Free Colleges: More Students, Less Quality

„Bernie Sanders is wrong.“ It’s a phrase that we have heard so often over the last few months, often enough at least to even get a book with the title. That is no surprise considering how the candidate for the Democratic Party, who at the moment polls in second place behind Hillary Clinton, keeps uttering false facts, keeps promising freebies and keeps promoting the holy „democratic socialism“.

In an op-ed on October 22 for the Washington Post, Mr Sanders again got confused. This time he took a stance for free colleges and used some countries – including Germany, as examples of how great this system would work:

„In Finland, Denmark, Ireland, Iceland, Norway, Sweden and Mexico, public colleges and universities remain tuition-free. They’re free throughout Germany, too, and not just for Germans or Europeans but for international citizens as well. That’s why every year, more than 4,600 students leave the United States and enroll in German universities. For a token fee of about $200 per year, an American can earn a degree in math or engineering from one of the premier universities in Europe. Governments in these countries understand what an important investment they are making, not just in the individuals who are able to acquire knowledge and skills but for the societies these students will serve as teachers, architects, scientists, entrepreneurs and more.“

As a German who currently goes to universities in this country I couldn’t resist to write something about this.

First of all, it is true, here in Germany you can study (basically) for free. I for example only have to pay a fee of about 120 Euros each semester for a bus ticket. And it is true as well that this is not limited to German citizens only. Everyone can visit a college, no matter if he or she – or the parents for that matter, have ever paid into the system.

However, this has consequences: Erich Barke from academics.de took a closer look at the budget of a university in Germany, compared to one in the US. For that, he selected the Leibniz University in Hannover and the University of Texas at Austin – both of them are good universities, but not elite, compared to other colleges in the respective country. Even so, the differences in quality are enormous:

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Remember, this are two solid universities, so Barke also compared the Leibnitz University with two of the better institutions in the world (which are both located in countries with tuitions):

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Compared to the MIT and Stanford it’s even worse.

As you can see, the Leibnitz University has less funds per student and less staff and at the same time is financed nearly entirely by the government.

There’s no doubt that this miserable situation hurts the German universities. Actually, it’s pretty much demonstrable. Let me tell you two short anecdotes:

Just a few years ago, at the time I was still deciding which course I should choose, I visited an information event at a university in Munich. It was a presentation on civil engineering and the professor who introduced us to this course showed us the structure of it, the content etc. At one point he said that because tuitions have been cut (in Bavaria this happened only in 2013, so quite late), his faculty already has problems to finance research programs.

Since my first semester I have experienced this as well: To put it simply, there is not enough … enough of everything. There are not enough rooms for everyone, there are not enough employees, which leads to long waiting periods for students if there are problems or other requests, and there are not enough professors to teach (or they are totally stressed out). It’s an acute situation in which everyone is overextended and irritated.

It’s easy to see this drop in quality in global university rankings as well. Let’s take a look at the top five colleges from the US and Germany respectively in the most important lists and where they rank:

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Sources: QS 15-16: www.topuniversities.com/university-rankings/; Times Higher Education 15-16: https://www.timeshighereducation.com/world-university-rankings/2016/world-ranking#!/page/0/length/25; ARWU 15: www.shanghairanking.com/de/ARWU2015.html; CWUR 15: cwur.org/2015/; US News: www.usnews.com/education/best-global-universities

In the CWUR 2015 ranking, which lists the top 1,000 colleges on this planet, a total of 55 German universities are mentioned – compared to 229 for the United States.

At last, you can recognize a clear trend similar to the one in the United States: Because of the lower costs and easier access to these institutions there are more and more students and because of that, a Bachelor’s degree possibly won’t be enough soon. In 2009, the number of students passed the amount of apprentices, and it’s getting more extreme as the years pass by, as you can see in this chart (blue are the number of apprentices, red the students, the numbers are in millions):

infografik_1887_zahl_der_studierenden_und_auszubildenden_n

This are just some of the consequences of a free college system as Bernie Sanders proposes it, a system in which, as Mr Sanders says, „governments […] understand what an important investment they are making, not just in the individuals who are able to acquire knowledge and skills but for the societies these students will serve as teachers, architects, scientists, entrepreneurs and more.“

At the end of the day the result will be the following: More students, less job opportunities (or higher job requirements), less money for the universities and less quality. You can certainly #FeelTheBern in Germany already.

