Manifest Destiny: China's (almost) fruitless attempts to develop the west

I'm back! I know, you've been missing me, so you can blame my job (I certainly do!). But I'm back now, with an intriguing new thought: manifest destiny. Could it happen in China?

The Chinese government really wants to develop the western interior of China, and justifiably so. However, they have had remarkably poor results. I was reading about "Lanzhou New City" recently and I was struck by the difference between China's difficulty to move westward and that of the United States. So what is really hampering China's western development and how could China learn from where America has already trod?

Well, first let's examine our similarities and differences. Ignoring the obvious differences like time period and macro-geography, there are some remarkable similarities. At the commencement of westward development, both nations lacked infrastructure, including even simple roads for basic mobility. Both nations are strongly encouraging westward development from a government level. Both have remarkably similar geographical challenges (more on this later). Both have natural resources of immense economic value laying beneath its western lands.

So let's look at each of these similarities to see how they worked for America and what they might mean for China.

1. Lack of infrastructure

You played Oregon Trail. I don't need to remind you about the complete lack of infrastructure circa 1849 in the American west. The railroad came later as demand for goods in the west grew. But yet, people got there, stayed there and built cities there. Obviously, this would have been much easier with roads, but you need people to build roads. This isn't exactly a Build It They Will Come kind of thing. People have to be there first, then we'll build the roads. So why does it seem to be such a substantial struggle for China? Probably because China is trying to run before it walks.

China is trying to develop western cities as manufacturing cities which will then need to transport their goods back to the rest of the population, which will obviously need roads or railroads to do so. But there's also the issue that China's undeveloped regions are so much further behind China's developed regions than America's undeveloped regions were behind its developed regions. While America's west was wilderness, its cities weren't as modernized as they are today. Lacking electricity, private vehicles and often running water, development was easier to establish in a new location with factory machinery, for example, being run by horses, water mills or simply manual operation (think: weaving looms). But now let's look at China. Western China isn't all that different from the American west: vast, primarily unpopulated and almost devoid of technology. Many villages and towns still don't have electricity. But developed Chinese cities have all the modern accoutrements: electricity (of course), wifi, cell phones (even 3G), state-of-the-art medical facilities, personal vehicles (even Hummers, believe it or not) and all the other features of modern life. So this gap between developed and undeveloped is huge, perhaps insurmountable. To establish even basic factories, some cities will have to get hooked up to the electrical grid. It could be hundred of miles to the nearest electrified city, so they'll need to build their own power plants (or maybe even wind farms?!). Then build better roads to get these goods to market. But they'll need communication methods to attach to their eastern offices (or, at least, eastern customers, investors or brains). Talk about a huge start-up cost.

2. Government support

This doesn't require much discussion. Both the US and China actively encouraged westward expansion through incentivizing private development (Sooners and Boomer, for example) and public development (China's "Lanzhou New City").

3. Geographic challenges

Many Chinese love to argue the reason western cities have struggled to develop are based on purely geographic reasons. For example, Lanzhou (the old, original one, not the one the government is building from scratch) is nestled in a mountain valley, trimmed in neatly by the Qilian Range to the north and south, at a bend in the Yellow River (yes, that Yellow River). While this certainly makes it difficult to expand, it hasn't struggled in the past to be the gatekeeper of the river and a railway hub. After all, Denver has similar geographic challenges and nothing has stopped them from expanding. Neither has it hampered Santa Fe and Albuquerque, Amsterdam (built below sea level) or Chicago (built on sandy shale beds that they said could never support the weight of skyscrapers). With a little know-how and desire, this shouldn't be a show-stopper.

4. Natural resources

And now for my favorite part. Gold. Both of these nations have a really, really good reason to go develop these lands. America's was gold (and the simple desire to conquer all that moves); China's is natural gas. I wrote a few months ago about China's future in natural gas. If you missed it, you should go read it here. Long story short, there's a huge supply (and demand) if only they can be correctly tapped. So there's unquestionable wealth to be made if only someone will go get it. But here's the reason there hasn't been a 'gas rush' to rival the American Gold Rush: fracking is expensive. Unlike gold which could be panned by anyone with plenty of spare time and a pan, fracking requires millions of dollars of equipment and high-tech education. This is a different kind of prospector, a wealthy one, not a desperate one, and wealthy prospectors are not as likely to pursue risky investments as desperate ones on their last leg.

