Ken Szulczyk's Blog

The U.S. Unemployment Rate: "Lies, Damned Lies, and Statistics"

2012-02-12T20:43:00.000-08:00

The quote from Mark Twain, "Lies, damned lies, andstatistics," sums the theme of this blog. Politicians are haunted by the one fundamental law of economics; adownturn in an economy leads to an ouster of its political leaders. Hence, our political leaders will do anythingthat is immoral, illegal, or unethical to garner votes for another term inoffice. Furthermore, the politicians mayencourage government agencies to skew, distort, or exaggerate its statistics toappease, mollify, or mislead its citizens, especially the ones who vote. Consequently, this blog examines the U.S.unemployment rate in order to gain insight about the true impact of the 2007Great Recession.

The first observation of U.S. government statistics is thesheer volume of information, data, and reports a bureaucracy can offer Each department of the U.S. federalgovernment has a branch that collects, analyzes, and publishes statistics. Then this branch literally publishes hundredsof different statistics with thousands of technical reports. Most people who visit these websites areeasily overwhelmed by the information. The Bureau of Labor Statistics is the branch that collects and publishesstatistics for the U.S. Department of Labor.

The second observation is the definition ofunemployment. The U.S. governmentdefines unemployment (called U3) as a person who is currently not working andactively seeking employment. If a personworks one hour per week, he/she is not technically unemployed, although an houra week cannot support a level of living. If a person wants to work, but the job market is so bad, he/she give up,then that discouraged worker is no longer considered unemployed. Consequently, the unemployment rate candecrease if a large number of unemployed give up the pursuit for a job. The Bureau of Labor Statistics publishes thelabor underutilization statistic (called U6) that includes discouraged workersand part-timers who want to work full time. The (seasonally adjusted) U6 was 15.1% for January 2012.

The third observation is a bureaucracy continuously revisesits statistics. Hence the reportednumbers are always in flux. For example,the Bureau of Labor Statistics uses telephone surveys to gather unemploymentdata and examines reports from the state's unemployment offices. Then the statisticians computes the statisticfor that month, quarter, or year. Hereis the kicker. After a statistic is releasedto the public, a bureaucracy may increase or decrease this number several timesover the next several months. Why arethe numbers constantly revised? Did thestatisticians not count all the surveys? Were the states late in reporting their statistics? Hence, government statistics have a degree ofarbitrariness, as the numbers are continuously revised.

The fourth observation is the statisticians seasonallyadjust the numbers for monthly and quarterly data. For instance, the Bureau of Labor Statisticsreported the U.S. unemployment rate fell to 8.3% in January 2012. The news reporters blindly reported thisnumber to the masses without any serious analysis or verification. U.S. reporters have regressed into parrotswho caw in unison for the government's slogans, sound bites, and propaganda. Whatdoes 8.3% really mean? First, thisstatistic was seasonally adjusted. Statisticians smooth monthly and quarterly statistics; high numbers arereduced while low numbers are increased The reason is the economic activity is different for every month. January cannot be compared to December,because December has more economic activity than January. Once the statistics are seasonally adjusted,then different months or quarters can be compared. The unemployment rate that is not seasonallyadjusted was 8.8% for January 2012. Although this number cannot be compared to December, it can be comparedto January 2011, which was 9.8%. Similarly,the not seasonally adjusted U6 was 16.2% for January 2012, falling from 17.3%for January 2011.

The fifth observation is theslight upward trend of the unemployment rate. In Figure 1, the annual unemployment rate is plotted between 1947 and2011. The blue line indicates the jaggedoscillations of the unemployment rate. Economistsdefine a recession when the real growth rate of the Gross Domestic Product(GDP) is negative for two consecutive quarters. All recessions since 1947 were drawn in manually on the graph. When examining Figure 1, the Great Recessionof 2007 and the recessions of the early 1980s were particularly severe whencompared to previous recessions, because the unemployment rate peaked almost at10%. The early 1980s had a quite successionof three recessions. Using statistics tofit the best line through the data yields the red line. Further examination of Figure 1 shows theimpact of the housing bubble during the 2000s. The housing bubble temporarily lowered the unemployment rate below thetrend, as the bubble created millions of jobs. Unfortunately, the red line angles upward with a slight slope, indicatingover time, the unemployment rate is creeping upward. Thus, the U.S. economy went throughstructural changes that were not conducive to low unemployment rates. The structural changes werede-industrialization, outsourcing, rise of the service economy, rise of the ITindustry, aging population, and growth in government. Consequently, all structural changes imposebenefits and costs on society, and they would required a separate blog.

