WTF happened in 2024? - btbirkett@gmail.com - Gmail

WTF happened in 2024? - btbirkett@gmail.com - Gmail

WTF happened in 2024?

In this issue: WTF happened in 1971? WTF happened in 2024? It’s morning in America My new year’s resolution for Rational Optimists

Dear Rational Optimist,   Remember The Jetsons?   George Jetson commuted to work in his flying car, which folded neatly into a briefcase. Robot maids took care of the housework. A three-hour workday left plenty of time to relax.    The cartoon reflected America's boundless technological optimism of the early 1960s. Unfortunately, that was the peak. Something derailed American innovation, and optimism, in the 1970s. That something still lingers today, suppressing our potential.   Today, in this first Diary of 2025, we’ll explore this phenomenon. And I’ll make the case that we’re currently living through the most transformative moment since the 1970s.   If I’m right, America’s next chapter will be its best. The next 50 years will look radically different than the last 50. And you'll want to rethink how you invest for 2025 and beyond.   Wtfhappenedin1971.com is a website worth visiting. It’s a collection of dozens of charts showing how the early 70s was a pivot point for America, in a bad way. Three examples:   #1: Wages stopped rising in lockstep with productivity. While our economy kept growing, workers received less of the benefit:

Source: Economic Policy Institute   #2: Prices began to skyrocket. For 70 years, a can of Campbell’s Tomato Soup cost a dime. In the early 70s, the price started to go parabolic:

Source: Political Calculations   #3: Incomes diverged. Income gains accelerated for richer folks, but slowed down for the middle class.

Source: CBPP.org   Before 1971, America turned innovation into shared prosperity. A factory worker could support a family, own a home, and send kids to college on a single income. Then something changed. The rich started getting a lot richer, while gains for everyone else slowed down.   So WTF happened in 1971? The conventional explanation: President Nixon took America off the gold standard, giving politicians carte blanche to borrow and create new money.   For a full explanation of how this decision warped the American economy, I recommend Lyn Alden’s book, Broken Money: Why Our Financial System is Failing Us and How We Can Make It Better.   But that, I think, is only half the story. The real earthquake hit in 1973 when the OPEC oil cartel imposed an embargo.   Oil prices tripled in months. Americans found themselves waiting in long lines for gas. The economy plunged into recession. The 1973 oil shock ended the era of reliably cheap energy:

Source: FRED   America faced a choice at this moment. The country was sitting on plenty of its own oil. We could have pumped more. Instead, our oil output fell 40% over the next 35 years.   Better yet, we should’ve built out our nuclear generation capacity. Instead, we chose to use less energy. In 1973, for the first time since America’s founding, energy use per person turned down. It has never recovered:

Source: Our World in Data   Conservationists who see this as a win are missing the big picture. America’s energy use per person rose by about 2% annually for nearly two centuries—from its founding in 1776 to 1973. More energy let us do more work, more efficiently, dramatically transforming the physical world.   When energy was cheap and abundant, Detroit built muscle cars with roaring V8 engines. Boeing's jets conquered the Atlantic. NASA's rockets reached the moon. An endless stream of power-hungry inventions like washing machines and dishwashers made life easier.   The early '70s was peak “Made in USA.” Our largest companies built cars, drilled oil, and made stuff. One in four Americans worked in factories, earning solid middle-class wages.   The 1973 oil crisis shattered this world. Manufacturer profits plunged. Mass layoffs followed. Economist William Nordhaus found America's economic slowdown was "primarily centered in those sectors that were most energy intensive." Read: industries that used the most energy.   My friend Matt Ridley, honorary founder of The Rational Optimist Society, wrote:   It is commonplace today to say that innovation is speeding up, but like much conventional wisdom, it is wrong. With the exception of the digital industry, the West is experiencing an innovation famine.   Rational Optimist Society honoree Peter Thiel agrees, saying: “We wanted flying cars, but all we got was 140 characters?” (a reference to Twitter).   When cheap energy disappeared, American innovation turned away from the physical world and toward the digital realm. Innovators shifted their focus to creations that didn’t need much energy.   Look at the most valuable US companies then versus now. In 1970, the giants were General Motors, ExxonMobil, Texaco, and General Electric—companies that made stuff.   Today, Apple, Microsoft, and Google dominate. These companies mostly move bits around the internet.