So what does this mean for China's Gas Rush (I'm going to make this a thing, just you watch)? China needs to find a way to further incentivize fracking. Private investors aren't jumping on this bandwagon just yet, likely because it's still so expensive and risky, but great development typically rides on the shoulders of private investors (aka prospectors). With that in mind, the government needs to find a way to help offset the risks so prospecting can thrive, naturally providing an ideal opportunity for cities to grow, infrastructure to develop and technology to enter.


I've examined a number of similarities and, in the process, differences. So what we are left with is a slew of questions.

How will the Chinese government go about incentivizing private investment?
Will Chinese (or foreign) investors ever consider the west worth the risk?
Will China be able to overcome the dramatic wealth disparity between the 东南沿海 (southeastern shore) region and the interior?
Can China continue to grow and develop as a world economic leader without sucessfully developing the west?

Only time (and some carefully planned economic and social policies) will tell, but I think we can be fairly certain there won't be any prairie schooners in this particular story of western expansion.

Stop Hating On China

China gets a lot of hate these days from the developed world for...stealing jobs, I guess. China also seems to be the only country we criticize so strongly for being 'backward', which probably has something to do with being threatened by the fact they are so different but so very successful. As I'm sure you can guess, I get a bit defensive when people start hating on China for no specific reason or for the reason that "they took our jobs." My Ohio hometown is a manufacturing and farming town that has seen many factories close and jobs leave for cheaper places. At the same time, though, better jobs have been coming in, including having Marathon Petroleum re-establish its branch there as one of the national headquarters after splitting the headquarters in two. So, blue collar jobs went out while white collar jobs came in. Bad for the economy? No, not at all. You just got a promotion.

The problem is simple: we are near-sighted. Our myopia blinds us to the opportunities developing just over the horizon, convincing us that change is bad and stagnation is best. Yes, the transition is painful, that I will not deny. You will be unemployed (like me) while your industry shifts and recreates itself (the better the firm, the more seamless and continuous said shift will be). But this is the growing period and so much more is waiting for us at the end of it.

Economics has a model for this (there's a model for everything,  you just have to know how to use it) in which it is important that workers can move freely (which you actually can, for the most part, despite how little you want to). Think of it this way: you're working on a new team, each of the members come from similar backgrounds and no large-scale training is required to take on any new role within the group. Three of the six of you have done the research on previous projects, three have done the visual and oral presentation of material and all of you have done management/leadership and internal communication. But on this project, you only need two people on research, two on presentation, one leader and one communication agent. No one can do everything and splitting into two separate groups would push you into diseconomies of scale. When dividing labor, it is key to consider each individual's personal skills. In economics, we call this 'competitive advantage'. Each person needs to do what each person does best. Even if someone is better at everything, they can't actually do everything, so when choosing which of two people should do the research or the leadership, the guy who is worse at everything, but better at research than leadership, should do the research. By doing this, you get the best possible results, with everyone doing their best work. It's efficient and effective.

But what does this have anything to do with China? China has that competitive advantage. China is better at labor-intensive jobs, plain and simple. The reasons are many, but the biggest is simply that labor is cheap. It is cheap because it is plentiful (and because there are no labor unions, labor laws are lax/non-existent, working culture is just different, etc.). Knowing this, that means the developed world has a different competitive advantage and employing China's competitive advantage can only be good for us, driving down the cost for our goods (either passed on to you by way of lower prices or by way of higher profits, passed on to you as a shareholder or employee). China, in turn, uses our competitive advantage in R&D, high technology, innovation, management, international know-how...