Figure 1: The U.S. Unemployment Rate between 1947 and2011

The sixth observation is the structural change inemployment. All the statistics were convertedto a percentage of the U.S. population to remove the impact of a growingpopulation. In July 1, 1947, the UnitedStates had a population of approximately 144 million, which increased to 312million by July 1, 2011. In Figure 2, thefirst trend is the shift to more part-time labor. Part time labor comprised 5.3% of thepopulation in 1968 and gradually rose to 8.8% in 2011. The second trend is the impact of a recessionon full-time employment. Every U.S.recession since 1947 was drawn manually onto Figure 2. A recession always caused the destruction offull-time jobs. The 2007 Great Recessionwas particular nasty as the percent of full-time workers decreased to 36.1%from a peak of 40.4% in 1999. Thisindicates a loss of approximately 13.5 million full-time jobs in 2011. The third trend is the increase of people notin the labor force. Again, the 2007Great Recession had a severe impact on the economy. The percent of people not in the labor forcewas 27.6% in 2011, increasing from a trough of 24.8% in 2000. Approximately 8.7 million people left thelabor force. Many reasons account forthe exit from the labor market and are discussed in the next paragraph.

Figure 2: Full time,Part time, and Unemployed

The seventh observation is a little discussed statisticburied within the Bureau of Labor Statistics' website. The statistic is the labor participation rateas a percentage of the population (age 16 and over). This statistic by nature will never equal100%, because several groups of people are never in the labor force. The groupsare teenagers (16 to 18 years old), discouraged workers, retired workers, prisoners, committedpatients, students who do not work, and soldiers. Illegal immigrants who work may not bereflected in the participation rate, if the Census Bureau counted them in thepopulation, but the Bureau of Labor Statistics did not count them in the laborforce. In Figure 3, the laborparticipation rate is graphed between 1947 and 2011. The U.S. recessions were drawn manually ontoFigure 3 and a recession always lowered the labor participation rate. The 2007 Great Recession was particularlygruesome. The labor participation ratefell to 58.4% in 2011 from a peak of 64.4% in 2000. (The Year 2000 was really a good year). Approximately 14.2 million people left thelabor force. (The last paragraphindicated 8.7 million workers left; government statistics when viewed fromdifferent angles usually yields different results!) The real question is where did these peoplego? Are they discourage workers who gaveup the pursuit of a job? Did more peopleretire, did more people enter college without working, or the statesincarcerated more prisoners?

Figure 3: LaborParticipation Rate between 1947 and 2011

One important assumption was made in this blog; theassumption is the Bureau of Labor Statistics is not manipulating thenumbers. Although U.S. bureaucracies arenot political in nature, the top leaders of the bureaucracies are chosen by thePresident with confirmation of the Senate. Moreover, a bureaucracy's funding depends on the President andCongress. The President and Congressmenwant to be re-elected and they may put pressure on the bureaucracies to releasepositive statistics. Consequently,bureaucrats have an incentive to skew the statistics, making it appear theeconomy is improving especially before an election. The 2012 presidential election is around thecorner and the news is reporting optimistic unemployment statistics, indicatinga possible economic recovery. However,if one reads the comments at the end of those rosy unemployment stories, thereaders' commentaries express disbelief in those numbers. Unfortunately, this blog cannot uncoverfraudulent government statistics. However, the U.S. government's statistics do indicate the following:

The 2007 Great Recession was one of the worserecessions to hit the U.S. economy since the Great Depression.
Employers are using more part-time labor andless full-time labor. The 2007 GreatRecession was particularly harsh on workers with full-time jobs.
A large number of workers left the laborforce. The million dollar question iswhy did these workers leave? Didmillions of workers become discourage and give up their search for a job? Are more workers retiring? If more Americans are retiring, why are theyounger workers not filling these vacancies?

Hyperinflation: Effects, Cause, and Survival

2012-02-06T19:25:00.000-08:00

Many Americans do not understand what hyperinflation is ormore importantly how to protect themselves from it. We had an excellent political and economic systemthat sheltered us from hyperinflation for two centuries. Hyperinflation is the rapid, excessive growthprices, when a country's inflation rate exceeds 100% per year. What does this mean in real terms? If the United States had an inflation rate of100% per year, then every year on average, prices would double. If your favorite bubbly soda costs $1 at thebeginning of the year, its price would rise to $2 by the end of the year. If your house was priced at $150,000, thenits price would climb to $300,000 by the end of the year. Thus, hyperinflation increases the prices ofall products in our economy.

Hyperinflation has a disruptive impact on an economy. Hyperinflation rapidly decreases consumers'purchasing power, because prices in an economy rise faster than workers'wages. Employers and workers who oncewere enjoying the comforts of middle class can literally be shoved into povertyover night. For example, if our economyhas an inflation rate of 100% and workers' wages increase by 50%, then theseworkers experience a decline in their purchasing power. For example, you earn $30,000 per year at thebeginning of the year and your favorite soda costs $1. Thus, your purchasing power allows you to buy30,000 sodas. However, if the inflationrate is 100% and your salary increases by 50%, then you can only buy 22,500sodas at the end of the year. The pricefor soda rises to $2 each, while your salary climbs to $45,000, causing a 25%decline in purchasing power.

Hyperinflation causes interest rates to exceed the rate ofinflation. The increase in interestrates is similar to a decline in purchasing power. If the inflation rate is zero, and a bankcharged a 5% interest rate on a loan, then this interest rate is called real,because the borrower is paying back the loan with 5% more money. If the inflation rate climbs to 10% and thebank still charged 5% interest, then at the end of one year, the average pricesin our society increased by 10% but the bank only collects 5% more money. Thus, the purchasing power for the bank decreasesby 5%. Hyperinflation can disrupt a country'sfinancial sector. Banks and financialinstitutions can close over night, as the value of their loans shrivel tonothing.

