Toilet Paper in a Pandemic

This probably isn’t the best use of my time right now,  but maybe there’s a teaching moment here.

In the face of the COVID19 pandemic, folks in the US (and apparently most developed nations) have gone on a toilet paper buying spree.  One result besides the appearance of empty shelves, has been a lot nasty commentary in social media and news media attacking people for alleged “hoarding” of TP. The comments have come complete with  all the cheap puns and childish humor talk of toilet paper invites. (I will probably fall prey to that too!)

In store after store, the shelves often appear empty and denuded of toilet paper. This is a rather sudden and unexpected development for most people accustomed to a first-world life where a fundamental fact of like is assumed to be: there will always be toilet paper.  People and pundits have proclaimed a shortage of toilet paper brought on by irrational “idiots”. Social judgements and pejoratives have been flying since.

Even economists are not exempt. Justin Wolfers has likened the toilet paper shortage to a classic run-on-the-bank (couldn’t resist the pun, eh, Justin?) which might be individually rational but becomes a systemic failure. Justin considered the possible need for a national strategic toilet paper reserve.

I’ve read several pyschologists speculate on the “meaning” and “underlying psychological needs” driving the “hoarding” of toilet paper. I’ve read that it’s a controllable first-world comfort when people are faced with a sudden, scary uncertainty. Maybe there’s a tiny bit of truth in that, but it’s not enough to IMO to move that much TP. Other psychologists have speculated that it’s herd behavior. Some people bought up some more TP than normal, so they did too. Soon the shelves were bare and panic has ensued. Again, maybe a little sliver of truth, but not enough.

I’m going to weigh in on the topic, too. I think I have a bit more experience with toilet paper than the average person and more so than the average economist. It’s not because of my diet. Not only am I an economist and things like “supply” and “demand” are my basic tools, but early in my career I was the business planner/strategist for a very large industrial distributor/wholesaler. A distributor that distributed – you guessed it – toilet paper.  A lot of it. We didn’t supply much to the retail channel. We supplied businesses, factories, restaurants, hospitals, schools, and hotels.  Thanks to us, the nether regions of millions of people from GM factories to Florida resorts were kept clean and hygienic. I learned a lot about the economics of toilet paper back then. I’m sure it’s changed some since, given the better inventory management tools available today, but the essence of analysis still holds.

I think what we’ve seen has been a fairly rational response, at least initially, and I don’t see any great toilet paper crisis of 2020.  Yes, there has been some individual hoarding behavior, but probably a lot less than people think. What I see is a sudden shock to one of the most incredibly stable supply chains around. You see, there really isn’t any toilet paper inventory as you think of it.  Let me explain some of the economics of getting dried squares of wood pulp from a mill to your butt without discomfort.

TP-nomics: More than you ever wanted to know

Consumption drives the demand toilet paper.  Even in a crisis, there is not really any speculative value to toilet paper, nor is there any value to just owning a bunch of it. There is no ongoing use value either. Use two squares, and it’s done. It’s not like paintings which give ongoing value just for having them. It’s not a good store of value like cash, or gold, or bonds. It’s not a capital asset like a house, furniture, or a car.  It’s a single use value.  True, the perceived use value is high (at least in non-bidet using developed countries), but it’s very utilitarian. It doesn’t even bring social status, despite all the Charmin advertising.

I can tell you this from having analyzed and modeled the consumption and demand for toilet paper all those many years ago. It’s stable. Rock stable. Easy to forecast. If you know how many butts you’re dealing with, you can predict the consumption. That’s it. (and no, local cuisine or tastes don’t matter). People x days = TP needed.

The second fact of TP economics is that there’s a giant distributional mismatch. It’s produced in vast quantities in a very small number of places (mills) but consumed in a mind-boggling number of very specific locations. There are two in my house alone. When the need for it arises, the inventory MUST be in each location. When I want TP in the downstairs bath, I’m going to be really annoyed if it’s not there and I have to go source it from the upstairs bath or the basement pantry. I’ll be even more annoyed and greatly discomfited if I have to go to the store before I can use the toilet. Know what I mean?

In contrast, toilet paper is produced in a small number of places called mills in very, very large quantities on very, very large machines. So while we might indeed know how much TP is used each day – and that’s pretty much how much TP will be produced each day – we still have a problem. We produce just enough each day, but it’s in giant quantities in a few places when what we really want is a few squares in billions of places.

