conversableeconomist

Online Access and Academic Journals

The publisher of my own Journal of Economic Perspectives, the American Economic Association, decided earlier this year to make the journal freely available to all on-line–not only the most recent issues, but the archives going back 12 years or so. Thus, I read with particular interest the article draft report that Mark J. McCabe has done for the National Academy of Sciences: \”Online Access and the Scientific Journal Market:
An Economist’s Perspective.\”   Here are some of his comments, although I have omitted citations for readability.

Conclusion
\”Online access to the scientific literature has transformed the distribution of the scientific literature. This literature is now easier to search and read, especially for the producers of new articles: the scientist authors affiliated with research institutions. Unfortunately, the cost of supporting this enterprise has not declined. Ironically, the same technologies that enable immediate access for readers also facilitate bundling and pricing policies by the major commercial publishers that exacerbate rather than alleviate the inflationary pricing trends of the pre-internet era.\”

On the \”journals crisis\”
\”Starting in at least as far back as the 1980s, and continuing to the present day, prices for these journals have increased at rates far exceeding general inflation rates, and faster than the growth in overall library budgets. This trend and its negative impact on institutional journal collections are often referred to as the “journals crisis.” With the emergence of low-cost internet-based distribution of content in the late 1990s, as well as open access journals, there was some hope in the library community that this crisis might abate, and access prices might even decline. However, prices continued to increase at or above economy-wide rates of inflation.\”

[I\’d add that my own journal published one of the early papers documenting and discussing this subject in our Fall 2001 issue: \”Free Labor for Costly Journals? by Theodore Bergstrom.]

How has the journal market evolved with on-line publication? 
\”By 2000 or so, most of the changes wrought by the internet that are visible today were in
evidence. They include:
1. Current journal content is sold primarily as part of large publisher-specific journal bundles, or
“Big Deals,”and normally includes access to content back to the 1990s. Print
is still available for a surcharge.
2. Bundle prices are institution-specific; access is sold on an annual subscription basis.
(Contrast this with the absence of price discrimination in the print era, and the lack of bundling.)
3. The emergence of commercial and non-profit open access (OA) journals. OA journals can be
accessed online at no charge, and recover their costs through some combination of author fees
and grant monies and government funding. The Directory of Open Access Journals or DOAJ currently catalogues more than 6000 titles, many of which are peer-reviewed.
4. Publisher sell their electronic journal backfiles for a one-time charge; 3rd parties provide
electronic access to backfile content from multiple publishers on an annual subscription basis,
e.g. via Ebsco or JSTOR.
5. In addition to the open access working paper repositories mentioned earlier, dozens of major
research universities and funding organizations have adopted (open access) self-archiving
mandates. (go to http://roarmap.eprints.org/ for a list of the organizations and the repository
websites).
6. Google Scholar. This search tool was not introduced until late 2004 but has quickly emerged
as a powerful complement to the content available online.\”

How online access to journals has entrenched incumbent publishers
\”The conceptual/theoretical analyses of journal bundling discussed earlier suggest that the adoption of Big Deal contracts are likely to deter new entry (and/or encourage exit), and enhance the market power of the largest incumbent firms. In other words, although online distribution did lower distribution costs it obviously did not change the basic demand conditions in this market; if anything this new technology augments their exploitation, since it has facilitated cost effective bundling and price discrimination. The annual 7% price increases should continue until those demand conditions change.\”

Do articles in open access journals get more citations?
\”Although open access journals have begun to proliferate, perhaps in response to publisher bundling, their long-term viability in lieu of subsidized author fees remains uncertain. One of the chief benefits of OA is supposed to be greater readership and impact (and this assumption is important in providing the economic justification for the OA business model). However, the evidence in support of this claim remains uncertain. Although initial studies of this question revealed large positive benefits of online access (including open access), more recent papers on this subject have identified a series of data and econometric problems that when addressed eliminate most but not all of the presumed benefits.\”

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How the U.S. Has Come Back to the Pack in Higher Education

In posts over the last few days, I\’ve showed the basic patterns of U.S. income inequality over the last century, and showed how patterns of supply and demand for skilled labor can explain the movements of inequality of incomes.