Hyperinflation harms the savers. If a person saves money by hiding it in theirmattress or deposits in a bank account, their savings loses value. For example, Brazil had a hyperinflation rateof 10,000% per year during the 1980s. Atthe beginning of the year, a ride on the city bus was 1 peso, and by the end ofthe year, that same bus ride was 10,000 pesos. Savings are literally wiped out, as consumer prices rise to astronomicallevels. If a saver deposits theirsavings at a bank and the bank pays less interest then the inflation rate, thehyperinflation reduces the purchasingpower of the savings. (We are assumingthe bank can still remain in business). Thus, savers have to convert their savings into a stable currency orinto physical assets to protect their purchasing power.

Hyperinflation is cruel to people earning fixedincomes. If a person is receiving SocialSecurity, an annuity, fixed investment income, or aid from the government, thenhyperinflation quickly erodes this income. Some government programs such as Social Security are index forinflation. Government payments are in theoryautomatically increase with inflation. However,hyperinflation causes prices to rise quickly and the increases in SocialSecurity is not likely to rise step by step with inflation. Consequently, people on a fixed income becomethe most vulnerable in society.

Hyperinflation could benefit the debtors, depending on thetype of loan. For example, if a debtorowes $100,000 mortgage on his house and the interest rate is fixed, a debtorcan pay back this debt with devalued money. The hyperinflation increases the value of the house and the debtor'swages. However, the monthly loan paymentsare fixed and quickly diluted. If theloans have an adjustable interest rate, then the debtor's monthly paymentincreases from the higher interest rate caused by hyperinflation. Then the debtor could default as his monthlypayments spiral to high, new levels, way beyond his income. Consequently, debtors with fixed interestrate loans will benefit, while those with adjustable interest rates may go intodefault.

A country in the throes of hyperinflation will suffer from asevere recession or depression. As thevalue of a currency quickly deteriorates, the savers and people on fixedincomes are pushed into poverty. Thevalue of their savings and fixed income is quickly eroded. The loss of purchasing power will reduceimports, improving a trade deficit. (Hyperinflation could boost exports, if the exporting industries cansurvive the hyperinflation). Foreigncountries will also stop accepting that country's currency for payment. Then hyperinflation causes interest rates torise to insane levels, shutting down the financial system. Banks, finance companies, and pension fundcompanies will close their doors. Finally,hyperinflation destroys the tax base, causing government tax revenues tofall. Tax evasion may become rampant, ifpeople know their tax office is in disarray and devastated; they intentionallystop paying taxes. (A person cannot beaudited if no tax officials are around to do any auditing.)

Hyperinflation has only one source. If the inflation rate exceeds 10% per year,then a country's central bank iscreating inflation by rapidly expanding the money supply. The usual scenario is the central bank helpsgovernment finance its budget deficit and debt. Consequently, government in countries with high deficits and debt tendto have high inflation. Many believe theUnited States will experience a bout of hyperinflation, as the Federal Reservefinances the U.S. government's deficit and debt. The U.S. government has a $1.5 trilliondeficit and a $14 trillion debt that is quickly rising to catastrophic levels. Most of this debt is not indexed forinflation. Hyperinflation can literallywipe this debt clean. Unfortunately, theUnited States will enter a severe recession that will be exported to the restof the world. Furthermore, he U.S.dollar as the world's reserve currency will come to end.

The expansion of the money supply is more complicated than"printing money." For example,the Federal Reserve granted anywhere from $2 trillion to $8 trillion inemergency loans to banks for the 2008 Financial Crisis. (Nobody really knows the exact amount exceptthe Board of Governors of the Federal Reserve). The Federal Reserve just changed numbers in their computer system forthe amount of reserves a bank has at the Federal Reserve. However, the banks chose to hold onto thismoney. If banks loaned this money toborrowers, then the reserves are converted into loans that eventually end up inchecking and savings accounts, increasing the money supply and inflation rate.

People will have a warning sign before the destructive waveof hyperinflation hits the U.S. economy. The trigger will be the international investors. Investors and governments in China,Kazakhstan, South Korea, Russia, etc. believe the growth in U.S. debt isunsustainable. Consequently, investorsare reducing their holdings of U.S. dollars and U.S. governmentsecurities. The U.S. debt will hit apoint when investors stop buying U.S. government securities. Then the U.S. government will be short ofcash in the trillion dollar range. Ifthe U.S. government does not have the cash, then it cannot pay its workers,bureaucrats, soldiers, or citizens receiving entitlement benefits. Thus, the Federal Reserve will be forced tobuy this debt and the inflation rate will become to climb as government spendsthe reserves, injecting the reserves into the economy.