So why are we complaining? Because it hurts. It wasn't what you expected. We are in transition right now. China has only been open for business since 1979 and didn't become a powerhouse economy for a while after that. We're still finding our new place in the team and trying to get ourselves up to speed on that new statistics program so we can fulfill our new role to the best of our abilities. Think of this whole process as getting a promotion. The first couple weeks are hard, because things are now expected of you that you've never done before. But your boss (the market) has confidence in you and has given you a new responsibility, so get excited! You've got a raise, a corner office and a new, clean white collar. Get excited and stop complaining that the new guy on your team does things a little differently when he gets all the research on your desk in half the time for half the pay.

Making the switch: China's move toward natural gas

Like much of the rest of the developing world, China burns a LOT of coal, with coal providing at least 77% of electricity (Mongolia beats them out, with 96.1% of its electricity coming from coal, while the US uses coal to produce less than half of its electricity). Not surprisingly, China is the world's largest consumer of coal and has actually started importing coal as of 2008. During my time in Harbin, you couldn't open your windows without a film of coal dust coating your windowsill in a few minutes and there were days where a green haze descends over the city, making the air unbreathable. The coal use has not only produced a slightly disturbing carbon footprint and health issues for Chinese residents, but also political unrest. Much of China's coal deposits are located in Inner Mongolia, a province primarily populated by shepherds, and China has ramped up coal production, in part to decrease its dependence on foreign coal. The increase in mining has the locals a bit upset, in part because its extremely invasive, sucking up scarce, valuable water, and in part because the mines are being worked by non-Mongols, creating ethnic friction. Basically everything about coal is causing China problems. So what's the solution? It could be natural gas. (Disclaimer: My knowledge of the energy industry is somewhat limited, so these are my thoughts based on the facts I do know.)

1. Gas would ease domestic political unrest.

Natural gas is a pretty exciting emerging alternative to oil and coal, something pretty much every country is pursuing, especially the US. Aside from the fantastic environmental benefits of gas over oil (discussed below), the fact that oil wells are quite non-evasive (and hardly leave any trace at all once decommissioned) should help ease some of the Mongol herding population's worries. Wells are little more than a fenced-in small area of valves and pipes, leaving the landscape effectively unspoilt, so herding can continue uninterrupted, unlike coal mining, which unapologetically strips the landscape. It would also require fewer miners, so the local-outsiders stress would be lightened. So, no real downside there. (Well, except for the water issue, which I'll discuss towards the end.)

2. Gas solves much of China's pollution problems.

Using gas has pretty much no environmental downside given the alternatives, as it produces around 25% less carbon dioxide than petroleum and is shockingly 85% cheaper than oil (although this will fluctuate as drilling and demand increase). While China's demand for oil is skyrocketing (about 15% per year) thanks to its skyrocketing demand for cars (about 23% sales growth per year)(1), this also means its demand for foreign oil and carbon emissions are also skyrocketing. Even with the recent slowdown in car sales, emissions and oil demand are still going through the roof. Well, one of the advantages for China, unlike the US where a mere 3% of natural gas is making it to vehicles (2), China's car purchasers aren't buying a new car to replace a car they already have, but instead buying their first car. This means the car-buying decision doesn't include the option of just keeping the old one and driving it a bit longer. For America to switch to electric or natural gas-burning vehicles, we must replace all the cars being driven everyday and get everyone in the market for used cars (like myself), to buy a new car instead. That drastically increases the cost of a "new" car, as a used car, on average, costs less than half the cost of a brand new car, according to bankrate.com (not to mentioned effectively killing a huge industry). But China doesn't have this problem, as it doesn't have much of a used car industry to begin with. So not only would natural gas be relatively easy to implement in the car industry (with some careful strategy and planning), it would decrease monetary and environmental costs related to the entire energy industry, shrinking the carbon footprint created by coal and oil.

