Saturday, December 31, 2011

On the Economics of Evil

Elsewhere, we have talked about how evil arises in the mind, and a little of how it is made manifest in the world.

One may wonder how one talks about evil in an economics blog. It is almost impolite. After all, evil is, in the end, irrational, and ignorance part of its nature. And economics is the domain of the all knowing, rational agent. One might say, economics is the study of the behavior of God, or gods, at least, anyway, under some of its more implicit assumptions. Perhaps this is one of the profession’s problems, then, when trying to explain the behavior of men.

Evil is as evil does. So what is as evil does? What is the economics of evil?

Evil sacrifices the greater good for its immediate gain. Since its own welfare is ultimately dependent upon the greater good, it thus consumes the foundation of its own wealth, and must look ever farther to feed its hungers, until it can no longer support itself, and collapses. But before it collapses, it may have consumed the substance of many. Those incapable, those inattentive, or those ineffectual in opposing it.

Eventually, good always triumphs. Good may triumph through might. But the reason, though, good always triumphs is because in the end, evil always fails. But it may succeed for a time, and the damage it may have inflicted be awful.

And when the good turns evil, it fails. Signs of turning evil are signs of failure. But not all signs of failure are signs of an internal evil. Failure may be imposed from above, inflicted.

It first seems as if we can talk about evil in terms of what are called discount rates. An individual with the lower discount rate is a person who ‘values the future more.’ He is a person more prepared to reduce consumption today so that he has more to consume tomorrow, and is held as somehow more virtuous, ‘more good,’ than someone who consumes more today, with perhaps less thought of tomorrow.

But we are living through a period where this virtue turns into exploitation, and destructive of the foundations of all wealth. An individual with a lower discount rate, exchanging with a person with a higher discount rate, will eventually come to possess all the other has, no matter how small the difference in discount rate. Even if the person with the larger discount rate is a person of relative virtue, he is not virtuous enough to retain his wealth. Is the gradual confiscation of the wealth of the less virtuous, then, itself a sign of virtue, or a sign of a lack of restraint, and of evil?

Or is instead the failure of the person with the higher discount rate a sign of his ‘evilness?’ For failure is what will result. He will lose his capital. Should he now be condemned to labor as a slave on behalf of the person with the lower discount rate, who now may consume the fruits of the labor of both, in perpetuity? Who is evil? The slave, who has become so because of his inadequate virtue, or the slaver?

The slaver, having consumed the wealth of his slave, is reduced to consuming the slave’s surplus, which it is in the slave’s interest to minimize. Having reduced the slave to subsistence, the slaver must then compel him to produce more.

So we see that commission of a lesser evil, what can be just a tiny difference in discount rates, by one, becomes, if not countered, the making of a greater evil, by the other.

Where is the happy median?

The accumulation of capital by a society is a great virtue. But so is its proper allocation. And this proper allocation is necessary, for when the wealth of a society becomes excessively concentrated, it can no longer maintain itself without the consumption of the capital of the rest of that society. Virtue pursued to excess has become Evil.

It justifies itself by its earlier successes still, yet its ends have changed. No longer is virtue seen as the pursuit of the common good. For the common man has proven himself to be without virtue, and dross, unworthy of the considerations of the powerful. What was Virtue turns to the fulfilling of its own now insatiable needs, and, at first just incidentally, the impoverishment of others. It goes too far, first blighting the lives and hopes of those less endowed, or less lucky, and then becoming corrupt and turning on itself, feeding on itself.

Evil is seldom pure. How do we recognize when virtue has turned evil, and harnessed to evil ends? How do we recognize the deterioration of our society, our nation, and our world? How do we recognize the infliction of evil, and the imposition of failure?

After all, Evil will cloak itself in virtue. Its agents may even, at first, imagine themselves virtuous. And what it imposes will not be called failure. It will be called something else. Evil deceives, doing one thing while saying it does another. And where it does what it says, its motives and goals are not what it says they are. But because Evil’s ends are irrational, as these become clear, irrational too become its justifications. Its speaking, and its actions, become increasingly detached from reality, and from each other. And its speaking and its actions become increasingly incoherent

Evil inflicts misery, whether or not it profits. And its profit is always less than the misery it inflicts. Evil provides no nourishment. What it seems to provide is never worth the price.

Evil does not create, except implements of destruction. It only manipulates, and takes. Indeed, creation is anathema to Evil, which opposes creation at every turn. It destroys what it cannot have, and pollutes, both what it does not possess, and what it does.
Evil cannot control its appetite. No amount of wealth is sufficient to its needs. And what to others are wants, mere desires, to Evil are needs, and needs that can never be satisfied.

Evil’s end is not what power can do, to the benefit of others, but power itself, and what it can do to gratify its needs. Evil considers itself to be justified in its extravagance.

We coddle the wealthy. We are told that they are the creators of jobs. Yet, there were more jobs when they were not so coddled. There was more wealth, and more creation of wealth, when the wealthy did not have so much. And now, we are told, we must give them even more. We, the people, must tighten our belts, and sacrifice of our own wealth, to feed the needs of the wealthy, the wealthy creditors who hold our debt, the debt of the people.

But ask the wealthy. Are they not virtuous? Do they not deserve the rents they extract from the people? Have the people, the debtors, through their inferior virtue, not embonded themselves to their creditors, the wealthy?

We will always have the wealthy. They will always extract their rents and fees from the people. But when are they too much? When are they more of a burden, than any benefits which the people might gain from them? Or are the rents and fees extracted from the people put to good use? Who, or what do they feed? If the wealthy would be the masters of the people, are they good to the people, or are they not? Are the extractions returned to the people, as the virtuous master would do? (But why should they be? Are not the people of inferior virtue to the wealthy, and undeserving?) Or are they not instead turned on self consumption, and the feeding of the worms of competing corruption which are now at the economic processes at the heart of the nation, and perhaps the world?

With the growth of the global economy, the reach of Evil is the ends of the earth, and, unless effectively opposed and contained, it will consume the sustenance of all else before it consumes itself.

But- perhaps we should look at the latest corruption in high places as- justice. Tolerating Evil, even perhaps, as some claim, inflicting it on others, Evil comes to us.

There are those who believe that, or say that, having achieved wealth and prominence, that this is evidence of moral superiority; that they are morally superior to those of us who have not. (Have we ourselves not said this? Have we not used our nation’s wealth and power to justify our- ‘Exceptionalism?’) Do the wealthy use this to justify their stewardship, or their extravagance? Is it become an instrument to do good, or wealth to conspicuously consume, resources denied to others, and wantonly destroyed. Do they nourish others, or deprive them of things they value, of the resources needed for the enjoyment of such liberty as they have?