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Big Week For The United States

At the beginning of this new week, again we saw a minor bear market in the NYSE. The DOW Jones only fluctuated roughly 100 index points within the span of the day, comparing the openings of the past few weeks it seems more stable. Is the market really “stable”? Was this past few weeks a minor liquidation of bad assets, that resulted in a crash in the markets, or is there a more serious underlying issue?

Considering the Fed is going to decide on whether to finally give some sort of “tightening” to the markets, might be the major role in this seemingly speculative stability. The question  is whether or not the 0.25% interest rate hike, if allowed, will actually do anything at all? As stated earlier this will not do any significant change, it might cause a speculative bubble at the most. This is because, now that interest rates have gone up a tiny bit, it will show traders that maybe there is still some value to the dollar after all. Considering the interest rate will only be a 0.25% rise, it will not be significant in its aims at contracting the expansions the Fed made in the rounds of QE.

But the underlying issue still remains on what is currently happening to the markets, its like a wheel falling off of your car, all the nuts and bolts are missing ,besides one last very loose one, and you decide to tighten it by cranking the tire iron a couple times. Will that honestly achieve any hopeful results?

The fact is that the monetary printing of the federal reserve has gone on for far too long, and is now in a stage where all of it’s assets are pyramided so tremendously that it can only end in a bust. It can only truly collapse, and it will be a bad collapse. This is because the United States has been leveraging loans continually, for free, for over 6 years straight, yet we have not seen any significant growth! Considering the PPI has not had any significant change over the past 5 years, compared with stagnate new order capital goods shows us that people are not spending money on capital goods. Also, not creating more capital goods where prices should be falling. In a healthy economy prices should fall! This is because over time technology will produce more of a given product, causing the supply to shift rightward, which will correlate to a fall in prices. The fact that the index has not had any significant fluctuations over the past 5 years, keeping supply constant and increasing the demand for capital goods, shows that the rise in asset prices has not gone to any real production, rather just an over-valuation of the asset prices.

If you look at the GDP we see a steadily rise, yet that is only the asset prices rising. Asset prices rising, without any increase in capital, means there is an asset bubble. This asset bubble, as stated before, comes from the strictly easy money policy of the Fed. Can the rate hike help? At best it will prolong the economic disaster for a while longer, and people will be duped yet again by the “omnipotent” cartel we refer to as the Federal Reserve.

Also, strangely enough, we will be tuning in to watch the Republican debate on September 16th. This debate will go along the same lines as every other debate, where politicians are capable of dodging questions, and not giving clear decisive responses. I doubt the actual cause of the stock market turbulence will even be brought up, as the politicians do their best to lie to the American public as to which one of them is better for the “job”. Obviously, for sound economic theory, I must support Rand Paul. The nationalists, like Trump, will continually blame the natural division of labor that brings us all the amazing things we use today, and it will be interesting to watch. This week will be a big week for the United States’ Political Economy.

Trump, Tarrifs and Trade

I recently critiqued Bernie Sanders’ welfare ideas in the article, “Bernie Sanders’ Welfare Trap”. In the spirit of being fair, this article will address the crazy notion that populist Republican Donald Trump came up with. Namely, a 25% tariff on Chinese produced goods. In this day an age it’s remarkable how many people still do not understand the negative affects of tariffs, regulations and other trade barriers.

The media has had a heyday with Trump these last months. His popularity, especially among the blue collar class, has skyrocketed. To many he’s an amusing departure from the typical dull and boring establishment candidate. He talks off-the-cuff and spouts his opinions without a second thought of any political fallout. His stance on issues from immigration and foreign policy to international trade has made him the populist candidate, not unlike Theodore Roosevelt some 100 years ago. But are his fans even listening to what he promotes? Do they understand the consequences of electing an individual who’s intention is to amass even more power in the executive branch, ala Roosevelt?

