To add to my recent post on the university reform in Great Britain, here is Iain Pears, via a fist full of dollars on the draconian debt relief plan for students imposed by the government:

Students will be charged at 3 per cent plus inflation for a very long period of time once they hit a certain level of income. This is sheer profiteering disguised as fairness. Essentially, the government will be requiring individuals to issue 30-year index-linked bonds on their own balance sheets, rather than do it itself. A few sums shows what this might mean. For the government will raise the money to advance the loans on a flat rate basis. It will, in other words, borrow the money at about 2.5 per cent, and lend it out at 6.1 per cent, more if inflation increases. While it will enjoy the benefit of seeing its real debt eroded by inflation, the student will not be permitted the same escape route. If only half the total number of students take out a loan of £7000 every year, then that would amount to a transfer from the state’s balance sheet to those of individuals which stabilises over 30 years at about £110 billion. The government would pay a peak £2.75 billion a year in interest for this, and receive peak income of £6.75 billion back, as wage inflation will ensure within 12 years that most graduates earn over the £41,000 benchmark which triggers the maximum levy, and there seems to be no provision for this to be index-linked.

Even Barclaycard would applaud such audacity, not least because there are measures to guarantee this income stream by imposing financial penalties on anyone who wishes to pay off their debts early – a unique and almost feudal arrangement, where individuals are going to be forced to remain in debt, effectively to provide the government with cash flow, for most of their working lives. I know of no other case of a government requiring its citizens to be in permanent debt. The argument that this is just like a mortgage is specious, as mortgages are not index-linked, there are a wide variety of different time periods available, individuals have a choice of which ones to take, and they are secured on hard assets which have traditionally risen in value over time. None of these conditions apply to student loans.

the injustice of Great Britains tuition reform

Recently, Great Britain has been rocked by violent student protests. The students are upset about the recent plans to immediately triple public university tuition. The financial times reports that:

Weeks of protests in London at increases to university tuition fees have seen the UK coalition government cross the Rubicon. The student demonstrations represent the first direct and violent opposition it has faced. And while the administration has come through un­deflected – if perhaps shaken – it should learn some lessons.

These protests have been characterized by some as being a tantrum by spoiled middle class students. The Lex editorial in the FT called the reform more "complicated that cruel" because lower income workers would be given loans to cover their tuition. The amount that would need to be reimbursed would decrease if the students make less than they expected coming out of college.

So is the Financial Times correct? Is the reform both economically and morally sound? I am not so sure. First on the economic front: Most economists suggests that growth is extremely important as a means of escaping financial ruin. More growth means more tax revenue which can only help restore Great Britains finances. Since the Solow's ground breaking work in the 1960s(see my previous blog post), we have known that per capita Growth comes from three places. Increased accumulation of physical capital (factories etc), human capital (skills and training) and finally through knowledge capital (innovation and technological advances). Because of diminished returns and depreciation of human and physical capital) only knowledge capital leads to long term higher growth rates. A solid University system helps to develop two of the three vehicles of higher growth: developing human capital, by giving workers the skills that they need, and the all important knowledge capital, developing new innovations. By increasing the price of college tuition the government could have a negative effect on growth and thus exacerbate Great Britain's shaky economic situation.

On another level, this debate is a moral one and gets to right and left wing values between socialized good versus individual responsibility. People on the right might claim that the British Education system is still much less expensive than that of the United States. The high tuition rates in the United States puts the burden on families to determine how important higher education really is. If they are led to believe that education is really as important as the economists say, they would find a way to pay for it. Either by saving or going into debt. The higher revenues they receive would easily allow them to cover their debts. As a result of individual responsibility, willingness, as well as business acumen, growth would not be seriously affected.

There are serious problems with this argument. First, while the United States system may be great for those who choose to use it, there is a growing rift between those Americans who have been to college (usually upper class kids following the legacy of their parents) and those who have not (mostly poor kids who have no family history in higher learning). As the chart via Ezra Klein shows, only 28% of the population have a college degree. The United States is falling behind many other countries in terms of graduation rates in recent years.