The U.S. government could increase taxes or reducegovernment spending to reduce the deficit and slow the growth in debt. However, we most likely reached a point of noreturn. No tax increase or governmentspending decrease could reduce the growth in government debt. In 2011, the average U.S. debt per everyAmerican man, woman, and child was approximately $40,000, far exceeding mostpeople's income level. Unfortunately,Americans have entered a dangerous time period, when government deficitspending will come to an end and the United States will enter the Second GreatDepression.

How to protect yourself from hyperinflation:

1) Hyperinflation will lead to a breakdown in society. Store shelves will become empty and bare, asfood prices exponentially rise. You needto stock up on the following items:

· If you require medications, then you need tostock a year supply or more. You also needto get your hands on a first aid kit that includes general antibiotics and painkillers.

Stock up on nonperishable food. Nonperishable food can be stored safely foryears. Many dried fruits, dried milk, driedvegetables, dried soups, dried beans, and dried lentils could be stored foryears and safely eaten. Canned productscan go bad within a year or two. Somerecommend you create several secret storage sites to hide food. As millions go hungry, they will resort toviolence, theft, or home invasions, searching for food and supplies.
Accumulate weapons, such as guns, bullets, andknives to protect yourself and your family. If riots break out in the cities and paychecks for police are whittledto nothing, then the police will stop showing. In some U.S. cities during 2011, police would not show up for minoroffenses.
Become self-sufficient. Learn out to grow a garden, raise chickens,fish, or hunt. You also need to stockpile equipment that support those activities. Even if you do not smoke tobacco, you should grow tobacco. You can use tobacco to barter with friendsand neighbors for things you need.
You need access to safe drinking water. You may need to boil water to kill anymicroorganisms.
Accumulate useful items like an emergency radio,flashlight, small propane stove, tools. etc. Some good items are a hand crank radio, or a panel of solar cells thatcan charge batteries.

2) Money becomes useless during hyperinflation, as money quicklylosses its value. People who depend onthe government for income such as Social Security, Medicaid, Medicare, foodstamps, etc. will see the erosion of their benefits. Expect the government to increase thesebenefits slower than the inflation rate. Unfortunately, our most vulnerable citizens may perish during a bout of hyperinflation.

3) If you are still earning wages, then once you are paid,you convert your wages into assets. Manyanalysts recommend people to buy gold, silver, and other precious metals. With the downturn in the world economy in 2012,these metals are rapidly increasing in price. They may or may not be good investments. Then will the government pass laws to confiscate gold and preciousmetals for national security? Usuallygovernment officials worry about their safety and security before theircitizens. However, any assets other thanprecious metals will retain their value. Once money becomes useless, people will barter for goods they need. Medications, seeds, guns, bullets, gasoline,cigarettes, liquor, and nonperishable food become the new currency.

4) If you want to transfer money outside of the country,move it out now. During a financial crisis, a country will impose capitalcontrols. Usually the capital controlwill prohibit the outflow of currency or precious metals. If you are planning to flee the countrysearching for greener pastures, then you have to do this before thehyperinflation. Other countries willerect barriers to isolate themselves from the crisis and prevent an influx ofrefugees. Fleeing to another countrydoes entail risk. If a worldwidedepression ensues after the U.S. hyperinflation, a country may expel all theforeigners. Britain is planning to shutdown its borders, expel foreigners, and impose capital controls, when the Eurocollapses and the European Union begins to disintegrate.

5) Many Americans are living from paycheck to paycheck. They will not have financial resources toweather a hyperinflation. Riots andcivil unrest will erupt in the cities, as people search for food to feed theirfriends and family. The Occupy WallStreet protests were quite tame and will pale in comparison to the real unrestthat will ensue from a starving population. Unfortunately, government officials will do anything to retain theirpower and control. If a government'sresources are severely reduced and limited, any government will use soldiers tofire real ammunition on its people to retain control. The best place to live is in rural towns, faraway from large cities. Then you becomefriends with your neighbors, and watch each other's backs, forming a truecommunity.

6) Do not count on the media to warn their viewers of animpending wave of hyperinflation. Unfortunately,reporters rely on information from the government. A reporter never asks our political leadersthe difficult questions, or rarely check facts. Most government officials will not inform the public until it is toolate. Once hyperinflation hits, the newswill bombard the viewers with the hyperinflation diet, how to look fabulous ona hyperinflation income, or dating secrets for singles who are mired with hyperinflationtroubles. Unfortunately, hyperinflationwill come swiftly and unannounced like a torrential storm system that pummels asmall town. The only sign will beinvestors stop buying U.S. government debt. Then prices for food and consumer goods will start rising gradually atfirst, and then the price increases will accelerate to insane high levels.

The Problems of Higher Education and the College Bubble

2012-01-30T17:53:00.000-08:00

TheOccupy Wall Street protestors meander through the cold streets in the winter of2011. They are angry over corporategreed, crony capitalism, income inequality, and corrupt politicians. Their voices are united and call out forchange. They interrupt politicalspeeches, boycott the large banks, and in some cases, shut down sea ports, suchas Oakland California. Although collegestudents are well represented in the protest movement, they have been silentover greed in higher education. How didcolleges and universities become exempt from public criticism? If anything, university leaders are just asgreedy as some of those Wall Street bankers. This blog outlines this greed in higher education and the financialstorm that will unravel the college bubble.

