Secular Stagnation Notes

1. All this buzz about secular stagnation implies the economy was running just fine and now post financial crisis and resulting recession, it is stagnate.

Rob Brenner and others have a different perspective - the capitalist model actually has never worked and stagnation has just been interrupted by weird periods of growth.

2. The Harrod-Domar growth model also sheds light on why there is this stagnation or 'excess capacity' and equally interesting how such a state can persist.

The model assumes for any change in the rate of investment, a change will occur on the demand side and on the supply side. On the demand side the increase in the rate of investment filters through the multiplier and increases the rate of income. On the supply side the increase in the rate of investment causes a change in the rate of potential output. Equilibrium is defined not only as y = potential output but when their rates of change are also equal.

Solving the model we find r must be equal to the given capital ratio times the marginal propensity to save. But if actual growth r is greater than p*s then demand will be greater than capacity and a shortage will ensue causing firms to act in the opposite way of an equilibrating action; they invest more even though they should invest less.

Imposing secular stagnation onto these results we can understand why this stagnation could persist- if the actual rate is smaller than the required rate to utilize all capacity then there will be a capacity surplus and firms will decrease investment when they should invest.

The model demonstrates something we already had intuition about- some investment is needed to correct the deficiency in investment.

Rise of Rentiers and Capital's Never Ending Quest

(Notes and Thoughts from David Deming's talk on Value of Post-Secondary Education)

The situation

The cost of  a college degree has been increasing steadily while state funding of post-secondary education has stayed the same since the 90's and more recently decreased (Deming et. al, 2014). This means students have had to foot more of the bill - which would explain the increase in student debt. The federal government's Title IV financial aid program is supposed to help fill this gap.

However, a good chuck of Title IV money is flowing to for-profit online colleges. For-profit online degree granting institutions have exploded in growth, many relying on Title IV as revenue (Deming et al., 2014).  Not only that, the largest of these institutions are owned publicly traded companies.

Deming and his co-authors investigate the value of a for-profit online degree given their explosive growth and their allocation of government funds. They find that, "applicants with bachelor’s degrees in business from large online for-profit institutions are about 22 percent (2 percentage points) less likely to receive a callback than applicants with similar degrees from non-selective public schools, when the job vacancy requires a bachelor’s degree" (Deming et al., 2014). This finding, coupled with the fact for-profit degrees are more expensive than public and community colleges, suggests investing in a public university or community college degree is the better investment compared to a for-profit online degree.

Implications and Questions

-Why is the cost of a college degree increasing?

- Title IV flowing to online schools which are more expensive and LESS valued in labor market has implications on student debt.  Debt might be higher and would definitely be harder to pay off, thus sucking more consumption out of the future and possibly leading to higher default rates.

-It seems as if financiers have ingeniously found a way to make the government absorb the risk of bad loans while they take in the profits.  The government lends the money to the student, which then gets transferred to the for-profit online college.  The college gets the money regardless of if the student graduates, graduates and finds a bad job, or graduates and finds a good job.  The risk of the student not being able to pay back the loan (which according to Deming's study is higher than a public degree holding student) is shifted to the government.  I might be missing something, but this seems like a great set up if I own stock in a publicly traded corp that has its hand in the for-profit degree business.

Deming et al. Paper

Deming, D.J., Yuchtman, N., Abulafi, A., Goldin, C., & Katz, L. (2014). THE VALUE OF POSTSECONDARY CREDENTIALS IN THE LABOR MARKET:
AN EXPERIMENTAL STUDY. NBER.Working Paper 20528
http://www.nber.org/papers/w20528