These reforms hurt the poor doubly because they go into effect immediately. This means that many poorer families are not given enough time to build up their savings necessary to pay for the higher tuition. Without the necessary saving many will be forced into the governments college tuition debt scam. This program is filled with smoke and mirrors: the decision to increase debt financing and to give debt relief to students who make less money after college, should be taken with a grain of salt. The purpose of this policy is increase revenue on the backs of students. This debt relief program cannot be overly generous because that would defeat the purpose of the bill which was to raise revenue.
The students are right to demonstrate. They are not spoiled brats, the FT editorialists are.

I think that Paul Krugman gave the best critique of president Obama's negotiation with the republicans:

"here’s the thing: while the bad stuff in the deal lasts for two years, the not-so-bad stuff expires at the end of 2011. This means that we’re talking about a boost to growth next year — but growth in 2012 that would actually be slower than in the absence of the deal

This has big political implications. Political scientists tell us that voting is much more strongly affected by the economy’s direction in the year or less preceding an election than by how well the nation is doing in some absolute sense."

The fundamental question was how long the universally popular unemployment benefits were going to be continued versus the tax cuts for the rich (opposed by a majority of Americans). A good strategy would have been to say that unemployment benefits should last at least as long as the tax break for the rich. This would have been seen as being both moral and reasonable. If the republican argument is that you should never raise taxes on ordinary Americans, the democrats could have argued that people who have lost their jobs recently during the economy meltdown should also be considered ordinary Americans. Reducing their benefits would have the same deleterious effects as raising taxes on the economy as a whole. If the republicans suggest that the debt level is too high, this plays directly into Obama hand. He could then demand that the tax cuts for the rich expire. Obama definitely dropped the ball on this one.

The Solow conundrum: How to increase savings?

Today, I looked at growth theory as set down by Robert Solow. I was not looking forward to it primarily because I find one of the core ideas upon which it is built to be such a head-scratcher. Solow contends that people, by saving more, can increase their investment and thus their capital per capita and thus increase their growth. This growth though is not durable because capital accumulation creates a diminishing return and eventually the rate of depreciation of capital will equal the rate of capital accumulation and the net result will be 0 (see diagram). The puzzling idea upon which this is based is that every individual instead of spending their revenue saves it and transforms it into investment capital. It is based on the concept that there is a natural rate of output that is endogenous to both saving and spending rate. This is clearly not true in the short term. Decreasing C in no way affect S. Instead you will have a paradox of thrift whereby as C decreases Y decreases and the saving rate will not be affected. So how does the savings rate increase?

My first solution was to say that perhaps what we are talking about is an open economy and consumption is really foreign consumption. This gets rid of the paradox of thrift problem, and the saving rate will certainly increase in this case. This though is not the answer: The investment capital being saved is foreign capital: Buying a foreign factory is not going to help local factory workers be more efficient.

I next decided to change focus. Perhaps savings is the wrong side of the equation. We should be looking at Investment. If investment increases, the savings rate would certainly have to increase. The easiest concept is to imagine the government, borrowing money and investing it at a higher rate. It seems though that in this case, interest rates would go up and the government investments would just crowd out the private ones. The savings rate would not necessarily go up.

The only way saving can go up, is by incentivizing people to increase their investments. For example by decreasing the risks involved with investing. If people feel more secure that they won’t be wiped out in a financial crisis, with FDIC insurance for example, they would undoubtedly be willing to put more money in the bank which could then be lent out and resaved thus increasing the total amount of investment and savings. Next if people could be made to believe that the marginal efficiency of capital will increase in the near future, they would be certain to invest more of their money. If the marginal efficiency of capital increases, investments will increase. This of course is the point that Solow was trying to get at, only through technological innovation, which increases the marginal efficiency of capital, can growth be maintained.