The third fact about TP economics, is that despite whatever its use value is, the dollar value per cubic foot of space it occupies is very low. It’s bulky. That means for a store or distributor it takes up a LOT of shelf space but doesn’t generate that much sales revenue or profit margin compared to other higher-value, smaller items.  At home, you only keep a roll or three in the bathroom. Nobody builds a bathroom cabinet to accommodate the giant Costco carton. For the store, the only way to survive those economics is to turn-over the inventory rapidly. That means that relative to demand, there’s actually very little in inventory. The large bulk makes it look plentiful to the consumer, but it’s not really. It’s simply being restocked, re-ordered, and replenished faster than just about any item in the store.

So how does our vast national TP distribution system work? It’s a network of very high turnover inventory locations, each one serving to “break bulk” in the distribution from mill to your butt.  The mill produces today and puts it on trucks or rail cars immediately and ships it out.  As soon as the truck/trains can get to the distribution centers (like the ones my ex-employer owned), it’s unloaded. A train car load is split up and becomes stacks of pallets or stacks of cases but they don’t sit still. That inventory is turned over very fast -meaning the cartons are loaded onto trucks and delivered to stores, factories, hospitals, and smaller wholesalers. Even back in my day 40 years ago, we emptied and shipped out that whole rail car in less than week. I wouldn’t be surprised if these days, turnover in some distribution centers could be measured in hours.

There really isn’t any toilet paper buffer inventory anywhere. As a nation, we haven’t really had a reserve of TP to buffer fluctuations in demand or supply – because we don’t need it.  Forests keep making wood fiber at about the same rate every day. People keep wiping their butts at the same rate everyday. What appears to be inventory is only temporary spots of relocated stuff that we turnover as fast as a possible. We have just-in-time production.

To recap:
Made in mill by train load –> whse in cases/pallets –.>store in multipacks –> home by carton–> bathroom cabinet by the extra 1-2 rolls –>dispenser roll

As soon as the minimum viable quantity runs out at each stage, we replenish. It’s a TP flow, not a TP inventory.  In reality, the slowest moving inventory is at the household.  Most households tend to buy one to a few weeks worth of TP at a time. They don’t want to waste space storing more. Assuming they don’t wait till they totally run out, that means they may have, on average, let’s say 10 days worth of TP on hand. When it gets low, they buy more. The grocery or big box where they shop knows that thousands of customers are doing the same predictable thing and the store only stocks enough for maybe 2-3 days worth of sales in inventory, maybe even less, knowing they’ll get more shipments.  The shelves always look nicely stocked with TP, but it’s all fresh, new stuff – unlike that jar of pickles you bought that was actually produced a year ago and been sitting in the store ever since.

So What Happened?

Everything is fine, until the Centers for Disease Control or other public health authorities try to gently prod people to “prepare” for possible isolation and quarantine because of COVID19.  It’s rational and it’s needed. The point of the isolation, social distancing, and quarantines is to minimize social contact. That means being prepared to go awhile without going to the store.  A necessary implication is that everybody’s household supply of TP is inadequate. If they typically run a 10 day supply on average, they need to temporarily increase purchases to actually create what they haven’t had before: a buffer stock.  So people started buying more. Rationally buying more.

Buying a buffer stock is only a temporary increase in demand.  Once you have your buffer, you go back to buying just enough to match usage, keeping the buffer stock in place. You might think that having households add some buffer stock shouldn’t be a big deal, but it was – because that’s how fast TP inventory turns over.

Initially the guidance late last February was for households most at risk to prepare (buy buffer stock) and two weeks was suggested.  But the pandemic has spread faster than most people expected. We now know from Italy’s experience and China’s that extremely broad based and possibly longer  isolation  – meaning minimizing trips to store – is needed. So it’s been an unprecedented and unexpected bump up in purchasing.

But it’s temporary. It  may take weeks for the production chain to catch up, but  purchasing will slow down too. Mills will ratchet up production some.  Nobody is going to truly hoard TP. Contrary to Justin Wolfers’ analysis, TP isn’t like cash. People can keep hoarding cash without limit. TP has some physical limits. Remember it’s high bulk/low value. Where would they put it all?

The dynamics on some other products is a little different. But even with something like hand sanitizer, where the shortages reflect a large sudden increase in consumption and demand, I expect part of the sudden shortage is because we generally have a high-turnover product distribution system. In hand sanitizer, eliminating the shortages depends largely on the ability of manufacturers to switch production facilities away from other products and into more sanitizer production. I expect that to be feasible, but I don’t really know that industry well enough to predict how soon it will restore equilibrium.

There are products in an apparent irrational short supply due to hoarding/panic behavior. I attribute a lot of that to Americans’ fascination with zombie apocalypse movies.

But toilet paper?  It’s a temporary shock to a stable supply chain.