Trade and Tariffs

To get a handle on what the fallout may be on a 25% tariff of Chinese goods is to look back to those glorious years of The Great Depression. Shortly after the stock market crash in 1929, the Hoover administration signed the Smoot-Hawley Tariff Act of 1930 into law. Economic historians, the world over, can tell you how departmental that was for the US economy and world economy as a whole. It kicked off a series of trade wars that left the industrialized nations weakened. They became economic islands of autarky. An autarky is a self sufficient economy. The problem is, no nation can sustain its economy under the severe conditions of an autarky. The Great Depression deepened and spread around the world. Post WWI Germany, in particular, was harshly affected by these trade barriers. Without the ability to export what manufactured goods they produced, they fell into a series of hyper inflationary bouts that destroyed their currency. A decade of isolation and alienation from world markets gave rise to the sentiment that elected The National Socialist Workers’ Party of Adolf Hitler. A key plank in Hitler’s economic plan was an autarkic fatherland that would conquer her neighbors in order to provide for her citizenry. To hell with trade, free or otherwise.

After Adam Smith became famous with his book, “An Inquiry Into The Nature and Causes of the Wealth of Nations”, other classical economists continued where he left off. One of these economists was David Ricardo. Ricardo famously postulated that through the specialization of trade, even when a nation has an absolute advantage, both trading partners became better off and the standards of living for their respective citizens increased. To illustrate, imagine Costa Ricans wanting to have maple syrup for their pancakes. They could attempt to grow maple trees in a tropical climate and harvest the maple syrup. They might even pull it off with enough capital investment, but at what cost? Simultaneously, imagine Canadians having a craving for bananas. They too could attempt to grow their own banana trees in giant greenhouses. What would the immense cost be to undertake a project of that scale? The answer is for each country to specialize in what it can produce at the lowest opportunity cost. In our example, Canada specializes in maple syrup production and Costa Rica trades in bananas. Both nations can then allocate their scarce resources in other more beneficial projects. The price for each good would also be cheaper for consumers as there would be a net increase of the traded goods in each country.

Although free trade became fashionable after Adam Smith among British intellectuals, it didn’t catch on with the US government. The government continued to impose protectionist tariffs on other nation’s goods as a chief source of revenue. This is a part of what is known as mercantilism, where the government controls trade between nations and businesses as it was in the colonial days. In the mid 19th century, the newly formed Republican Party under Abraham Lincoln proposed high protectionist tariffs to protect the fledgling industry of the northeast, in particular the railroads. After his election, Lincoln signed the Morrill Tariff which increased the import tariff from 21% to 31% overall on goods imported from Europe. Before the Morrill Tariff, the US had enacted a 55% tariff that almost led to the secession of South Carolina under the Andrew Jackson administration. A compromise was struck and the tariff was eventually lowered to 21%.

Protectionist tariffs had hit the agrarian southern states the hardest, as they depended on good trade relations with their European partners. Cotton was the nation’s key export and garnered great wealth for southern growers. The Republican Party incorporated a plank into their platform that would funnel some of that wealth to their friends in the northeast by way of a higher tariff and subsidies. In his 1st Inaugural Address, Lincoln stated that he would enforce the collection of “… all duties and imposts…” much to the southern states’ chagrin. It’s no surprise the first shot fired was at Ft. Sumter, an import duties post that controlled shipping into Charleston Harbor.

Free” Trade

Our above example of maple syrup and bananas pertained to specialization in trade where each trading partner had an absolute advantage. But what happens when both nations have comparatively the same opportunity cost and resources to produce comparable goods? Let’s take automobiles as an example. After WWII, the US had dominated the world market in automobile manufacturing. It wasn’t until Europe and Japan had rebuilt their economies that they became competitors in the global automobile market. How does the advent of new competition affect world trade? The same way competition affects trade on the local level. Each producer must compete with the lowest prices and at the best quality in order to please consumers. Similarly, this is the same with consumer electronics, textiles, agricultural products and a myriad of other goods. Some developing nations compete with other more advanced nations through lower labor costs. Others through natural resources such as, lumber, oil or rare earth metals for lithium batteries. The end affect is higher standards of living for the globe through better allocating scarce resources into their most productive uses.

