States Cutting Higher Education and the Future

Here is a nice chart showing the one aspect of the decapitalization of the US, and how we are short changing our future.

http://www.offthechartsblog.org/adding-up-five-years-of-state-higher-ed-cuts/

A case of present wise, future foolish:  Do taxpayers think they are coming out ahead?  Not so:  The people they are depriving of education, first of all, are their own children.  And second of all, their children are the people who will be supporting them in their retirement.

When a person is retired, they live off the labor of the current work force.  They do not somehow save up their labor, and get what they produced all back when they stop working.   The retired are supported by the people who are still working.  It is the labor of the younger generations which supports the elderly.   

Any sensible person would want that workforce to be as prepared and as capable as possible to support them in their retirement. But by reducing, cutting back on their education, the taxpayers are depriving this workforce, on which they will depend, of the resources, the preparation and capabilities, necessary to support them.  They should instead want them to be prepared, to have the capital, the human capital, to produce enough goods and services to support them in a reasonably comfortable retirement. 

And so also that the next generation themselves can be reasonably comfortable, as they work. If they are not reasonably comfortable, they will be resentful, at the least, and may choose to cut their elders off, at the worst, when they come into their power.     

Helping to pay for the higher education of the upcoming generations is one of the most important ways a person saves for their retirement. Seeking instead to secure their labor with debt bondage is counterproductive, since it discourages the investment the young must make in the first place, and also makes them resentful of the imposition of social burdens.   

Money in the bank is useless without a well functioning economy.  And you cannot have a well functioning economy without an educated workforce.

And this is another case of inter-generational warfare, See: http://anamecon.blogspot.com/2012/10/inter-generational-borrowing.html

And it also points up its folly.

There is another interpretation:  Trade. Everything in an economy is connected.  Thus the equalization of factor prices applies to all factors.  Those which are more insulated from the direct effects of trade, such as education, are affected more slowly, but affected still.  The persistent trade deficit will result on downward pressure on all production, on all sectors of the economy, including education and the capitalization of the workforce.   

The increased necessity for the importation of skilled labor, brought about by short-changing domestic investment in higher education, is another aspect, and a case where the feedback is reinforcing and aggravating the trade deficit.

Does Principal less than Principal Plus Interest Imply Default?

There has been some conflict over the idea that, since the majority of money (95%) is created as debt, the problem is that while what money is owed is principal plus interest, (P + I) and what money exists is merely the principal (P), it is always impossible to pay back the total, (since P < (P + I),) and so there will always be default.

Paul Grignon, from whose excellent movie   “Money as Debt II” http://www.youtube.com/watch?v=jQuEOUzA9P8 I originally gained this idea, now says the primary cause of default is secondary lending.  

http://peemconference2013.worldeconomicsassociation.org/?paper=proposed-new-metric-the-perpetual-debt-level If I understand him right.

We examine this.

WE consider a steady state economy, one which is neither growing nor contracting.  The velocity of money V we consider constant.  Banks lend out $100 at the beginning of the year.  This is all the money there is in the economy.  All money is debt.  At 6% interest.

All loans are to be paid in full at the end of the year.  Otherwise, there is no interaction between the banks and the rest of the economy.  $106 is required at the end of the year, but only $100 exists.  If we look at all of the actions internal to the economy, that is, the economy separate from the banks, none change the money supply. Only the paying back of loans, which extinguishes the money, or creating new loans, which creates money, changes the money supply.  If loans are paid early, the interest is collected. Paying early extinguishes the money, whether on principal or interest.   If the money supply is to be maintained, the loans are lent out again.  In this case $106 is still required at the end of year. Of course, the next year, $106 can be lent out, thus allowing the $6 in interest to be rolled over, along with the rest of the money in the economy,  the debt compounding. But see below.

Internal lenders, (secondary non-bank lenders,) who must first borrow the money from the banks at the beginning of the year, before they lend it, do not change the money supply. They may sell the loan, for money, but that doesn’t change the total supply of money.   Neither do they change the default rate to the banks.  In this sense: Default to secondary lenders is passed on as default to the banks.  They transmit, but do not originate.  