The moral justification of those in high places can be rephrased: They rule for the benefit of the people, to shower them with the blessings of their making. Or, instead, they rule to inflict punishments on the people, who by their inferior virtue, come to deserve them.

The powerful cannot be merely indifferent. Then they are only self-serving, and there is no basis to their claims on wealth, and no reason for society to grant them.

Are the poor and undeserving supposed to accept these hardships, laid upon them by the demands of the wealthy, as justice served?

And what do we see, but the enforcement of this process, the reduction of debtor to slave, by our government. Are we surprised then, by reaction against the government, since it has become an instrument of compulsion, for the extraction of rent from the people, to the vast enrichment of a few. The protector of the people, having become enslaved by the wealthy, is despised by the people. Do the people, rather than seeking their government’s freedom, despair of their government, and turn on it, and seek its destruction?

Do those who tolerate evil deserve evil things to happen to them? Is it a form of justice that those who tolerate evil, though they do no evil themselves, should be punished? Is tolerating evil itself evil? Is being a bystander to a crime itself a crime? Is to allow evil to consent to evil?

Justification for government and regulation is seen by the behavior of the wealthy. Without a strong and free government, the wealthy cannot do other than they do, and that is to wreak great harm on the society that supports them, and their wealth. And we, the members of that society, may react one of two ways: We may accept the punishment, allow the destruction of our society and our wealth, and consider it just reward for our failures, or we may oppose the evil.

Finally, though man is limited in knowledge and rationality, the shape of the future is becoming increasingly clear. The earth is limited. The ends of the earth have been found, and been found to be not so very far. Consideration of and action to counter overpopulation, global warming, the depletion of resources and increasing toxicity of the environment, are all becoming more imperative. Will man pursue the course of evil, with evil consequences, or will he seek the course of rationality, and act accordingly?

Sunday, December 18, 2011

European Debt Crisis: Talk by Dr. Heiner Flassbeck

OK. TV Time again. Take 20 minutes to understand the cause of the European debt crisis.

Back in the 1990’s , just before the initiation of the euro, the Germans tried to institute a full employment policy by holding down wages for an extended period of time. That failed. They did succeed in beggaring their neighbors, however.

Or you can get it, where I first got it, at:

Where I was pointed by: (Although I visit regularly.)

Dr. Flassbeck concludes with a few words about the US, worth noting also.

Still like the idea of Import Certificates, since they force the balance of trade, and each country's policy is independent of any other country's policy, even if with a currency union.

Wednesday, December 14, 2011

Debt, Total Debt and by Sector as Ratios to GDP

Well, I am stung by “reason’s” criticism of my ‘misleading’ graphs. Yes, they were in nominal terms, but nominal terms are what you have to repay. But here are the same data as graphs plotted as ratios to GDP. They are all ratios of the nominal figures, so the ‘nominality’ cancels out. Not as good as ratios to income, as reason further suggests, especially the likely to be interesting ratios to the income of the various sectors. Which we shall see.

In any case the picture is no prettier, although noisier, ratios being what they are. See:

for the original graphs.

Here is total debt to GDP:

This is the sum of these figures:

GFDEBTN/1000 Total debt of the US federal governemt, divided by 1000because the original graph is presented in millions, and for some reason just doesn’t convert if you naively add graphs together.
HSTCMDODNS Total Household debt of all kinds, I think.
SLGSDODNS Total debt of State and Local Governments.
TBSDODNS Total debt for non-financial businesses.
DODFS Total debt for financial sector.

Pretty much still exponential, with a bulge during the Reagan years. Reagan's good years financed by deficit spending? What would Keynes say?

Here is the graph for the various sectors, separated. Still clear, or even more clear, actually, is the point I was trying to make, in my comment, with the original graph, that deleveraging, and it is mostly deleveraging in the financial sector, seems to correlate with the federal government going into debt at an ever faster rate. That is, our government seems to be borrowing from the banks, to rescue the banks. And the debt that is still increasing, is the debt of the people.

One thing that is interesting is that the debt of the financial sector has gone from the lowest to the highest. Who do they owe? Check out:

Looks like the banks are just a front.

Saturday, December 10, 2011

Advertising is (Mostly) a Waste of Resources

Advertising is (Mostly) a Waste of Resources

In 2008, the year for which I have figures (Outsell July 14, 2008 Third Annual Outsell, Inc. Study Forecasts $412.4 Billion in 2008 Advertising and Marketing Spending, of which $250 Billion or so was directly for advertising) That works out to some $830 for every man, woman and child.

Advertising and Marketing work out to about 3% GDP. But what is produced?

Advertising and conservation of money: People can only spend so much. They can only spend as much as they earn. Less taxes, of course. Oh, sure, they can go into debt, and spend more now. But that means, in the not so long run, they end up spending less than they earn, since they cannot spend what they lose in interest and charges on the loans they take out. Or they can save and spend a little less than they earn now, and in the not so long run, have a little more to spend than they would otherwise, assuming they gain a little extra in interest. But that’s it. That’s the most people can spend, and it doesn’t matter how much is spent on advertising. So advertising is at best a zero sum game. Advertising cannot make people spend more. In fact, if it encourages people to go into debt, it causes people to have less to spend, in the not so long run.

So spending on advertising is at best competing for a fixed quantity of dollars. But in the real sense the more resources are spent on advertising, the fewer resources are available for production of useful goods, and services, and the poorer society is. The poorer the consumer is. And the poorer the producer is.

Advertising is an example of what’s called a failure of composition: One business, if it advertises, gains a benefit in increased sales. But if all businesses advertise, then they all lose, because the market can only be so large. In fact, the market is actually smaller due to the fact that the more advertising, the more society’s resources are diverted from productive activities to paying for that advertising. The less money is available to produce other, perhaps more desirable, goods and services for society, so the poorer society is. Unless you consider money spent on advertising as a net contribution to society, like, say, art. But what kind of art does it qualify as?

Now what is true in general is true specifically for the holidays: The holiday shopping season does not increase consumer spending. Advertisers spend more, and yes, consumers do spend more during the holidays. But, they simply have only so much to spend each year, so the existence of a holiday season makes no difference in the total that would be spent each year, and thus the total that is spent.

Consider Black Friday. Where one store opens early, it has an advantage. Where all stores open early, there is no advantage, but all stores incur additional expense.