Not only do their business models require little energy. They require far less manpower. IBM was the largest company in 1970. Apple is the largest today. Apple makes 10X more revenue per employee!

Source: Stock Analysis   The digital revolution reshaped the American Dream and transformed our screens. But  it left our physical world frozen in time.  Buildings, bridges, and highways all look the same as in 1970. In some places, they look worse than 50 years ago because maintenance has barely kept up.   Physical innovation hasn’t just stalled. It’s gone backward:   We’ve closed more nuclear power plants than we’ve opened this century.   America hasn't built a major airport in 30 years.   Airplanes fly no faster than they did in the 1950s.   But it’s all changing now.   1973 marked the beginning of America's innovation famine. 2024 marked its end.   It's morning in America   When our grandkids pull up the charts 50 years from now, they'll ask: "WTF happened in 2024?" But unlike 1973, they'll be asking why things suddenly started getting better.   After 50 years of rust and decline, American manufacturing is roaring back to life. Spending on new factories hit $1.4 trillion last year… easily a record.

Source: FRED   Most of that $1.4 trillion is being used to build computer chip, electric vehicle, and battery factories. These are the building blocks of tomorrow's economy.   Meanwhile, our best and brightest are focused on producing cheap, abundant energy again. Big tech is investing in next-gen nuclear. Fracking has already lifted American energy production to new records… and just might give us cheap geothermal next.   This resurgence of real-world innovation can usher in a new era of widespread prosperity. The digital revolution helped coders get rich but eliminated a lot of other jobs. Building real, physical stuff gives opportunities to many more people. You can already see glimmers in the statistics.   According to the Federal Reserve, the bottom half of Americans now own $3.9 trillion in wealth—a record.   And data from Bank of America shows wages for lower-income earners are growing at a faster clip than for high-income households.   For the first time in half a century, America is building again. The spirit of innovation that gave us the transcontinental railroad, the Apollo program, and the Empire State Building is waking up from its 50-year slumber.   This renaissance is washing across the entire economy. Five specific innovations are driving the transformation. I call them “The Five Frontiers."   We’ll discuss them next week in Part 2.   Imagine if your iPhone had a “think hard” button…   Press it, and suddenly your phone becomes as smart as a room full of PhDs. It could solve physics puzzles and decode biology riddles that’d stump most experts.   ChatGPT creator OpenAI made this real with its new artificial intelligence (AI) model, o3. It “thinks” before answering. And the more it thinks, the smarter it gets.   On a competitive programming exam, o3 scored among the world's top 175 human programmers. It also beat a group of PhD experts at the GPQA problem-solving exam.   o3 solves math problems that baffle professional mathematicians. It writes code better than most elite programmers and tackles reasoning challenges that weren't supposed to be possible for years to come.   We’ve jumped from college-level AI to PhD-level AI in just two months.   o3 breaks down complex problems into smaller steps, just like a human would. If the first approach doesn't work, it backtracks and tries something else. “Thinking” models use roughly 50X more computing power than the latest ChatGPT.   The big question on investors’ minds as we enter 2025 is: Will the AI spending spree continue? The release of o3 tells us the answer is a resounding YES.   o3 isn’t available to the public yet, but it’s coming.   My new year’s resolution for Rational Optimists: Get your hands dirty with AI. If you’re not already using AI, you should be.   Claude 3.5 Sonnet is my favorite AI tool. It edits all my writing. It pulls out valuable insights from dense research papers in 30 seconds, which used to take me an hour to slog through.   A friend uses Claude to comb through financial filings and extract data, which he sells for thousands of dollars a year!   Remember when people talked about the digital divide between those with and without internet access? The new divide will be between those who use AI and those who don't.   Chatbots like Claude and ChatGPT are a productivity gift from the gods. In the next year or two, we’ll see billion-dollar companies run by teams of fewer than five people, with AI doing the heavy lifting.   AI won't take your job. But humans using AI might.   I’m considering writing a longer piece on how to use AI in your life. If you’re interested, email me: Stephen@rationaloptimistsociety.com.   "Will AI steal our jobs?" I get this question almost daily, always tinged with fear and resignation. This mindset misses the crucial fact: You're living at the most pivotal moment in history, and you have the ability to influence it.   The calculator reshaped math. The internet transformed information. O3 is revolutionizing thinking itself. This isn’t the end of human ingenuity, it’s just the beginning.