Ezra Klein linked to this outstanding video conference from Jesse Schell on the future of video games. He starts his lecture by saying that the sudden rise of facebook games such as Mafia Wars and Farmville "knocked us (game designers) on our collective ass." Perhaps the most astounding Facebook innovation is the unscrupulous way in which they generate income. Instead of a traditional pay as you go system for their games, they use a new system called Lead Generation, in which the costumers get game credits for however long they play. These credits allow gamers to buy prizes from the game store. There is only one catch: To qualify for these prizes, you have to have be a paying member with a 15$ a month co-payment. Gamers can get extra game credits by paying cash or signing up for a credit card. These credit cards will soon come in handy: Gamers can throw in twenty bucks in a game such as mafia Wars to increase their level.

Another interesting aspect of these new games is their social aspect. In the past gaming was about escaping from reality, the prototypical gamer was an awkward antisocial teenager who spends most of his time in front of the computer screen. These new games seem to be focused on a much wider and more social audience.

here is the link:


http://g4tv.com/videos/44277/DICE-2010-Design-Outside-the-Box-Presentation/

Here is a post from the New York Times on Morgan Kelly, one of the prophets of the Irish banking crisis. Highlights include the two videos, the first which shows the arrogance of the former prime minister who accused Kelly of fear mongering. He suggests that pessimists such as Kelly should committ suiciede. The second video is the night of Ireland's fateful decision to guarantee Irish bank deposits. Kelly argues that the Irish banks could be facing two problems. If the problem is non permanent, a simple lack of liquidity, the decision to guarantee the deposits will be an extremely good bluff. It will restore confidence and Irish assets will eventually return to their real value. Subsequently, the Irish government will not have to pay out a single dime. If the problem on the other hand are permanent, if the banks made tons of bad loans and are holding essentially worthless assets than the Irish government would be on the hook for billions. Kelly said the problem was essentially solvency and not liquidity and he was right.

In an intriguing article on surfing phenom Kelli Slater, Matt Higgins raised the controversial question as to whether the ten time champion should be considered one of the greatest athletes of all time. A recent sport illustrated columnist had him listed among the finalists. Chris Mauro made the case for Slater after he won the World Surfing Championship in Puerto Rico earlier this year. Undoubtedly, trying to decide who is the best ever is an act of enormous stupidity when there are so many different types of sports and so many dominant athletes around today. With that said, I believe that Slater can in no way be considered the best ever; in fact it is possible that he is not the best surfer. Quite possibly Laird Hamilton is the better surfer and a more monumental figure in the sport. Hamilton, who at an early age showed great promise in the sport, shunned international competitions believing that the competitive element of competition was not what the sport was really about. Instead he believed that surfing was about pushing the limits to what was possible. He was one of the pioneers of tow-in surfing where the surfer is towed out miles into the middle of the ocean to where rogue waves over hundred feet high are breaking. Here and here are highlight links for the two surfers. Here is a video of a recent Daily Show interview with Susan Kasey author of Wave.

This debate between Hamilton and Slater highlights one of the central problems: In counter culture sports such as Surfing and rock climbing, in which many of the top performers shun competition, it is sometimes hard to know if the person with the most championships is really the best.

Ireland's after the fact diagnosis

On the Newshour Wednesday, Peter Kirkegaard made a puzzling statement: “Ireland clearly exemplifies that you can do everything right, but, if you get your banking system wrong, then you're going to end up in the same situation as Greece was in.” The banking system was done in by a laissez faire ideology which permeated the financial and governing elite in Ireland. Bank officials and regulators turned a blind eye to the massive speculative real estate bubble and Ireland has been embroiled in a financial crisis ever since. Of course while Greece had been roundly disparaged over the past decade for being a fiscal basket case, very few people criticized the banking system of Ireland.

What were hugely criticized at the time was Ireland’s decision to protect its financial system, especially Ireland’s highly controversial decision at the end of 2008, to guarantee all bank deposits and debt. This decision was widely criticized at the time as a go-it-alone and beggar-thy-neighbor approach. Many people thought that investors would flee to what was perceived as the relative safety of Irish banks. Very few thought that the problem was in fact the opposite: that the banking system was gravely ill and that the Irish government would be left on the hook for large payouts that they couldn’t afford pushing them to the brink of sovereign default. Economists who sounded the alarm over Ireland’s debt problem were fustigated for being one-sided irresponsible and unpatriotic.