This brings us to a clear case where regulation makes an economy more efficient, and that case involves what used to be the so called Blue Laws. These were laws which banned most retail stores from being open one day a week, usually Sunday. (Pharmacies were a notable exception, but even they could only sell medical related merchandise.) Now as we argue, annual personal expenditures are conserved. That is, having seven days a week or six days a week of shopping makes no difference to the amount of money available to be spent. No more is spent in seven days than would be spent in six. Or looking at it the other way, no less would be spent in six than is spent in seven. But with stores open seven days, what we have is the increased expense of keeping those stores open the extra day. Since retail trade represents about 7% GDP, a reduction of 1/7th of its (real) expenses would result in a 1% increase in the efficiency of the economy. About $130 billion, or about $430 would be made available for every man, woman and child in the economy. ( We say ‘real’ because we’re talking actual resource usage, electricity and wages, not nominal expenses like rent. Rent isn’t going to change, but paying rent isn’t consuming resources. It is merely a transfer of demand (for resources) from the retailer to the landlord. Also, the actual ‘real’ savings is probably going to be somewhat less, since heating, and cooling, of the store must be done seven days a week, to some extent, whether the store is open or not.)

This is another example of the failure of composition. Clearly, if just one store is open on Sunday, that store will have more business. It will take business from its competition. But with all the stores open on Sunday, we have seen that there can’t be more business for all the stores, and there is instead the added expense of the stores being open seven days instead of six. Having his store open seven days instead of six is, for a retailer, a very significant expense, an expense he passes on to his customers. His customers, paying more for each item, are not able to buy as much stuff, and so are less well off. Consumers pay, in real goods and services, real resources, for the convenience of shopping on Sunday.

Now something similar to the increase in efficiency which would be obtained by closing stores one day a week is being driven by increased retail selling over the Internet, which is reducing the number of brick and mortar stores, and thus the expense involved in operating them. On the other hand, Internet competition is forcing those stores which remain open to be as convenient as possible, thus inducing them to be open on Sunday.

Some advertising is desirable, bringing the buyer to the seller, and informing the buyer of his choices. But more than that is, from a social point of view, harmful, not because it influences buyers into making sub-optimal choices, (which it may,) but because it consumes resources to no one’s benefit.

The irony, of course, is that the billions of dollars per year spent on advertising have not lead to an increase in corporate profits, but rather an increase in expenses, and a decrease in profits. Though not in percentage of profit. Advertising simply does not increase the amount of money available for the consumer to spend, but its expense must be borne by all producers and consumers. The result is higher prices, and a reduction in the quantities produced and consumed. The more advertising, the greater the expense.

A technical note: The degree to which the producer or the consumer bears the cost of advertising depends on the relative elasticity of the supply and the demand, just as with taxes: Elasticity of demand is the ratio of the change in quantity demanded to the change of price. Elasticity of supply is the ratio of the change in quantity supplied to the change of price. A large elasticity implies a large change in quantity leads to a small change in price. A small elasticity implies a small change in quantity leads to a large change in price.

Now if demand is less elastic than supply, consumers bear the greater burden of the cost of advertising. If supply is less elastic than demand, producers bear the greater burden of the cost. From this, we would expect producers to spend more money on advertising relative necessities, such as food, than discretionary goods, such as automobiles, or jewelry.

But there is significant advertising in many discretionary goods, where the producer would seem to bear most of the costs.

Now in today’s global economy, where supply is often world wide, supply tends to be very elastic, and so for most goods, the burden of advertising is borne by the consumer. In the case of jewelry, and articles geared for the wealthy, for whom price would seem to be no object, it would appear that demand is relatively inelastic. Thus a disproportionate amount of money would be spent on the advertising of luxury goods. On the other hand, there does not seem to be so much advertising for interchangeable necessities, such as different brands of gasoline.

Sunday, November 27, 2011

Morality and Debt

We have presented the producer-consumer problem as the basic problem in economics. (See: )

However much money the consumer starts with, the consumer must spend his money until the producer has it all, and then the system collapses, (or the consumer runs into debt, and then it collapses.) When the market for the producer’s surplus collapses, the system then implodes. How then to maintain demand in the consuming sector, so it never runs out of money (demand) and will always provide a market for the producing sector?

We have used producing and consuming sectors in the original analysis, and as a kind of shorthand. We could generalize the problem and instead say the powerful and the weak sectors, where the real value of goods exchanged between sectors is equal, or even slanted so that the weak sector produces more than the powerful sector, and thus it is the powerful sector that is the ‘consuming’ sector. But the powerful sector is able to secure a greater proportionate revenue than the weak sector. (It uses its power to do this. We can define the powerful sector as that which is able to secure a higher proportionate revenue than the weak sector, defined as that sector unable to do so.) The powerful sector has a higher profit margin. And so it accumulates the money of the weak sector, and eventually acquires it all. Then it runs the weak sector increasingly into debt.

The moral implications of the terms producer and consumer, are, here, absent. In the reality, where the weak sector produces more than the powerful sector, they are inverted to appearances: The powerful creditor sector has not earned its wealth, but gained it through manipulation and force and fraud, that is, what ever instruments it has at its disposal that make it the more powerful, and the weak debtor sector has not become debtor through sloth. The weak sector is the producing sector, but its wealth is taken through the greater power of the creditor sector.

Does the creditor sector produce or consume? Well, the whole point of extending credit in the present is to, in the future, consume more than one produces. It is a matter of ordering. First, one produces more than one consumes, extending credit. Then one consumes more than one produces, collecting on the debt. However, this initial production by the creditor sector of surplus, to ‘hook’ the weak sector, is not necessary, but only the least unjust.

Whoever controls the flow of money controls the economy. The creditor sector need only start with a portion of the money. Then by collecting more in interest from the producing sector than the creditor pays the producing sector for what it consumes, the creditor sector will accumulate the money of the weak sector. This is the money of the producing/debtor sector. See:

And the video

Especially from about 32 minutes on, but watch the whole thing.

The consuming/creditor sector need not ever have produced anything.

Now the creditor sector seeks to loan to producers, because only producers can pay them back. Only those who produce more than they consume, who are net producers, can pay back loans, in any real sense. So either the creditor sector starts as a consuming sector, or it becomes one. The creditor sector must be a consuming sector, since in order to be paid back, it must allow the producing/debtor sector to produce a real surplus, and make the producing/debtor sector hand that surplus over. It consumes an ever greater portion of that surplus, as the producing /debtor sector becomes more in debt. The producing/debtor sector must become ever more in debt because there is never enough money in circulation to pay back the principal and the interest on the loans the creditor sector extends. This proceeds until the producing/debtor sector owes more in interest than it can produce, and must consume its capital to maintain payments. The creditor/consumer takes some of the production the weak producing/debtor sector needs to maintain itself and its production.

Thus we come to an inversion of the original problem. The consuming/creditor sector has the surplus of money, and the producing/debtor sector is starved of the money needed to support itself. It contracts. But it is leveraged against itself. That is, its nominal net income is negative, because the burden of what it owes, the interest burden, nominal interest times money owed, is greater than its profit margin times how much it produces. (The situation is even worse where a portion of the principal must be repaid.) So it is perpetually in the state of losing money That is, rolling over ever more debt.

