The following is a report I compiled with two friends to determine which factors had the greatest impact on a college graduate’s starting wages. Though the calculations are sound, the report has not been edited for grammatical errors or clarity. Our data was based on publications from 2010.
Continue reading “What key determinants are responsible for a graduate’s starting wages?”
What if the US suddenly lost its position as the worlds reserve currency? A run on the US dollar will cause economic stagflation: as the dollar value falls the exchange rate will depreciate, causing inflation to increase and raising business costs which will lead to layoffs/ increased unemployment. Because current US domestic demand is driven by the borrowing of substantial foreign investment, available loanable funds will decrease, borrowing will constrain, and US demand and aggregate output will fall, consequently leading to financial market collapse and economic decline. Because of a large trade deficit, a depreciating exchange rate will cause inflation to subsequently rise as more dollars are needed to buy less, increasing the cost of imports. Unemployment will increase as consumption falls. The government will need to print money to maintain consumption, which will further devalue the dollar and cause runaway inflation.
In addition to being the world’s reserve currency due to historical US political and economic stability, foreign investors are attracted to the developed financial markets offering high liquidity. Large foreign capital accumulation can be costly as sterilization can cause the return on reserves to drop lower than the interest paid on issued bonds. Foreign investors with much government bonds will demand higher interest rates and start targeting other investments, such as debt, due to their relatively low risk, high liquidity, and steady returns. High foreign investment appreciates the exchange rate, increases a trade deficit, and may lead to an over-valuation of currency.
Suppose the US economy is operating under “normal conditions”— assuming 2.7% inflation, 5.8% unemployment, 3.8% economic growth. Which policy is more effective, fiscal or monetary? The Fed operates under the legal mandate to ensure stable growth and full employment. If these are the measures of “effective”, monetary policy should be more effective because it causes “immediate changes” in the money supply and interest rates, immediately combating inflation. If there are supply shocks, monetary policy best stabilizes prices. Under the assumption of the Taylor Rule, monetary policy achieves its goals by adjusting target inflation rates and federal funds/ discount rate with tools such as open market operations and quantitative easing which alter the money supply. Under rational expectations, if the Fed announces higher inflation in the future, consumption should increase now and unemployment decreases. Because consumers are not rational and prices are sticky, changes in the money supply do not immediately impact the consumption, so there is a multi-month lag in response. However, a zero-bound funds rate has the same effect as a contractionary supply shocks, so while it may stimulate consumption, it may be detrimental to welfare.
Fiscal policy requires legislation and implementation which takes time to impact the economy. Taxes will not respond quickly enough to a supply shocks, and subsidies not not evenly distribute the benefits due to crowding.
Also, despite decreases in prime rates and large denominated CD rates, credit card rates are very sticky and do not respond accordingly due to habit forming consumption. If an economy possess much revolving credit that drives consumption, monetary policy may not be most effective for increasing welfare, but instead benefit lenders.
A Case for Economic Equity and Long-Term Growth (Draft)
Abstract
Macroeconomic policy issues, as well as the theoretical assumptions underpinning their conclusions, must be considered within a political Liberalism framework that ensures and upholds the democratic values of freedom and equality inherent to the constitution. The complexity of economic development requires a holistic empirical approach that accounts for the historical, political, sociological, and business factors contributing to the makeup of society when crafting and recommending economic policy.