Onesign of greed is the rapid rise in price for higher education. Tuition increases have far outpaced inflation. I graduated with a bachelor's degree from asmall liberal arts college, Northern Michigan University, in 1993. My tuition was approximately $2,000 peryear. In 2011, this same universitycharged approximately $8,000 per year. If the university increased the tuition at the end of the school year,then this is approximately a 7.5% increase per year. The average U.S. inflation rate ranges from 2to 3% per year, far below the tuition increases. Unfortunately, my university is typical ofhigher education, because most U.S. colleges and universities increased their tuitionat similar rates.

Therapid increase in tuition is not the complete story. Universities and colleges created a varietyof fees to extract even more money from students. Most universities and colleges chargeapplication fees for admissions, library fees, computer lab fees, buildingmaintenance fees, etc. and the list continues ad nauseam. Unfortunately, administrators increase thesefees along with increases in tuition. Whena university or college has a little financial trouble, they create new fees asa revenue source. Unfortunately, at someinstitutions, the fees actually rival the tuition. The explosion of fees cause collegeadministrators to be disingenuous. Whena university or college reports a tuition increase to the public, these feesare not included in the tuition increase.

Leadershipin universities and colleges deliberately skew statistics. If we look at my alma mater, NorthernMichigan University, the State of Michigan appropriated approximately $39million for Fiscal Year 1992, which climbed to $45 million for Fiscal Year 2011. Although the State of Michigan is mired in a perpetualrecession since 2001, the state government still increased its appropriationsto the university. Over 19 years, theuniversity gained an extra $6 million in funding, which amounts to a 0.75%annual increase. If the inflation rateis 3%, then the State of Michigan reduced its funding by 2.25% in real terms (=0.75% - 3.0%). Similar to the U.S.federal government, an increase in a program's budget just became a decrease. Consequently, leadership at universitiesnever report their state appropriations, nor show the state appropriations overtime. They show particular statisticshow the state is harming and underfunding higher education.

Universityofficials often quote the startling statistic, which is the state fundingpercentage. For example, the State of Michigan provided 60% of funding toMichigan universities in 1987. In 2011,the state only provides 18% of a university's funding. The conclusion is State of Michigan is cruel,heartless, and shortsighted. If thestate continues this trend, then the state can never compete with the otherstates and could never attract the high-tech industries. The State of Michigan did increase its appropriationsin dollars to its public universities and colleges during tough budgetyears. Other factors could worsen astate's funding percentage. First, ifthe university increases its tuition faster than the increase in state funding,then the state funding percentage would decrease. Second, if a university accepts and enrolls morestudents, then the state funding percentage would decrease, because theuniversity receives more tuition dollars from more students for the same levelof state funding. Consequently, universityand college leaders use misleading statistics to garner higher funding levels,which suspiciously sounds like greed.

Greedrears its ugly head, when it comes to university business or businesses locatedon university property. Many campuseshave fast food restaurants, coffee shops, stores, and travel agents that sellservices to the students. The universityand colleges charge these businesses a premium for their leases. In 2003, Oklahoma State University had abudget crisis and the administration increased tuition by 24%. An owner of a coffee shop was forced from thestudent union, because a national chain offered better terms for the lease thenshe did. Also, that chain did not wantcompetition. With U.S. universities andcolleges comprising of thousands of students (consumers), universities can profitfrom lucrative supply contracts. Forexample, a university enters a contract with a particular beverage company, andonly that company’s sodas are sold on campus. Then this beverage company bestows gifts and endowments upon theuniversity.

Theleadership in higher education propagate outright lies about tuitionincreases. A great lie recycled amonginstitutions of higher learning is the university will increase financial aid,if the university increases its tuition. On the surface, this sounds reasonable. However, this notion is quickly dispelled once you peer under thesurface. For example, if a universityincreased tuition by $10 million and then offered $10 million more inscholarships, then the university does not collect more funding. A university would never do this. However, if the students received morescholarship money from outside the university or applied for more studentloans, then the university receives more money from the tuition increase(assuming the university does not lose students). Financial aid that comes from the university'spocket book will never keep pace with the tuition increases. One albatross that will haunt universitiesand colleges is the students reliance on student loans to finance theireducation.

Administratorswho increased tuition too rapidly force students to accumulate large amounts ofdebt. The average student loan debt was$25,000 in 2011, which doubled from 1993. One condition students do not realize that federal student loans areloans, and they must be paid. Themonthly loan payment can be estimated by the Rule of 100. If a student owes $50,000, then his estimatedmonthly payment is approximately $500 per month (divide loan balance by 100). Some professionals, such as PhDs, lawyers, medicaldoctors, and dentists accumulate student loans in excess of $100,000. Using the Rule of 100, their monthly paymentscould easily exceed $1,000 per month. Manypeople heard the government will forgive the loan after twenty years ofrepayment. However, if a student defaultson the loan, this 20-year limit does not apply.

