David Farnum: The Real (Estate) Cost of Student Debt

David Farnum’s LinkedIn Page

Many economic effects are complex. In the 6th student guest post this semester, David Farnum points out one of the more subtle costs of student debt:

The increase in student loans has lead students to increasingly make sub-optimal real estate investment and are forced to take relatively more expensive rentals.

The sentence above is actually an example of the requirement that my writing teaching assistant Adam Larson and I recently instituted that students write an explicit thesis statement at the top of their posts, in accordance with my dictum in “On Having a Thesis”  

The thesis statement does not always have to actually appear in your post or essay, but it needs to exist and you need to know what it is.

Here is David’s argument for that thesis: 

While the repayment of principal and interest on student loans themselves can be expensive, one of the hidden expenses is the opportunity cost of having this student debt amount, namely sub-optimal investment choices. One area of investment choices that are distorted due to accumulating student debt is in the real estate market: increased debt levels force recent graduates to forgo purchasing real estate assets. This impacts them on two fronts, first it limits their portfolio exposure to potentially lucrative investment returns and causes them to pay for relatively more expensive rentals.

As pointed out in A Random Walk Down Wall Street, an investment into hard real estate assets such as houses can provide excellent returns into a well diversified portfolio. Burton Malkiel explains:

As long as the world’s population continues to grow, the demand for real estate will be among the most dependable inflation hedges available. Although the calculation is tricky, it appears that the long-run returns on residential real estate have been quite generous…In sum, real estate has proved to be a good investment providing generous returns and excellent inflation-hedging characteristics.

It makes sense that recent graduates would want to invest into such an asset class to better ensure they are able to take advantage of the long run returns that Malkiel describes. However, as more and more students are graduating with expanding college debt levels, they are increasingly unable to afford the purchase of a house. A 2013 post by Liberty Street Economistson the New York Fed blog analyzed the impact of student loans on home ownership. They explain their findings from the graph (below):

By 2012, the homeownership rate for student debtors was almost 2 percentage points lower than that of nonstudent debtors. Now, for the first time in at least ten years, thirty-year-olds with no history of student loans are more likely to have home-secured debt that those with a history of student loans.

In the past, those aged 30 with college debt were more likely to purchase a home due to their greater propensity to acquire higher paying jobs and thus be able to afford home ownership. However, this relationship has changed starting in 2012, possibly due to the higher overall levels of debt precluding mortgage approvals and reducing already debt burdened individuals ability to make home payments. The advent of this increasing proportion of students with debt and higher overall debt levels has been a contributing factor in the fall of home ownership, potentially leaving a large portion of recent graduates investment portfolios underexposed to the real estate sectors.

Not only are debt-burdened students under-investing in home ownership, they face increased relative prices for renting. A WSJ article entitled A Tough Time for Renters, outlines the rapid rise in rental prices:

The cost to rent an apartment jumped in 2014 for the fifth consecutive year as strong demand and short supply left vacancies at historically low levels. Nationwide, apartment rents rose an average 3.6% last year…the average monthly lease rate to $1,124.38, the highest since Reis started tracking the market in 1980.

A calculator provided by the New York Times allows one to compare the relative costs of renting vs home ownership based on a variety of input factors. Using the settings given, the equivalent home price to the national average monthly lease rate would be roughly $311,000. Given this is higher than the $199,600 national median sales price of existing homes, clearly the cost of renting currently greatly outpaced the cost of purchasing a home nationally.

However, the national data can skew the renting data, as rental rates will be especially high in areas of high populations such as large cities. Using a similar process to the NYT, online residential real estate company Trulia estimates the percentage difference in the cost of renting vs. buying a house in populous metropolitan areas. Their interactive map indicates that even in heavy populated areas, the cost of home is significantly less than that of renting, including a 21% difference in New York and Los Angeles, a 29% difference in Boston, and a 42% difference in Chicago.

All else being equal, this relative cost increase should tip the scales toward home ownership; however, as discussed above, the increased student debt levels have precluded individuals from home ownership. Not only are they missing out on the investment opportunity of real estate, they are throwing away relatively more money into the rental market.

Jonathan Zimmermann: The Quest for Uselessness

A large share of all the things that human beings want are things that are experienced in the mind. So it should not be too surprising that people will sometimes spend money or time on an idea that they find entertaining or humorous. Such was the pet rock craze a few years back. I was intrigued to learn that my student Jonathan Zimmermann accomplished such a feat of marketing an entertaining idea in a smaller way. His report on that is the 5th student guest post this semester. (Jonathan had another guest post a few weeks back that you might be interested in: “Swiss Franc Shock: Time to Take Advantage of Return Policies.”)

or the first time, Google Play (the Android app store) has surpassed the Apple app Store for the total number of published apps. Of course, among the almost one and a half million available applications, a lot of them, if not a majority, are of relatively little use. But usefulness is not a requirement for a successful app, as we saw for example many “fake razors” encounter a huge fame in the earliest days of the Apple app store.  So what exactly is the limit of “uselessness”? How far could a developer go, and especially, do people need to at least believe that the app will be useful to want to download it? In this post I want to share my experience on an interesting experiment I conducted a few years ago.

It was a few years ago and I had just started to learn how to develop Android app. But coding wasn’t the part that interested me; I wanted to create, to publish. So I asked myself “What is the most simple, the most elementary app that I could develop and publish with my very limited newly acquired coding skills?”. The answer was easy: an app that doesn’t do anything. How would I call that app? “Useless”, because it has no features and is of no use. How to market it? Well, what is the only way to market nothing? Simply being honest and telling people not to expect anything from a nothing.

I published the app (still available with its description on Google play). I didn’t advertise it, and just waited for some organic traffic to come. In a few days, hundreds of people downloaded it. After a few months it had tens of thousands of downloads, for a total of more than 120 000 users today! Did I produce value? It seems like it: the average rating, by more than 4000 users, is 4.5/5, a very high rating for an Android app! But there is more: the ratio of review per download and the ratio of comment per review were extremely high!

Not only did the app satisfy its customers, but the average user seemed to be a relatively highly educated person. In one comment, a high school teacher even said he shared this app with his whole class.

Most positive comments looked something like that:

I love it, great job android market. This app has changed my life for the better. I used to wake up every morning crying, but now I have hope again. Finally something real, consistent, reliable, trustworthy. This app has shown me that there are things in the world that are truly what they claim to be. Simple, humble yet sophisticated. A Monk in the app, a world leader among its kind for having integrity. This app is a masterpiece. It is what it says, does what it’s supposed to do and comes with a 10×1 return policy.

by savage santana (edited)

So what about the people that didn’t like it? The only reason why it has a score of only 4.5/5 is that most users would either put the best rating (5) or the worst (1). Only a few would put an average rating, like 2, 3 or 4. And what were the reasons behind most of those 1-star ratings? Most of the time, they were written by unsatisfied customers that found some use in an app that what supposed to be useless:

I downloaded this app, with hope of finding no usefulness whatsoever, that hope was lost when I found it had many. I noticed the moment I opened the application, I had something to read. I enjoyed reading about how the creator of this app did not like how the Android Market had it’s name changed and the purpose of the apps creation. I also found how useful this would be for people who found it difficult to spell (Apart from some spelling mistakes). It also had enough light to see objects in the dark.

by Carl-Michael Hammon (unedited)

So think absurd, and don’t be afraid to be absurd. Downloading this app was perhaps, for some people, a right to be irrational for a few minutes. Sometimes, it feels good to not make sense. And this feeling is more logical than it seems.