But this is the basic point.  If we keep secondary lenders separate from banks, the net default rate to banks does not change. The default rate is still just a consequence of the original shortage of money to pay the interest, unless the money supply is expanded.  Anyway, if the default rate is greater than the 6% interest rate, then there is money retained in the economy by other actors.  If the default rate is 8%, then 2% is retained as cash by the economy for the next year.  Indeed, we would expect a certain amount of this kind of default in an economy in any year.  Call this distributional, as opposed to secular, default. Roughly, the distributional default rate would be a constant, although this might depend on the growth rate or inflation. We will ignore this, as it is not brought about by a shortage of money, but by the distribution of money in the economy.  Because of distribution, some people will have more than enough to pay back their loans, some people will not have enough, and this will even out.  But because P < P + I, there will in addition always be some who will not have enough money to pay back their loans.

Suppose now instead the banks spend $6 throughout the year. (Interest to savers may be some of this.)  Essentially they are giving away this money, although they may demand real services for it. Then there would be $106 at end of year.  There would be no secular default, but there would be 6% inflation, with constant velocity, as the money supply has expanded by 6%, while the economy has, by assumption, remained at a steady state. The same result would happen if the banks were just to lend out $106 at the beginning of the second year, as above, thus covering what would otherwise be defaulted upon at the end of the first year.

Suppose the banks spend $10 throughout the year.  Then there would be $110 at the end of the year, and 10% inflation, with $4 remaining in circulation at end of year, when all loans were called due, and $106 collected.   But $106 would still have to be lent out, at the next cycle, as the required base money supply is now $110, and anything less, (or more,) would change the money supply, and if less, cause deflation, from $110, and if more, inflation.    

Suppose the banks spend just $3 through out the year.   Then the money supply increases by 3%, and there is 3% default.  This suggests an equation: rate of Money added + Default rate = mean interest Rate. (Rate of Money added in a steady state economy will equal the inflation rate, but it will not equal the inflation rate in a growing economy.)

Let’s look at this some more.  The increase in the money supply need not be just the banks spending money.  It could also be the government issuing money.  And this increase in the money supply could be greater than the interest rate.  Then default would be ‘negative,’ (by which we mean there would be net cash at beginning of the next cycle,) and inflation greater than the interest rate.  

Another thing that could happen is the banks could increase the rate of loaning money above $100, the first cycle.  But this would just set the base at say $110. Thus the increase in bank lending would also contribute to inflation.

Suppose now an economy growing at 3%.  Then if the banks put in $6, 6%, we would have 3% inflation:  Rate of Inflation = rate of Money added – Growth rate.  As before, zero secular defaults.  But suppose instead the banks just spend nothing.  This will lead to 3% deflation. The default rate would still be at 6%, though, because there is the 6% shortage of money. So in a growing economy, our first equation still is: rate of Money added + Default rate = mean interest Rate. These terms are the purely monetary terms.  Inflation and the Growth rate are the terms involving the real economy.  Substituting for rate of Money added, from one equation to the other, we have: rate of Inflation + Growth rate + Default rate = mean interest Rate. Note we allow the default rate to be ‘negative’ if there is a sufficient increase in the money supply.  (Note also that if we include the distributional cause of default, we actually have:  rate of Inflation + Growth rate + Default rate > mean interest Rate.   But distributional default is a complication we are ignoring. I think it averages out as roughly a constant over time, and so does not affect the secular default rate.) 

Back to a steady state economy. Instead of all money being created by loans, we are told that there is $5 in the economy, not created by the banks as loans.  Banks lend out $100 at 6% interest at the beginning of the year.  So there is $105 at the beginning of the year.  All loans to be paid in full at the end of the year.  No other interaction between the banks and the economy.  So $106 is required at the end of the year, but only $105 exists.  All internal actions, in particular the actions of internal lenders, add to zero.  Paying early extinguishes the money.  However, unless $5 is put into the economy the next year, then the banks will have all the money. ($105) Then the next year all the money which is in the economy will be lent, that is, all the money will be created as debt.   Which the banks loan out at 6%, requiring $111.30, or default to the amount $6.30.  So we see an amount equal to the interest on all money must be pumped into the economy each year to avoid defaults.  This leads to inflation, at the rate of interest.

So we see that, in a steady state economy, unless new money is created each year, at the mean rate of interest, there will be default.  If new money is created each year, there will be inflation.    