For this paper we will assume that economic growth is the aim for society. Inequality is a product of increased bargaining power resulting from increasingly powerful institutions in the business, financial, and governmental sectors (Kumhof 2011; Barnhizer 2004; Argyres 1999). Research has repeatedly confirmed growing inequality globally and domestically (Hisnanick 2011). Inequality, manifested as widening income and wealth disparity, contributes to domestic and global account imbalances, consumer debt, and economic stagflation, i.e. inflation and unemployment (Kumhof 2012; Rajan 2012). In addition, inequality is linked to key social variables such as political stability, civil unrest, democratization, education attainment, health and longevity, and crime rates (Thorbecke 2002). Greater economic equality always results in greater long run economic prosperity for the whole. (Wilkinson 2009)
The thesis explored in this paper is that bargaining power inequalities causally contribute to economic and socioeconomic inequality due to path dependency, organizational inertia, and habit formation. Bargaining power inequalities increase proportionally with capital accumulation, concentration, and centralization. This paper will show that the restoration of equal bargaining power will rectify financial and labor market imperfections and spur economic growth. In addition, this paper argues that US economic growth over the past several decades has been vastly overestimated due to increases in financialization.
Executive Summary
In order to determine the best policy for rectifying inequality and spurring economic growth, this essay provides an overview of current economic and socioeconomic conditions within the US and abroad, identifies problems within those conditions, and details the contributing historical economic policies that shaped them. It then examines the systemic causal mechanisms contributing to current US economic conditions, present potential policy solutions that seek to address these underlying causal mechanisms, and lastly interpret and rank their theoretical effectiveness. This paper addresses the following areas:
I just read the article titled Disruptions: With No Revenue, an Illusion of Value that discusses the overvaluation of tech companies.
This article is so intuitive, yet so refreshing. It’s incredible that people aren’t discussing another eminent collapse.
Let’s talk about money and value.
Money represents a denominated value; it represents purchasing power. What does it mean to be worth something? It must possess utility, and that utility must be great enough, must possess enough value, that you would be willing to trade something else you value equally for it. But what if the value of what money is representing is actually valueless? What happens when the value attached to the dollar don’t reflect the value attached to the object? What happens when the dollar is worth significantly more than the object? You simply won’t exchange your money for the object, and suddenly it’s value decreases and disappears.
What if someone told you that a company was worth a billion dollars, but you actually believed it was worth nothing? I think of Instagram, Facebook, Twitter, Groupon. How do these companies generate revenues? How much value are people willing to give up to use these services?
The problem is speculative valuation. The question of whether these tech companies will actually deliver the advertising dollars is still out. A valuation is only as good as its assumptions. Valuations based on discounted cash flows rest on some limited tentative assumptions, specifically: basing projections that the past will be like the future, variable discretionary capital expenditures, as well as the uncertainty of discount rates and growth rates. What if the market suddenly decides that companies like Instagram are no longer “cool” and stop using the product? What’s going to happen to that billion dollar valuation?
The tech industry is experiencing a speculative bubble, similar to the one witnessed preceding the real estate bust and the resulting financial crisis. What is the real value of information technology? I know it increases efficiency, it provides us with superficial pleasure as we peruse the internet, look at Facebook pictures, and the like, but what happens when we no longer derive value from these things? What happens when suddenly Instagram is no longer cool? The value will disappear along with everyone’s money.
I also believe that the education system, specifically higher education, is experiencing a boom and will eventually bust. What is the real value of going to college? You accrue massive debt that you can’t ever escape, your income is increased marginally, and there’s no guarantee you’ll get a job. What happens when people simply decide that the price tag isn’t worth it, they don’t want the loans, they don’t think college is worth it? The value disappears.
What other industries are suddenly thriving? Health care? Is health care an over valued industry?
As this article mentions, and I believe and have said for a long time, that our economy’s worth is built on distorted valuations. The financial industry is over 21% of our economy. That’s right: twenty-one percent. What value are they actually producing? Financialization leads to decreased real asset investment, so I argue they produce no value. Instead, financialization increases speculation, risky investment, decreases private savings, and increases debt, among other things.
Our economy is a house of cards. Where is the real value? What things possess real utility? When shit hits the fan and people have no more money, no more surplus income, no more savings: what will they be spending their money on? What good or services will people include to satisfy their necessary consumption for sustenance? Will people prefer to spend their money on services or goods? I suspect real-asset goods. Is technology a good or service? It is intellectual capital, but does it possess any tangible value? No. If people are broke, you think they’ll spend money to use Instagram? I bet not. And what if Instagram decided to use advertising? And what if those people are so broke that they don’t buy what they advertiser is offering? Why would a company advertise with Instagram, or Twitter, or Facebook, or similar companies?