If one accepts the argument that the supply of skilled workers in the U.S. hasn\’t been keeping up with demand in recent decades, and further accepts the argument that a skilled workforce is essential to future growth in a nation\’s standard of living, it\’s troubling to observe that the America\’s long-standing advantage in sending more of its people on to higher education is evaporating. For example, in a report out last month from the Georgetown University Center on Education and the Workforce, Anthony P. Carnevale and Stephen J. Rose write: \”A clear trend has emerged: The United States is losing ground in postsecondary education relative to our competitors. … The significance of these rankings goes beyond mere bragging rights—increasing our supply of skilled labor is central to the vitality of the U.S. economy.\”

Carnevale and Rose illustrate the point with two figures. The first one shows the share of those in the age 25-64 age bracket who have college degrees (including both two-year and four-year degrees). The U.S. ranks near the top, with Japan and Canada. But if one looks at another figure, this time showing only those in the younger 25-34 age bracket, one sees that the U.S. advantage in college attainment is concentrated in older age groups. The U.S. is only middle-of-the-pack in attainment of college degrees among high-income countries.

In the Summer 2008 issue of my own Journal of Economic Perspectives, Elizabeth Cascio, Damon Clark, and Nora Gordon make a similar point in \”Education and the Age Profile of Literacy into Adulthood.\” They write: \”For most of the twentieth century, the United States led the developed world in participation and completion of higher education. … In recent years, however, other high-income countries—many of which established comprehensive secondary schooling in decades prior—have substantially expanded access to university education. In fact, many countries that significantly lagged the United States in university graduation only a decade ago—Finland, Sweden, and the United Kingdom among others— now have comparable
if not higher graduation rates.\”

They offer a table showing that in 1970, the U.S. led most countries of the world in (four-year) university graduation rates, and often by a lot. By 2004, lots of other high-income countries had closed the gap.

Carnevale and Rose point out that on current trends, the number of U.S. workers with a post-secondary education will rise by 8 million by 2025, and argue that the U.S. should set a goal of adding an additional 12 million workers with post-secondary education over that time. The goal seems worthy enough, but the devil is in the details. After all, the true challenge isn\’t to hand out an extra 12 million college diplomas, but to raise the education level of high school students so that more of them are ready to attend college, and to reform higher education to get costs under control and assure that it is adding to the skill sets of students, broadly understood.

There\’s a lot of cynicism these days about U.S. higher education, about whether the ever-rising costs are worth the benefits. I live and work in higher education, and there is plenty of room for reform. But whatever one\’s doubts about the current state of U.S. higher education, watching the U.S. lose its historical advantage over other high-income countries in terms of what share of the population gets a college degree is deeply troubling. 

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Causes of Inequality: Supply and Demand for Skilled Workers

Last week I posted on how measures of U.S. income inequality have evolved over time. There, I ducked the question of why this has happened. In \”The Undereducated American,\” a report that came out last month from the Georgetown University Center on Education and the Workforce, Anthony P. Carnevale and Stephen Rose offer a nice synopsis of the answer economists give most often.

They write: \”The relative wages of college-educated workers have been rising much faster than the wages of
people with a high school diploma. The laws of supply and demand are the best single indicator of whether the United States is producing enough, too few, or too many college graduates. If the relative earnings of college-educated workers rise faster than the earnings of their counterparts, it means the demand is growing faster than supply. The data, therefore, are unequivocal—Americans are undereducated.\”

To illustrate this theme, they present a couple of useful figures from the 2008 book by Claudia Goldin and Larry Katz: The Race Between Education and Technology. The first figure shows how supply and demand of college-educated workers has evolved over time, compared to the 1970 levels. The general pattern is that demand for these skilled workers was ahead of supply in the 1920s, supply then went ahead of demand most of the time up until about 1980, and since then demand for skilled labor has outstripped supply.

The next figure shows the \”wage premium\”–that is, how much more is skilled labor paid over unskilled labor. In this figure, “skilled labor” is defined as all holders of four-year college degrees and graduate degrees, plus one-half of those with some postsecondary education, while \”unskilled labor” those who did not complete high school, those with only a high school degree, and the other half of those with some postsecondary education.

When demand for skilled labor outstrips supply, then the wage premium for skilled labor is high. When supply outstrips demand, the wage premium for skilled labor drops. This is a powerful explanation for why inequality of incomes has changed over time.

