Fall is in the air, and with it the return of America’s youth to college campuses. Eager young minds will be returning to the classrooms in the hopes (and in the hopes of their parents who are shelling out tens of thousands of dollars) that they will be able to land a “mega-job” that will make them wealthy (or at least not make them poor). While studies have shown that college degreed people make more over their lives than those who only graduate from high school, there is no doubt that the cost of college has exploded over the last four decades, while the financial benefit to a college education has not kept pace. Evidence of this is that over the last 25 years, roughly 1/3 of college graduates have eventually ended up in jobs that don’t require a college degree (http://www.ny.frb.org/research/current_issues/ci20-1.pdf). Although college graduates have historically had lower unemployment rates than the rest of the population, even during downturns, junior isn’t taking on astronomical amounts of debt in order to ensure that he won’t spend a few months of his life collecting unemployment, he is doing it so that he can obtain a well-paying job. Given that some college degrees cost as much as a house in some parts of the country, telling kids that their degree (even one in the abstract theory of dead languages) will make them more marketable and that they should saddle themselves with the equivalent of a small house payment upon graduation, is borderline fraud.

But what has caused this bubble? Well, for one it is artificially increased demand that resulted from a conscious policy decision several decades ago that it would be a good thing if everyone should go to college. Consequently, low-cost student loans, grants, etc were instituted to make it possible for anyone who wanted to do so to afford college. At the time the policy was decided upon back in the 1960’s, roughly 10% of the U.S. population had a bachelor’s degree or more. Today, more than 30% do, which is a success if you think that everyone having a college degree is a good thing. However, this has had a couple of effects. First, more than tripling the share of the U.S. population that holds a bachelor’s degree, all things being equal, is going to depress wages for college degree type jobs. When my mom and dad graduated from college in the late 60’s, having a college degree of any sort virtually guaranteed you a middle class job (at a time when typically middle class households had only one breadwinner). Today, that is clearly not the case. Secondly, college degrees have been dumbed down as colleges have adapted their standards to enable them to capture more of the federal money as well as pursue various perceived social justice goals by working overtime to pass people onto a degree whose special God-given skills simply aren’t the same ones that are conducive to academic success. Evidence of this can be found in that more and more employers are finding that their newly minted college graduate can barely read, can’t write, and can’t properly use the English language.

The second reason for the bubble is that the “cost” of the college degree has increased, according to some estimates, by a factor of 12 over the last 30+ years. While general inflation and increased demand would account for some of the increase, the astronomical increase is largely due to legacy costs; that is college administrators are “empire building” by adding additional (extremely lavish) administrative positions that don’t directly impact teaching and learning (Coordinator of Diversity and Social Justice anyone?), building new shiny buildings to show that they are doing something, adding a new football field, etc. etc. All of these increase the prices that colleges must charge, and yet they have little to no impact on the quality of the education.

Bubbles, by their very nature, consist of assets that increase price far beyond their actual value. Bubbles can go on for a long time until investors come realize that the true value of the asset is far below the current market price for it. When this happens, bubbles pop and deflate. The college bubble has gone on as long as it has because the American public has largely bought into the notion that a college degree will get you a good job. However, employers long ago caught on that simply having a “sheep skin” from a college does not mean that they are getting an employee that is necessarily more qualified for a specific job. The American public is starting to realize that college, while still a good investment for many, is not a good investment for everyone. The improved earning potential from a degree is not always commensurate with large cost at some institutions. As this perception continues to take hold, the college bubble will pop.

One source of puzzlement today among the policy elite is why, despite unprecedented intervention in the economy /markets by the Fed, along with unprecedented amounts of government stimulus, this economic recovery is the worst that anyone can remember. It is so bad in fact that more than half of the country still thinks that we are still in a recession, even 5 years after the recession officially ended.

So what has happened? How could so many smart people be so wrong? How could policies and actions that created earlier recoveries and expansions fail to do the same here? Those on the left will likely claim that the problem is that the stimulus should have been bigger. Many of those same pundits and policymakers will also claim that without the policies that they advocate, the Great Recession could have been the Great Depression II and that we should be satisfied with sluggish growth because things could have been so much worse. On the other hand, those on the right will argue that the policies were all wrong and that with tax cuts and less regulation, the economy would be humming along the way that it used to do back in the good old days.

