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.

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 http://research.stlouisfed.org/fred2/
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:
http://anamecon.blogspot.com/2010/11/banks-are-forcing-debt-on-rest-of-us.html

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.
Cf: http://anamecon.blogspot.com/2010/10/what-income-of-top-1-means-to-rest-of.html

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.

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

http://seekingalpha.com/article/203422-how-import-certificates-could-balance-trade-and-budget

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?

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:

http://streetlightblog.blogspot.com/2011/09/estimating-cost-of-eurozone-crisis.html

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:http://anamecon.blogspot.com/2010/05/greek-debt-and-producer-consumer.html

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:

http://anamecon.blogspot.com/2010/04/effects-of-unbalanced-trade.html

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: http://seekingalpha.com/article/203422-how-import-certificates-could-balance-trade-and-budget

Or for a brief description on import certificates, see: http://en.wikipedia.org/wiki/Import_Certificates

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.

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

Some links: First: http://blogs.reuters.com/david-cay-johnston/2011/09/16/shrinking-corporate-officer-pay/

“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: http://prescriptions.blogs.nytimes.com/2010/01/17/an-economist-who-sees-no-way-to-slow-rising-costs/ for another explanation. But that doesn’t explain the difference between US and Europe.

So next: http://economix.blogs.nytimes.com/2011/09/16/the-role-of-prices-in-health-care-spending/

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: http://www.boston.com/Boston/whitecoatnotes/2011/09/journalist-groups-decry-removal-online-doctor-discipline-data/mRYBMGSUQYNyJb5vChPJsO/index.html

See: http://anamecon.blogspot.com/2010/03/real-problem-with-health-care-in-us.html
for my description and prescription.

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:
http://economistsview.typepad.com/economistsview/2011/09/the-lack-of-ice-age.html#comments. 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?

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 (http://www.bls.gov/news.release/empsit.nr0.htm) =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.