3. Gas would make the world like China more.

I'm personally of the opinion that the world's problem with China is a bit childish. Regardless, it exists, and America, in particular, isn't particularly pleased with China's trade balance. Fantastically, gas could help ease some of these problems, too! Glory, glory, hallelujah! China has loads of shale beds, the deposits drilled into to withdraw natural gas, spread out all through the northern and western portions of the country (these are the same beds where much of the coal is located). The IEA estimated the country's total recoverable resources at 50tcm (3), almost 6 times America's 8.5tcm (4), so it's not exactly hurting for resources. The government has also committed to pushing for an increase from 4% to 8% share of China's primary-energy consumption. (5) Even though that's a lot less than most rich countries where gas makes up at least a quarter of the total energy mix, that's a huge shift for the global industry. A shift of one percentage point in China's consumption is roughly equal to 25bcm a year, which is about half of Qatar's annual output. (3) Qatar is the world's biggest exporter of gas. Is the gravity of this making any impact yet? Because of China's differing geology from America's, China's complete lack of infrastructure and the distance of the shale beds from water, an important input for fracking, getting to the point where China can sustain itself on gas could take a while. (Right now, different Chinese energy firms are investing in other international firms in attempts to gain expertise in the field.) That means massive imports. That'll drive down China's trade surplus, so politicians like Romney should be happy. Very happy.

So in the end, China is making the move toward cleaner energy, for economic, political and environmental reasons. Whatever the reasons, it's for the best, as making the change to natural gas has pretty much no real downside aside from the amount of time it will take to make it happen. I, for one, look forward to being able to breathe with my windows open when I visit.

(1: "China May car sales up 22.6 percent year-on-year", Reuters, http://www.reuters.com/article/2012/06/09/us-china-autos-idUSBRE85803C20120609)

(2: "Gas works", The Economist, July 14th edition)

(3: "A world of plenty", The Economist, July 14th edition)

(4: "Natural gas reserves", ClearOnMoney, http://www.clearonmoney.com/dw/doku.php?id=public:natural_gas_reserves)

(5: China's 12th 5-year-plan, translated by APCO Worldwide, http://www.apcoworldwide.com/content/pdfs/chinas_12th_five-year_plan.pdf)

How Didier Drogba has Singlehandedly Signaled a Change in China's Economy

On June 20th, Didier Drogba signed with the Shanghai Shenhua, raking in over $300,000 a week. Yes, that's a lot of money, especially in China, as it totals an annual salary of $15.6 million, placing him (according to my own calculations) just shy of the Top 10 Highest Paid Footballers in the World. That's pretty impressive for a guy on the tail end of his career at age 34, transferring to a frankly awful league in a developing country. (Samuel Eto'o's move to Anzhi Makhachkala is another example of intriguing financial and economic movements, although that one was funded by one individual's extreme investment.) While it was well known that Drogba would be going the way of David Beckham, stretching out his career by going to a less competitive, "powder puff" league (as I think of it) that's willing to pay him as much for his name as his skills, I was a rather startled to see him ending up in China instead of the MLS.

So why do I care, besides that it happens to involve two of my favorite subjects: football and China? What does a Ivronian international's decision to move to the good ole Chinese Super League (中国足球协会超级联赛) have anything to do with the Chinese economics that I'm supposedly supposed to be discussing in this blog? Drogba's move signals a change in both China's social structure and its economy.

First, signing such a huge name shows a changing opinion of football in China. Despite having at least three tiers in the professional system and being operated by a government body (Chinese Football Association), CSL is so poorly viewed in China that it can't even manage to get a television deal from the government-monopolized television broadcasting company. To put that in perspective a bit, while I was in China, I had no trouble (well, despite the time difference) watching UEFA Champions League (inter-league European competition) or Serie A (Italian league) matches on television, but never once did I see a match or coverage of CSL matches. All the football magazines I bought went on and on about European leagues but never once mentioned the CSL. The rampant corruption and China's method of selecting youth for development (discussed in The Economist's article here) are certainly partially at fault. Shanghai Shenhua's decision to spend such a hefty sum rivaling that spent in the European leagues (which are both disgustingly more wealthy and vastly more popular) signals a huge change in expectations regarding the popularity of football in China.