Service industries are the result of past increases in productivity that lead to equal distributions of rising income which created a larger middle class; this middle class created a demand for services that were previously only available to the upper class; but as income distribution widens and wealth accumulates at the top while everyone else gets poorer, people will not be able to afford services. They won’t spend money on luxury goods. They won’t go out for dinner as much anymore.
But this will only occur when people can no longer borrow on credit. At present, debt is solely responsible for our sustained domestic demand and aggregate output over the years. Financial liberalization (cheaper borrowing through regulation) has allowed consumption to remain relatively stable as real wages stagnanted and inflation rose.
Only when lenders can no longer extend credit will our country experience massive stagflation (high inflation, high unemployment), eventually leading to a massive economic collapse. We may be witnessing the beginning of such a stagflationary period.
How can someone prepare for a bubble collapse? Where should they invest their money? Commodities? How can someone bet against the market? Which goods will be in higher demand as incomes continue to drop and inequality worsens?
I’ll be posting a massive paper on inequality within the next few days and I’ll elaborate in depth on how inefficiencies within various channels lead to economic inequalities that reduce socioeconomic equity and decrease economic growth.
Capitalism functions because of exploitation. You can’t make profit without a level of exploitation, i.e. labor must be compensated less than the value that the work produced to yield profits. The degree of profits yielded in proportion to the value produced is a good indication of whether exploitation is occurring. If you look at profits, productivity, and real wages, you’ll see that severe inequalities exist.
I use the word “exploitation” because it doesn’t sugar coat the reality of what’s going on: unequal bargaining power leads to income, wealth, and opportunity inequalities. Unions exist to restore bargaining power from the management/ absentee ownership. It’s when unions possess greater bargaining power than their employers that inefficiencies arise. The decline in unions is a major reason why inequalities have risen over the years.
The US works more than any other country. We have the least vacation days of any other industrialized/ OECD nation. We have the least paid vacation days. I don’t think it’s fair to compare inequalities between developed and undeveloped nation. It’s all relative. So you think we have it pretty good in the US, that $7,25 isn’t too bad? You are forgetting that $7.25 is meaningless without a context, i.e. the cost of living, CPI/ inflation has continued rising despite stagnating wages making it increasingly difficult to save and live comfortably, especially for those in the lowest income brackets. Poverty levels are artificially low due to the credit boom– which, since its bust, has led to increasing poverty levels. The Gini coefficient has rising consistently since the 70’s, which I attribute to the coinage act of 72/ introduction of fiat currency which instituted federal monetary policy.
Also, the vast majority of worker representation has been the direct result of union organization. People should appreciate the value of unions and why they’ve been vital to our progress. You can thank unions for: the 40-hour work week, overtime pay, vacation pay, sick days, workers compensation and a living wage. Union decline is mostly do to corporations becoming increasingly ideologically opposed to them: It’s all about shareholder profits.
As resources become monetized and increasingly scarce through the process of capital accumulation, concentration, and centralization, there will be an inevitable rise in exploitation and inequality. US economic data points to this trend. After looking at history, throughout all civilizations, you’ll see that man’s natural tendency is to exploit as a consequence of his natural will to power/ dominate. I do not think any nation, especially the US, is immune to this tendency. Slavery is very real. We might not have chattel slavery, but with increasing debt levels and the passing of recent laws preventing the option of bankruptcy, I would argue that we are experiencing the rise of a certain “bonded slavery”. Choosing your wage contract is just an illusion of freedom if someone still owns your labor income. Allowing workers to choose which job they’re best at allows for the efficient allocation of labor. (Recent legislation just made it legal to deduct outstanding debt from paychecks before you receive it)
All I’m saying is that, contrary to what a few politicians spout off, unions are actually a good thing for democracy, equality, and economic progress. Maybe they don’t make us as competitive abroad, but we’re importers, not exporters anyway (International current account imbalances is a separate issue). Ensuring that our labor force is receiving equal and fair distributions of income/ wealth maintains consumption, drives domestic demand, and fuels economic progress. Income inequality and disparate levels of capital accumulation increases financialization, decreases real asset investment, and hampers long term economic growth– and could potentially lead to economic stagflation, which many argue we are seeing the beginnings of.