Consider instead overlapping periods of loans.  Banks lend out $100 at beginning of year: $50 for a year;  $50 for 6 months.  Then the banks loan out the $50 again at mid year, for a year, etc.  Assume as before the velocity of money V is constant.   Then $51.50 is taken out of the economy at the end of 6 months. If then only $50 is lent back in, the banks keeping the $1.50 interest, then only $98.50 will remain in circulation.  But if we assume business as usual, and that the money will be distributed throughout the economy, then the $1.50 interest due after 6 months will be defaulted on.  This default is required to maintain the money supply, in the economy. If it is not defaulted, the money supply will contract by $150, unless the banks now lend out $51.50.

Suppose instead the banks will lend just the $50 out again.  After 1 year, then, on the first year loan $53 will be taken out, so only $95.50 will remain in circulation. So we see that with overlapping loans, the result will still be some combination of deflation, default, or increasing indebtedness with inflation.

What about with deflation?  Indebtedness can still compound.  The banks keep all interest to themselves. Then after one year, $100 is owed on $94 in circulation, and after two years $100 is owed on just $88 in circulation, etc.  This is a cumulative 6%, or $6 on the $100 which is owed.  This is constant, so the reduction in circulation each year is constant, although the percentage decrease in money in circulation increases.  6.38% decrease in the 2^nd year, 6.82% decrease in the 3^rd year, 10.35% the 7^th year, when $100 will be owed on just $52 in circulation.  This is independent of any growth, or contraction, in the in the real economy.

In this toy economy, we have either default or compounding debt, just because P < P+I.

Finally, we note again the odd consequence of distributional default, which is that the economy retains cash not owned by the banks.  Peculiarly, except for this small percentage, plus any money issued by government each year, or given away by banks, each year, all money is effectively owned by the banks.

Putting Armed Guards in All the Schools is Nuts

Putting armed guards in all the schools is nuts.  There's like 100,000 public schools in the US, which, with (just) two guards apiece, at say $60,000 per year comes to $1.2 Billion.  This is a cold calculation, but this investment would have to stop the killing of about 300 people, children, valued at $4 Million a person, a child, each year to be worth the cost to the economy.  Note the phrase: "would have to stop the killing of."  Even with this security there is no guarantee of efficacy.  Besides, there's the school buses, too, which would have to be protected.  And then there are shopping malls, public parks, and all kinds of public events where people gather.  A society is simply a soft target, which is why societies have traditionally sought to fight their wars somewhere else besides their home turf.   

 The $4 Million figure is roughly the economic contribution made by a person to society (in the US) during his lifetime. Figure 150 Million people actually working in a $15 Trillion per year economy makes the average of each person’s contribution $100,000 per year. Figure 40 years effective working life, $4 Million total contribution.  The actual average contribution is probably a little less, (although one can argue also considerably more, as much of an individual’s contribution to society is not measured,) so even this overvalues the economic value of a life. This site gives a figure of $5 Million, depending:

 http://www.lifeslittlemysteries.com/2764-infographic-the-dollar-value-of-a-human-life.html. 

The EPA in 2010 said $9.1 Million as the value of a life, but that’s too much, and overvaluing life is as harmful as undervaluing it. If you spend too much money trying to save lives you don’t spend enough money living life.   Suppose you valued people’s lives at $1 Trillion dollars each.  Then you would spend that much money keeping each person from getting killed. But you’ve only got $15 Trillion to spend, so you could only keep 15 people per year from dying. You and everyone you knew would spend your entire labor insuring those 15 people didn't die. And then you wouldn’t have any money for anything else.  

About 2,500,000 people die each year in the US, and gun violence, especially when you subtract out gangs, is not more than a blip. Deaths due to medical error is about (at least, either about 100,000 or 200,000, depending on who you ask) 10 times as much, and one can argue that 'guns to protect people’s rights' is, like medicine, a necessity, despite the unfortunate statistics, for both the gun industry and medicine.

Homicide of all sorts came in at number 16 in leading causes of death in the entire population, in 2011, firearms accounting for 11,100 or so.  But... If you tease the data a little bit, homicide is 3rd or 4th leading cause of death up to age 34, comparable to suicide, ahead of cancer, and only clearly behind unintentional injury, (ie accidents, I suppose,) compared to which rate it is about a third.  This will get you to the site:
http://webappa.cdc.gov/sasweb/ncipc/leadcaus10_us.html  About 4/5ths of these homicides are gun related.  So for that age group at least, gun control advocates have an issue.