Now the question arises: Why are corporations flush with cash? First, they are not. See:

Second, labor also constitutes part of the producing sector, and labor is losing money.

Why are the banks in debt? The banks are just a front. They owe also. Who do they owe? They owe themselves. That is, they are front corporations which, when they fail, will have no assets, but the assets will have been transferred to another corporation with the same owners. The one percent.

As the producing/debtor sector contracts, it is ever less able to repay its debts to the consumer/creditor sector, which debts increase even as the producer/debtor sector’s ability to repay decreases. Austerity cripples the producer/debtor sector, effectively making its debts larger and more difficult to pay back. More and more of its assets are transferred to the consuming/creditor sector, until the producing/debtor sector is stripped of its assets.

The details of this process are interesting in themselves. The consumer/creditor sector controls the quantity of money available to the producer/debtor sector. (But there is only money to pay the principal, never enough to pay the principal and the interest.) When it extends more credit, there is more money, and the price of things goes up. The members of the producer/debtor sector must borrow to keep up. (It is a failure of the commons. If no one borrows, no one has to borrow. If some borrow, the others have to, to keep up. Note also, the creditor/consumer sector can drive up prices by increasing its own demand, thus forcing increased levels of debt on the producer/debtor sector.) Then when the consumer/creditor withholds credit, there is less money, and the price of things, particularly assets, goes down. Not only that, when there is less money, there is greater unemployment, businesses contract, and, because money is needed to repay debts, more debts that cannot be repaid. Consider housing. By withholding credit, the price of houses is driven down. And there are more foreclosures.

Now it is argued that assuming a debt is purely voluntary, and that therefore the resulting indenture is essentially freely entered into. Assuming this excuses a process and result that is to many people intrinsically repellant, the assuming of debt may, under some circumstances, itself be compelled. Indeed, purely voluntary situations are rare. There is almost always some degree of force of circumstance, and often circumstance where one’s choices may be limited to a choice of evils. When the cost of living exceeds income, one is left with the choice of starving, or dieing of exposure, or assuming debt, and at least postponing the day of reckoning. Or, in the absence of universal health insurance, many are vulnerable to the choice of assuming debt or dieing of their malady. Similarly, where education is necessary to advancement in society, yet its results uncertain, one is left with the unhappy choice of almost certain poverty or a chance at either prosperity, if as a result of the education one secures adequate employment, or debt peonage if one does not. In either case, the debt must still be repaid, but in one case one is able to pay it off, and in the other one may not be.

Another instance where one assumes debt without choice is through agency, eg the government. Then there is the businessman seeking to preserve his business, or the farmer seeking to pay for planting his crop.

Then there is fraud.

And as ownership is concentrated, monopoly can be expected to be more and more of a feature of economic processes. It is the nature of monopoly to provide to less than the market needs, and people need to borrow to pay the rents collected by- those who extend credit.

In an environment where others assume debt, the resulting increase in the money supply drives up the cost of living, making it more difficult to sustain one’s life style without borrowing. Further, this life style may be deserved, that is a reasonable proportion of a person’s contribution to society. It is essentially unfair that someone who makes a considerable contribution to society be yet forced to live a life of penury. Yet those who blame him for the assumption of debt effectively condone this.

We have shown that being in debt need not imply a moral obligation to repay: The debtor, far from being lazy, may produce for society more than his fair share. Indeed, the lazy and indolent are not extended credit. Only the producers are sought out by creditors, who effectively seek to indenture them.

The debt may have been forced on the debtor, often by circumstance induced by the creditor. Even if not, the perpetual obligation often resulting from overbearing interest amounts to a form of slavery, and this is reprehensible.

The creditor has no implicit claim to moral superiority. Neither should the debtor berate himself as morally inferior, and as deserving of indenturship.

The true immoral behavior may thus be on the part of the creditor.

Monday, November 7, 2011

Links to Mansoor Khan

Here are active links to the articles Mansoor Khan refers to in his comment to Debt, Total Debt and by Sector. I encourage the reader to check them out. First:

In Modern Monetary Theory, (as far as I understand it.) the government creates money by printing it, politically easy, once established, preventing inflation, and destroys it through taxation, countering inflation, politically hard. A government of reasonable virtue and principle would be required. A certain amount of inflation is more likely. Indeed, since debtors tend to be numerous, and creditors relatively few, a certain amount of inflation, which favors debtors, might counter natural tendencies toward the concentration of wealth. Compare this to what we see: Creditors have seized control of the government, and seeking to retain what are essentially ill gotten gains, are directing the government toward our common ruin.

(For a nice exposition of the problems with the current system, see:

Money as Debt:



Money as Debt II: )

Next from Mansoor Khan:


Good. Helicopter money to every citizen. Give citizenship a tangible benefit, rather than the burden implied by the national debt. Negative taxation, which is precisely what the government should do when demand is depressed. And/Or it could guarantee employment, which would work as an automatic stabilizer.

An orderly bankruptcy of the financial system, with the government as receiver.

Mansoor's proposal for 100% non-lendable equity accounts seems doable. They would carry essentially negative nominal interest. The magnitude of this interest would be minimized by interbank competition for deposits.

Thursday, October 20, 2011

Import Certificates: Another Problem and its Solution

Previously, we discussed problems with trade certificates and their use as a solution to the European debt crisis. Another problem with import certificates is that a country may require the importation of certain goods. It would not want to deprive itself of these goods by failing to issue certificates allowing their import. This might happen say, if Country A imported oil from Country B, but Country B didn’t import so much of the production of Country A. Country A would not want Country B to have to scramble around looking for import certificates so it could export to Country A a good Country A found necessary. Why should Country B bother? The issue is how to incentivize Country B to export to Country A the good Country A found critical.

The main incentive here of course is prices. The idea is that the money Country A gives to Country B for goods from Country B Country B can spend on Country A’s production. If Country B does this, spends this money, on Country A's production, trade is balanced. The problem is if Country B doesn’t want to spend Country A’s money. If Country B wishes to trade the Country A’s money with Country C for Country C’s production, and Country C then spend Country A‘s money on Country A’s production, all well and good. Trade is balanced. It’s when Country A’s money is hoarded that a problem arises. Indeed, Country A’s cumulative balance of payments is proportional to the quantity of its money that is hoarded by other countries, (minus the quantity of other countries’ money Country A hoards.) So the problem for Country A is to discourage the hoarding of its money. (Of course, Country A also wants to discourage the buying up of its assets.) Having its ‘trade’ money expire is one solution. This would motivate its quick expenditure. But Country A can’t just have ‘trade’ money, or money in foreign countries only, expire. All its money has to expire. But now we’re talking about inflation, the slow expiration of all its money. If Country A allows modest (moderate?) inflation, Country B is motivated to spend whatever of Country A’s money it has with reasonable speed, unless country A borrows it back at positive real interest, in which case Country B is again motivated to run up a surplus with Country A.