In this argument, we are looking at Keynesian policies that may/may not have worked (at least they did not produce the result that was predicted at the time that they were implemented) vs. Reaganesque supply-side measures such as tax cuts that were not tried. At the time that everything appeared to be melting down, the left (aka Democrats) felt that they were looking at the second coming of the Great Depression and so they took actions largely in line with what they felt Roosevelt would have done (or in the case of Fed Chairman Ben Bernanke, what the Fed of the 1930s should have done). In other words, the left instituted roughly the same policies that they always advocate for; policy prescriptions that have been largely institutionalized in the Democrat psyche because a great Democrat President implemented them and they worked. The right (aka Republicans) on the other hand, continues to argue and advocate for roughly the same policies that they always advocate for (tax cuts); policy prescriptions that have been largely institutionalized in the Republican psyche because a great Republican President implemented THEM and they worked.

The problem with advocating policies on this basis is that Roosevelt’s policies were largely the appropriate policies for the economy of the 1930’s and Reagan’s policies were largely the appropriate policies for the economy of the 1980’s. To use Reagan as an example, his tax cuts cut the top tax rate from over 70% down to under 30%. This is a massive cut of tax rates and would naturally have a large impact on the economic incentive structure, even leaving aside the differences in economic structure that exist between our time and his. Implementing a reduction in tax rates from 39% (Clinton era rates) to 34-35% is tinkering around the edges and likely won’t have much of a change on the underlying incentive structure in the economy. To use Roosevelt as another example, his stimulus measures were going into an economy that was largely industrialized, in contrast to our own economy which is largely service-based. In addition, Roosevelt wasn’t facing the large bureaucracy that was sucking up large amounts of stimulus money to fund itself nor was he facing as large a phalanx of special interests (government was much smaller then)  that invariably uses its political influence to bring money to itself and put it into economically unproductive activities. Consequently, his stimulus measures were likely more economically effective whereas Obama’s stimulus appears to have been little more that payoffs to various Democrat special interests.

In summary, the economic measures advocated today are likely to have limited impact because the economy (government and the private sector) is largely structured differently than they were when the policies being advocated seemed to function. We need a different policy paradigm than the ones that are being advocated today, even if some of the policies being advocated (i.e. massive reduction in government regulations) would have a place in that paradigm. Reagan’s tax cuts worked because they were large and they were the right policy at the right time. Yours won’t because they won’t be.

Winston Churchill is once reputed to have asserted that the Balkans region was an area that produced more history than it consumed. Since 1945, a chronically history-producing continent has seemingly taken a holiday from it. While there were some minor disruptions during Cold War years, the threat of mutually assured destruction from the nuclear arsenals of the U.S. and the Soviet Union created a sort of stalemate where major wars (aka ‘history’; nobody goes to watch movies or read stories about the intense negotiations regarding the wording of paragraph C of the 6^th article of the European Constitution, ‘yawn, zzzzzzzzzzzz’) were not possible. In the West, European institutions were formed to help lessen the rivalry that had led to wars in the past, and these institutions were expanded into Eastern Europe after the fall of communism. Sure, there was the little war in the Balkans in the early 1990’s, and the NATO air campaign against Serbia at the end of that decade. But apart from that, 3 generations of Europeans have grown up without a major war breaking out on their borders that had the potential to be disruptive to the current order. With the United States underwriting the security of Western Europe during the Cold War, and the lack of an established threat in the years following the Cold War, European nations have largely (with the exception of Britain and France) ignored the need for robust military expenditures.

However, with the recent actions of Russia in the Ukraine, history in Europe is beginning to stir from its slumber. While nobody expects a series of miscalculations that will lead to WWIII, it appears at the time of this writing that Russian military vehicles did cross into the Ukraine and several were destroyed, which essentially means that a large European power has again, in the space of a few months, invaded another European state. While Russia seems to be backing off this at the present time, its’ meddling in the Ukraine along with the invasion and annexation of the Crimea, means that Eastern Europe at least has become a more unstable (aka history-producing) place.

What this means for European economies in short run is negative in that the sanctions that they are placing on Russia (and Russia’s retaliatory sanctions) will hurt various sectors of the European economy. Over the long term, it likely means that European nations will need to spend more on defense and build real militaries that are capable of projecting force, instead of what many of them actually have (not to mention any names) which is sort of a perfunctory professional fighting force that may or may not be adequately equipped. These additional necessary expenditures to increase the size of and better equip the various militaries are likely to have a certain drag on the economy that will reduce by some unknowable fraction the potential for economic growth in Europe going forward.