As any economist (or anyone who's had any discussion with me about decision-making) knows, we don't buy anything unless we expect the payoff to be greater than (or at least equal to) the cost of purchase. (Economically, there may be non-monetary payoffs (prestige, for example, but that can also translate into monetary gain from sponsorships, ect.), so looking strictly at accounting won't necessarily give you the whole picture.) So that means Zhu Jun and his staff expect Drogba to bring in at least $300,000 worth of income (monetary or non-monetary) each and every week. That's some high expectations for a club that's struggling to fill its 33,060-capacity stadium (Old Trafford, Manchester United's ground, in contrast, seats over twice that). So popularity must be looking up! Why, exactly, I couldn't tell you. Chinese players certainly aren't getting any better and expats certainly haven't decided to switch to local football from European leagues. So natives must be taking to it, perhaps due to increased interest in European leagues thanks to expat or Western influence or simply a shift toward a different sort of sport preference. Regardless, Shanghai Shenhua plainly believes the face of Chinese sports is changing.

So there's the social shift. What about the economic shift? The economic shift is somewhat veiled in that it is a transition that has been taking place for quite some time, but it is now taking a new form. China is now willing to spend on football as a luxury good. Despite a huge population that should translate into a huge potential talent pool, China doesn't compete well on the world stage (they didn't even qualify for the World Cup in 2010 and only qualified for the 2008 Olympics because they hosted it), as "Olympic medals or World Cups...are luxury goods. Even for a government, there are choices to be made: the Chinese may have decided that athletics [gymnastics] gives more bang for its buck than football."(1) Investing in sports is risky and China's poor performance in football in comparison with gymnastics  means the payoff is unlikely to be very high (in economic terms, the discount rate is high due to poor expectations).

But something has changed! Didier Drogba is certainly a luxury good, a man whose salary prices him out of most countries' leagues. China isn't new to consuming luxury goods to the extent that it has been accused of "malconsumption," choosing luxury goods over more essential goods that raise the true standard of living. In fact, although China's overall economy has slowed down from its astronomical growth, luxury brands are still selling strong, on pace to top Japan as the world's largest luxury market, consuming a fifth of the world's luxury brands totally a projected $27b in 2015. (2) But this market has been limited to luxury cars, clothing, handbags, fragrances... It's a new thing for China to begin splurging on luxury footballers. China's luxury market is growing by about 18% annually and it seems some of that growth is coming in the form of sports (and not just the extremely popular NBA China). So if you're looking to invest or advertise, you might consider getting involved with the good ole Super League. Don't be surprised if you see Maotai as Shenhua's new sponsor sometime soon!

(1: "China and football: World Cup economics", The Economist, http://www.economist.com/blogs/freeexchange/2010/07/china_and_football)
(2: "Slowdown in China? Not for luxury brands", CNN Money, http://money.cnn.com/2012/04/24/markets/china-luxury-brands/index.htm)

Labor Unions in China: Why you should be expecting them.

You should probably print screen this, because this is probably the only time you'll ever see me propose the organization of labor unions. So here it is: China needs labor unions.

I'm sure you're familiar with (at least, if you're American) the figure of speech "owing your soul to the company store," referring to late 19th-century to mid 20th-century coal mining towns, where "Miners were paid by scrip, in the form of tokens, currency, or credit, which could be used only at the company store. Therefore, even when wages were increased, coal companies simply increased prices at the company store to balance what they lost in pay." (1) So what's my point? No, the Chinese are not mining coal. Okay, well, yes, they are. A lot of it. But that's not what I'm talking about. What I'm talking about is the 21st-century Asian equivalent.

If you're a little clueless about the Chinese economy or population, you should know a few things. Roughly 120 million Chinese citizens are migrant workers (12 million of Shenzhen's 14 million are migrant workers), leaving their families from inland rural China to work in factories on the south-eastern coast, sending back the bulk of their earnings to support their aging families  who are almost always gripped by poverty. Only 10% of these workers have ever achieved education beyond middle school (2). They work in labor-intensive, low-skill jobs, often in factories producing for export.