A balance must be maintained. Too fast inflation will discourage imports, ie cause a nation to be charged higher prices by one’s partners. Too slow will encourage hoarding of its money.

We note in the Greek problem, Greece is unable to inflate its currency, which would force other countries to buy from it, but is stuck with the common currency, the euro which, no matter how it inflates, will not encourage others to buy from Greece in particular.

Also, this seems to be an intrinsic problem with a country’s having its currency as the reserve currency, as other countries are naturally going to want to hoard that currency, thus, maintain a trade surplus with that country. Thus, that country will naturally tend to a trade deficit, and the economic ills attendant on that deficit.

Barring inflation, and returning to import certificates, another possible solution would be for some goods to be exempted. Exempted goods would generally be basic commodities, since exempting value added goods, unless they were capital goods, would not result in net real benefit to the importing country. This is an important point, which we will discuss eventually.

The importing country’s eventual goal of course, would be not to require the import of so great a quantity of critical goods, or at least to manage the exchange of export for import so the quantity of goods exempted would gradually be reduced, and eventually eliminated. This would result in a certain sort of self-sufficiency.

One could argue that a country requires all the goods it imports, or it wouldn’t be importing them, but for most value added goods there exists, internationally, a surplus of production, and therefore competition for that country’s markets. Indeed, there may be a surplus of factors in that country itself, idled by trade. There will, in fact, always exist a surplus of supply, because labor produces a surplus, which is not distributed down the labor chain, to the unemployed, who have no demand, (having no money) but only up.

The consumer of exempted goods would have to issue certificates at a less than 1-1 ratio, export to import, to other countries, or more specifically, for all non-exempted goods, if it were to balance its trade. Thus, if exempted goods constituted 10% of imports, its other certificates would have to be in the ratio 1 to .9, export to allowed imports, in order for that country to balance trade. Thus, it would face its other trading partners with a mercantilist appearance, unless it could assure these other countries trade with its suppliers of exempted goods. That is, it could give to these other countries the rights, the certificates, it earned from importing the exempted goods. Country A, importing oil from country B, gives to country C rights to export to country B, along with rights to its own market. Country B gives rights, certificates, because it has no desire to be exploited either. These rights, together with Country A’s own rights, would combine to a one to one ratio to Country C. Country A would experience a deficit with Country B, a surplus with Country C. Country C would experience a deficit with Country A, and a surplus with Country B. Country B would experience a deficit with Country C, and a surplus with Country A. But each country’s total trade would balance.

For a country such as the US, balancing its trade in just other than exempted goods, ie oil, would be an improvement. However, the certificates it issues can be phased in independently of the exchanges of certificates from the importation of exempted goods.

Each country, then would be in the position of merely exempting any goods it found critical. It would scale back exchange rates in other goods to a less than 1 to 1 ratio, and fill in the difference with the certificates it had earned in importing the exempted good.

Sunday, October 9, 2011

Debt, Total Debt and by Sector

Today we're just going on a little about debt, so you get the picture(s). These are all taken from FRED graphs, the St. Louis Federal Reserve's data manipulation and display feature, which apparently anybody can register for and log on to. And with a little practice you can get the graphs I have here. They are a little small, but at FRED
you can make them into PDF files and any size you want. The first is total debt for everyone in the US, everyone being, roughly:

GFDEBTN/1000 Total debt of the US federal government, divided by 1000 because the original graph is presented in millions, and for some reason just doesn't convert if you naively add graphs together.
HSTCMDODNS Total Household debt of all kinds, I think.
SLGSDODNS Total debt for State and Local Governments.
TBSDODNS Total debt for non-financial businesses.
DODFS Total debt for financial sector.

It's at roughly $55 Trillion and holding steady, more or less, these past three years. For the 45 previous years it was pretty much growing at an exponential rate. Interesting. See my previous discussions on money and debt eg:

Here is the debt decomposed into the five sectors: First, state and local government debt is seen to be relatively small potatoes. After that everybody else is pretty much still in the race. These last three years, financial has deleveraged a lot, households a little, and business has held steady. Federal govt. debt, however, has accelerated, which seems to imply that, (as others have noticed) the government is going further faster into debt to pay for the financial sector's deleveraging.

Now $55 Trillion is about $180,000 per person, which is also about the per capita capitalization of the United States. That is all the assets in the United states add up to about $55 trillion dollars or so. Maybe slighty less. Anyway, that person at the mean, asset, or wealth, speaking, who is further up the totem pole than the median, (who is half way up the totem pole,) owns nothing. And anybody below him owns less than nothing. Objectively speaking. That is, anybody below that line pays interest, and anybody above that line collects it. Now that mean asset holder is somewhere in the top 5% as far as I can figure, (somewhere between a guess and a calculation.) That is more than 95% of the population each own less than $180,000.

Look at the total debt line. It was going exponential. Is still going exponential, if you discount the financial sector and its deleveraging. You're probably wondering how you did it, since, on the average, your own total debt line looks just the same a that one. Because you pay the debt. All of it. Businesses pass on debt to their customers in higher prices. Government, federal state and local pass on debt in the form of higher taxes. The financial sector passes on debt in higher fees, and higher interest rates. So the bottom line is not just your bottom line. All sector's debt weighs on the consumer, and that is you. And it takes many forms, not just higher prices and taxes. It's also higher unemployment, higher underemployment, and fewer government services, and less services from businesses. More foreclosures and decaying infrastructure. All so that a few percent can collect their unjust profits, and live in the style to which they are becoming accustomed to.

Tuesday, October 4, 2011

Import (Trade) Certificates: Some Problems and Solutions

Import (Trade) Certificates: Some Problems and Solutions

In our previous post, we suggested import certificates as a solution to the European debt problem.

While the idea of import certificates seems attractive, there are details that may have to be worked out. Here are several possible problems, with some solutions.

Consider the market, say, for 1-1 import certificates, certificates giving the right to import $1 worth of goods or services for every $1 worth exported. although it could be any ratio. Suppose the markets for goods were such that anything imported by the issuing country could be sold. If the certificates were perpetual, holders would tend to hold on to them, waiting for the highest price a foreign producer would be willing to pay, which could be quite high. Imports, then, would be below a level which was advantageous to the importing country. Certificates might tend to accumulate, until there was a sell off, leading to a boom-bust cycle of importation.

Suppose instead they had expiration dates, like options. 90 days, 6 months, 1 year. Then there might be a chronic shortage of imports. Or, instead of expiring, they could revert to the government, which could auction them off.