When left alone, this laissez-faire globalization of trade benefits everyone. It helps to stay off conflicts which lead to wars and supplies less affluent countries with goods that may otherwise be unattainable. But laissez-faire capitalism is in short supply these days. Just as large protected crony corporations intervene in local exchanges, they also intervene in global trade. Trade agreements such as NAFTA, GATT, SAFTA and the recent TPP are anything but examples of free trade or capitalism. These managed trade agreements hamper competitors by incorporating the use of political force. They cause trade imbalances, shortages and lowered standards of living for everyone involved. They give the crony corporations an absolute advantage by hampering smaller competitors on both the national and international level. Those who scrutinize the concept of free trade are mistaken if they think a multi-thousand page trade agreement represents free trade.

Conclusion

Donald Trump’s idea of slapping a 25% tariff on Chinese goods wouldn’t protect anybody. The idea behind a tariff is to protect a certain national industry. Like a tariff on steel is an attempt to protect less competitive steel producers in the US. But the goods that are imported into the US from China aren’t even manufactured here. A tariff will only cause Walmart and other retailers to raise prices. How is that going to help the American worker?

Trump seems to believe by enforcing the tariff he will compel manufacturing to return to the US. Those goods that China exports are produced with low-cost unskilled labor, by and large. As I had written in my article, “Creative Destruction, Technological Unemployment and Choice”, what manufacturing that does return to our shores is largely being manufactured by advanced robotics and automation. This is little help for the mass of displaced unskilled US workers.

Starting a trade war with a country that manufactures most of your stuff and holds most of your debt is extremely foolish. Trump claims that he’s not all that smart, but the key to his success is surrounding himself with smart people. Maybe he ought to consider finding some smarter people. After all, even if a hole is surrounded by a doughnut, it’s still just a hole.

Minimum Wage Hike? Take a Hike!

Raising the minimum wage is something that the lower waged workers of society are demanding, so why not raise the minimum wage? This consensus comes from the misconceptions given to us by current theories presented which are that of increasing of minimum wage will directly increase the laborers standard of living. How will increasing the minimum wage cause increases in productivity and efficiency?

There is absolutely no economic law that suggests increasing the minimum wage will increase the proficiency of the market economy. People that do not understand the dynamics of economic theory create misconceptions that create this post hoc assumption that increasing the minimum wage will increase employment, and will increase the standard of living. One very interesting “empirical evidence” that employment does not drop, comes from the fable of the advancing economy of Washington. According to the B.L.S it seems that the unemployment rate is at a steady decline. Considering Washington has the highest minimum wage in the United States, we see the fable that increasing the minimum wage does not cause unemployment with this empirical “cut and dry” case.

However, while looking at the employment graphs in correlation with the age level we see teenage unemployment is much higher than the United States average. Considering teenage unemployment is higher in washington is perfectly explained through economic analysis. The fact that minimum wage hikes happened most densely in the washington area has caused a surplus of labor. How will minimum wage cause a surplus of labor?

When the supply of labor is ascending through its supply schedule it hits a point where the two separate schedules meet and interlock. This is referred to as the present state of rest. This occurs when everyone demanding labor and everyone supplying labor, at a given price, can leave the labor market at a state of rest. Such as a willing person to exchange their labor for greater than $10/hr, while the demander of labor will not pay more than $11/hr for the labor. So, the catallactics suggest that the price for the state of rest is between $10/hr and $11/hr.

Minimum wage is an outside coercive entity, the state, forcing a price floor on the market. This aggression against the dynamic functions of the market pushes the price above the state of rest. When this occurs, the demand for labor will ascend backwards on the schedule, while the supply of labor will ascend forward. This will always cause a surplus of labor, simply because at the new price there is a excess amount of people willing to work at the low-wage level. Yet, the people demanding the labor will reduce their quantity-demanded. So, therefore, there is no longer a market clearing price.