A federalstudent loan may be worse than a loan from a loan shark. The U.S. government imposes drastic penaltiesthat could haunt a student who defaults. First, the student cannot file for bankruptcy. A bankruptcy court cannot discharge federal studentloans. Second, the loan holder, the U.S.Department of Treasury or SallieMae, may add fines and penalties, which coulddouble the outstanding loan balance. (I stronglydisagree, because if a loan can never be forgiven, why does the government getto double the loan balance.) Further,the loan holder will capitalize the interest, which means the monthly interestis added onto the loan balance, causing the loan balance to grow in size. Third, the seven-year rule for bad debts doesnot apply to student loans. A studentcould be plagued with bad credit, as long as the loan is in default. Fourth, the government may prohibit thestudent from federal contracts and programs. If the student becomes a dentist, doctor, or professional, then thatstudent who defaulted cannot see patients, clients, or federal employees whouse government insurance, like Medicaid, or Medicare. Finally, the U.S. government may withhold taxrefunds, garnish wages, or garnish Social Security Benefits. Student loans can shackle a student for therest of his/her life.

Administratorsin higher education cash in on school spirit. Freshmen are so happy to move away from their parents and begin theirstudies, they buy their school's clothing and knickknacks. The universities and colleges own the trademarksfor their logos and names, and they collect a percentage of sales from everyt-shirt, clothing, or knickknack with the university’s logo. If the college or university has a popularsports team, a university or college usually receives a 10% royalty payment forevery trademark item sold, which could net the institution millions of dollarsper year. Finally, every college anduniversity has an Alumni Association. They encourage their graduates to join the association after graduationand donate money to the university. Although I received a good education from Northern Michigan University,I will never donate any money to this institution. I remember how those greedy bastards in theadministration acted, when I owed the university a $100. An administrator threatened to withdraw mefrom the university halfway through the semester. (I also had similar issueswith my alma maters, Oklahoma State and Texas A&M; unfortunately, it is allabout the money.)

Administratorsin higher education greedily collect their tuition dollars and squeeze anyoneassociated with the university or college for money. Greed is not necessarily bad, depending wherethis money is spent Administrators often state the university isincreasing tuition to hire more professors and improve the quality of theireducation. However, this is true withcaveats. First, the current trend isadministrators are hiring more adjunct faculty (part-time professors) or enrollmore graduate students to teach the lower level courses. Hiring more adjunct faculty and graduatestudents lower a university's cost, because their salaries are lower and they usuallyhave no fringe benefits. Second, universitiesand colleges have the most unequal salary distributions among professors. At one college where I taught, the salariesranged from $30K for an English professor to $100K for a financeprofessor. Finally, the golden rule forpublic schools also applies to colleges and universities. The more distance an employee places himself froma classroom, the higher his salary. Consequently, the sport coaches, presidents, provosts, and deans earnthe highest salaries on campus.

Administers often make the claim that higher tuition andmore fees help support more research. The best universities in the United Statesare research universities. Administratorsuse tuition and state funding to build new laboratories and researchfacilities. However, administrators donot give the full story. Theadministration encourages the scientists, researchers, and professors to findexternal funding to support their activities. In some cases, a professor's longevity at the institution is contingent onhis ability to obtain outside research money. Professors are always applying for grants from corporations, and thefederal and state governments. Consequently, administrators force professors to finance their researchwith outside funding sources.

Leadershipin higher education use tuition and state funding to fund sports programs. A sports program can easily cost millions ofdollars for a large university. In somecases, a coach of a popular sports team could earn a higher salary than theuniversity president. What do sportshave to do with educating students? Absolutely nothing! However, theuniversity is a business. If the revenuefrom game tickets, merchandise, and advertisement covers the costs of the sportsprogram, then the university should keep the program. Unfortunately, many universities and collegeswithout a popular NCAA team may be subsidizing their sports programs withtuition and state funding, diverting money away from education.

Thetuition and state funding support the leadership of the university orcollege. Usually colleges anduniversities are bloated institutions with layers and layers of uppermanagement. The upper management is thepresident, provosts, and deans. Theuniversity or college president earns a salary ranging from $200,000 to$500,000 per year with many perks. Oneperk is the president lives in the president's mansion on campus for free. Other leadership positions are the provostsand deans, whose salaries range from $100,000 to $200,000 per year. Salaries in higher education are not on parwith banker salaries on Wall Street. However, the salaries show the same trend. Universities and colleges are trying to cutcost by hiring more adjunct faculty or enrolling more graduate students. Moreover, administrators created newpositions, such as lecturer to pay lower salaries than a professor. Towards the top of the hierarchy, salaries fordeans, provosts, and presidents are increasing rapidly.

Salariesfor presidents, provosts, and deans will continue to rise. Unfortunately, many institutions of higherlearning stopped promoting faculty to leadership positions within theuniversity. A shortage of leadership hascaused many vacancies in leadership. Then the administrators keep increasing salaries to attract applicantsfrom competing universities, instead of promoting within their ranks. It is common for a president, provost, ordean to stay at the college for a couple years until they move to a higherpaying position. Before the 1990s, itwas common for presidents, provosts, and deans to remain at one university fortheir whole life. At one smalluniversity where I taught, the president's position was vacant for twoyears. If this university can survivewithout a president for two year, then this sounds like a great opportunity toeliminate a position, saving the state and students some money.