Wages in China are increasing (3), driving up the cost of production of all those cheap exports that we Americans enjoy, but what's helping to keep the cost of production low at all (well, besides a seemingly endless supply of willing labor)? One factor is certainly the working conditions: cheap, minimalist, "efficient." Take, for example, Apple supplier Foxconn (富士康), who has received thorough scrutiny after more than a dozen employees committed suicide in just a few years. At firms like Foxconn, migrant workers live on site in snug dormitories (which charge rent) where they basically hot bunk. While the facilities usually include social facilities like a coffee shop, bar, dance club, lounge, etc., employees have little time (or money) to enjoy them, as they work long, sometimes 12-hour, days. The long days, which leave employees exhausted, keep workers from venturing out of the dorm life and sending home all their earnings keep them from spending money on leisure of any kind. This leaves many employees feeling isolated and hopeless as they fail to form relationships in or outside the factory and fail to earn enough to support themselves outside the factory as well as their families back home.

Is it the factory's fault that labor is plentiful and if one worker won't work under those conditions, another will? No, certainly not. I'm not trying to demonize firms like Foxconn. Most of them aren't making much profit anyway, squeezed by their clients, and are just trying to keep their costs as low as possible. But what does this mean? Are Chinese factory workers forever cursed to owe their souls to the company store?

For once, labor unions are the answer. Chinese workers need some bargaining power and labor unions would be a way to do it. Some villages have already started organizing marches and movements which have had mixed results.

But here's the problem: independent labor unions are illegal.

Shoot. There goes my theory. There is a single, national trade union federation, representing 193 million workers as of 2008: the All-China Federation of Trade Unions (4). It's a government-affiliated labor union, which, if you ask me, is entirely redundant. A labor union is meant to organize workers to protect them when no one else will. Workers don't need a union if the government goes to bat for them itself, which is one of the reasons unionization has declined in the US over the last few decades (structural change model). Frankly, a government- and party-affiliated labor union seems a bit redundant. It also means things aren't going to get better as they are. The government isn't protecting workers and workers don't have a way to organize to protect themselves.

So how long until Chinese workers experience better working conditions? Not until the government gets on the workers' side. At present, the government's incentives are not in line with the workers', because the government is focused on whole-economy growth. GDP growth doesn't need workers to be happy, just to produce, especially since the primary impetus of growth at present is exports, which sell primarily because they are cheap. They're cheap in part because labor is cheap. So until the government and the workers' incentives run in the same direction, we won't see organization or protection of workers.

What does this mean to you, though, if workers do manage to organize? Organization means cost of production go up. Cost of production goes up means price of the good goes up. That means paying a bit more for your beloved iPad (the $500 price tag already affords Apple over $200 in profit (5), although this profit margin has fallen a bit with newer models). How much are you willing to spend to assure better working conditions for Chinese workers?

(1: West Virginia Archives & History, West Virginia's Mine Wars, http://www.wvculture.org/history/minewars.html)
(2: China Labor Bulletin, Migrant Workers in China, http://www.clb.org.hk/en/node/100259)
(3: globalEDGE, Production Costs in China Rise as Wages Increase, http://globaledge.msu.edu/Blog/post/1123/Production-Costs-in-China-Rise-as-Wages-Increase)
(4: The Economist, Membership Required, http://www.economist.com/node/11848496?story_id=11848496)
(5: PC World, Apple's iPad Profit: Breaking it Down, http://www.pcworld.com/article/188196/apples_ipad_profit_breaking_it_down.html)

Want more? Try out this video lecture by Chinese labor activist Han Dongfang in Montreal, February 2007.

Student Loans and the Demise of American Responsibility

So, pardon me for going off my theme for this blog, but I've been wanting to write a post about this for quite some time, so please enable me here for a bit.

