone necessary actions, as can we all: “Because markets are efficient, these high prices must be reflecting the remarkable potential of the internet”; “the U.S. housing market largely reflects a strong U.S. economy”; “the climate has always changed”; “how could mere mortals change something as immense as the weather”; “we have nearly infinite resources, it is only a question of price”; “the infinite capacity of the human brain will always solve our problems.”
Having realized the seriousness of this bias over the last few decades, I have noticed how hard it is to effectively pass on a warning for the same reason: No one wants to hear this bad news. So a while ago I came up with a list of propositions that are widely accepted by an educated business audience. They are widely accepted but totally wrong. It is my attempt to bring home how extreme is our preference for good news over accurate news. When you have run through this list you may be a little more aware of how dangerous our wishful thinking can be in investing and in the much more important fields of resource (especially food) limitations and the potentially life-threatening risks of climate damage. Wishful thinking and denial of unpleasant facts are simply not survival characteristics.
Let me start with one of my favorites. For the 50 years I have been in America, Business Week and The Wall Street Journal have been telling us how incompetent at business the French are and how persistently we have been kicking their bottoms. If only they could get over their state socialism and their acute Eurosclerosis. And as far as I can tell we have generally accepted this thesis. Yet Exhibit 1 shows what has actually happened to France’s median hourly wage. It has gone from 100 to 280. Up 180% in 45 years! Japan is up 140% and even the often sluggish Brits are up 60%. But the killer is the U.S. median wage. Dead flat for 45 years! These are the uncontestable facts. So, all I can say is that it is just as well the French have not been kicking our bottoms. But how is it that we can believe so firmly in something that just ain’t so, and by such a convincing amount?
Exhibit 2 examines the proposition that although our wages may have done poorly, we are still the place that creates jobs. The left-hand panel certainly seems to confirm that with our modest official unemployment rate for 25- to 54-year-olds of below 5% compared to 9% for the E.U. The righthand panel, though, shows the true picture. It looks at the unemployment rate adjusted for the nonparticipation rate, the percentage of all 25- to 54-year-olds who are not actually working (i.e., it includes those discouraged, uninterested, or even sitting in jail). There are now 21% not employed in the U.S. compared to 20.5% for the E.U., and our long-suggested job creating skills are looking a little thin.
The problem lies in the so-called participation rate, as shown in Exhibit 3. The U.S. was one of the leaders in the percentage of women working, and from 1972 to a peak in 1997 the U.S. participation rate rose from 70% to 80%. From 1984 on, the U.S. spent 20 years ahead of most other countries in participation rates, but after 1997 something appears to have gone wrong: While other developed countries continued to increase their participation rate, that of the U.S. declined from first to last in fairly rapid order.
What a far cry this reality is from the view generally accepted by our business world.
Exhibit 4 examines our belief that we have the best health care system in the world. And why shouldn’t we, given the money we put in (left-hand bar chart), over twice the average cost paid by the E.U. But the right-hand bar chart shows what we get back. Two years less life than the median. And watch out for when the Turks, Poles, and Czechs cut back on smoking, for then we may find our way to the bottom of the list.
But if you really want to be worried about our comparative health you should take a look at Exhibit 5, which comes hot off the press from the guy who was just awarded the Nobel Prize for Economics (wait a minute, must be some mistake, this work seems perfectly useful). The data shows the death rate for U.S. whites between the ages of 45 and 54, which happily these days is when very few people drop off. Since 1990 there has been a quite remarkable decline for other developed countries, about a one-third reduction, as you can see, including for U.S. Hispanics. But for U.S. whites there is a slight increase! Further analysis for that group reveals that the general increase is caused by quite severe increases in deaths related to alcoholism, drug use, and suicides. Had the rate for U.S. whites declined in line with the others there would have been about 50,000 fewer deaths a year! (For scale, this is nearly twice the yearly number of traffic deaths in the U.S.)
You have to be careful these days when you suggest connections. For example, people have been told off for proposing that dramatic increases in population can help destabilize societies. Syria had two and a half million people when I was born and has 29 million people now. You can guess how much worse the situation is because of this but you should not talk about it. Similarly, Prince Charles has been extensively criticized by professors in The Guardian for suggesting that a several-year drought in Syria exacerbated social tensions by ruining many farmers. As if! (You cannot prove precisely what effect climate damage had, but you certainly cannot prove that it did not have a large effect. It certainly had a contributory effect.)