But while I\’m sure this argument is a lot of the explanation for rising inequality, maybe most of the explanation, other issues play a role as well. For example, the demand for skilled and unskilled labor is also affected by factors like the great advances in information and communications technology in recent decades, and by the  ability of firms to outsource some kinds of production to other countries. In addition, the evidence on income inequality from my post last week suggests that a lot of the rise in inequality is because of gains going to the very top of the income distribution--not necessarily broadly distributed to all of those with a higher level of education. So puzzles about the causes of inequality remain. 

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Everybody Hates Biofuels

I hope that reports from international agencies will include some interesting facts, but I don\’t expect them to have policy recommendations that are more than fluff. Thus, it\’s stunning to me that a June 2011 report from 10 international agencies–FAO, IFAD, IMF,OECD, UNCTAD, WFP, the World Bank, the WTO, IFPRI and the UN HLTF–have come out with a strong and clear recommendation that governments drop their biofuel subsidies. 

The report is called \”Price Volatility in Food and Agricultural Markets: Policy Responses.\” It describes the situation of global prices in agricultural products over the last few years like this:

\”Irrespective of any conclusion that might be drawn concerning the long term trends, there is no doubt that the period since 2006 has been one of extraordinary volatility. Prices rose sharply in 2006 and 2007, peaking in the second half of 2007 for some products and in the first half of 2008 for others. For some products the run-up between the average of 2005 and the peak was several hundred percent. On the rice market the price explosion was particularly pronounced. The price rises caused grave hardship among the poor and were a major factor in the increase in the number of hungry people to more than one billion.8 Prices then fell sharply in the second half of 2008, although in virtually all cases they remained at or above the levels in the period just before the run-up of prices began. Market tensions emerged again during 2010 and there have been sharp rises in some food prices. By early 2011, the FAO\’s food price index was again at the level reached at the peak of the crisis in 2008 and fears emerged that a repeat of the 2008 crisis was underway.\”

The 10 agencies point to a number of factors affecting food prices: growing world population and incomes, weather-related disruptions, and others. But then they focus quite particularly on biofuels subsidies (I\’ve dropped footnotes and paragraph numbers from the quotation that follows).

\”Between 2000 and 2009, global output of bio-ethanol quadrupled and production of biodiesel increased tenfold; in OECD countries at least this has been largely driven by government support policies. …  Biofuels overall now account for a significant part of global use of a number of crops. On average, in the 2007-09 period that share was 20% in the case of sugar cane, 9% for both oilseeds and coarse grains (although biofuel production from these crops generates by-products that are used as animal feed), and 4% for sugar beet. With such weights of biofuels in the supply-demand balance for the products concerned, it is not surprising that world market prices of these products (and their substitutes) are substantially higher than they would be if no biofuels were produced. Biofuels also influence products that do not play much of a role as feedstocks, for example wheat, because of the close relations between crops on both the demand side (because of substitutability in consumption) and the supply side (due to competition for land and other inputs).

\”At the international level, crop prices are increasingly related to oil prices in a discrete manner determined by the level of biofuel production costs. … Since both energy and food/feed utilise the same input, for example grain or sugarcane, increases in the production of ethanol reduce the supply of food and result in increases in its price. This relationship between the prices of oil, biofuels and crops arises due to the fact that, in the short run, the supply of crops cannot be expanded to meet the demand by both food and energy consumers.

\”If oil prices are high and a crop\’s value in the energy market exceeds that in the food market, crops will be diverted to the production of biofuels which will increase the price of food (up to the limit determined by the capacity of conventional cars to use biofuels – in the absence of flexfuel cars and a suitable distribution network). Changes in the price of oil can be abrupt and may cause increased food price volatility. Support to the biofuel industry also plays a role. Subsidies to first-generation biofuel production lower biofuel production costs and, therefore, increase the dependence of crop prices on the price of oil. Such policies warrant reconsideration.\”

And so the 10 international agencies offer what strikes me, by the standards of these kinds of reports, as a shockingly blunt recommendation:

\”Recommendation 6: G20 governments remove provisions of current national policies that subsidize (or mandate) biofuels production or consumption.\”

conversableeconomist

How high is U.S. income inequality?