And on a final note, for the capitalist skeptics who think that doing art is great but making money is better: do not worry, I didn’t lose my business acumen and carefully placed a discrete ad inside the app. It generated a few thousand dollars of revenues. Not too bad for a few hours of “programming”.

Christopher Skehan: Everyone Needs a Vacation

Link to Christopher Skehan’s LinkedIn Home Page

I am pleased to host this guest post by Christopher Skehan on the importance of vacations—even as compared to other business concerns (obviously related to Dan Miller’s case for the importance of sleep). It is the fourth guest post this semester from students in my Monetary and Financial Theory class. You can see links to all of the other student guest posts here. Here is Chris:

It’s no secret that everybody loves time off from work to go on vacation. It seems pretty simple that people should work to live, and therefore use all of their vacation time. Yet, American business culture produces employees imagining industriousness that includes first-in and last-out workers, all nighters, and long work sessions for consecutive weeks. For many there is no room for vacation in this industrious image. “More than forty percent of American workers who received paid time off did not take all of their allotted time last year, according to “An Assessment of Paid Time Off in the U.S.” commissioned by the U.S. Travel Association, a trade group, and completed by Oxford Economics” (Forbes). The U.S., one of the few developed countries that doesn’t require companies to provide vacation time, needs to change because taking a vacation is good for production and in some cases can even prevent crime.

This productivity science seems like a justification for laziness in the workplace. However, several scientific observations have proved that taking small breaks during long study sessions not only dramatically improves your productivity but also your mental ability. The theory is simple, the brain is a muscle, and every muscle tires from repeated stress. “In the mid-1920s, an executive in Michigan studying the productivity of his factory workers realized that his employees’ efficiency was plummeting when they worked too many hours in a day or too many days in a week” (The Atlantic). So if this is true on a micro level then it must be true on a macro level.

So far it is clear that taking breaks and by extension vacation are essential for employees, but does it hurt the employer? Quite the contrary, it has several advantageous for employers according to Forbes. First, when one employee leaves it forces an additional employee to learn the functions of a new job. This system creates an unintentional education system, and prevents the risk of crisis when a key employee is lost. Secondly, it cuts cost through reductions in health insurance payments. “The American Psychological Association has documented several potentially stress-induced health threats, such as increased cardiovascular risks and aggravation of existing conditions” (WSJ). Reducing health issues from your employees in not only the moral thing to do, but can now be justified in your balance sheets as well. Thirdly, mandatory vacation prevents fraud and embezzlement. “In 2007, Jérôme Kerviel, a trader at Société Générale, lost over $7 billion of the bank’s money. He later admitted hadn’t take one single day of vacation that year because he did not want anyone else to look at his books” (Forbes). For situations like this the FDIC has mandatory two-week vacation for certain industries.

The FDIC has the right idea but it needs to be implemented to every industry. During my time in Italy this last summer everything closed from one to three in the afternoon for people to go home and eat lunch with their family. When I explained to my host family that Americans didn’t do this they thought it was insane and called us robots. Now I think they are right, and think it is essential to implement mandatory vacation time for all employees. It reduces the cost of health insurance, increases productivity, produces a more trained workforce, and stops fraud.

John Stuart Mill’s Defense of Freedom of Religion for Mormons as an Argument for Chartering Libertarian Enclaves

Brigham Young’s family. Link to an overview of Mormon polygamy.

Brigham Young’s family. Link to an overview of Mormon polygamy.

John Stuart Mill was no fan of Mormonism. But he defended the right of Mormons to practice plural marriage–something the US Constitution as interpreted by the Supreme Court in Reynolds v. United Statesdid not do. The argument he makes is that when a group has fled for refuge to an out-of-the-way corner of the Earth, freely allows outside missionaries to come preach against its barbarism, and freely lets people leave the group, then it should not be molested even in customs that seem barbaric. Here is his argument, from On Liberty, Chapter IV, “Of the Limits to the Authority of Society over the Individual” paragraphs 21:

I cannot refrain from adding to these examples of the little account commonly made of human liberty, the language of downright persecution which breaks out from the press of this country, whenever it feels called on to notice the remarkable phenomenon of Mormonism. Much might be said on the unexpected and instructive fact, that an alleged new revelation, and a religion founded on it, the product of palpable imposture, not even supported by the prestige of extraordinary qualities in its founder, is believed by hundreds of thousands, and has been made the foundation of a society, in the age of newspapers, railways, and the electric telegraph. What here concerns us is, that this religion, like other and better religions, has its martyrs; that its prophet and founder was, for his teaching, put to death by a mob; that others of its adherents lost their lives by the same lawless violence; that they were forcibly expelled, in a body, from the country in which they first grew up; while, now that they have been chased into a solitary recess in the midst of a desert, many in this country openly declare that it would be right (only that it is not convenient) to send an expedition against them, and compel them by force to conform to the opinions of other people. The article of the Mormonite doctrine which is the chief provocative to the antipathy which thus breaks through the ordinary restraints of religious tolerance, is its sanction of polygamy; which, though permitted to Mahomedans, and Hindoos, and Chinese, seems to excite unquenchable animosity when practised by persons who speak English, and profess to be a kind of Christians. No one has a deeper disapprobation than I have of this Mormon institution; both for other reasons, and because, far from being in any way countenanced by the principle of liberty, it is a direct infraction of that principle, being a mere riveting of the chains of one-half of the community, and an emancipation of the other from reciprocity of obligation towards them. Still, it must be remembered that this relation is as much voluntary on the part of the women concerned in it, and who may be deemed the sufferers by it, as is the case with any other form of the marriage institution; and however surprising this fact may appear, it has its explanation in the common ideas and customs of the world, which teaching women to think marriage the one thing needful, make it intelligible that many a woman should prefer being one of several wives, to not being a wife at all. Other countries are not asked to recognise such unions, or release any portion of their inhabitants from their own laws on the score of Mormonite opinions. But when the dissentients have conceded to the hostile sentiments of others, far more than could justly be demanded; when they have left the countries to which their doctrines were unacceptable, and established themselves in a remote corner of the earth, which they have been the first to render habitable to human beings; it is difficult to see on what principles but those of tyranny they can be prevented from living there under what laws they please, provided they commit no aggression on other nations, and allow perfect freedom of departure to those who are dissatisfied with their ways. A recent writer, in some respects of considerable merit, proposes (to use his own words) not a crusade, but a civilizade, against this polygamous community, to put an end to what seems to him a retrograde step in civilization. It also appears so to me, but I am not aware that any community has a right to force another to be civilized. So long as the sufferers by the bad law do not invoke assistance from other communities, I cannot admit that persons entirely unconnected with them ought to step in and require that a condition of things with which all who are directly interested appear to be satisfied, should be put an end to because it is a scandal to persons some thousands of miles distant, who have no part or concern in it. Let them send missionaries, if they please, to preach against it; and let them, by any fair means (of which silencing the teachers is not one,) oppose the progress of similar doctrines among their own people. If civilization has got the better of barbarism when barbarism had the world to itself, it is too much to profess to be afraid lest barbarism, after having been fairly got under, should revive and conquer civilization. A civilization that can thus succumb to its vanquished enemy, must first have become so degenerate, that neither its appointed priests and teachers, nor anybody else, has the capacity, or will take the trouble, to stand up for it. If this be so, the sooner such a civilization receives notice to quit, the better. It can only go on from bad to worse, until destroyed and regenerated (like the Western Empire) by energetic barbarians.