But I don't think it is worth the cost, given history and the culture.  Although I also think gun advocates are off a little, too.  Organization, not individual gun ownership, is necessary to protect against tyranny.  And here, for instance, the effective destruction of labor unions, which many gun owners favored, has removed one of the people’s great barriers to tyranny .  Militias?  As long as the government can concentrate force, and is the corrupted captive of Finance...

Also, there is a certain amount of hypocrisy behind the gun lobby’s proposal.  It is often the same people who argue against universal health care.  If they really valued those children’s lives, they would favor universal health care, since the denying of insurance is effectively a devaluing of life.  They propose to spend $40 Million per saved life due to gun violence, ( and expand the government’s police force by 200,000,) but they won’t spend the thousands per life, and save the many thousands of lives, to reduce the death rate of the not so well to do to one or another possible medical problem. 

Do the Wealthy need the Middle Class?

Can the Wealthy, by Themselves, Sustain the Demand of an Economy?

Can the wealthy own too much?

Paul Krugman, back in 2008, could find:” … there’s no obvious reason why consumer demand can’t be sustained by the spending of the upper class — $200 dinners and luxury hotels create jobs, the same way that fast food dinners and Motel 6s do. “

http://krugman.blogs.nytimes.com/2008/12/17/do-we-need-the-middle-class/

What we are seeing today, with the combination of rising income inequality and  unemployment, is the inability of the wealthy to do this. They cannot, of themselves, provide enough demand to keep the economy at full employment.  We are also seeing it in Europe, with the economic damage inflicted by wide spread austerity.  After all, the wealthy, including many wealthy bondholders, are unable to sustain economic demand in the face of shrinking payrolls and public expenditures.

In order to sustain demand, the wealthy would have to spend almost as much as they earned, even as does much of the middle and lower class.  And they would have to spend it mostly on the productive economy, and not just on real estate and such.  That would just be the churning of existing assets, and add a minimum of jobs. And this production would necessarily involve the massive production of useless, or at least unused, artifacts. That is, this production would largely have to be economic waste. The wealthy already do the best they can to be wasteful, with their yachts and multiple mansions, luxury hotels and yes, $200 dinners, but they are already failing, and it is only going to get worse, as income becomes increasingly concentrated and mal-distributed.

Indeed, we can characterize wealth by the extravagance and wastefulness of its expenditures.  Since this extravagance represents an economic loss to the rest of the economy,  the greater the concentration of wealth and its expenditures, the greater the waste, and the poorer the economy. (So there is a tax multiplier not just on the quantity of wealth, but on the quality of its expenditures.)

The wealthy are actually poorer if they keep this wealth and income to themselves.  After all, they basically control the government, so all public goods are essentially already under their control. So the decline of infrastructure is a decline of their wealth. The only thing missing is the formal privatization of ownership. Thus the progression is not just the increased concentration of true wealth, although there is some of this, but the increased individuation of ownership of the assets of society. That is, the wealthy already hold in common the essential assets of society, including the so called public ones, if not formally then informally.  However, they seek to exploit these assets in a non-sustainable way, thus destroying the commons on which all depend.  

And because of the multiplier effect, the synergy of common effort having results greater than the sum of individual efforts, much of their own wealth depends on the perpetuation of this commons.

Consider what the rich already own.  The increased concentration of wealth can only constitute, collectively, an essential meanness among the wealthy, or, if you will, a meanness of the system, seeking to take from those who have much less, even what they have.  

We can suppose that everything is owned by the rich, and is just to service the rich.  It then comes down to how much the rich are willing to pay the help.  And the answer seems to be, among our current crop of wealthy, not much. They keep insisting on paying less. The fact is, with the economy in a shortfall of demand, even with the ability to pay more, our wealthy will not.

The further problem is that by depleting the middle class, they are also destroying the market required for  most of those individually owned assets to have a positive return.  After all, it is rich people who own fast food restaurants and Motel 6s, and from whose profits they buy their yachts. They will not profit if no one has the money for fast food restaurants, or Motel 6s. If we look at a ghetto, all of those ruined buildings were once owned by wealthy people, either for dwelling or for income.  If they cause the ghetto-ization of their world, they will not be the wealthier for it. 