If you are ideologically opposed to unions, I would like to ask that you explore how unions have been instrumental in improving our economic development and our standard of living as a nation and consider reevaluating your position. They are incredibly important for our long term economic growth. This is a nice read from a non-partisan think tank: Why Unions are Good for the American Economy
You must understand the real utility of unions. Yes, work conditions have improved, I agree. That’s not why I believe they’re so important nowadays (after all, if I worked as a slave making nothing, but the conditions of my job were exquisite, I would still argue there were serious problems). I’m discussing why unions are important for ensuring that increases in income distribution mirror increases in productivity. One of the most important roles of unions is ensuring fair wages. This is why I believe they are important: restoring and equalizing bargaining power.
Yes, there have been massive changes within the labor markets from industrial to technology, but that doesn’t explain why wage inequalities have risen, and why it’s not due to decreases in unions (decreases in collective bargaining power) and increases in corporate/ management bargaining power. Federal monetary policy is a major reason for contributing to this bargaining power inequality. By establishing an arbitrary target inflation rate (NAIRU is bull and the Taylor rule is empirically bogus) and avoiding full employment, they create a surplus of labor which in turn decreases employee wage contract bargaining power that would otherwise increase their wage compensation to fair levels (and eliminate wage stagflation).
Why are individuals leaving unions? I would ask myself, why would they leave when they have better pay and benefits? This doesn’t seem rational. As I mentioned before, corporations make it incredibly difficult to join a union. They’ll import labor from somewhere else in the country before they’ll accede to union demands. It’s simply not advantageous to join a union when you could risk losing your job (especially when unemployment is high/ artificially inflated– they could simply hire someone else).
Politics (and the role of lobbying) play a very significant role for this decline.
Why have wage inequalities has risen over the past decades?
There can be serious problems with unions. I’m not arguing dysfunction can arise. Teacher unions have grown so large and powerful that no realistic progress can be made. It’s silly. I watched Waiting for Superman and it was appalling, but it’s a system that serious serious overhaul. But collective bargaining power is an important feature for preserving equity within the US.
I just finished reading the article by Raghurum Rajan titled Democratic Inequality.
The article examines the years surrounding the Great Depression and details how conspicuous consumption caused people to spend beyond their means, specifically through the use of debt. Because I’ve been studying Institutional Economics and just read Thorstein Veblen’s book The Theory of the Leisure Class, this notion of conspicuous consumption and “Keepin’ up with the Jones'” tickled me.
More importantly, the article details the motivation of legislators in certain districts to vote against the expansion and competition of lending as a way of leveraging inequality to the benefit of wealthy private lenders who comprised the bulk of their constituency. This consequently increased their profits, in the short term anyway. The result fueled a financial frenzy and collapse similar to the run up observed in 2008.
Rajan’s take away point: while financial expansion is not inherently bad, it is not a wise decision directly preceding a crisis.
I’ve been reading a lot on the various topics relating to inequality lately, specifically the areas of current account imbalances, household savings and debt, power bargaining, financial liberalization and other monetary policy.
This has lead me to study of Institutional Economics, and to a lesser extent Historical Economics, pointing me to the works of Thorstein Veblen, Max Weber, John Galbraith, John Schumpeter and others. The study of Institutional Economics is intimately connected to understanding Evolutionary Economics due to its emphasis on social relations as the determinants of behavior and change. It paints what I believe is a more accurate portrait of economics that exists as an organic ecology of free and independent agents competing and working together to bring about change within a given economic system. The contrary picture that mainstream economics presents is a framework of actors existing in a static equilibrium state with fixed behaviors and qualities, such as rational expectations, profit maximization, and the representative firm.