By this logic, the world should definitely allow some hard-core Libertarian enclaves to exist, somewhere. It seems unfair to me that there is no city in the world that people can go to and live under totally Libertarian rules. There isn’t even a city in the world where people can go and live under otherwise totally libertarian rules with the one compromise that they must continue to pay the taxes that they would otherwise have had to pay where they came from. One can question whether hard-core Libertarianism would work well as a governing principle for society, but it is a crime that people can’t try it out somewhere on earth.

David A. Garvin and Joshua D. Margolis on Misjudging the Quality of Advice

“Most seekers who accept advice have trouble distinguishing the good from the bad. Research shows that they value advice more if it comes from a confident source, even though confidence doesn’t signal validity. Conversely, seekers tend to assume that advice is off-base when it veers from the norm or comes from people with whom they’ve had frequent discord. (Experimental studies show that neither indicates poor quality.) Seekers also don’t embrace advice when advisers disagree among themselves. And they fail to compensate sufficiently for distorted advice that stems from conflicts of interest, even when their advisers have acknowledged the conflicts and the potential for self-serving motives.”

– David A. Garvin and Joshua D. Margolis, subsection on “Misjudging the quality of advice” in “The Art of Giving and Receiving Advice,” Harvard Business Review, January-February 2015, p. 64

Quartz #60—>The Coming Transformation of Education: Degrees Won’t Matter Anymore, Skills Will

blog.supplysideliberal.com tumblr_inline_nl2qutMaRo1r57lmx.png

Link to the Column on Quartz

Here is the full text of my 60th Quartz column, “Degrees don’t matter anymore: skills do,” now brought home to supplysideliberal.com. It was first published on February 9, 2015. Links to all my other columns can be found here.

Although I think the provocative title on Quartz helped get people to notice the column, I have what I think is a more accurate title above. This is my 2d most popular column ever. You can see the full list in order of popularity here.

If you want to mirror the content of this post on another site, that is possible for a limited time if you read the legal notice at this link and include both a link to the original Quartz column and the following copyright notice:

© February 9, 2015: Miles Kimball, as first published on Quartz. Used by permission according to a temporary nonexclusive license expiring June 30, 2017. All rights reserved.

If I were to make a nomination for the most destructive belief in our culture, it would be the belief that some people are born smart and others are born dumb. This belief is not only badly off target as a shorthand description of reality, it is the source of many social pathologies and lost opportunities. For example:

Too much of our educational system, both at the K-12 level and in higher education, is built around the idea that some students are smart and others are dumb. One shining exception are the “Knowledge is Power Program” or KIPP schools. In my blog post “Magic Ingredient 1: More K-12 School” I gave this simple description of the main strategy behind KIPP schools, which do a brilliant job, even for kids from very poor backgrounds:

  1. They motivate students by convincing them they can succeed and have a better life through working hard in school.
  2. They keep order, so the students are not distracted from learning.
  3. They have the students study hard for many long hours, with a long school day, a long school week (some school on Saturdays), and a long school year (school during the summer).

A famous experiment by Harvard psychology professor Robert Rosenthal back in 1964 told teachers that certain students, chosen at random, were about to have a growth spurt—in their IQ. These kids did wind up having their IQ grow faster than the other kids. If we had an educational system that expected all kids to succeed, and gave them the kind of extra encouragement that those teachers unconsciously gave the kids they expected to do well, then kids in general would learn more.

Kids whose teachers had low expectations can expect more typecasting in college. Too many majors fall into one of two categories: (a) majors in which there is no easy way to tell whether a student has mastered any skills that will help get a job or make life richer, or (b) majors designed to weed out all the slow learners and only try to teach the students who catch on quickly. Behind the practice of weeding out slow learners is the misconception that a slow learner is a bad learner, when in fact a slow learner who puts in the time necessary to learn often ends up with a deeper understanding than the fast learner.

The good news is that a total transformation of education is coming, whether the educational establishment likes it or not. I draw my account of this transformation of education from two prophetic books by Harvard Business School professor Clay Christensen and his co-authors:

  • Disrupting Class: How Disruptive Innovation Will Change the Way the World Learns by Clay Christensen, Curtis Johnson and Michael Horn
  • The Innovative University: Changing the DNA of Higher Education from the Inside Out by Clay Christensen and Henry J. Eyring.

The road ahead is clear: the potential in each student can be unlocked by combining the power of computers, software, and the internet with the human touch of a teacher-as-coach to motivate that student to work hard at learning. Technology brings several elements to the equation:

But since motivation—the desire to learn—is so important, a human teacher to act as coach is also crucial. In particular, without a coach, the flexibility for students to learn at their own pace can be a two-edged sword, because it makes it easy to procrastinate.

In the end, none of this will be hard. The technology and content for that technology are already good and rapidly improving. And although it is a bit much to expect someone to be both a great and inspirational coach and to be at the cutting edge of an academic field, the number of great athletic coaches and trainers at all levels indicates that, on its own, being an inspirational coach is not that rare. Being an inspirational coach in an academic setting is not quite the same thing, but I am willing to bet that it, too, is blessedly common. By having the cutting-edge knowledge from the best scientists and savants in the world built into software and delivered in online lectures, all a community college has to do to deliver a world-class education is to hire teachers who know how to motivate students.

Similarly, at the K-12 level, it is easier to find teachers who will be inspirational if those teachers can connect each student with expertly designed software customized for each student’s learning style. And teachers will be able to encourage each student to dig deeper into some particular interest that student has—well beyond the teacher’s own knowledge. Yet the teachers themselves will end up knowing a lot—much more than they learned in college themselves, simply from working alongside the students.

But what about all the forces arrayed against educational reform? Though they have won over and over in the past, those reactionary forces will be overwhelmed by these new possibilities. They will be like the corporate information technology department trying to stop workers from downloading unapproved, but inexpensive software on their own to get the job done.

The day is not far off (some would argue it is already here), when any parent who has the inclination to be a learning coach can team up with inexpensive online tools to give his or her child an education that is 20% better (say as measured by standardized test scores achieved) than what that child would get in the regular schools. It is hard to start a new charter school, and harder still to change a whole school district. But when an individual family can opt out, it is no longer David vs. Goliath in a duel to the death, but David leaving Goliath behind in the dust in a foot race. In the end, I think organized institutions can do a better job at teaching than parents on their own—but only if those institutions do things right. The ability of individual families to opt out will force most schools to get with the program, or lose a large share of their students.

None of this will happen instantly. In K-12, some states already have a strong tradition of educational reform, and will jump-start these changes. In other states, the forces arrayed against reform will be able to hold back progress for quite some time, by fighting tooth and nail against it. Rich, educated parents may help their kids tap into the new educational possibilities more quickly than poor parents who aren’t as attuned to education. But when performance gaps open wide enough, education in the laggard states will come around, by popular demand. And the scandal of ever more substandard education for the poor will encourage efforts by concerned citizens toward solutions empowered by the new learning technologies.

In higher education, students voting with their feet will make schools at the bottom of the heap change or die. Many of the most prestigious colleges and universities will resist change much longer, but some will embrace the “flipped classroom” model of doing everything online that can effectively be done online, and doing in the classroom only those things for which face-to-face interaction is crucial. And when some of the prestigious colleges and universities embrace the new methods, those colleges and universities will move ahead in the rankings as a result. The rest will ultimately follow.