Copyright Reform: A Proposal

My proposal for copyright reform:  5 years, 5 million copies, or 30 years, which ever comes second.

You have rights to your work for at least 5 years, no matter how many of your work you sell. Suppose you sell 7 million, or 70 million, in 5 years. Then at 5 years, that's the end of it.  Your work enters the public domain.

Suppose you only sell 3 million by the end of 5 years.  Your rights are extended until you sell another 2 million.  Unless that takes more than 30 years.

Suppose your work is something off beat, or scholarly, and is never going to sell 5 million copies.  Then you have the rights for 30 years. 

Good for books.  For movies?  If a movie hasn't made its money back in 5 years, it isn't going to. 



Comments?  Problems?

(Cross posted to:  http://economistsview.typepad.com/economistsview/2012/12/gop-fires-author-of-copyright-reform-paper.html#comments)
 

Winners and Losers in Free Trade.

It is often said, in the justifications of free trade, that there are more winners than losers.  But this is not quite what is actually the consequence of free trade.  It is more correct to say that there is more winning than losing, but this is not at all the same thing.  The winning may be concentrated among a few, while the losing could be distributed among many, in which case there would be more losers than winners.  Further, the losers could be among the less wealthy, and thus less able to afford their losses.  Is this what we are seeing in the new global economy?  The rich winning, and getting very rich, while many others are losing, and hurting? 

Inter-Generational Borrowing

Nick Rowe addresses the problem of inter-generational borrowing at:

http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/12/debt-is-too-a-burden-on-our-children-unless-you-believe-in-ricardian-equivalence.html

The issue is brought up again by Dean Baker: http://www.cepr.net/index.php/blogs/beat-the-press/children-and-grandchilden-do-not-pay-for-budget-deficits-they-get-interest-on-the-bonds

If I read Nick Rowe right, he assumes (using a toy economy based on apples,) that A: Apples don’t last.  And concludes:  B:  Each generation, in borrowing apples from their children,  consumes an increasing share of the apples produced by their children.  That is, each generation consumes more than they themselves produced, taking from the production of their children. (The second generation gives to the first, but borrows even more from the third, etc.) I think this is correct, and is Nick’s point: Inter-generational borrowing is not neutral. Succeeding generations end up short. And Dean Baker, who claims that there is no transfer of wealth with inter-generational borrowing, is wrong.

If I read this right, then the only moral position is to grow the economy at a rate greater than the increase in (real) inter-generational borrowing. ( Of course, this eventually comes up against physical limitations.) That is, plant apple trees at an increasing rate, greater than the increase in inter-generational borrowing. But this requires (it seems to me) that the present generation consumes less than they would if they hadn’t borrowed in the first place.  That is, the present generation must invest more than they borrow.   

But in terms of the present, real value, this just means the present generation should consume less than they produce, and invest the rest. The borrowing of money is irrelevant, except where it affects this. 

In fact, the borrowing of money is rather inverted, because the younger generation is forced to borrow money from the older, established, wealthier generation, pay that older generation back with interest, and thus end up with a diminished share of the  real pie. 

So this is what the government is doing.  It is the younger generation borrowing from the older, who refuse to pay their taxes, and instead consume more than they produce.   Social Security and Medicare notwithstanding,  (Who, after all, will be cheated, if Social Security and Medicare are not adequately funded in the future?) the government, in principle, represents the interests of the young. Its proper purpose is to invest in the future, which is more the younger generation's than the older.

But the government has been co-opted by the older generation, who, instead of holding it in trust, exploit it to their own profit. 

The Republicans’ stated goal, then, and that of Austerians in general, the shrinking of government, (especially those parts of government that pertain to investment,) is to cheat the young out of their interests.   This is what we are seeing in youth unemployment across the globe, so much being taken away that the younger generation is even being decapitalized.  Here in the US, it is seen as higher costs of college, and lower investment in primary education, the neglect of infrastructure, etc.  (Infrastructure is of greater benefit to  the young, since they can expect to use it longer.)

So not only is it the 1% vs the 99%, but it is the old vs the young.  

The problem for the old, of course, is that by decapitalizing the young, they are decapitalizing themselves.  Because it is on the backs of the young the old hope to take their ease.  

 Running a trade deficit is also borrowing from future generations, and is thus also immoral, unless it is done for investment.