Or the certificates, instead of going to the exporter, could simply be retained by the government, which then sold them at auction. Howard Richman in

recommends this, as well as targeting the certificates at those countries which exhibit mercantilist practices against the US. If they were targeted at any country which persisted in having a surplus with the US, they would be just as effective as untargeted ones. Attempts to route trade trough other countries would bring these countries to surplus, and then trade certificates could be issued against those countries, too.

Richman, in his article, also discusses the legal implications with respect to WTO agreements. The fact is, the adoption of import certificates would spread, and render those agreements redundant. (We should also expect resistance from the WTO, since they would be rendered redundant.) Since the universal adoption of import certificates would result in all nations having a balanced trade budget, discussions instead would revolve around bilateral differences in allocation, if temporary imbalances were seen as beneficial to one country or another, eg, to capitalize an export industry in one of the countries.

They might constitute a barrier to growth of trade, since any country with an increase in imports, need not be assured a corresponding increase in market. But under these circumstances, exporters to a particular country could be issued import certificates targeted to that country. That country would then be assured an increase in market, and so would not be discouraged from increasing its imports. It could exchange these rights with other countries, for import certificates from them. And this brings us to another option. The import certificates could be sold along side the exports of goods or services. Thus the foreign importer would acquire the right to export to that country, to sell as he chose. There would thus be no barrier to expanding trade, since each country, on expanding imports, would be assured of the rights to a market for its own exports. It would not be assured of the market itself, of course, as there might not be one there for what it produces. However, the country is better off than before, because it has rights to a market that someone might produce for, and it can exchange these rights to a market for what it produces.

At the level of producers, this might get very complicated. So, the import certificates follow the exports to the importing country, whose government acquires the rights. Then the problem of the allocation of rights to producers becomes a domestic one for each country. (This would in fact be the default situation, since any government could just tax the certificates away from its importers.) Each country’s own government would be the clear cause of any woes resulting from trade.

The whole thing seems to take on an aspect of barter. Countries have rights to markets they might not want, looking for someone with rights to markets they do want, who might not want the rights to the markets they do have. But in fact there is already a market for much the same thing, and that is the currency exchange market.

What could go wrong? Well, a country with substantial debt is eventually going to want to issue import certificates to a value less than its exports. In this way it can pay off its debt. That means its going to have to trade with countries which issue it certificates to value more than its exports. Its debt holding partners have to allow themselves to be repaid. See the example below.

A country wanting to indulge in mercantilist practice is also going to want to value the certificates it issues at less than a dollar for each dollar exported. Were all countries to engage in this practice, or even enough countries to engage in this practice, world trade, and the world economy, would contract. What would be good for one, would be bad for all. But how would one discourage individual perpetrators? The desire to expand one’s economy, at the expense of others, should not be rewarded, nor allowed to wreak havoc with the world’s economy. Now a valuation of its import certificates at less than the value of its exports, would be a clear signal of mercantilism. It would be anti-social behavior, though not aimed at anyone. But of course, it would be aimed at each country in its particular, since it is to each country that it is issuing its certificates to. That is, it would be saying to each country that it wishes to take advantage of it, to exploit its trade to grow at that country’s expense, by forcing a trade deficit on that country in particular.

Each country would be taking it ‘personally,’ and have the individual choice: To allow itself to be exploited, or to retaliate against the mercantilist country, say by issuing trade certificates against that country which were similarly valued at less than the value of the export.

Actually, retaliation would not be necessary. Suppose country A is issuing import certificates at a 1 to 1 value, one dollar of import certificates with each dollar of exports. Then any country B which issued certificates against country A of, say, $.90 per dollar exported to country A, would automatically see its trade with country A contract. That is because at the next round of trade, country A would only be able to export $.90 worth of goods to country B, and thus country B would only receive certificates to export $.90 worth of goods to country A. The next round country A would only be able to export $.81 worth of goods to country B, and that is all the certificates country B would receive. And so on.

In order for trade to maintain at the same level, country A would have to issue certificates to the value of $1.11 per dollar worth of goods exported. Then when country A exported $1 worth of goods to country B, Country B would return with $1.11 worth of goods, and the right for country A to export another $1 (90% of $1.11) worth of goods. So the situation would remain stable. Country A would actively have to allow itself to be exploited. It would have to cooperate in going into debt.

So, what is the import certificate that we are now talking about?

It is issued by each government. It is a right to import a specific quantity of goods or services into the country of that government. It is issued. for one of that country’s exporters, (perhaps to that exporter,) and it goes along with the export to the government of the country of destination. That government, depending on its domestic policies, may do with the certificate as it wishes. It may be allocated. It may be auctioned. It may be bought, sold, or exchanged.

It is 1 to 1, the right to $1 of import for each dollar of export, (eventually, in the case of debtor and creditor nations.)

We have discussed some of the alternatives, and the problems attendant on each. Some country A may issue them domestically. But that does not give any incentive to country B to import from country A. Not only does country A giving the certificate to country B give country B the right to trade with country A, but the incentive to do so, since it assures the rights to a market for its own producers. This type of import certificate constitutes a reward from country A to county B for buying from country A. How could country B complain?

Saturday, October 1, 2011

Trade Certificates: Solution to the European Debt Crisis

Trade Certificates: Solution to European Debt Crisis

Here’s a nice discussion of the European debt crisis:

It’s the third of three articles on the thing, so click on the blog title to access the rest.

We reduce it to the producer-consumer problem. See:

But Kash describes the crisis per se is a result of the sudden cessation of capital flows from the center of the Eurozone to the periphery. These flows had to cease, and probably suddenly, some time, as the debt imbalance inevitably piled up. Kash also notes a fair percentage of those flows were for investment. The periphery countries weren’t exactly squandering the money, but that really doesn't matter, except to make the tragedy more poignant. He suggests shared responsibility for the crisis. Yes, the central countries have to pay. Actually, have already paid, they just have to swallow their losses. Making the peripherals pay is just going to make them less able to consume German surplus production. In fact, the peripherals have to achieve a trade surplus. Germany will have to find other markets for its surplus. Inflicting pain on the periphery, except to the point where they have to live within their means, is graceless. Of course, the entire process of- inflicting surplus production on them has reduced their ability to do this. The same thing has happened to the US with its trade deficit. Its ability to live within its means, actually the means itself, its industry, has been compromised.

Now Greece borrowed a lot of foreign money. That money had to be, eventually, spent on foreign goods. Or else they would still have it, in cash, and be able to give it back. We observe that debt, if you don't have the cash, must be ultimately be payed with goods, services, or assets. Nothing else will do.