I'm sure you've heard at least a hint of all the calls to energize the economy by forgiving student loans. To be straight-forward, I think this is an absolutely awful suggestion, fueled, in part, by my generation's refusal to take responsibility for our choices (further manifestations are, in my opinion, seen in my generation's views on religion, morality, abortion, intellectual property rights, alcohol, marijuana...).

Let me briefly outline the seemingly-brilliant idea: As of 2007 (and rising since), about 60% of America's 8,986,150 college students carry student loans with average debt per student as high as $22,700. On top of this, college students are now carrying record-high credit card debt, with the average balance (2009) of $1,645 and 21% of students carrying a balance between $3,000 and $7,000. The average student also has 4.6 credit cards to his name. With all of this debt on their shoulders, once students finish school and begin to produce and consume, they are crippled by this debt, forcing them to pour a large portion of their earnings into repaying student loans at "high" interest rates, fueling private banks (read: the "1%"). If student loan debt is forgiven, young college graduates will be free to spend this money in the economy or invest (save towards buying a house, for example), stimulating the economy without huge loss to the government or banks.

So, here's my problem with this whole argument, and it's not even my moral compass having a heart attack, screaming that students made a commitment and must fulfill their responsibilities. My problem, primarily, is an economic one. Let me go through the failures of this theory categorically:

1. Not all debt is debt accrued for educational purposes.
   
   Debt in America is sky-rocketing (dangerously, if you ask me) across all demographics, not just students, with the average credit card debt of an indebted household over $16,000 (as of March 2010), so why should students be any different? Holding debt is, apparently, becoming less and less costly (perhaps because society now accepts it as part of life and therefore it has lost much of the social stigma attached to being indebted in the past), so people are more and  more willing to hold debt...at rapidly increasing rates. Borrowing doesn't begin once education begins. Despite what might be expected, taking out student loans is rarely the beginning of someone's indebtedness; only about 15% of college freshmen had a zero balance in 2008, the average balance being near $1,000. Something tells me (based on personal experience) much of that spending hasn't been on books, but instead on midnight IHOP runs, Chipotle burritos, shopping trips to the new and exciting mall, music festivals with friends, Greek organization dues, beer... Pardon me for not believing the government should pardon loans so that I can afford to buy more beer.
   
2. Issuing private loans on education is risky.
   
   There's a reason interest rates are "high" on loans issued for things like education: it's risky. Unlike a loan used to buy a house or car, the education you receive can't be repossessed if you don't pay. There's no guarantee for a bank, nothing to cover their losses. Don't forget that banks are businesses, and businesses are just like people: we do nothing unless we can gain (or at least not lose) from it. A bank can't afford to offer loans that don't pay, or at least break even, so the higher interest rates help protect the bank in two ways: a) increase the payment on the loan, so even if you stop paying before you've paid it off, they can still be okay, b) weed out loan-seekers that value their education less, as only students who value their education at a rate equal to or greater than the interest rate will accept the loan. Because these students show dedication to their education, they are also more likely to show dedication to their commitment to pay back the loan.
   
   Because private lending for education is so risky, the government has stepped in, offering government and government-protected loans to offset the risk to the bank. The government has chosen to take the loss if a student fails to pay back his loan because the government values the education of citizens very highly (potentially higher than students do, and probably higher than it should, based on the falling return to college degrees and rising college-graduate unemployment/underemployment rates).
   
3. Forgiven debt will not necessarily increase market consumption.
   
   Really, the idea of forgiving debt isn't really new at all. It's been tried on the international scale to stimulate developing economies since the mid-90s, including a huge movement called "Jubilee 2000," calling for universal debt forgiveness for HIPCs in 2000. Except it didn't work. Like, at all. The problem with debt forgiveness revolves around two things: the root of the problem (is debt really the disease, or is it just a symptom?) and incentives. Forgiving debt does not change the relative cost of consuming vs savings, but merely increases income, so spending patterns don't change, just the volume. While this may not entirely be an issue with forgiving student debt (since the end goal is simply to increase consumption, the variety of which is irrelevant), it certainly doesn't aid our economy as proponents of the movement would like to think. Why? Because one of the primary instigators of the economic woes is consumers' poor consumption choices. Blame it all you like on predatory lending, but the fact of the matter is consumers chose to spend more than they had. Why would this change simply because they have more money to spend? The cost of borrowing has not increased (quite the contrary, it would decrease! I'll explain this more in my next point). People's preferences for consumption don't change because they have more to spend. A thrifty person that wins the lottery generally doesn't cease to be thrifty.
   