How history plays out is never certain, though. Putin could be forced to back down. The sanctions could result in economic decline in Russia that would cause Putin to be ousted. Or perhaps feeling cornered, he could lash out towards the West. Or perhaps he could recognize that he needs the West for energy exports more than they need him. Or he could increase Russia’s economic linkages with China to replace those with the West. There are many possibilities. That he has acted as he has means that Europeans will never fully trust him, and will likely attempt to develop other sources for the energy (and other products) that they have been getting from Russia.  The other result of the situation in the Ukraine is that history has been brought back onto Europe’s radar, which means a different geo-political and defense outlook for Europe going forward

Although certain mixed indications appear to show that the U.S. economy might be on the mend (while ironically the stock market has been declining over the last couple of weeks), commentators in some corners of the internet are starting the J-word (Japan). Although it may seem hard for anyone under the age of 30 to imagine, but there was a time in the 1980’s when many Americans thought that the U.S. was going to be displaced by Japan, much the way people look at China today. However, over the last 20 years, Japan has become Exhibit A for an economy suffering generational economic stagnation, and certain commentators are worried that the U.S. is looking at a generational period of economic stagnation.

In many ways, the story of Japan seems eerily similar to that of the U.S. In both cases, we see massively inflated property bubbles that burst (and in Japan’s case a massive stock market bubble too), followed by years of low interest rates, bad banks, and a sluggish economy. In Japan, as in the U.S., there is an aging population which also serves as a drag on economic growth.

However, there are many differences as well, which support those who doubt that the U.S. is in fact the next Japan. Firstly, the Japanese property bubble was much larger than the American one, in that valuations reached even more absurd heights than they did here. It was reported at the time that all of the real estate in Tokyo was worth more than the entire United States, and that the Imperial Palace grounds were worth more than the entire state of California. Say what you will about the American property bubble, but valuations never became this ridiculous.

Secondly, Japan also had a massive stock market bubble that dwarfed anything that the U.S. has seen. The Nikkei Index peaked at 38,957 on December 25, 1989, and is currently trading around 14,800, or a loss of 54%. This is unlike anything that the U.S. has ever seen. The worst comparable period would have to be the 1929 crash, in which it took another 24 years for the U.S. stock market to get back to the 1929 level. In the case of Japan, we are almost 25 years on and the Nikkei would have to increase by 163% to return to the 1989 level. It is possible that this may never happen.

Another factor buttressing the “U.S. is not Japan” thesis is population growth. One reason for Japan’s sluggish/stagnating economy is simply that the population has stagnated. Since 1990, Japan has grown by only roughly 4 million people (3%), whereas the U.S. has grown by 63 million (25%) over the same period. All things equal, a population that is growing (unless perhaps if that growth consists largely of retirees immigrating into the country) will result in an economy that is growing; and one that will certainly grow faster than a country with a stagnating population. In addition, the U.S., even with the some of the recent anti-immigrant rhetoric, is still one of the most welcoming countries on earth which can serve to increase the population, while Japan largely is not. Consequently, there is not likely to be a wave of immigrants into the country bringing skills and ‘human-capital’ that will serve to grow and youthenize (to make younger) the population, which would allow for less stagnation or more growth.

Finally, a growing population such as the U.S. will create a growing source of domestic demand, whereas a stagnating population will not. Consequently, a country like Japan is much more reliant on exports to grow its economy than one like the U.S. This, and the fact that so much trade (i.e. oil prices) are denominated in U.S. dollars, means that the Japanese economy is much susceptible to foreign exchange rate fluctuations to dictate the competitiveness of its exports. The U.S., on the other hand with its currency still operating as the world’s reserve currency, has more options at its disposal to enhance its foreign competitiveness.

Overall, although there seem to be many superficial similarities between the U.S. and Japan, their demographics, economies, and global economic positions are very different. While both the U.S. and Japan face some similar problems, the U.S. is still projected to have roughly 400 million people by 2050 (an increase of 60% over 1990), while Japan is projected to have 87 million by 2060 (a decrease of 30% since 1990). That, the fact that the U.S. can produce its own fossil fuel energy (Japan, currently largely cannot), the fact that the U.S. will have a younger population than Japan, as well as the U.S. position in the global economy makes it unlikely that the U.S. will be Japan anytime soon.

I am happy to report that ‘I Want A Divorce-Why America Needs To Go Its Separate Ways’ is now available on Amazon.com and Createspace.com.

In this book I lay out the reasons why I think it might just be better if Americans went their separate ways. Like an old married couple who realizes that they have grown apart and have nothing in common, Americans are increasingly living in separate worlds that, apart from language, have little in common with each other. The day-to-day experiences are in many ways so divorced (what does a rural North Dakotan have in common with a San Franciscan) that it is increasingly impossible for them to even comprehend the other. Consequently, it is becoming increasingly difficult for each side to view the other as being part of the same country, whose rights and views deserve respect. In an alternate universe where instead of 50 states we had 50 separate independent countries, it would be highly unlikely that California and North Dakota would choose to be part of the same political entity. Historically, countries that begin to diverge in extreme ways eventually end up in violent confrontations. Rather than allowing that to happen, I argue that it is time to start considering how Red America and Blue America might arrange an amicable divorce.