I know that may sound a bit abstract and may not translate as anything immediately meaningful at first glance, but the consequences of adopting a theoretical approach as opposed to a historical empirical approach are very real. Specifically, I believe that the theoretical economics embodied by mainstream neoclassical theory is not only a very poor framework for analyzing long term policy decisions (it’s great for short term modeling and analysis), it breeds a mentality of devoid of conscientiousness, one of instant gratification for the now irregardless of long term consequences. This attitude is embodied in the quote by economist John Keynes who said “The long run is a misleading guide to current affairs. In the long run we are all dead.”
Interestingly, conscientiousness is the single most important personality measure for predicting the long term success of individuals. And why wouldn’t this hold for institutions?
Studies show that conscientiousness dictates education achievement (and here), longevity, and it even determines the business success of psychopath’s.
More later.
To pay off our $15.5 trillion national debt the government will continue monetary expansion and quantitative easing, i.e. printing money. Inflation will rise. Prices Increase. Income/ real wages will stagnate and unemployment will increase as businesses look for ways to cut costs. Since businesses possess bargaining power, wage labor markets will suffer. The cost of living will be so great that people will be forced to reign in consumption and cut spending. If you have debt (financed by wealthy private domestic lenders), you will have difficulty paying it off because cost of living has left you with less money to live on. If you can’t pay it off and file for bankruptcy, they will not only repossess your assets, you’ll still be in debt, thanks to recent revisions in Chapter 7 and 13 Bankruptcy laws. What’s left of the middle class will continue getting squeezed until the income disparity is so large that poverty will be the norm. Meanwhile the wealthy will get richer as they continue cashing in on your debt.
A word of advice: get out of debt, fast.
Now, I have to ask myself: if income drops and consumption decreases, and if credit and loans are more difficult to obtain, what will sustain the domestic demand that drives economic growth? Simplified: if 90% of the country has no money, how will they buy things, and how will businesses make money?
Data indicates that our GDP has continued increasing and is back to pre-recession rates.
What if I said GDP is a worthless measure of the economy? What about exponential growth in inequality? What if I said real wages were a better determinant of economic prosperity and success?
Just read the paper Unequal = Indebted by Michael Kumof of the IMF.
It’s a short paper highlighting some of inequality’s effects. Take specific look at the commentary on China’s growing current account surplus. Contrary to popular belief, inequality has been rising just as quickly over there. The reason they aren’t in debt is because of their inefficient financial markets, in contrast to the US hyper efficient financial markets. They save more, despite making less and less, because there aren’t developed financial markets that provide banking services. This excess surplus travels to the US and fuels the debt investment driving our consumption and domestic demand. This type of behavior is driving global current account imbalances.
I’ve been thinking a lot about what’s going on in the US economy. Every time I hear someone talking about how to fix it, I feel that they have it horribly wrong. They just aren’t looking at the facts. They aren’t asking themselves where these facts point. This includes my robotic peers and my calcified professors. Everyone one wants to speculate with their platonic definitions and abstract calculations and no one wants to look at the facts, the actors, to data, the trends, and it’s really disconcerting.
That being said, I’ve just read several journal articles on this topic and one struck me most poignantly, titled Income Inequality and Current Account Imbalances by Kumhof Et Al of the IMF. Not only did their hunches and conclusions resonate with me beautifully, they happened to address the exact questions I’ve been wrestling with in my own journals and writing. It was a relief.