So, how do we look at the teenage rising unemployment rate to give empirical proof that this occurs? Certain firms are now faced with an ultimatum. One choice is to reduce the interest income owed to the capitalists who have advanced capital. The first choice will cause investment to decline and will force the business to close. The second choice, then, is to boost the firm’s entrepreneurial ability to reduce expenditures in other factors of production in order to maintain the employment of labor. This becomes very problematic for small-business, because they have less room to cut factor prices.

However, the marginal firm that can maintain production after the wage hikes now are employing a factor of production at a higher wage level, higher than the market rate. This induces the business owner to decide to pick La Crème de la crème, meaning they will go for a laborer that has a less risk factor. How will they look at risk factors? Easy, they just need to assume with people between 16-19 are far less reliable than the average adult. Also, 21-25 would be a little more dependable, in the eyes of the business owner. At last the business owner reaches their target employee at the age of 25-39. Why not choose people younger than 25? Because life experience has all taught us too well that youthful energy, rather fun at times, can be very undependable in regards to responsibility and maturity.

So then what occurs? We see a crowding out effect emerge in minimum wage level jobs because now the minimum wage level job seems more lucrative than before, and the employer is much more stricter. So people that were at one point unwilling to work for $10/hr now are willing to work at $13/hr, and the people with the least amount of experience are truly shafted. This turns into a vicious circle, in the long-run, because now when that teenager who was forced out of the labor market through aggression becomes an adult no longer has any experience. So, now measuring the “risk-factor” of the potential employee, the employer is becoming less impressed with the same person who has now reached the age of 25. Therefore, the long-term effects of raising the minimum wage causes forced unemployment in exchange for voluntary unemployment.

How does this affect the production cycle? When the laborers now receive a higher wage, higher than the market clearing wage, the laborer will then go around and spend this money. What happens next is the intertemporal market needs to adjust to rectify new spending patterns. So when the present output capacity of the production cycle is at the level of X, the increased spending into the products will signal to producers to increase production. When that occurs, considering we are holding the present supply, X constant; the only option for the market to equilibrate itself is for producers to raise the prices from p to p’ . When the prices raise, as a result of the wealth effect, we see increased production. This is where the proponents of minimum wage hikes fall apart.

When the prices raise, we increase production, however the wages of laborers have only increased nominally and not in real terms. The fact that the nominal wage increase correlates with the increase in prices we will actually see the real wages of the laborers drop. This is because now, in the aggregate, prices have risen (p to p’). The worst effect is what occurs after the prices rise and the market adjusts to the new nominal wealth levels; the production cycle is still in full force due to the initial price increase and now there is an abundance of supply that can no longer meet demand causing surpluses. However; since the coercive force of the state has aggressively forced higher wages; the firm can no longer drop the prices, from p’ back to p, in response to the newly achieved surplus. This is due to the fact that now factor prices are propped up artificially, there is downward nominal wage rigidity which cause a ratchet effect on consumption prices. Thus, when next round of production occurs the firms create a lot less output, resulting in a shrinking level of output.
It is clear from our analysis that the wishes of the labor market to raise the minimum wage will result in inefficiency, and a subjective drop in consumption. The laborers wishing to improve their standard of living will cause an over inflated consumption market, crowding out of teenage labor, and involuntary unemployment.

Negative Effect of Fiduciary Institutions

       The effects of fractional reserve banking is tremendous in expanding the power of L’État, corruption, bribery, and all of the lovely things centralized coercion brings you and I. The entire fiduciary system is flawless in its ability to undermine the integrity of warehousing currency, and is a systemic ingenious way to vacuum the purchasing power from every single person that falls victim to the inherent fraud.

       The a prior law of praxeology explains that human beings will always act in a way to satisfy wants. This epicurean feat transforms our scientific understanding of human action, meaning people will advance their means to find satisfactions. This can only be possible in a world of scarcity, and disequilibrium. Holding a system of money proper, and not substitute, will always allow the functions of monetary units to reflect calculations for producers, and allow praxeology to accomplish its task in a less diluted manner. Returning our socially accepted currency to a unit of hard currency will cause an effect that will dissipate all confusion, just as a farmer may pasteurize a cow’s milk, we as praxeologists are forced to “pasteurize” the market economy, and doing so with a fiat currency is very problematic.