When looking for statistics on U.S. income inequality, my standard starting point is the data from the U.S. Department of the Census, which shows the share of income received by each quintile (that is, each fifth) of the income distribution, as well as the share received by the top 5% of the income distribution.
(Specifically, see Table F-2 at this link.)

The basic story is that the income distribution didn\’t move too much from the mid-1950s up to about the mid-1970s; indeed, when I was learning economics in college in the late 1970s and early 1980s, a rule of thumb was that the U.S. income distribution was essentially stable. But since then, the share of income going to the top fifth has risen substantially, from 40.7% of all income in 1975 to 48.2% of all income in 2009. That increase of 7.5 percentage points is almost all traceable to the top 5%, which saw its share of total income rise by 5.8 percentage points over this time–that is, from 14.9% of total income in 1975 to 20.7% of income in 2009. Over this time, the \”fourth fifth\” of the income got a slightly smaller share, and the bottom three-fifths all saw a substantial decline in their share of total income.

In an essay in the March 2011 issue of the Journal of Economic Literature, Anthony Atkinson, Thomas Piketty, and  Emmanuel Saez write about \”Top Incomes in the Long-Run of History.\” (An ungated version of the paper is available at Saez\’s website here.) They use tax data to construct estimates of income inequality in the U.S. and other countries going back to early in the 20th century. The tax data isn\’t directly comparable to the Census data just mentioned, but it\’s the only reliable source of data on the very top of the income distribution going back this far in time. The paper is long and chock-full of insights, but here are a few of their basic facts on U.S. income equality over time.

First look at the share of income going to the top decile–that is, the top tenth–of the income distribution. This follows a U-shaped pattern: after rising in the 1920s, the share of income going to the top tenth drops in the Depression, stays relatively fixed from the 1940s up through the 1970s, and rises since then.

Now, break down that top tenth into three parts: the top 1%–the solid triangles in the graph; the next 4%– that is, from the 95th up to the 99th percentile–which is the hollow triangles in the graph; and the next 5% after that–that is, from the 90th to the 95th percentile–which is the hollow diamonds in the graph. It turns out that most of the increase in the share of income received by the top 10% is actually a rise in the share being received by the top 1%.

Finally, look not at the top 1%, but at the share of income received by the top one-tenth of 1%. Remarkably, it turns out that a large share of the growth in inequality is because of growth in the share of income received by this tiny sliver of the income distribution.

How bothersome is the level of inequality we have reached in the United States, and the concentration of that inequality in the extreme upper part of the income distribution? There is of course great controversy on this point. After all, these figures are annual snapshots, and don\’t show mobility across income levels between years. Probably the top 0.1% of the income distribution varies considerably from year to year, depending on which executives are cashing in a lifetime\’s worth of stock options in a single year. At the bottom end of the income distribution, income statistics don\’t take into account the value of \”in-kind\” transfers like Medicaid, Food Stamps, or vouchers for low-income housing. There are questions about how well tax data captures the overall income distribution at different historical points in time. There are a variety of arguments over why this trend toward great inequality has happened, many of them emphasizing how changes in information and communications technology have allowed those with high skills to increase their earnings.

For now, I\’ll duck these issues and controversies , and just let the fact that I think these data are worth presenting speak for itself. We can debate what the facts mean, but it IS a fact that in historical terms, U.S. income inequality is currently very high, about as high as it has been in the last century. It is also a fact that most of that change in inequality is because of a larger share of income going to the very top of the income distribution. 

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The Severity of the Great Recession

Kevin J. Lansing of the San Francisco Fed offer some graphs that illustrate the severity of the Great Recession: one compares the decline in real household consumption per person in the 2007-2009 recession to the recessions of 2001 and 1990-91; another compares the decline in real household net worth per person in these three recessions.


Lansing offers an additional figure worth contemplating: the change in the employment/population ratio since 1988. The unemployment rate has some well-known difficulties as a measure of the employment situation: for example, \”discouraged\” workers who have given up looking for jobs are not counted as officially unemployed, but rather as out of the labor force. But the employment/population ratio is just based on dividing two numbers–employment and population. The shaded areas in the figure show periods of recession, when the employment/population ratio does tend to fall.