Collegesand universities find themselves in a difficult position in 2012. Although it is true, more people enroll in higher education toupgrade their skills during a recession. We are in the fifth year of the 2007 Great Recession, and no economicrecovery is on the horizon. Institutionsof higher education kept raising the price of their product, until theirproduct became unaffordable. Any furthertuition increases may cause students to leave in droves. The students are no longer willing to financetheir education with student loans and go thousands of dollars into debt,especially if the students cannot find a job in a bad economy. The albatross of student loans may also causefurther problems for a university. Ifthe 2012 college graduates cannot find jobs and start defaulting on studentloans, then the U.S. government will restrict future loans. Then the era of easy loan money will come toan end.

Universitiesand colleges can no longer rely on foreign students to help fill in budgetproblems. Foreign students pay the fullcost of their education and this cost has become prohibited. Furthermore, the financial crisis is global,reducing the number of rich foreign students who can afford to pay high tuition. Moreover, foreign students have other optionsthan to study in the United States. Theycan enroll in universities in Europe or Asia that are much cheaper and thesecountries have easier visa requirements. Finally, an analyst in China did state this in January 2012. Although education in the United States andEurope is considered superior and students will find better paying jobs intheir country with a U.S. or European degree, those students may not do betterif they stayed in their own country for an education. Once the cost of education is included, thereturn to their education becomes negative. Many public universities and colleges charge foreign students between$30K and $50K per year for tuition.

TheUnited States is in a college bubble. Universities and colleges have inflated their costs to unsustainablelevels. Decreasing student enrollmentwill cause a financial tsunami that will devastate many colleges anduniversities. Universities and colleges arebureaucratic institutions that employ a large army of staff. Once funding starts decreasing, massivelayoffs will follow. Some colleges anduniversities will not survive a contraction. One estimate is 30% of U.S. universities and colleges will fail anddisappear within five years. The IvyLeague and well-funded public universities will survive the collegebubble. However, the expensive privateuniversities, such as University of Phoenix, Kaplan University, and Devry will becomethe first casualties of the college bubble. University of Phoenix and KaplanUniversity already reported a 40% decline in enrollment for 2011. (These private for-profit universities tookgreed to a new level and they deserve their own blog). Furthermore, some law schools are reporting10% declines in enrollment for 2011. Some law school graduates are suing their alma maters, because the lawschools misrepresented the job placement statistics.

Thisblog's purpose is not to scare students away from higher education. This blog just illustrates that universitiesand colleges are money making ventures that are just as greedy as their WallStreet counterparts. The only differenceis higher education fooled the public; they are profit institutions that hidebehind their nonprofit status. The costof higher education has exploded and may become unattainable to many students. Therefore, students must view highereducation as a long-run investment decision, especially before the decision toaccumulate thousands of dollars of debt.

The Fundamental Flaw of the European Union (EU)

2012-01-23T18:05:00.000-08:00

Many believe the European Union (EU) was untenable,impossible, and prone to failure. However, this is not true. Theproblem stems from EU members that cannot control their governmentdeficits. Most governments of the world are also afflicted with thisproblem of deficit spending, when government continuously spend morethan what it collects in taxes. Unfortunately, deficit spendingduring the Great Recession was particular ruinous on the EuropeanUnion and will lead to its demise and breakup.

The introduction of the Euro was efficient andbeneficial to the European Union. When 27 countries use the samecurrency, money, resources, services, and goods can easily crossborders. (Britain still uses its Pounds and Hungary uses itsForints). In theory, regions in Europe would specialize, causingproduction to expand and trade to flourish. With a unified currency,banks in one country could lend to citizens, businesses, andgovernments in other EU countries. The exchange rate risk would bezero, since everyone uses the same currency. Businesses could investin other EU countries with no worries of inflation, devaluation ofcurrency, etc. Consequently, the Euro should unite Europe and helpexpand its economy.

Where did the introduction of the Euro go wrong? Theproblem lies with budget deficit spending, which was explicitlyoutlined in the Maastricht Criteria. Before a country could join theEU, that country's government deficit could not exceed 3% of itsGross Domestic Product (GDP), and its government debt to GDP ratiocould not exceed 60%. The 2011 statistics for some of the EUcountries are listed below in Table 1. Although the MaastrichtCriteria is for membership, almost all EU members have structuralbudget deficits and growing government debt that far exceed themembership criteria. Of course, many more conditions were imposed onmembership, but two Maastricht Criteria are the important ones thatwould lead to the demise of the Euro and the breakup of the EuropeanUnion.