So what is to be done? Austerity works for households. For nations? You might think. But the problem is deflating a nation's economy destroys productive components while it is reducing consuming elements. Indeed, the productive elements need the consuming elements to continue consuming unless they have compensating export opportunities. For it is only by exporting that the deficit country can pay back the debt, but will the surplus countries allow this to happen? Or instead is the deficit country is forced to sell assets, which worsens its ability to pay in the future?

In fact, the entire process, in the absence of any debt forgiveness, has a dubious- morality. The surplus country lowers prices, drives businesses in the deficit country out of business. See:

Runs up the debt in the deficit country, then buys up the deficit country's assets. Moral? Or a form of war?

Greece, for instance, had a significantly deteriorating trade balance since about 1990. It seems to be a self-reinforcing thing. And now its assets are being sold. Germany's trade surplus has been increasing steadily since 1990. Is it buying Greek assets?

We recommend the introduction of import certificates, to force a balance of trade, and pay off reasonable debt. See:

Or for a brief description on import certificates, see:

Rather than the targeted certificates, we merely encourage all deficit countries to phase in general certificates, not aimed at any country. Indeed, once the process starts, certificate trading will quickly become the norm, since deficits will be forced and focused on those deficit countries which do not practice it, and trade wars will ensue between surplus countries.

Better than selling the farm. Certificates could be phased in, to prevent economic trauma. The goal would be exporters would be issued 1 euro worth of import certificates for each euro they exported. This certificate would allow the importation of 1 euro worth of goods or services. These certificates could be bought and sold. For the deficit country, these could be phased in, starting near the percentage of deficit. Thus, for a country with a 30% trade deficit, they could be originally issued at 1.25 euro worth of imports allowed, say, for each euro worth of export, and then reduced in periodic increments until one euro of import per euro worth of export, at which point trade would be balanced. In fact, if this were practiced by Greece, eventually their trade and capital flows would each be balanced. Problem solved. To pay back what is already owed, eventually Greece must have a trade surplus, so it would, for a while be issuing certificates allowing say .9 euros of imports for every euro worth of exports. This would force it to have a 10% trade surplus, with which to pay back its debts. It also implies that they willl be consuming at less than their production, which is the point of the austerity process. Of course, the process would take longer than any interest on the loans Greece presently owes to compound to unpayable heights. Do the Germans have any intention of allowing Greece to pay them back, since this would damage their own economy? Or are they instead after Greek assets?

But Greece can be the master of its own fate, if it so chooses. With a little help. And so can the US.

And the peoples of the Germanys and Chinas of the world will have to consume to their ability to produce.

Meanwhile, with each country issuing trading certificates, international trade wold be balanced on a nation by nation basis. No country could be claimed to exploit its surplus to cripple the economy of another, and expand its own economy at the other country's expense. All countries would have to live with in their means. And the benefits of otherwise free trade could be enjoyed at a maximum sustainable amount.

Monday, September 19, 2011

Links 9-19-11: Corporate Salaries; Health Care

Some links: First:

“Since 1994, business receipts have grown about 50 percent faster than profits, tax data show. Since corporate officers are supposed to run companies efficiently, the narrowing margin on sales is an indicator of poorer performance and thus may partially explain why overall their pay is smaller than in the 1990s, a fact nobody knew until just now.”

These would seem to be the top 5% minus the top 1% guys. We would also expect this as a result of increased foreign competition that is, though indirectly for most corporations, the equalization of factor prices brought about by that foreign competition.

Not so much health care and education, (defense?) though, as these are most insulated from direct foreign competition. So we would expect these to become relatively more expensive, but see also: Baumol’s cost disease, at eg: for another explanation. But that doesn’t explain the difference between US and Europe.

So next:

Seems on of the reasons healthcare in the US is more expensive is because the prices are higher than elsewhere! Everything costs more! Well, yeah, that’s what cartels and monopolists do: drive up prices by restricting access to goods and services. An aside on the government role in all of this:

for my description and prescription.

Tuesday, September 13, 2011

An Ice Age in Our Future?

Well, the subject of climate change has comes up from time to time. Often in denial.
A recent cite of evidence (Shrinking Artic summer ice.) has come up at: Follow the comments for more references. I think I’ll also give some references in a later entry.

Climate change may seem to be a little off the path for an economics blog, but the economics of winter is very different from that of summer. So also the economics of a changed climate as well.

Now I’m not one of those climate change deniers. But neither am I quite in the camp of the global warmers, either. Global heat retention, yes, but that’s not quite the same thing.
The main problem is that we are dealing with a non-linear system, here, and non-linear systems are, well, non-linear, full of curves and unexpected changes. And reversals.

Most particularly, from the point of view of climate change, for the past million years or so, whenever it has warmed up- enough, we have an ice age: God turns on the air conditioner, to cool things down. NOTE: Ice ages work the reverse of how you might think they do. They do not start cold, and then warm up until all the ice melts. They start warm, and cool down until they stop, because... well, the air conditioner shuts down: Evaporation in the Pacific is no longer sufficient to drop more snow in Canada than melts in the summer.

Now some theorize that this is driven by external forces: changes in the orbital parameters of the earth. My own idea is that it is strictly internal, brought about by the peculiar nature of the ocean circulation of the earth, these days. (It may be phase locked by orbital parameters, but that is much different from saying the change in orbital parameters is the cause.)

Ice ages have only been happening for the last million and a half years or so. What about the ocean circulation could have changed?

Drake Passage 41 mil yrs ago: This created the Antarctic current, which just goes around Antarctica, and which basically cut off Antarctica from the rest of the oceanic circulation.

Isthmus of panama 3mil yrs This cut off direct flow from the Pacific to the North Atlantic, which would help cool the Pacific.

Bering straits got narrow about 1.5 million years ago, when they were probably in the neighborhood of 200km wide. A pretty gradual transition, admittedly, but there is a definite critical point in the transition, when the straits were narrow, and shallow, enough to block sufficient flow to the Artic from the Pacific to keep the North Pacific from overheating.

The theory runs like this: Because the earth is warmer, but the pole is still cold, there is increased heat transport from the equator to the North pole. The main transporter of heat is the circulation of the ocean. But because of the peculiarities of modern geography, for the Pacific, the North Pacific, to cool off this way , water must circulate through the Indian ocean and up the South and North Atlantic to the North pole. It can’t just go to the South pole to cool, as this is blocked by the Antarctic Current. Neither can it just go through the Bering Straits, which is too narrow and shallow to support a sufficient rate of flow. Because this current is so long, it is not strong enough in itself to equalize the temperatures in the ocean, in particular, to keep the North Pacific cool, and the Arctic relatively warm.