But the decline in the employment/population ratio in this recession is enormous: 5.2 percentage points over four and a half years: from 63.4% in December 2006 to 58.2% in June 2011. Back in the grim double-dip recession of the early 1980s, for comparison, the employment/population ratio fell 3 percentage points over a bit more than three years, from 60.1% in December 1979 to 57.1% in March 1983.


These enormous declines in consumption and in asset values and the loss of jobs, of course, help to explain why the economic \”recovery\” is sometimes being called the Long Slump. The pattern also offers some background as to why the federal budget talks seem so intractable: when a recession dents the economy this badly, passions are going to run high. 

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Producing Safe Assets, Searching for Risky Opportunities

Private capital is, on net, flowing from advanced economies to emerging economies. However, even larger flows of public capital are, on net, flowing in the other direction from emerging economies to advanced economies. Here\’s a figure to illustrate the point, from Simona E. Cociuba of the Dallas Federal Reserve:

These \”upstream\” capital flows–that is, from middle-income to higher-income economies–won\’t go on forever. At some point, countries in the rest of the world will not wish to expand their holdings of foreign and especially U.S. dollar assets further.

But the pattern of the U.S. economy investing overseas in somewhat riskier private assets, while foreign governments and investors stock up on safe U.S. assets like Treasury bonds, may be a pattern that lasts for a long time. As I learned from an article by Richard Cooper on trade imbalances in the Summer 2008 issue of my own Journal of Economic Perspectives, even though foreign investors own more in U.S. assets than U.S. investors own in foreign assets, U.S. investors receive larger cash flows from their foreign assets than do foreign investors from their U.S. assets.

In 2009, for example, total U.S.-owned assets abroad were $18.3 trillion, while total foreign-owned assets in the U.S. were $21.1 trillion. However, the U.S. economy as a whole received $165 billion in receipts and payments from its assets abroad, while the foreign investors received $124 billion in receipts and payments from their U.S. investments.

How is the U.S. economy getting higher payments from a lower total pile of assets? A more detailed look at those assets suggests and answer. More of the foreign assets are in low-earning safe havens like Treasury securities, while more of the U.S. assets abroad are direct ownership of assets or equity. For example, the U.S. has more direct investment abroad ($4 trillion) than the foreign-owned direct investment in the United States ($2.7 trillion). Similarly, U.S. investors owns more corporate stock abroad ($4 trillion) than foreign-ownership of corporate stocks in the U.S. ($2.4 trillion).(All statistics in these last two paragraphs are from tables B-103 and B-107 from the back of the 2011 Economic Report of the President.)


There is a long-term advantage here for the U.S. economy, based on its financial and legal structure, and its investment and managerial expertise. In a metaphorical sense, the U.S. economy operates like a huge bank, accepting \”deposits\” from the rest of the world on which it pays fixed safe interest rates, and then seeking ways to invest that money in corporate projects around the world.

That is, the U.S. economy can provide safe assets like Treasury bonds for the rest of the world economy. Governments of emerging markets often cannot borrow a great deal in their own currencies, and their economies have a hard time creating assets that global markets will regard as \”safe.\” (Indeed, Ricardo Caballero of MIT argues that a cause of the financial crisis was the attempt of the U.S. financial sector to produce additional safe assets from mortgage-backed securities to satisfy the demand of foreign investors for such assets.) Meanwhile, managers and investors from the U.S. economy can also provide a certain kind of oversight of overseas companies in a way that in some cases is likely to work better than local oversight: that is, oversight from U.S. investors and managers can be more informed and less susceptible to local political pressures.


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Lucas and Stokey on liquidity crises

Robert E. Lucas and Nancy L. Stokey have a lovely readable article in the June 2011 issue of The Region, published by the Federal Reserve Bank of Minneapolis, on \”Liquidity Crises.\” The paper offers a readable overview that connects the main  themes of high-profile academic theory papers in this area to what actually  happened. A few highlights:

\”Any one bank, no matter how large and respected, can go out of business almost without a ripple. Anyone living in an American city can list the downtown banks he grew up with that vanished in the merger movement of the 1990s. Who misses them? Indeed, who misses Lehman Brothers, for generations one of the most respected financial institutions in the world? Its valuable assets, both physical and human capital, were quickly absorbed by surviving banks without notable loss of services. It was the signal effect of the Lehman failure, whether a signal about the situations of private banks or about the Federal Reserve’s willingness to lend to troubled banks, that triggered the rush to liquidity and safety that followed.\”