There is one other force that will propel the transformation of education: a shift from credentials to certification. In most of the current system, the emphasis is diplomas and degrees—credentials saying a student has been sitting in class so many hours, while paying enough attention and cramming enough not to do too much worse than the other students on the exams. More and more, employers are going to want to see some proof that a potential employee has actually gained particular skills. So certificates that can credibly attest to someone’s ability to write computer code, write a decent essay, use a spreadsheet, or give a persuasive speech are going to be worth more and more. And any training program that takes the need to maintain its own credibility seriously can help students gain those skills and certify them for employers in a way that bypasses the existing educational establishment. Just witness the current popularity of “coding bootcamps.” That model can work for many other skills as well. For many students, that kind of certification of specific skills is a very attractive alternative to a two-year degree.

When this transformation of education is complete, K-12 education will cost about the same as it does now, but will be two or three times as effective. College education will not only be much more effective than it is now, it will also be much cheaper. There will still be a few expensive elite colleges and universities–these schools are not just providing an education, they are selling social status, and the opportunity to rub shoulders with celebrity professors. But less elite colleges and universities will find it hard to compete with the cheaper alternative of community college professor as coach for computerized learning. So the problem of college costs will be a thing of the past for anyone focused on learning, as opposed to social status.  (Of course, if lower college costs are one side of the coin, lower college revenue is the other side. College professors as a whole are likely to have a lower position in the income distribution in the future than in the recent past, with premium salaries limited to a shrinking group of well-paid academic stars.)

Florida State University Psychology Professor K. Anders Ericsson studies expert performance, whether in sports, art, or academic pursuits. His research shows that ordinary people with extraordinary motivation can achieve remarkable performance through a pattern of arduous work and study called deliberate practice. By bringing computers and computer networks in to help with the other aspects of teaching, our society will be able to afford to focus on instilling in students that kind of extraordinary motivation. When that happens, the world will never be the same again.

Steven Landsburg: Big Price Fluctuations are Evidence of Competition

“A monopolist always has price-sensitive customers—because if they’re not price-sensitive, he’ll keep raising his prices until they are. Therefore, even when market conditions change, a monopolist can rarely afford to raise prices very much. Big price fluctuations are evidence of competition.”

– Steven E. Landsburg, More Sex is Safer Sex, p. 137. This is a fun piece of economics. Draw the supply and demand pictures and monopoly optimization pictures to see the logic here. There is wiggle room for this claim to not always be true, but Steven’s generalization has a lot of merit.  

Negative Interest Rates and When Robots Will Set Monetary Policy: George Samman Interviews Miles Kimball

Link to the Article on cointelegraph.com. Mirrored by permission

Miles Kimball, who is a Professor of Economics and Survey Research at the University of Michigan tells CoinTelegraph about negative interest rates, the future of paper and electronic money, and how cryptocurrrency fits in.

Negative interest rates are a recent topic garnering much attention in the economic world. In no particular order, Denmark, Switzerland, Germany, Netherlands, Germany, Austria, and Sweden have or have recently had negative interest rates. On top of that some corporate bonds have had negative interest rates as well like Nestle and Shell.

What are Negative Interest Rates?

Negative interest rates are when you give the bank or government some form of money, and over time that bank or government will give you back less money than you initially deposited.

Essentially, you are paying a bank or government to take care of your money. This is the result of a flight to safety for people who are extremely risk averse, and it generally happens coming out of a massive recession in places where there is little to no growth (e.g. the EU).

CoinTelegraph: Why is it easier to have negative interest rates with electronic money vs paper? Also can you explain how this would work with a currency like bitcoin vs. “electronic dollars”?

Miles Kimball: It is easy to have negative interest rates for money in the bank: the number for the balance in the account gradually goes down if nothing is put in or taken out. Because paper money has a particular number written on it, getting a negative or positive interest rate for paper currency requires a little more engineering. And that engineering involves having the e-dollar be the unit of account.

If the paper dollar were the unit of account, then the interest rate for paper currency is always zero (unless you have a system of directly taxing paper currency, which is administratively burdensome and politically much more difficult than an electronic money system). So to have negative interest rates on paper currency as well as in other assets, the e-dollar needs to be the unit of account.

With the e-dollar as the unit of account, everything the central bank needs to do to have a nonzero paper currency interest rate can be done at the central bank’s cash window where banks come to deposit or withdraw paper currency from the central bank.

For good monetary policy, it is important that the central bank have control over the unit of account. And this e-dollar unit of account might have many of the aspects of a cryptocurrency–perhaps enough that it can be considered a cryptocurrency.

As far as private cryptocurrencies (like bitcoin) go, it is fine to have private cryptocurrencies perform the medium-of-exchange and store-of-value functions of money, but monetary policy requires control over the unit of account. So central banks need to retain control over the type of money that defines the unit of account–in this case the e-dollar.

Under an electronic money policy, 3 key things will insure that the e-dollar (or e-euro or e-yen or e-pound etc.) is the unit of account:

  • a requirement that taxes be calculated in e-dollars.
  • accounting standards that require accounting to be done in e-dollars.
  • the kind of need for coordination between businesses and between businesses and households that leads people to do daylight savings time (without any intrusive inspections of someone coming to look at your clocks).  

CT: How can you have negative interest rates in a cryptocurrency system?

MK: To have negative interest rates in a cryptocurrency system that uses bitcoin, say, for most transactions, there should be a separation between the unit of account and the medium of exchange.

Having an e-dollar that is distinct from a bitcoin is the way to do this. (Also, it is good to have many different stores of value. But that always happens.)

Currently, robots cannot do monetary policy as well as central banks can. Someday maybe they will be able to. Then a robot can be put in charge of the e-dollar. But there would still need to be a separation between the e-dollar unit of account (controlled by a robot) and anything that mechanically has a zero interest rate stated in terms of itself (as bitcoin now does).

CT: What are your thoughts on bitcoins ability to be a currency?  What are its limits from your perspective?

MK: Bitcoin is a currency already. But it would not be good to try to use it as a “full-service” currency. A good unit of account needs to have a constant value relative to goods and services. Bitcoin does not do this. And it cannot keep a constant value relative to goods and services without a much, much, more sophisticated algorithm for controlling the supply of bitcoins that would rival in complexity (and exceed in quality) what central banks now do. Good monetary policy is not easy.

The unit of account should be under the control of the institution that does the best job at keeping the value of the unit account constantly relative to goods and services–and in the process, keeps the economy at its natural level of output.

Currently, that is central banks. Bitcoin’s value fluctuates wildly relative to goods and services. Central banks (which are humans assisted by computers) still do a much, much better job at monetary policy than the bitcoin algorithm would.

CT: Also if you could talk more about blockchain technology and central banks? What type of tools/operations would be best suited for a blockchain?

MK: I am not a technical expert on blockchains, but I think blockchains or technical advances inspired by blockchains will be important in making e-dollars work as well as possible. Electronic dollars include money in the bank, but its being done in a very inefficient way, and transaction costs are huge, banks need to go the way of bitcoin. Blockchain technology is a great advance because it can do it much more cheaply than how the current banking system handles transactions now. It will make electronic transactions will be much more meaningful.

CT: Do you have any thoughts on the “currency wars” and their impact on central bank policies? Do negative interest rates have anything to do with this?

MK: Talk of “currency wars” is mostly silly. If all countries do expansionary monetary policy, that is not a currency war, that is a global monetary expansion not a currency war. If every time you read about a “currency war,” you substituted the words "global monetary expansion,” you would not go far wrong.