Meanwhile, what comes down must first go up. For snow to accumulate in Canada, it first has to evaporate, off the North Pacific Ocean. Ordinarily, evaporation in winter is less than the melting rate in summer, so the snow melts each year. But evaporation increases exponentially with temperature, while melting only increases linearly, (I got this from an old Dover book on glaciers.) so there is a crossing point, when the evaporation rate off the ocean goes above the melting rate for snow in Canada. See Diagram.
Note the Temperature and Quantity scales are rather qualitative. (Quantity is quantity of water.) The point is just to suggest that with increasing temperature, an exponential curve will eventually rise above any straight line.

And then you have to figure in the wind, which increases during ice ages, to an average 30km/hr or so. But that increases both melting and evaporation rate, so it would give an upward curve to both lines.

However, there is another feature about increased wind velocity, which we might dub “Quantum Earth.” What we mean by heat retention is that the average energy content of the atmosphere will increase. As the energy content of the atmosphere increases, so will the average wind velocity. As the wind velocity increases, so will the Coriolis force, which will cause more cyclones and such. This will happen. But if wind velocity increases enough, it might also cause an increase in the bandedness of the atmosphere. (This is a speculative thought: So instead of two, there would be three jet streams in each hemisphere, and four climatic zones. Basically a new one would appear at the equator, as the others migrated north. But, this would render the climatic gradient from North to South steeper, so the present temperate zone would take on qualities of artic air.

But of course, this bandedness idea is not necessary to the rest of the theory, as it is so far developed.

So ice ages are caused by warm ocean, particularly the Pacific. During ice ages, oceans start warm, and slowly cool, about 10 degrees C. And during the interglacial periods they increase that same 10 degrees C., much quicker than they cool, by the way. And indeed, since the end of the last ice age, oceans have warmed by about 10 degrees C. Check out, eg, “Vostok core data images.” Note CO2 levels also peak, prior to ice ages.

So the issue becomes, or the question is, are we headed for an ice age, or are we going to blow right by the conditions necessary for one by having such a massive quantity of greenhouse gases in the atmosphere, if that makes the difference.

And which ever one, how fast?

Friday, September 9, 2011

Unemployment, Average Wage and the Distribution of Income

Employment and the Average wage.

Consider an economy where one person collected the entire national income in wages. Everyone else would be unemployed, or at least would be paid nothing.

We look at a model economy: The economy is static, that is, one whose size is some constant Y. There is only labor and labor is all paid the same, W: See: Diagram. GDI (Y) is Gross Domestic Income. Then the income of that economy is the box, any box actually, equal to Y = W x N, N the number of workers. But, this is also the production
of the economy (GDP), since everything produced will be consumed. (From the assumption of constant size, there is no change in capitalization. Capitalization changes the size of the economy. Capitalization is only a temporary expedient for consumption, since any increase in production brought about by capitalization must still eventually be consumed.)

Now, given the economy is static, what would happen if we raised (real) wages, to W’. Then the number of workers would have to decrease, to N’ where the area of the box would remain the same: W’ x N’ = Y = W x N. Unemployment would thus increase. Conversely, if we were to decrease wages to W’’, then in a static economy, the number of workers would increase, to N”, W” x N” = W x N, and unemployment decrease. (The curve of constant GDI, or Y, is a hyperbola, by the way.)
Now we can consider W to be just an average wage, the mean wage, of those actually employed, (but not including those not employed,) and the arguments are the same. If we increase the mean wage, employment will decrease, if we decrease the mean wage, employment will increase. We will assign a constant: c = mean wage at full employment..

We wish to find this mean wage, (actually in general the mean of the sum of all forms of compensation,) at full employment. Given: Present total wage; Number employed at full employment. Find c.

We now go to the real world, although we treat it just like our model.

So: Total Compensation of employees received = (BEA Table 2.1) $8264T;
Total number of workers at full employment ( =153.6M.

Then: c = $8264T/153.6M = $53,802, mean wage at full employment.

So we have c x N(total) = W x N, for all W and N.
Our formula for this model then would be c/W = n, where n = N/N(total) is the share of employed.

Since we are looking for unemployment rate as a function of mean wage, the variable n is equal to n = 1 - %u/100; %u equals the percentage unemployed So we substitute that expression for n: So:

w = c/(1 - %u/100)
c/w = 1- %u/100
%u = (1 - c/w) x 100

However, as a prescription, w as a function of %u is more useful. For instance, with c as defined above, = $53,802 per capita, for a 5% unemployment rate, we would want a mean wage of $56,634. This would be our target. Compare this to the mean wage of $59,188 for a 9.1% unemployment rate. Some suggest that the true unemployment rate is much higher, especially if we include underemployment. An unemployment rate of 15% suggests the mean wage is at $63,296, or nearly 12% too high for a tolerable 5% unemployment rate.

Of course this is not correct, as a higher unemployment rate than measured suggests a higher total labor force, and thus a lower c. Consider instead a total labor force of 160 Million. Then for the same values of total compensation paid employees, $8264T, we have c = $51,650. If we estimate 20M unemployed, for an unemployment rate of 12.5%, we have a mean wage of $59,029, or about 9% higher than the $54,368 mean wage required for 5% unemployment.

So the prescription is to lower the mean wage to c/.95, which will result in an unemployment rate of 5%. Since this is just an average, it can be done in a number of ways, depending on the inclination of policy makers. One way would just be counting the unemployed as employed. This of course would have no real effect. A real way would be to lower every employed person’s wage by the difference. This would provide money to employ the unemployed at the same average wage. Another way we might consider would be to lower the minimum wage. Assume 20% of the labor force works at or near minimum wage. Then by lowering their wages ah, $25,000 or so, unemployment could be reduced from 12.5 % to 5%.

Well, minimum wage is about half $25,000. So that method is infeasible. But the same could be accomplished by lowering say the top k% in income by 100/k times the difference. Thus transferring about $500,000 per person, on average, in the top 1%, would compensate for the difference between 12.5% unemployment and 5%unemployment. On average, since the top 1% consists of all those making more than $400,000. But it also consists of those making much more.

The existence of this solution implies that, where there is a great disparity of income, a consequence of that disparity is a high unemployment rate.

Indeed, the calculation could be modeled on percentages: A transfer of 7.5% of national personal income from the top 1% of the income earners to the rest of the labor force would decrease the unemployment rate about the same amount, from 12.5% to 5%

The philosophy is if the boss pays himself too much, he can’t hire as many workers. Those he hires he can’t pay as well, and he can’t train them as well. Jobs that need to get done don’t, or get done badly. In today’s society, there are many jobs that need to be done, but the bosses pay themselves too much.

Note the figure we have used: Total compensation of employees received. However, we can use other figures of personal compensation: eg: $12,091T (BEA Table 1.10 lines 2+11 Compensation of employees, paid + Net Operating Surplus, figuring the bosses also pay themselves out of corporate profits.) This merely affects c, and the absolute scale of the differences, but not the percentages.