SO relax. Wash your hands and stop being so nasty and judgemental of people.   If you’re going to criticize people, try criticizing them for standing so close in line or not covering their cough.

 

 

Learning in a Pandemic – 2

poster saying keep calm and keep teachingOPEN LETTER: Planning to Make “the Switch”

This is part two of my posts about teaching in the COVID19 pandemic amidst the possibility that we (faculty)  may have to switch on short notice to teaching at a distance what were originally face-to-face classes.  If you haven’t already, please start by reading my first post about getting in the right frame of mind about making “the switch”.

In my first post, I emphasized that making switch isn’t the same as “teaching online”.  Teaching online implies a much bigger, more complex undertaking that involves a designing and conceiving an entire course differently.  You aren’t doing that. Your goal now is to take finish the course as best you can without doing face-to-face meetings because those now endanger people’s health in the community.  You’re trying to improvise and fill-in a very specific gap in a very specific course in a very specific course.  I’m going to write this as if I’m speaking to professors preparing for their own individual classes and as they make contingency plans as a group for their program/department. I’m trying to consider both full-time and part-time.

Mind the Gap

I really mean “analyze the gap” but this sounds better. The key to preparing to make the switch is going to be understanding that gap – the gap in your course.  There is no magic formula. There is no universal rubric. Each class-instructor combination is likely unique.  Depending on circumstances, you might want to consider thinking in terms of 2-3 scenarios instead of phrasing it all as “going to online for the remainder”.  For example, scenario 1 might be “we are told to make the switch a week before final exams”.  That’s going to be different thing than “we are told around mid-semester to make the switch” or being told at the 3/4 mark. I’m going to ignore here the possibility you are told to “convert an entire summer session class to online with only 2 weeks notice in advance”.  That last scenario is a lot more complex and really does resemble trying to design/create a whole online class. I’m going to focus on finishing a f2f without actually meeting.

I would start with your existing syllabus and plans for the remainder of your course. In your own words, what’s the gap between what the students have already learned and what they need for the final exam or capstone assignment or just what’s remaining to be covered. In other words, what’s missing?

  • What assignments & topics haven’t been started and will need to be done entirely in the revised approach?
  • What types of work do students need to do to learn that material/concepts/skills and what is the critical aspects of how they can effectively learn it?  For example, suppose I were teaching my f2f macro econ course. If the gap contains the stuff about how Keynesian theory vs Classical theory works, that can be handled fairly well through readings and lectures. New, additional reading can substitute for some lecture fairly well in my experience. But on the other hand, if money  & banking is what’s missing and in the gap, then there’s really no good substitute for doing some problem sets related to it.
  • What assignments are have been started and now need to be redefined or altered? I expect this would include most kinds of project work. Students have already started it with a vision of the goal or output.  If that output/result is a paper to be turned in, then all’s good. You can do that easily via the LMS.  But if it involves in-class presentation, then you need to focus on alternatives.
    • Flexibility works wonders. Consider giving students options for completion or presentation: perhaps a selfie-video, perhaps a written paper instead, a small video conference, etc.
  • Is there group work planned or in progress?  Your challenge here is help them find a mode of communicating and working together remotely.
  • Assessments:  how many and what type of assessments/graded stuff is in the gap?  Final exams come to mind.

Once you focus on your gap, you’ll start having a good idea of what your needs are. In general,in my opinion, courses that are the closest to traditional lecture-and-test or lecture-and-write paper are likely to have the clearest gap. There’s specific topics to be covered and it’s mostly an “information provision” problem.  In my opinion, the project stuff, assignments already underway, group work, and classes that are heavy on in-class seminar/active synchronous discussion  work are the most challenging and will require the most creativity.

What’s In Your ToolBox Now

Next, consider what specific resources or preparation you already have.  I’d start with your faculty and any existing online classes you have. Then I would consider what tools/technology/materials you already have available. Finally, consider what people you can contact to fill in your toolbox if needed, such as faculty you could consult in another program/college, or your Center for Teaching Excellence, or your LMS management department.

For example, in my program we’ve discussed this and largely done our contingency planning. We’re fortunate. The gap is largely about several topics, some problem sets, and the final exam mode (we have proctored exams of a departmental final). But, every faculty member in our program has taught or is teaching their courses in both online and f2f formats.  So we each have both the experience in online, in using the LMS, and we have alternative approaches and materials already ready and available.  Our school has a robust LMS and we don’t need the video options much.  Our toolbox suits our gap pretty well.

In another program I’m familiar with, they’re close to the same situation, but they have experienced online+f2f full-time faculty but some part-time faculty don’t have the online experience and would lack some materials.  Their tentative plan would be for the experienced full-time online profs to share what’s needed from their existing resources and assignments.