4. Debt forgiveness sets a precedent for future irresponsibility.
   
   This is the biggest deal, in my opinion. This whole thing could be viewed as a bit of game theory, a game between students and the government. Who pays the loan? If this were a single, non-repeating game, the government could forgive the debts, set the books back to zero and start again, no lasting consequences because everyone will operate on the assumption that this will never happen again. Ever. But how does that work? This would set a dangerous precedent: the government forgave our debts before, they could do it again. While no one may consciously say this, recognizing its childishness, the underlying assumption that this could potentially be a repeating game will forever sabotage this plan. This, again, popped up with the Jubilee 2000 attempts. Why would individuals be any different than countries?
   
5. Who pays the lenders?
   
   Frankly, money doesn't grow on tress. I think everyone knows this. So where does the money come from to pay the lenders? Lenders gave money to schools (via students) to pay for students' education, so who pays them back if the students don't? Here are our options: students (the designed payer), government (better known as taxpayers, aka you), schools or no one. Obviously we need not discuss the 'students' option, so let's discuss the government. So, regardless of whether the government pays private loan-issuers or simply forgives all government loans, the results are the same (the magnitude alone changing): a huge budget deficit. Money went out that won't come back. Who funds a budget deficit? Taxpayers. How do we fund a budget deficit? Raising taxes. Last I checked, student-loan holders also paid taxes, so their taxes are going to increase to pay for the loans their not paying. True, the burden will be lighter as more people are paying for their loan. But are you willing to pay even higher taxes to fund other people's education loans? Raising taxes seem to be a huge political problem already, so this may not be a politically viable option. So what about schools? Can't schools repay the loans they were paid with? I wouldn't expect a car lot to repay the loan I took out to buy a new Aston Martin or the guy from whom I bought a house to pay the loan I used to pay his mortgage. Asking a school to pay back the loans will effectively force the cost of tuition even higher, creating a vicious cycle.
   
   So, what if no one pays the lenders? What if they're just wiped off the books? Well, from a private lender's perspective, hundreds of banks would go under, unable to get past the gigantic red marks all through their books. We've already seen banks collapse and require countless bailouts from the government. We can only imagine what would happen if we took ~$1 trillion out of their books from student loans. From the government's perspective, we're back to taxpayers. The 2012 election is already being characterized by the budget deficit and national debt. How will voters feel if we add about $1 trillion dollars to the equation? Likely, not good at all.

Those are my problems with student loan debt forgiveness. I'm sure it's not the best argued or researched and likely not unique, but it's my thoughts off the top of my head. I'm staunchly against this movement for the above reasons and open for discussion. The sources for the data quoted are below:

(American Student Assistance, Student Loan Debt Statistics, http://www.asa.org/policy/resources/stats/default.aspx)

(Creditcards.com, Credit card statistics, industry facts, debt statistics, http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php#Debt)

(Nerdwallet.com, American Household Credit Card Debt Statistics through 2012, http://www.nerdwallet.com/blog/credit-card-data/average-credit-card-debt-household/)

Grad School? What?

So, yesterday one of my professor expressed to me that he really thinks I should be attending grad school for economics. You know, mentioning that, say, six months ago would have been helpful. Regardless, I am beginning to seriously consider applying for grad school in the next year or two. The question: where? For what, exactly? While  he insists it is probably better to go in with an open mind about specialization, I'd like to choose my school with a strength in the specialty I'd take. And herein lies the eternal issue: where can I go that will give me a substantial assistant-ship without sacrificing on the quality of my own education? Also, what about that whole Chinese thing?