\”We will argue here that what happened in September 2008 was a kind of bank run. Creditors of Lehman Brothers and other investment banks lost confidence in the ability of these banks to redeem short-term loans. One aspect of this loss of confidence was a precipitous decline in lending in the market for repurchase agreements, the repo market. Massive lending by the Fed resolved the financial crisis by the end of the year, but not before reductions in business and household spending had led to the worst U.S. recession since the 1930s.\”

\”As deposits moved out of commercial banks, investment banks and money market funds increasingly provided close substitutes for the services commercial banks provide. Like the banks they replaced, they accepted cash in return for promises to repay with interest, leaving the option of when and how much to withdraw up to the lender. The exact form of the contracts involved came in enormous variety. In order to support these activities, financial institutions created new securities and new arrangements for trading them, arrangements that enabled them collectively to clear ever larger trading volumes with smaller and smaller holdings of actual cash. In August of 2008, the entire banking system held about $50 billion in actual cash reserves while clearing trades of $2,996 trillion per day. Yet every one of these trades involved an uncontingent promise to pay someone hard cash whenever he asked for it. If ever a system was “runnable,” this was it. Where did the run occur?\”

Lucas and Stokey answer that the run occurred in repo markets, and offer an intriguing table that shows while cash, private demand deposits, and money market funds all  had more money in January 2009 than they had in January 2008, repo contracts held by primary dealers dropped substantially.

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Inbound Foreign Direct Investment in the U.S.

The Council of Economic Advisers has a short summary of \”U.S. Inbound Foreign Direct Investment.\” This seems to be defined in the report as \”U.S. affiliates of foreign-domiciled corporations.\” I see a lot of commentary that mentions foreign ownership of U.S. portfolio assets, like U.S. Treasury bonds, but much less on FDI in the United States.

The CEA says: \”The United States continues to receive the most foreign direct investment (FDI) of any country in the world. … U.S. “majority-owned” affiliates of foreign corporations owned $11.7 trillion in U.S.
assets and had $3.5 trillion in annual sales in 2008, according to the most recently available data from the Bureau of Economic Analysis. Their value-added production within the United States was $670 billion in goods and services, which accounted for 5.9 percent of total U.S. private output. These firms employed 5.7 million U.S. workers, accounting for 5.0 percent of employment in the U.S. private workforce. … The U.S. affiliates of multinational companies are typically high-productivity firms that are major private-sector contributors to national efforts to innovate and build.\”

Here\’s a bar graph putting the activities of U.S. affiliates of foreign corporations in the context of the U.S. economy.

Here\’s a figure showing stocks of inbound FDI, where the U.S.  clearly leads the world by a lot. It also shows the Foreign Direct Investment Restrictiveness Index from the OECD. The U.S. isn\’t much above the OECD average on this restrictiveness index, but it\’s interesting to me that it is above the average at all.

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The Thin Line Between "Fees" and "Interest"

A couple of days ago, I posted about consequences of restricting payday lending, and how it serves as a modern example of the impulse that once produced usury laws. Payday loans charge a \”fee,\” rather than \”interest.\” But historically speaking, actual term for \”interest\” on a loan grew out of fees. Joseph Persky explained this point in an article in my own Journal of Economic Perspectives a few years ago: \”Retrospectives: From Usury to Interest.\”

Joe wrote: \”Canon law in the Middle Ages forbade usury, which was generally interpreted as a loan repayment exceeding the principal amount. Our modern word “interest” derives from the Medieval Latin interesse. The Oxford English Dictionary explains that interesse originally meant a penalty for the default on or late payment of an otherwise legitimate, nonusurious loan. As more sophisticated commercial and financial practices spread through Europe, fictitious late payments became an accepted if disingenuous way of circumventing usury laws. Over time, “interest” became the generic term for all legitimate and accepted payments on loans.\”

One of the big trends in modern banking and finance it seems to me, is a move toward making a greater share of revenues based on fees. Whether it is fees for bank overdrafts, making a late payment on a bill, going over your credit card limit, the example of payday loans in my earlier post, or in a number of other ways, many of us tend to accept as reasonable a level of \”fees\” that we would find intolerable if they were phrased in terms of an annual rate of interest being charged.