In our case, it’s the final exam that’s the issue. It’s proctored in person on paper for both online and f2f classes. We decided that our contingency plan would be to go to an all online delivery of the final exam using the LMS without proctoring but with a time limit. Not wanting to risk the exam contents “getting out” (it changes each semester, but not dramatically), we decided that if “the switch” were necessary, we would collectively, the five full-timers, write new questions for this semester, hoping to return to the old format later. We discussed and recognized that this will make semester-to-semester course assessment analytics impossible this time. (we actually do those analyses!) but this would be an emergency exception. That’s key. Be flexible and adaptable.

BTW: For those concerned about cheating in online exams, especially at the community college level. I am intimately familiar with a faculty member who has taught the same course online at two different schools for many, many years. The same final exam (or virtually the same) has been used at both schools. One school requires in-person proctoring of the final exam, the other allowed unproctored online exam taking in the LMS anytime during finals week.  This professor’s experience is that there is no significant difference in scores, distribution, or changes in median scores over time between the two schools and two methods of administering the tests.

This is consistent with research about cheating that identifies it as more pronounced risk in situations that are higher-reward/higher-stakes such as in gatekeeper courses at elite universities.

There was one major difference experienced between the two schools/methods.  In the school where students could do the final online unproctored – and they knew that when the course started – there was a tendency for some (a minority) of students to fall into a dependence on open book for answering quiz questions and then the test, with result that learning become more short-term oriented and not as deep.  This was addressed over time by limiting formative assessments/quizzes to two attempts with unlimited time, but then narrowing midterms to a timed period so they began to realize they couldn’t look everything up, and then having the final be timed and questions carefully written to not be “simple look up stuff”.  Time limits were set so that 98-99% of students can complete the test, but there’s not enough time to look up a lot stuff.

I’ve got some more thoughts and some ideas from my colleagues, but this is enough for now. I’m tired tonight. I guess there will be another post soon.

What’s the LMS Worth?

Herein, against my better judgement, I wade into the Great Instructure social media wars of 2019.  Last week, Instructure Inc., the publicly traded (NYSE: INST) company  announced it had agreed to go private and sell itself to private equity firm Thoma Bravo.  For people who teach in higher education this is big news. Instructure, is the current name for the company founded in 2008 that created and sells the Canvas LMS. Canvas in the last decade has toppled the previous king-of-the-LMS’s, Blackboard. Canvas is now widely reported to have largest market share of higher ed LMS market at least in North America. Moodle, the open source system, appears to dominate outside North America.

The announcement triggered a great deal of, let’s call it discussion, on social media, particularly Twitter. A lot of has gotten nasty and heated.  On the surface, the discussion seems to be about questions regarding what Instructure (or Canvas, or the data Instructure has collected) is “worth”.  Specifically, is it worth the $2billion Thoma Bravo has valued it at and why would TB pay that?

Underlying the valuation question though, is the real concern.  Can we discern the plans and future for Canvas (and thereby schools, instructors, students, the higher ed system, pedagogy, etc) from this transaction?  There’s roughly two camps. Both camps seem to think $2 billion is a big number.  I don’t but I’ll explain that later. One camp seems to be arguing that the $2 billion is perfectly justified as a valuation for Canvas as it is now and as an ongoing successful business and therefore there’s nothing to be concerned about here, nothing to see, just move along.  The other camp is seems to see $2 billion as a very big number and a clear indicator that Instructure’s new/future overlords will be monetizing the (relatively) massive database of user/student interactions (Instructure’s own claim as to it’s massiveness) and therefore putting students/faculty at risk from nefarious surveillance and profiling via AI (artificial intelligence and algorithms).

What I want to do is clarify some mistaken ideas/concepts that I see a lot of my education friends (and not so friends) arguing.  What’s been argued, by both camps at times, is not good economics or well informed finance. I’m not going to name folks here nor call out any one in particular. That’s not my intent. I’m hoping to clarify some thinking.

What’s a company worth?

Both camps seem to be arguing the “worth” (in precise economic/finance technical terms it is the “valuation”) of the company using the wrong theory or models of how valuation/worth is established.  The implicit model being used by all is familiar in economic/finance theory. It’s the idea that the current value of an investment (i.e. the purchase price of the company) should somehow be justified as expected present value of the future cash flows of the company from doing business.   That’s understandable. It’s a decent way to start evaluation of investment decisions – particularly inside companies when they decide to invest in something like a new machine or an expansion. It’s not the only consideration. There’s strategic considerations too.