Table 1: 2010 Budget Deficit and Debt for Select EU Countries

Country	Budget Deficit to GDP (%)	Government Debt to GDP (%)
France	7.0	81.7
Ireland	32.4	96.2
Italy	4.6	119.0
Greece	10.5	142.8
Portugal	9.1	93.0
Spain	9.2	60.1

Source: Eurostats, http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-26042011-AP/EN/2-26042011-AP-EN.PDF

What are the origins of the crisis? Everything wasgoing well until the Great Recession of 2007. Recessions alwaysreveal weaknesses in an economy. As bankruptcies increase, workersare laid off, and income falters, government may see its tax revenuedecline. Furthermore, more people use government's social programsand unemployment claims. This is the heart of a financial crisis. Arecession compounds a government's budget deficit. For example ,let's say before the recession, the Greek government had a budgetdeficit to GDP ratio of 3%. These are imaginary numbers forillustration. Then the recession comes, decreasing tax revenues by 3%and increasing government spending by 3% as more people utilizegovernment's social programs and file for unemployment. Now, theGreek government becomes plagued with a 9% government deficit that isdifficult to eradicate. If the Greek government increases taxes, thecitizens become angry and protest. If the Greek government reducesgovernment benefits, then its citizens again become angry and protestagain. Unfortunately, increasing taxes or decreasing governmentspending slows down economic growth. Consequently, the Greekgovernment has only one option left which is to sell bonds toinvestors to cover these structural deficits.

Selling bonds to cover budget shortfalls is only atemporary solution. Investors will only invest in government bonds,if they believe government will pay the bonds back at full value withinterest. Each year, many European countries keep issuing bonds tocover its deficits and its total debt begins to climb. Once the totaldebt reaches a particular limit, then investors will stop buyingbonds, precipitating a financial crisis.

Another problem of a growing debt is the governmenthas to increase the interest rate to attract investors. Then theinterest portion of the government's budget begins to grow, causingthe deficit to widen even more. This problem is compounded, if acredit rating agency downgrades a countries credit rating, such asthe Standard and Poor downgrade of 9 European countries in January2012. A downgrade informs investors that investment in thisparticular government's bonds are more risky. A government has toincrease interest on the bonds to attract investors. Then Greeceraised the stakes by informing investors it wants to pay 50 cents onevery Euro to its bond holders. That is a negative 50% return, whichis a huge loss! Who is going to buy Greek bonds now? Greece isdoomed, and it will leave the EU and resurrect its currency, theDrachma, again.

Many countries with perpetual budget deficits haveone more financing option. They can "print money" to coverbudget deficits. If the government cannot find investors to buy itsbonds, then government uses its central bank to buy its bonds,injecting money into economy. Injecting massive amounts of money intothe economy always lead to inflation. If a country has an inflationrate higher than 10% per annum, then it is a safe bet that most ofthis inflation stems from expansion of the money supply. That is whymany people believe the U.S. government's massive debt will lead tobout of high inflation. Once investors stop buying U.S. governmentsecurities, then the Federal Reserve will have to buy thesesecurities, preventing the shutdown of the U.S. federal government.Government will shutdown if government does not pay its bureaucratsand agents. (I could be wrong on this. During the breakup of theSoviet Union, people still returned to work when employers did notpay workers in months.) Unfortunately, high inflation can have adisastrous impact on an economy. If you want a good example, thenexamine the hyperinflation in Zimbabwe. In Europe's case, an EUcountry has no control over the money supply. This responsibility hasbeen relegated to the European Central Bank (ECB).

Now we arrive at the crux of the problem. Many EUmembers have structural budget deficits and the politicians arepowerless to tackle. If the politicians increases taxes or decreasegovernment spending, then government hampers the growth of theeconomy, deepening the recession and potentially sparking violentprotests in their countries. These countries continue to issue bondsto cover budget shortfalls. This worked until December 2011. However,investors shied away from the bonds, triggering a crisis in December2011. The only thing keeping the government bond market afloat inEurope in 2012 is the European Central Bank (ECB). The ECBeither guarantees or outright purchases government bonds. Once thisavenue is exhausted, these countries have one last option, leave theEuro and reintroduce its own currency. Then the countries are free toprint as much money as they need to cover their budget deficits.Unfortunately, this would be disastrous to their economy, but it isthe only option left when the politicians are powerless to tackletheir budget problems.

The European Union and Euro are not fundamentallyflawed. It was the perpetual government budget deficits during theboom and recession that will force these countries to leave the Euro.If the politicians used Keynesian economics as intended, then theEuropean Union could weather the recession and financial crisis. PureKeynesian theory is during economic booms when income is growing,unemployment is low, and the economy has good job growth, governmentshould increase taxes or decrease government spending to slow downthe economy. Although this seems counter intuitive, government wouldsee its finances improve, and a possible decrease in its outstandingdebt. Then government would have resources for deficit financingduring a recession. However, most governments used deficit spendingduring good times and bad, until the politicians broke the system.Now Keynesian economics has been rendered useless and ineffective.

Investors are scared and are moving away from theEuro. As the world decreases its demand for the Euro, the Euro willdepreciate against other strong currencies. When the Euro collapses,Europe would enter a deep recession that would be exported to therest of the world. During a financial crisis, it is fairly common fora country to impose capital controls to prevent an outflow of money(i.e. capital). A large outflow of money causes a country's currencyto devalue, which deepens the recession. Great Britain has plans toclose its borders to the refugees of Europe and impose capitalcontrols, as Europe sinks into its depression.