     When a person decides to place their money into a banking institution, that person has now elected to trust the bank with their monetary power. This bank now, is forced to maintain the unit of exchange and hold the monetary unit as if it were placed in a warehouse. When the consumer elects the bank it is because the consumer trusts the bank with their money. How would said consumer reflect their interest if they found out that the bank in question was merely using that monetary purchasing power to expand their assets through things like making loans?

   When person X decides to deposit $500 into Bank of Trust, that bank is now responsible for that $500. However, what the Bank of Trust effectively does is hold a percentage of the deposit as “reserves” and then commences to loan out the remaining. So, with deposit that X placed in the bank, they will hold $100 and then loan out the additional $400. This is fraud.

   Considering that person X did not grant specific permission to the Bank of Trust, the bank is effectively stealing the monetary purchasing power from person X, and gambling with it by loaning out the currency. This is theft and deserves punishment. The most deserving punishment for this theft is by the forces of the market society, however, we will not get into those effects in this article. The worst of this is that the fiduciary institution, Bank of Trust, will actually charge their consumer for this theft! Not only will the fiduciary institution charge the consumer, but the institution will not distribute any marginal gains made by this comportement criminel to the rightful owner of the monetary purchasing power

   This theft can not withstand a market society, so how would it effectively maintain its pyramid structure? The banks will collectively merge together to form a cartel and create a coerced “legal tender”on the people, with the promise to the state to finance all meaningless wars, and pay off all debts the state owes. The way it can do this is by expanding the monetary supply and financing the state while doing this.

   So when person X deposits the money, the fiduciary institution is now responsible for $500 to person X. However, the Bank of Trust loans out the $400 to person Y, which in turn deposits money into a separate institution. The Bank of Trust now has expanded the money supply an additional $400, because person X still has their claim on the original $500 deposit. The additional $400 loan has been created only in the form of money substitute, and thus has expanded the money supply but not the original money proper.

      There are many restrictive effects that results in this illusive expansion, too many to analyse in this article. The main concern we are dealing with, in this article, is in the terms of economic calculations through praxeaology. When the person Y receives the loan of $400 he then will go and spend the $400 depending strictly on the subjective time preference person Y holds. However, the mere fact that this money expansion never existed in the proper form we have now reduced the scarcity of medium of exchange. While reducing the scarcity of the medium of exchange the fiduciary institution has now distorted the a priori law of human action stated above. The fact that now person Y’s ends are met by an illusive expansion, it complicates the scientific data a praxeologist relies on. This is because the action of person Y is no longer organic, but rather stimulated.

      When outside entities stimulate human action, it can lead  to mere confusion towards whether society is wasting scarce resources or producing proper means of scarcity. This is due to the fact that we have disturbed the proper effect of human action. So, if person Y sees certain lucrative resources that adds psychic revenue, person Y will act to attain that end. If person Y’s means were less scarce, the marginal value calculation the person places in their ordinal utility-scale, would result clearer data as to which project is lucrative and which project is a “sinkhole”. Thus, the effect of this expansion distorts the functions of praxeology in respect to the study of human action. This distortion results in more inefficiency, that can only be rectified by a stable money proper. How can a human act on scarcity when their means have been met by an illusion of non-existent scarcity? If I convince myself that I no longer need food for nutritional value, but require an illusive pill to stimulate my hunger how will I know when i am on the verge of starvation or bodily satisfaction? For us, praxeologists, we need to search through the fog of data to understand the catallactics in present society.

      The task of removing the fog is a difficult task, even for the premiere members of society. There is no economic justification to support the creation of adding additional variables towards the catallactic dissection. The clear analysis of this article proves the truth towards to the original a priori law that humans act. Considering the fact that humans act leads us to understand that,at present, humans are at a state of dissatisfaction. Since  the cronies have used state force to cartelize this theft, shows this truth. For the swindlers have acted to attain an epicurean revenue. This mere fact leads to the question then, how can anybody defend these fiduciary institutions of fraud. This aggression committed by the state will only result in inefficient expansion and a lower standard of living for the class of society that does not receive any direct benefit surplus from the existence of state coercion, I.e the majority of consumers.