Norway's Government Pension Fund

Norway started a pension fund in 1990 as a way to invest petroleum income that comes from taxes, licenses, and the state’s direct investment. The idea was to smooth out the income from a highly volatile sector as well as to provide income past the point where Norway’s hydrocarbon resources begin to decline. What an adult thing to do. Today the fund is worth more than $1 trillion (that’s 1,000 billion or a million millions). It’s the largest sovereign wealth fund in the world and it owns 1.3% of stocks worldwide. In short, it's a juggernaut.

There are 5.2 million people in Norway so that’s roughly $195,000 per Norwegian. Norway’s GDP is about $370 billion per year, so the fund is roughly 3x GDP. For comparison, if the US had a fund worth $195,000 per citizen we’d have a fund worth about $64 trillion, and if it were 3x our GDP it’d be worth $56 trillion. I find this interesting for several reasons:

  1. States are the ultimate long term investor. Their size and longevity allows them to make volatile investments which over time yield higher returns, not touch the earnings, and watch the money compound for amounts of time that mortals can't replicate. A fund like this could take some small percentage out every year (say 1%-3%), never touch the principal, and could either greatly reduce taxes; increase investment in roads, schools, technology, etc.; provide a better alternative to Social Security; etc. - all of which would stimulate the economy. Granted, all the investment would have a crowding out effect which would likely reduce returns worldwide since the US is so large, but that’s another story.
  2. It allows the state to exert influence beyond politics, diplomacy, the military, taxes, etc. It literally gives them a seat in the boardroom of both domestic and foreign companies so they can influence things like environmental practices and executive compensation. Call it socialist if you like, but that’s some serious realpolitik. Maybe this is a more contemporary way for governments to generate income without burdensome tax laws, stay up to date with tech/business, and to influence the economy without regulations. It’s an interesting mix of socialism and free market ideas.

The Means of Production in Architecture: A Macro Explanation

As a follow-up to my last post, I just read "How software is changing the architecture industry." I don't agree with its conclusions (survivorship bias) but I thought it was interesting that others are noticing the same trends, so I'd like to attempt a macro explanation:

This is what pure competition predicts of successful technological innovations. When first invented a new technology offers a comparative advantage to early adopters, but over time the technology's adoption becomes ubiquitous and comparative advantage disappears. The technological innovation becomes necessary just to compete in the industry. Economic profit approaches zero, and if all goes well normal profit remains.

Architecture is either in the early or late part of this cycle. My bet is that we're in the second part - that is, there isn't much if any additional profit to be made off of adopting BIM. Clients and contractors already know this capability is out there and they expect it. Lawyers even more so. The margin of acceptable error in drawings has been much reduced in recent years. Basically, if you're still using CAD you're in a John Deere world with a horse and plow.

Willful Amnesia - Part I: Gasoline

One of the most tired utterances I often hear sounds something like 'well of course the cost of energy will be greater in the future' and everyone in attendance nods in agreement. But the sentiment doesn't align with reality, and in fact the price of energy has remained remarkably constant (more sources) over the last century or so, so why do people feel this way, especially in regards to gasoline?

First, people have difficulty implementing the concept of inflation, a.k.a. money illusion, into their day to day lives and instead tend to focus on numbers instead of purchasing power. That is, what their money can actually buy. It's one of those truly boring problems with large effects. Gas was $2.50 when I started driving in 2000 but I'd need to spend $3.40 in 2015 dollars to equal $2.50 in 2000 dollars. If prices were $3.40 today my knee jerk reaction is to say that prices went up and it's tempting to do so, but it's just not true. The most common example of this I hear is home prices 'we bought it for $70,000 30 years ago'. 

To those who are suspicious of inflation you'll hear that the price of energy isn't counted in the CPI (the consumer price index, the measure used to track inflation), and that's true. The reason it isn't included in the data is because the price of energy is volatile. Basically, the CPI would cease to be a useful measure. Krugman has a great explanation of this, and if we look at a graph over time we see that the price of energy really just oscillates around the general trend line.

Last up is loss aversion (seminal study from Khaneman). To offset the feeling we get from losing/spending something we need about 1.5-3 times the gain to make up for it, so if you drop $20 on the ground you'd need to find $30-$50 to cancel out the feeling you get from losing the $20. The fact that we purchase gasoline more regularly than some larger expenses also doesn't help. Spending $40/week is more painful mentally than spending large sums of money more infrequently. This could be a whole post on its own but suffice it to say for now that this insight explains a vast array of irrational human behavior.

The reason I writing about this now is because gasoline prices are almost half of what I'm used to at roughly $2.50/gallon (€0.58/liter) here in Chicago. While people like cheap prices it doesn't, in human minds, make up for when gasoline is $4.50/gallon. Next time gasoline prices spike people are going to complain about how energy prices are always going up and we'll have a sense of collective amnesia all over again, so while prices are low I'd like to point it out because as previously discussed, we tend to discount these periods.

The real question here, which I'd like to talk about soon, is qualitative. Are low gas prices net positive or net negative for society? I'd wager that many individuals are making some poor long term decisions during this windfall, and of course SUV and auto sales are up.