In sum, I believe the that the major source of our problems revolves around global account imbalances. More specifically, the global account imbalances and the low world real interest rates were the primary source that fueled financial instability leading up to the 2007 financial crisis. I believe that the perception of foreign investors that the US was a haven for ‘safe-asset’ investments, compounded by low interest rates post 2001, fueled financial recklessness leading to the financial crisis and our current recession. Before I explain…
Let’s establish the facts– basic facts– and ask ourselves some more questions regarding how these facts came to be (we can get into details later):
These are some basic facts regarding the current state of things. Let’s cite some facts relating to economics, finance, human behavior, and the like:
Consider the following: High domestic account deficits indicate high income inequality.
Why?
The authors of Income Inequality and Current Account Imbalances look at how income inequality is exacerbated by domestic lending of the rich. As rising aggregate output/GDP is coupled with rising income inequality and stagnating wages, poor/ middle class consumption is less than their drop in income due to domestic lending of the rich. (Prices go up, they get more credit/ debt, buy more, fuels domestic demand, aggregate output increases, current account deficit widens).
The typical short-term political fix is to target policies that allow for cheaper borrowing/ financial liberation (Hence the fed is keeping rates at 0% to increase borrowing). But long-term financial liberation only leads to higher domestic debt levels, higher debt services, and lower worker consumption: it generates increases in workers’ consumption, yet slows down capital accumulation as investors prefer financial over real assets (less value-added investing, more speculative investing, i.e. financial securities, real estate, etc, eventually leads to economic stagflation…. current situation?).
The article continues by discussing historical economic trends and the global repercussions if new policies are not sought to address these systemic issues. They project that the issue of domestic indebtedness will spread globally as the income inequality gap widens and financial liberation continues.
I’ve been thinking a lot about what’s going on in the US economy. Every time I hear someone talking about how to fix it, I feel that they have it horribly wrong. They just aren’t looking at the facts. They aren’t asking themselves where these facts point. This includes my robotic peers and my calcified professors. Everyone one wants to speculate with their platonic definitions and abstract calculations and no one wants to look at the facts, the actors, the data, the trends, and it’s really disconcerting.
That being said, I’ve just read several journal articles on this topic and one struck me most poignantly, titled Income Inequality and Current Account Imbalances by Kumhof Et Al of the IMF. Not only did their hunches and conclusions resonate with me beautifully, they happened to address the exact questions I’ve been wrestling with in my own journals and writing. It was a relief.
In sum, I believe the that the major source of our problems revolves around global account imbalances. More specifically, the global account imbalances and the low world real interest rates were the primary source that fueled financial instability leading up to the 2007 financial crisis. I believe that the perception of foreign investors that the US was a haven for ‘safe-asset’ investments, compounded by low interest rates post 2001, fueled financial recklessness leading to the financial crisis and our current recession. Before I explain…
Let’s establish the facts– basic facts– and ask ourselves some more questions regarding how these facts came to be (we can get into details later):
These are some basic facts regarding the current state of things. Let’s cite some facts relating to economics, finance, human behavior, and the like:
Consider the following: High domestic account deficits indicate high income inequality.
Why?
The authors of Income Inequality and Current Account Imbalances look at how income inequality is exacerbated by domestic lending of the rich. As rising aggregate output/GDP is coupled with rising income inequality and stagnating wages, poor/ middle class consumption is less than their drop in income due to domestic lending of the rich. (Prices go up, they get more credit/ debt, buy more, fuels domestic demand, aggregate output increases, current account deficit widens).
The typical short-term political fix is to target policies that allow for cheaper borrowing/ financial liberation (Hence the fed is keeping rates at 0% to increase borrowing). But long-term financial liberation only leads to higher domestic debt levels, higher debt services, and lower worker consumption: it generates increases in workers’ consumption, yet slows down capital accumulation as investors prefer financial over real assets (less value-added investing, more speculative investing, i.e. financial securities, real estate, etc, eventually leads to economic stagflation…. current situation?).
The article continues by discussing historical economic trends and the global repercussions if new policies are not sought to address these systemic issues. They project that the issue of domestic indebtedness will spread globally as the income inequality gap widens and financial liberation continues.
William Dare 