The only case when the word “currency war” is justified is when countries are each doing currency interventions by selling their own assets and buying equivalent foreign assets. If all countries do this, it all cancels out, and things are back to square one.  

As long as each country or its central bank is purchasing assets that have a higher interest rate or rate of return than the assets they are selling, it is a monetary expansion, not a salvo in a currency war.

Of course, monetary expansions have an effect on exchange rates, but if another country is not happy with that effect on its exchange rate, it should just match with its own, appropriately calibrated monetary expansion. That response is not a response in a “currency war,” it is normal monetary policy.

CT: Can you say what incentivizes central banks to have negative interest rates?

MK: The job of central banks is to keep keep prices stable and to keep the economy on an even keel by keeping output at the natural level. Doing both of these jobs well requires at least occasional use of negative interest rates.

As it is, the Fed, the ECB, the Bank of England, and now the Bank of Japan have a long-run inflation target of 2% because they haven’t yet put negative paper currency interest rates in their toolkit. Being prepared to do negative interest rates allows the inflation target to be reduced to 0–true price stability.

And being able to do negative interest rates makes it possible to nip recessions in the bud. These are big enough advantages that I think the eventually most central banks will indeed put negative (and positive) paper currency interest rates in their toolkit.  

Miles Kimball is an expert on negative interest rates as well as paper money vs. electronic money, and is a major proponent of electronic money. He writes on his own blog discussing e-money as well as other economic themes.

Steven Landsburg: The Immorality of Protectionism

“If you support protectionism [in general, not just in your industry] because you think it’s good for you, you’ve probably just got your economics wrong. But if you support protectionism because you think it’s good for your fellow Americans, at the expense of foreigners, then it seems to me you’ve got your morals wrong too.

…if it’s okay to enrich ourselves by denying foreigners the right to earn a living, why shouldn’t we enrich ourselves by invading peaceful countries and seizing their assets? Most of us don’t think that’s a good idea, and not just because it might backfire. We don’t think it’s a good idea because we believe human beings have human rights, whatever their color and wherever they live. Stealing assets is wrong, and so is stealing the right to earn a living, no matter where the victim was born.”

Inside Mormonism: The Home Teachers Come Over

In “An Agnostic Grace” I wrote:

Religion is the “everything else” category in our existence in human societies and as individuals after parceling out the things people understand fairly well about human life—just as “natural philosophy” used to be the “everything else” category after parceling out as natural sciences the things people were beginning to understand fairly well about the natural world.

Thus, it is important to understand religion. One reason is the project of constructing effective religions that do not require belief in the supernatural that I talked about in “Godless Religion.” Another reason is the project of understanding make things better for those who are poor or struggling without expanding government that I address in “No Tax Increase Without Recompense,” “Yes, There is an Alternative to Austerity Versus Spending: Reinvigorate America’s Nonprofits,” and “Why You Should Care about Other People’s Children as Much as Your Own.”

In addition to organizations labeling themselves as religions, I think 12-step programs that organize people to help one another in fighting addiction are a very important model to study. But my knowledge of 12-step programs is limited to what I have read and fictional portrayals. So let me focus for now religion, and specifically Mormonism, which I know well. 

Because of its distinctive features, Mormonism has a lot to teach in these regards. In particular, Mormonism organizes its members to provide many services to one another in ways that are not mediated by the market–something that could be emulated by community organizers if they focused on getting the bottom half of the population in income to help one another–with a sprinkling of help from volunteers from the richer half of the population with key skills–rather than pressuring for more help from the government.

I pursued this investigation previously in “How Conservative Mormon America Avoided the Fate of Conservative White America” and “The Message of Mormonism for Atheists Who Want to Stay Atheists.” In this post, I want to talk about home teaching. 

This past week, I have been visiting my Dad, who lives in Provo, Utah. (If you type Edward Kimball into the search box at my sidebar without quotations you can see more about my Dad. And unlike me, he has his own Wikipedia page.) On March 1, the home teachers came over.  Home Teaching is a microcosm of Mormonism. First, it is part of the emphasis on a lay ministry, in which every Mormon willing to do so is asked to take on a church service role or “calling.” Second, home teaching is an important part of the effort in Mormonism to take care of every Mormon. Home Teaching teaches the home teachers that no one is “riffraff.” Third, home-teaching illustrates the structural legacies of sexism that litter Mormonism’s structure and practices. (See “Will Women Ever Get the Mormon Priesthood?”) There is a parallel “Visiting Teaching” program in which women visit and teach on another, but home teachers teach the whole family, thus treating things as if men have things to say that everyone should hear, but woman have things that mainly other women should hear.

Home teachers and visiting teachers work in pairs–just as Mormon missionaries do. This makes possible an apprenticeship system for home teachers, although often both home teachers are experienced. All willing and well-behaved adult Mormons–plus male teenagers at least 14 years old–are asked to serve as either a home teacher or visiting teacher. Since about half of Mormons in a typical congregation are marginal members of the Mormon Church who do not always attend church meetings and are not willing to be home teachers or visiting teachers, each pair of home teachers usually has about four families to visit, and each pair of visiting teachers has about four women to visit each month. Getting all of this home teaching and visiting teaching done within the month is a tall order; most home teachers and visiting teachers fall short of the goal and feel some guilt about that. 

(Although I consider myself a Unitarian-Universalist, the Mormon Church officially considers me an “inactive” Mormon. I have specifically asked not to have any home teachers, and am grateful that this wish is respected. Some years ago, our family received regular letters from someone who was called as our home teacher, which did not bother us too much.) 

Mount Timpanogos as viewed from my Dad’s deck

Mount Timpanogos as viewed from my Dad’s deck

When the two home teachers arrived at my Dad’s house, my sister Sarah and brother-in-law Kevin greeted them at the door. Then everyone, including me, gathered in my Dad’s study, which has a picture window looking out on Mount Timpanogos. We had a very pleasant chat about things going on in our lives and in the home teachers’ lives. That kind of chat is actually one of the most important parts of home teaching; if a family is having troubles, then the home teachers will try to help themselves or call on additional resources of the Mormon Church if needed–volunteer time in abundance and money from the Church’s Welfare Program if necessary. After that chat it was time for the lesson: one I really liked. The home teachers gave us each paper copies of a document labelde “Lesson of the Bees” by Elder Russell Ballard. I am using my copy of that document to give the account that follows. 

We read out loud in turn. The first two paragraph went like this:

Honey bees, by instinct spend their life pollinating, gathering nectar and condensing that nectar into honey. It is estimated that to produce just one pound of honey, the average hive of over 20,000 bees must collectively visit millions of flowers and travel the equivalent of two times around the world. Over its short lifetime of just a few weeks to four months a single honeybee’s contribuition of honey to its hive is a mere one-twelfth of one teaspoon. Yet the small contribution is vital to the hive of the honey bees. They rely on each other. The lesson of the bees is profound: When many people each do something small, together they accomplish something large. 

Then the current president of the Mormon Church, Thomas S. Monson, was quoted as saying (amont other things) “Often small acts of service are all that are required to lift and bless one another; a question concerning a person’s family, quick words of encouragement, a sincere compliment, a small note of thanks, a brief telephone call.”

There was then a quotation within a quotation of a Mormon hymn, “Have I Done Any Good”:

Have I done any good in the world today? Have I helped any one in need? Have I cheered up the sad and made someone feel glad? If not I have failed indeed. Has anyone’s burden been lighter today because I was willing to share? Have the sick and the weary been helped on their way? When they needed my help was I there? 
There are chances for work all around just now, opportunities right in our way. Do not let them pass by, saying “Sometime I’ll try,” but go and do something today. ‘Tis noble of man to work and to give: love’s labor has merit alone. Only he who does something helps others to live. To God each good work will be known.   