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Over the last 50 years or so, and truly accelerating after the collapse of the Berlin Wall, the doctrine that free trade is a good thing has been institutionalized. Although the freeing of trade barriers has largely been a good thing, relative to what the world looked like 60 years ago, the idea that more free trade is always better is erroneous. Simply put, we might have reached a point in which more free trade may be more costly than the benefits would justify.

Although the basic underlying theory is sound, and nations who engage in freer trade are generally better off than those who don’t, there is no free lunch in economic policies. There are costs to any policy that is pursued, even if those costs don’t necessarily show up in the GDP number. The idea that free trade is, in fact, a free lunch is based on the concept that two countries should trade, even if one country can produce goods more cheaply than the other country, if the less productive country has comparative advantage (i.e. the productivity gap between the more productive country and the less productive country is less for some goods than for others).

A simple example would be a world in which Mexico and Italy produce only two products, wine and cheese. It takes Mexico 7 units of labor to produce a wine and 5 units of labor to produce a cheese, whereas it takes Italy 3 units of labor to produce either a wine or a cheese. Although Italy is better at producing both wine and cheese, the theory says that Mexico is relatively less worse at producing cheese (5 units of labor) than wine (7 units of labor). In a non-free trade world, Italy must give up 1 cheese to produce an extra wine, and vice versa. In a free trade world in which Italy produces only wine and trades with Mexico for the cheese it needs, Italy is able to obtain more than one cheese for every wine, and Mexico (which must give up 7/5 of a cheese to get 1 wine in the no-trade scenario) is able to get one wine for say every 6/5 of a cheese. As this theory is expanded, support is generated for free trade across all markets including the free trade of labor (i.e. unrestricted immigration).

What this theory leaves out is all of the costs associated with free trade. True, economic dynamism produces winners and losers, and nobody would seriously argue free market capitalism hasn’t been the greatest force for increasing the basic standard of living in human history. However, the theories assume that as old industries are displaced, new ones arise and the displaced labor is easily able to move into those jobs. This theory pretty well described reality when most jobs were easily learned jobs. However, today’s jobs, especially in the first world, are often highly specialized and it can take years to get really good (i.e. highly paid) at them. In many ways, they are like the craftsman jobs in the Middle Ages that would take years to master. For example, a doctor can’t easily become an auto mechanic, and an auto mechanic can’t easily become a computer technician, and a computer technician can’t easily become a commercial lender. It is not just a matter of retraining one person to do another job. In many cases it takes years of experience to become proficient at the new job. So when jobs are “sucked” out of an economy, in some cases that labor does not simply retrain into another job.  The labor may become permanently unemployed, or may work at a job with less value added, or could end up in another more productive industry. To the extent that the result is the first two cases, that is a net loss to the economy

One other major cost that is often ignored is that the theory assumes (or advocates) allowing the free flow of labor from one country to another. In a world in which everyone was the same culture this wouldn’t be a problem. However, we don’t live in such a world, and cultures do clash with each other as history shown again and again. Allowing unrestricted immigration can produce friction with the host culture which, at the very least, will require government resources to manage it. Sometimes, the friction can get so extreme as to explode into violence. Whether this is a net benefit for host country or not requires a cost benefit analysis. While it often turns out to be a net benefit, it is not guaranteed to be so. Also, the host government must possibly contend with the social costs of displaced native labor with immigrant labor. While the idea that the immigrants are “taking” the jobs of the native-born is easily debunked in an era of full employment or if the immigrants are filling highly specialized positions that the native born lack the skills for, it is much harder to debunk in an era of high native-born unemployment where the immigrants are filling medium skilled positions for which there is a sizeable (and unemployed) native-born labor force.

Overall, the cost of free trade ideology is mounting. For example, global financial interconnectedness has allowed bad housing bets in California to be transmitted around the world and negatively impact, say, Indonesians. And people who see their jobs outsourced and are forced to settle for jobs that pay half as much as their old jobs are not seeing the benefits of free trade. Also, the E.U., which was supposed to increase economic inefficiency through the lowering of trading costs and a common currency, has instead created a lot of economic disruption and instability, rendering the economic benefits less visible or even muted them. While some economic pain is unavoidable in a dynamic economic system, it is imperative that the costs not be discounted. The more losers a policy produces, the more resistance will build to that policy. Although some free trade is a good thing, too much of it could produce sufficient resistance that an open global economic system could be endangered.