Wednesday, November 16, 2011

Inflation and Black Friday

Planet Money's Adam Davidson has a interesting post comparing Black Friday and inflationary policy decisions.

His basic premise is that the US may have to resort to inflation as an "economic boost". This gets around parliamentary deadlocks around spending increases by simply forcing more money into the economy.

The goal here would be simple (emphasis mine):
With, say, 5 percent inflation — a bit more than double the current rate — $100 today will only buy $95 worth of stuff next year. That's frightening, which is the point. We actually want consumers to realize that prices are rising and that money in their bank accounts is losing value if they don't start spending. The same goes for companies too, which will be compelled to build and hire rather than sit on earnings, as many are now.
It's classic inflation, we steal value from the savers and make them generate more to reclaim that value. Obviously this sucks for people on fixed incomes and people close to retirement who now need a lot more money to retire. But that's frankly a necessary trade-off, we can't afford to give everyone a 20 year retirement on 40 years of work.

Instead let's tackle the two major problems Adam doesn't address:

  1. Flight of money.
  2. China (and other debtors)
#1: Flight of money

The premise of inflation is that "companies will be compelled to build and hire rather than sit on earnings". But it's not clear that this is really the case. Frankly, companies are already compelled to do this by their investors. If companies felt they could make healthy margins by investing some of their cash, they would be doing that right now.

At best, inflation may encourage companies to invest where they could make "unhealthy" margins. This may put some people to work. But businesses with unhealthy margins generally don't pay very well and they don't tend to be a good store of permanent jobs.

At worst, it would scare companies away from US dollars all together. If companies responded to increased inflation by simply ridding themselves of US dollars, it would increase circulation, but it's not clear that it would actually increase jobs.

#2: China and other debtors

The US has lots of debtors who have been promised a relatively low return on their government bonds.

Let's say you bought a 10 year, 3% government bond in 2006. Target inflation at the time was 2%, so you're expecting to make 1% real return on the bond.

Now it's 2011 and the US Fed says that target inflation is now 5%. All of a sudden, you're losing 3% / year in real value. In fact, that loss for the next 5 years is so big it's going to wipe out all real gains.

Put differently, you gave the US government an ounce of gold in 2006 and it gives you back slightly less than an ounce in 2016. You were expecting slightly more than ounce and you actually got less. The US government actually stole your gold while using it for 10 years.

This is a really terrible and poisonous feeling.

Now imagine that you're China and you have $1,000,000,000,000 in government bonds. Imagine how betrayed you feel now.


While #1 is not an absolute problem, it's definitely a gamble. However, #2 is a complete show-stopper.

Screwing over your lenders is a great way to kill an economy.

Friday, November 4, 2011

Fixing The Education System

This article by Time, brings up a great question of what priorities we need to make in our education system.

What should we train for in the "new economy"?

Well, basically everything :)

But if we want to get specific, let's start with the easy, universally applicable skills.

#1: Math

People in the Ukraine graduate high school at 16 having done Integrals and Derivative (what we call first year university calculus). And then there's first-year stats, which is pretty straightforward.

The standard for "high school" math should really be closer to what we currently think of as "second-year university" math.

Tools like Khan Academy are trying to do exactly this.

Solid math & stats skills are key component of everything from healthcare to science to engineering to sales & marketing to construction to politics, etc... Basically every well-paying white collar job has some essential math component.

#1a: Science training

Everyone should be equipped with the mental tools to both perform and evaluate scientific tests. In theory we learn all of this stuff, but we don't really practice it. How many people can say that they had performed even 50 controlled scientific tests before graduating from high school?

In University, most classes will do things like weekly labs, but most high schools I've known do not do this or do it to the level where it's "mastered" rather than just "known".

Lack of access to well-understood scientific method and stats is a major societal barrier. From politics to business to health, humans consistently demonstrate poor math/science reasoning skills.

This is a major barrier to top-level employment.

#2: Communication skills

Both written and spoken.

In the age of communication, this is more important than ever (not less). Whole businesses fail solely because of poor communication. People lose their jobs because of such nebulous things like "e-mail tone".

Relationships are fraught by poorly worded text message or just complete misunderstanding of word meaning.

Communications really has two parts:

  1. Composition construction: this goes beyond just spelling / grammar, beyond confusing homonyms. When you spend your life sending words (and not sending body language), you are bound by those words. We really need to walk people through major parts of the dictionary so that they can understand these words clearly
  2. Literature reading and comprehension. Humans communicate heavily through shared story and it's really up to us as educators and parents to expose children to those stories. 
Other stuff

Honestly, I would to teach a lot of other stuff do. Basic construction, soldering, electronics, programming, cooking, personal finance, etc.

But I really think the things above are the core features. You can work something like soldering into a good "science training" plan.

As always, I'm open to and would love to hear other thoughts on priorities :)