When I was young, instead of “Only he who does something helps others to live. To God each good work will be known” it went “Only he who does something is worthy to live. The world has no use for the drone.” This was amended because it was felt to be too harsh. (The biology is bad, too, but I doubt that played any role in the amendment. And notice that there has been no amendment to the gender-biased language.) The amendment came too late for me: I still feel in my bones "Only he who does something is worthy to live. The world has no use for the drone.“

The last paragraph of the document simply repeated the message of the first paragraph. But before that what was evidently a talk by Mormon apostle Russell Ballard talked about the significiance of the symbol of the beehive for Mormonism:  

The Beehive was a symbol of harmony, cooperation and work for the early pioneers of the Church. Brigham Young used the symbol to inspire early Church members to work together to transform the barren Salt Lake Valley into a beautiful and thriving community. The Beehive symbol was imprinted on the doors of the Salt Lake Temple and the Beehive House, Brigham Young’s Official residence, was adorned and named after a beehive sculpture atop the house. 

To this day, Utah is known as "the Beehive state” and a beehive is at the center of Utah’s state seal:

To me, the beehive is a fitting symbol of efforts to make the world a better place, even for those who, like me, do not believe in the supernatural. Saving the world takes the efforts of many, many people. It cannot be done alone. And beyond the goal of saving the world is the goal I talk about in “Teleotheism and the Purpose of Life” of bringing to pass “that day, that fine day, when God and Heaven do exist."

Virginia Postrel: The Glamour of Harmony

“… [the 1939 New York World’s Fair’s] merchandising sold both political planning and commercial products—and packaged both in glamour. It encouraged visitors to project themselves into a future not only of abundant goods and impressive technology but of effortless harmony and order. The fair did not acknowledge any contradiction between individual choices in the marketplace and ‘cooperative’ political planning. In its glamorous depictions of the future, all groups worked together in harmony, and individual and collective plans exactly coincided. By editing out conflicts, the fair heightened the allure of both its commercial exhibits and the politically directed future. It sold a world where everyone wanted the same thing, a world without trade-offs or losers.”

– Virgina Postrel, The Power of Glamour, pp. 191-192

Tina Rosenberg: A Psychological Depression-Fighting Strategy That Could Go Viral →

I love to see technological progress. Technological progress in mental health care is especially welcome. Tina Rosenberg discusses an approach that seems to be both effective and affordable. 

To lower the cost of treating depression in the US, the key policy issue is to make sure that certification and licensing for this kind of counseling is kept inexpensive. We need to keep psychologists from erecting barriers to entry just to protect their market position.

Q&A: Is Electronic Money the Mark of the Beast?

Simon: My name is Simon Hauser. I write for a german media outlet (Godmode-Trader.de) and occasionally I address your fascinating thoughts about monetary policy and in particularly e-money.

I appreciate that your “confessions” not only gravitate around the quantifiable sphere, but also around deeper and (by economists) often neglected issues like religion and the like.

To my knowledge the bible is the only sacred book that talks about E-Money - or to be more accurate - the abolishment of cash:

And he causes all, the small and the great, and the rich and the poor, and the free men and the slaves, to be given a mark on their right hand or on their forehead, and he provides that no one will be able to buy or to sell, except the one who has the mark, either the name ofthe beast or the number of his name. (Revelation 13:16)

What is you opinion about the potential dangers emanating from a unholy alliance between E-Money and a „beast“ for the concept of liberty? Wouldn’t E-Money – besides all positive effects it offers – be the ultimate tool of subjugation in the hands of a future system, which might lurk in the fat tail of probability distribution?

Best regards from an avid reader.

Miles: At first I was excited to read in your email that e-money was in the Bible. But as you point out, only as the work of the devil!

As far as liberty goes, it is important that my system is one that keeps paper currency around. It does not try to disadvantage paper currency, only to keep the interest rates on paper currency in line with the interest rates available electronically.  

Also, as a critique of the idea of just abolishing paper money, I always argue that it is hard to stop people from using paper currency completely because for some transactions there is a high demand for secrecy. If a government tried to abolish paper currency completely, people would start using foreign paper currency. A government could effectively tax paper currency to a substantial degree before people switched to a foreign paper currency, but there is a limit. (For the graphs in my Powerpoint file, I took a -20% interest rate on paper currency as my very rough guess for about how low the interest rate on domestic paper currency could be before people switched to using a foreign paper currency–in a context where the government was doing the usual things to discourage people from using foreign paper currency.) I don’t think it is that easy to take away people’s ability to do transactions in secret.

Miles’s Addendum: A famous economist (whose identity I will protect) made to me the following very interesting point: for those who worry about oppression by a future government worse than the government we have now, it is a mistake to put any faith in paper money. It is very easy for a government that sees paper money as subversive to make paper money worthless by issuing huge amounts of it. A technically cutting-edge country willing to annoy foreign countries, can even make foreign paper money worthless by issuing large amounts of high-quality counterfeit bills. Rather than putting faith in paper currency, a much better check on the power of a future government would be for the current government to issue convenient gold and silver coins of specified weight that could be used as money in dire future circumstances. As long as these gold and silver coins were not given a dollar value in non-apocalyptic times, but rather were labeled by weight, and were not used as a unit of account, they would not interfere with monetary policy in pre-apocalyptic dimes. (Their dollar values would fluctuate in value relative to electronic dollars according to supply and demand for gold and silver.) Of course in an apocalyptic situation, these coins would become a unit of account among those fighting the oppressive government–and that is as it should be. 

Notice that having had a gold standard means nothing in an apolacyptic situation because the government can simply go off that gold standard; what is needed in an apocalyptic situation is actual gold coins of known weight, or something else that can easily be used as a commodity currency. Those gold coins or other things that can serve as a standby commodity currency don’t cause any trouble in the non-apocalyptic situation as long as they have a fluctuating price relative to the unit of account in the non-apocalyptic times.    

Brad DeLong: Try Everything →

I very much like Brad DeLong’s message here. 

Policymakers have always had a model for escaping from the 2008 economic crisis. In the 1930s, US President Franklin D. Roosevelt responded to the Great Depression with a simple yet radical strategy: try everything that might boost demand, increase production, or reduce unemployment, and then scale up the things that work.

Brad is happy to include my proposals within the scope of “Try everything.” Here is my Twitter interaction with him on that. 

Negative Interest Rates and Financial Stability: Alexander Trentin Interviews Miles Kimball

Link to the original English version “SNB should introduce a fee on paper currency” and link to the German version “SNB sollte Gebühr auf Bargeld einführen.”

After Alexander Trentin wrote about my electronic money proposal in “Japan, It’s Time to Finally Overthrow Cash!” in a post on the Zurich web magazine Finanz und Wirtschaft (which translates as “Finance and Economics”), he arranged an interview with me. This is his distillation of that interview. I appreciate his permission to mirror it here, after a reasonable delay. What I like most about this interview is the chance it gave me to talk about how follow up an electronic money policy that makes deep negative interest rates possible with measures to enhance financial stability. 

The caption for the picture at the top is 

«The Swiss National Bank has crossed the Rubicon», says Miles Kimball. It would be reasonable for the Swiss central bank to introduce a fee on paper money.

and the summary at the top is 

Negative rates in Switzerland will result in massive paper currency storage, says Miles Kimball, professor at the University of Michigan. The Swiss National Bank needs to introduce measures to fight currency storage.