With that caveat, let me seriously suggest a connection between Exhibit 1, which shows no increase in the U.S. median wage for over 40 years following a wonderful prior 30 years of a rise of over 3% a year, and Exhibit 5, which shows the uptick in unnecessary deaths among U.S. non-Hispanic whites aged 45 to 54. This is precisely the age group that was led to expect better for themselves and much better for their children. But those aspirations have not been generously fulfilled. The U.S. Hispanics, in contrast, mostly arrived later and had different expectations. All in all, this data is quite bleak. The point here is that it bears absolutely no similarity to the more optimistic belief set that is generally accepted.
The data presented in Exhibit 6 examines the proposition that “more and more goes to the government and soon they will have everything.” You have heard that many times recently in the political debate. Sorry, “bull sessions.” You can see that the U.S. share going to the government in taxes is about the least in the developed world and that it has barely twitched for 50 years. Yet, apparently we have been steadily going to hell. How is it possible that such a view is given such credence in the face of the data, which is, after all, official and simple, not ingeniously manipulated by some perfidious Brit. (Yes, I admit it, I consider myself American or British depending on whether the context is favorable or not.)
“At least we live in a fair society” is the proposition examined in Exhibit 7. The Gini Ratio is a measure of income inequality. Low is good. Only Turkey and Mexico outflank the U.S. as more unequal amongst the richer countries. I was a bit surprised to see how high the U.S. already was in 1980 (I had been drinking from the same culture dissemination trough after all), but it was at least importantly lower.
“We have a democracy where people really count” is an idea that is built into the background cultural noise. Exhibit 8 (also covered last quarter) on the left shows how the probability of a bill passing through Congress is affected by the general public’s enthusiasm or horror. In a nutshell, not at all! The financial elite, on the other hand, can double the chance of a bill passing or, much more disturbingly, can completely block passage. Clearly these facts are totally incompatible with the concept of participatory democracy and equally entirely at odds with the much more favorable and optimistic beliefs we share about our democracy. We really, really want to believe good news and to believe that we have a superior system that only needs fine-tuning. But, it ain’t necessarily so.
“We have the best education system in the world” is a proposition that goes without saying in Boston, with Harvard, MIT, and literally dozens of other universities. But Exhibit 9 shows the more downto-earth fact: mediocrity.
Less than mediocre, though, is the data in Exhibit 10, which shows the percentage of 3- to 4-year-olds enrolled in school. This is an area of emphasis where the returns on investment are said to be particularly high – six for one – although I would not like to guarantee such returns myself. However, our relatively low ranking at the start of the process is not heartwarming.
Exhibit 11 moves on to our production of CO2, which per capita is the largest in the world, just ahead of Australia. The two of us also worry the least, except for one Middle Eastern oil producer. There is a nice, i.e., interesting, negative correlation here of -0.54. Not bad at all. The greater your fossil fuel intensity, the more ingenious your fossil fuel propaganda is to create doubt and the more we are encouraged to think beautiful optimistic thoughts: clean coal and clean oil. And even as more people can see the climate damage, the richer countries can convince themselves that the damage is not that serious. Poorer countries, meanwhile, do not have that luxury and about 20% more are actively concerned (about 80% vs. 60%) than are the richer countries.
And this brings me to the last and my absolute favorite of these false propositions, which I label, “I wish the U.S. government wouldn’t give so much to foreign countries (especially when times are bad)!” Now, I do not think I have met a single American who does not believe that the U.S. government is generous in its foreign aid. Yet, it just ain’t so, and by a remarkable degree. Exhibit 12 shows what other developed countries give, with the usual goody-goody Sweden leading the way with 1.4% of their GDP and the U.K. having quite recently shot up to 0.8%, for once ahead of Japan and Germany. Dead last is the U.S. at 0.2% of GDP, which it has averaged forever. This is the item with the biggest and most permanent gap between reality and perception. And, as always, the misperception is in favor of the favorable, the data that we would wish to be true.
Conclusion
This is more or less the best I can do to prove the point. We in the U.S. have a broad and heavy bias away from unpleasant data. We are ready to be manipulated by vested interests in finance, economics, and climate change, whose interests might be better served by our believing optimistic stuff “that just ain’t so.” We are dealing today with important issues, one so important that it may affect the long-term viability of our global society and perhaps our species. It may well be necessary to our survival that we become more realistic, more willing to process the unpleasant, and, above all, less easily manipulated through our need for good news.