Miles Kimball, economics professor at the University of Michigan, presented to a number of central banks his idea of a fee on paper currency. In his opinion it is crucial to inhibit the storage of cash to ensure the effectiveness of negative rates. Kimball writes about his idea at «Confessions of a Supply-side Liberal».

Mr Kimball, the president of the Swiss National Bank (SNB), Thomas Jordan, said that the current deposit rate in Switzerland of –0.75 percent could be even more negative. But how low can negative rates go?

If people know that the value of paper currency could go below par, the only limit to how low interest rates can go is full-scale economic recovery. Such an expansion – including in Switzerland’s case a competitive exchange rate – would make further low interest rates unnecessary.

But how low can interest rates go when people can earn a zero interest rate by storing cash?

People disagree about that. But even with a negative rate of –0.75 percent – given some time, let’s say five years – there would be massive paper currency storage. It might take a while until business models are set up to store paper currency. But if people knew the current situation would continue, this would happen at current negative rates. But if I were going to set up a paper currency storage business, I would be afraid that the SNB would disrupt my business – as it should. If people become confident that the SNB won’t do anything to get in the way of their profit by paper currency storage then the ability to set negative rates will be severely compromised. The SNB has already crossed the Rubicon into the territory where they need to do additional things to inhibit massive paper currency storage.

Last year you had a presentation to SNB staff. What did you advise them to do?

I proposed a deposit fee on paper currency. The path that the SNB followed makes it quite plausible. I know that they are open to new approaches. The fact that they went down to –0.75 percent tells you that they are open to try new policies. In the current context it is fairly straightforward and would sound reasonable to say: we start to see signs of a buildup of paper Swiss francs, so we want to inhibit that. We will cut off the arbitrage between paper currency storage and negative rate deposits by introducing a gradually increasing paper currency deposit fee. If banks want to deposit the paper currency with the SNB, they have to pay this fee. I don’t see any reason why the SNB could not defend this. Giving up the currency peg to the Euro was much more controversial.

So, if I would like to deposit bank notes on my account, the bank would charge me, because they have to pay a fee with the SNB. Is this correct?

Yes, if the deposit fee started at zero, but was going to increase every year by 1.25 percent, then even at interest rates of –1.25 percent there would be no temptation to pile up paper currency because there would be no way to profit from such cash storage any more. Notice that at that rate it would take years before the fee would be more than a few percent. With such a small deposit fee, most retailers would still accept cash at par. So the deposit fee should not create problems for regular households who just get paper currency to pay for goods. And hopefully the economy can recover before the deposit fee has to increase further.

You argue for large swings in interest rates to stabilize the economy. To fight a recession, you propose rates could go quickly to negative rates. What kind of level of interest rates would you have advised for the great recession in 2008/2009?

I wrote in “America’s Big Monetary Policy Mistake: How Negative Interest Rates Could Have Stopped the Great Recession in Its Tracks” that if we had a rate of –4 percent in the US in 2009, we would have a robust economic recovery by the end of 2009. In fact, I think a rate of –3 percent would probably have done the trick. To people who doubt that even –4 percent would have been low enough, I answer that you can go as low as you need to. At some point the economy takes off at very fast speed. That brings interest rates up. If measures are taken to avoid massive paper currency storage, then the only limitation on how low you can go on interest rates is that at some point you get an economic recovery.

You advocate negative rates instead of Quantitative Easing, QE. How do these instruments work differently?

QE operates with risk and term premia. With negative interest rates you lower all four interest rates: the central bank target rate, the lending rate, the rate on bank reserves, and the paper currency interest rate. Negative rates bring the whole term and risk structure down. If the risk premium is too high than QE works great. But it becomes harder: If you squeeze term and risk premia more and more, you need larger and larger amounts of QE to have an effect. And if you try to squeeze the risk premium below what it should be, there are probably some bad side effects. In contrast, if you use negative rates to pull the whole term and risk structure down, the economy can still function in a normal way. Banks operate on spreads: if they can lend at a higher interest rate than they borrow, they are fine. I don’t want to be too negative about QE, because during the financial crisis risk premia were elevated, so it was good to bring them down then. And there is a good argument to be made that risk premia have typically been too high even in normal times, so it is good to bring them down some. But there is a limit to how much QE can do.

Not all parts of the economy are evenly stimulated by low interest rates. What would you say about worries that, due to low rates, real estate prices and other asset prices could end up in a bubble?

According to standard economic theory, asset prices in general should be high when interest rates are low. If real estate prices in particular are an issue, you could have property taxes. But the big issue is not that property prices get really high, but the high degree of leverage in real estate. The right policy is to require banks to have 50% equity financing, in addition the individual mortgages should having 50% equity requirements. Only some of the equity financing of mortgages needs to come from the homeowner. Banks could effectively put up the rest by taking a portion of the capital gain or loss on a house when it is sold. The idea of high equity financing is to let the people who are putting up the equity sign up in advance that if prices fall, they will take the hit.

Are there other effects of low interest rates on asset prices?

The equilibrium real interest rates might tend to be low in the future. The transformation from manufacturing to services in many countries like Germany and in the future China could be one reason for that. The future interest rates could be positive, but maybe fairly low. Such a low interest rate in the long run would mean that predictions and expectations about what will happen in the more distant future are much more important for asset prices. The debates about such expectations could make asset prices fluctuate more.

Why is the distant future more influential when rates are low?

If interest rates are high, then companies only care about projects that pay out very fast,  because otherwise they can’t pay back that interest. On the other hand, if interest rates are very low, companies and people also make investments that may take quite some time to pay off, because the interest burden is modest. If you can wait a long time for the pay-off, people’s ideas of what will happen ten or twenty years from now will become crucial for buying companies or valuing projects. If you have low interest rates, asset prices will not only be high, they will fluctuate more. So we need to have structures in place to deal with that. A higher equity requirement for banks and mortgages will make explicit who is taking the risks. If the risk-bearing is not made explicit through equity requirements, it will be the government and taxpayer who will have to pay for losses to stop a financial crisis.

But would higher equity requirements not outweigh the positive effect of negative rates?

As there is an implicit government subsidy for debt, higher equity requirements are taking away some government subsidy for debt-financed investment. To compensate for that you may need to lower rates further. In a speech Larry Summers said that as aggregate demand is too low, we might need bubbles to increase demand when at the Zero Lower Bound. But having negative rates allow us restrain bubbles with higher equity requirements without worrying about having enough aggregate demand. Negative rates are powerful enough you don’t have to depend on asset bubbles any more to stimulate aggregate demand.

In one article, you argued that Switzerland offers insurance to the world through the safe assets it provides. But how can the country benefit from offering this insurance?

Switzerland should consider establishing a Sovereign Wealth Fund, separated from the central bank. This is now standard when a government has more financial wealth than debt. With negative interest rates large sums could be borrowed, maybe four or five trillion Francs, and they could be invested in exchange traded funds, to avoid get involved in individual companies. The business would be that of a bank: borrow cheaply, invest with a higher return. One reason for the criticism of the large foreign exchange reserves of the SNB was the low returns. I think higher returns would lead to greater acceptance of a large fund.

Bio of Miles from the German version:

Miles Kimball has taught at the University of Michigan in Ann Arbor since 1987.  He is Professor of Economics. Before completing his doctorate in economics at Harvard, he studied linguistics with a thesis on the philosophy of language. Kimball has presented his proposals on negative interest rates and the introduction of an electronic currency to many experts, including the Fed, the ECB and the Swiss National Bank. He also presents his ideas on his blog "Confessions of a Supply-Side Liberal.“
“I remember my own first grade teacher and how stirring she found the words of John F. Kennedy, as he took the reins of the country and challenged his fellow citizens to—and here I paraphrase only slightly—‘Ask not what I can do for you; ask what you can do for me’ Ever since, I’ve been alert to pro-government prejudice among teachers and other opinions leaders.”

John Stuart Mill on Having a Day of Rest and Recreation

It is not surprising that John Stuart Mill argues against the imposition of one’s religious strictures on other people–including one’s beliefs about a day of rest from regular work. What I find surprising is that he has so much sympathy for some sort of social rules to encourage people to take a day of rest. He does recommend that people not all synchronize their day of rest, since recreation often requires the help of someone doing herhis job. In On Liberty, Chapter IV, “Of the Limits to the Authority of Society over the Individual” paragraphs 20, he writes:

Another important example of illegitimate interference with the rightful liberty of the individual, not simply threatened, but long since carried into triumphant effect, is Sabbatarian legislation. Without doubt, abstinence on one day in the week, so far as the exigencies of life permit, from the usual daily occupation, though in no respect religiously binding on any except Jews, is a highly beneficial custom. And inasmuch as this custom cannot be observed without a general consent to that effect among the industrious classes, therefore, in so far as some persons by working may impose the same necessity on others, it may be allowable and right that the law should guarantee to each the observance by others of the custom, by suspending the greater operations of industry on a particular day. But this justification, grounded on the direct interest which others have in each individual’s observance of the practice, does not apply to the self-chosen occupations in which a person may think fit to employ his leisure; nor does it hold good, in the smallest degree, for legal restrictions on amusements. It is true that the amusement of some is the day’s work of others; but the pleasure, not to say the useful recreation, of many, is worth the labour of a few, provided the occupation is freely chosen, and can be freely resigned. The operatives are perfectly right in thinking that if all worked on Sunday, seven days’ work would have to be given for six days’ wages: but so long as the great mass of employments are suspended, the small number who for the enjoyment of others must still work, obtain a proportional increase of earnings; and they are not obliged to follow those occupations, if they prefer leisure to emolument. If a further remedy is sought, it might be found in the establishment by custom of a holiday on some other day of the week for those particular classes of persons. The only ground, therefore, on which restrictions on Sunday amusements can be defended, must be that they are religiously wrong; a motive of legislation which never can be too earnestly protested against. “Deorum injuriæ Diis curæ.” It remains to be proved that society or any of its officers holds a commission from on high to avenge any supposed offence to Omnipotence, which is not also a wrong to our fellow creatures. The notion that it is one man’s duty that another should be religious, was the foundation of all the religious persecutions ever perpetrated, and if admitted, would fully justify them. Though the feeling which breaks out in the repeated attempts to stop railway travelling on Sunday, in the resistance to the opening of Museums, and the like, has not the cruelty of the old persecutors, the state of mind indicated by it is fundamentally the same. It is a determination not to tolerate others in doing what is permitted by their religion, because it is not permitted by the persecutor’s religion. It is a belief that God not only abominates the act of the misbeliever, but will not hold us guiltless if we leave him unmolested.

I heartily agree with John Stuart Mill that “abstinence on one day in the week, so far as the exigencies of life permit, from the usual daily occupation, … is a highly beneficial custom.” It can be a hard custom to maintain for those of us who feel ourselves to be in some kind of contest (or what economists often call a “tournament”) against others whom we imagine as not taking any time off. For some of us in competitions we feel to be tight, even sleep seems like a luxury that is hard to afford. (I was glad to host the guest post “Dan Miller: Sleep as a Strategic Resource,” but look at the gainsaying comment to see how negative the attitude toward sleep can be among competitive types.)

Perhaps the best way we could shift the culture toward giving highly competitive folks like many of us a bit of a break would be to make our ability to keep up with everything despite taking time off something to brag about. I am thinking about something like the story I told in “How the Idea that Intelligence is Genetic Distorted My Life—Even Though I Worked Hard Trying to Get Smarter Anyway:

Once I actually got to college, with many other smart competitors, I knew I would have to work hard in ways more directly related to classes. But the desire to impress my classmates with the appearance of little input for high performance was still there. I still get a frisson of joy remembering the time one of my classmates expressed awe that I managed to survive in college despite not studying on Sunday.

In that vein, one of the things I have always been impressed with about William F. Buckley is that he managed to do everything he did to change the world while still pursuing his favorite recreations (such as sailing) vigorously. 

The following story is told about Joseph Smith, the founder of Mormonism:

That Joseph Smith liked to pull sticks, wrestle, play baseball, swim, and hunt is generally well known. William Allred, who played ball with Joseph many times, recalled an instance when someone criticized the Prophet for indulging in play. To answer the criticism Joseph told a parable about a prophet and a hunter—clearly explaining his own philosophy about the relationship of play to work. As the story goes, a certain prophet sat under a tree “amusing himself in some way.” Along came a hunter and reproved him. The prophet asked the hunter if he always kept his hunting bow strung up.
 “Oh no,” said he.
“Why not?”
“Because it would lose its elasticity.”
“It is just so with my mind,” stated the prophet; “I do not want it strung up all the time.”5

Except in genuine emergencies (which are frequent enough), let us try not to act like workaholics, especially since it tilts things toward everyone else feeling they need to act like a workaholic. There is plenty of trouble in the world, and a lot to do to save it. But maybe a little fun (and sleep) along the way will improve our productivity enough that it won’t put us too far behind in that endeavor.

And in fact, thinking only about "productivity” dramatically understates the benefit of taking some time off now and then. There is always a big danger of finding that one has worked very hard to take the world in the wrong direction. A balanced life gives one a fighting chance to gain the extra perspective needed to lessen that danger.

Virginia Postrel: The Glamour of Terrorism

“Jihadi terrorism combines two ancient forms of glamour, the martial and the religious, with the modern allure of media celebrity. It promises to fulfill a host of desires: for purity and meaning, union with God, historical significance, attention and fame, a sense of belonging, even (posthumous) riches and beautiful women. The jihadi’s ultimate goal of a restored caliphate exemplifies the glamorous utopia, while the terrorist plot recalls the synchronization of heist movies, with a secret and intricate plan in which every team member is important and the goal is to outwit authorities and commit a crime. It’s not hard to imagine how appealing all this might be to a bored, alienated, and impressionable person.”

– Virgina Postrel, The Power of Glamour, pp. 220-221

Noah Smith: These are the Econ Blogs You Need to Read

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Link to Noah’s article on Bloomberg View

In his article “These are the Econ Blogs You Need to Read,” Noah Smith has some kind words to say about me and this blog:

The Dreamers
Confessions of a Supply-Side Liberal, by Miles Kimball: My doctoral adviser has recently become one of the most interesting and original occupants of the blogosphere. His favorite topics include monetary policy – where he champions unconventional ideas such as electronic money, federal lines of credit, and a U.S. sovereign-wealth fund – and education, where he urges a rethink of our basic values and approaches. As the grandson of a prophet of the Mormon church, he also has a deep interest in religion.

Leaving this aside, Noah gives a very useful tour of the economics blogosphere. This is an article I will send my students to help them find their way in the econ blogosphere.