So as an example  we’ve heard arguments that Instructure has been growing, generates cash, and has margins of 70%, so the value is just reasonable and therefore there’s nothing for the education community to worry about.

On the other hand, some have essentially argued that the only reason private  equity would pay this and/or the only pay they can recoup their money is if they monetize the data and that is presumed to lead to nefarious outcomes.

Let me clarify. The company was purchased, not the software and not an asset. The company. There is only one real-world way that valuations of companies are established: Will somebody pay a higher price later for this same company?  Let’s be very clear. This is a private equity deal. PE funds do not run companies. They do not sell things. They buy and sell companies. Period. That is all they do.  The only customers they have are the other PE firms or corporations or banks that they sell their  companies to.  Period. Thoma Bravo is not in the education or edtech business. They are in the buying-and-selling software companies business. That’s it. And no matter what they say about “being in it for the long run”, they aren’t. PE firms generally look to recoup and sell the business inside of 5 years, preferrably a lot sooner.

Conclusion #1:  No matter what any manager at Instructure or TB tells you, the needs of higher education are no longer the driving force.  The driving force is putting together a nice story supported by anecdotal financial data that leads to some future firm paying TB way more than $2b in a couple of years.

So is Instructure worth $2b?  We’ll find out if and when TB sells it. My guess is yes, TB will definitely flip this in a few years for substantial profit, assuming the bottom doesn’t totally drop out of the LMS market. (a small but real possibility).

Any argument you make about the deal based on business fundamentals is nonsense and fantasy. It’s part of popular econo-myths. Before you try to argue with me on that, do this one test: can your implied model of valuation explain why Uber went public at a valuation of ~$100 billion when Uber has never made money, is cash negative, and has no prospects of making money?  Can your model explain WeWork?  If you still don’t believe me, I suggest researching a little with Professor Scott Galloway (@profgalloway) about how valuations and funding happens real world these days.

What’s next?

What can we expect? Will the data be monetized? Will it be sold off piece-by-piece? Will Instructure/TB now invest heavily in all kinds of accelerated innovation? (Ok, I just threw that last question in for laughs. Of course they won’t. Real innovation costs money, time, and work). Really, we don’t know but there are some high probabilities based on the new capital structure and owners.

First off, there’s the possibility of some good old fashioned battle of the funds. We know very little about the specifics of the Instructure-TB deal. That’s how private equity works. It’s private. It’s not transparent. However, it seems that Instructure has 35 days (counting holidays) to find a better deal. Some other funds, hedge funds in this case, have taken positions in Instructure and they don’t think $2 is enough.  Typically the only people who come out ahead in these situations are lawyers, banks, and partners at the biggest funds. Little shareholders and the rest of the human race, not so much.

Once the deal closes, the priority at Instructure will be clear and it has two parts. First priority is get the money (cash) back to TB. I’ve heard it said on the Twitters that TB is putting out $2b of it’s money to buy Instructure. Again, we don’t know details for sure, but that’s almost certainly false. PE deals don’t work that way -especially with a company like Instructure that generates a healthy positive cash flow, is profitable, and has little debt (AFAIK).  Typically the playbook is that the PE firm buys the company largely with the target company’s own money.  In this scenario, the PE fund (TB in this case) puts up a relatively small amount of their own cash up front. They take a very short-term bridge loan from a friendly bank to get the total $2b in cash needed to buy out the shareholders. Once the deal closes, Instructure Inc. then is directed by their new owners, TB, to get a loan from a bank secured by the company’s assets. The proceeds of that loan are then paid as some kind of “special dividend” to the new owners to retire their loan. The PE fund has a small at-risk stake at that point. Management fees or sell-off of some assets in the first year can often pay back that cash. By maybe the end of the first year, the PE fund has gotten all it’s cash back and is playing with house money at that point. The target firm (Instructure in this case) is likely a lot more debt-laden than before with a lot less free cash flow.

At that point, we consider the other priority (don’t worry, these folks can multi-task so you’l hear this one right away). Namely, the big priority is to develop a story that leads to another big pocket putting out well more than $2 in a few years. Tell the story and tell it hard. Once they’re private, that becomes a bit easier. Less real data has to disclosed since they’re no longer public, so it’s easier to be selective with the data and put your own spin on it without fear of those pesky shareholder suits and the SEC (is anyone actually still afraid of the SEC?).

PE firms, like Venture Capitalists or hedge funds, aren’t looking for nice safe returns on their money. You and I would be ecstatic to get annual returns of 10-20% on our retirement funds. These funds look for more. They want multiples of the initial investment. So they’re looking for deep pocket buyers that can and will spend not $2b, but maybe $4b or $6b or more in just a couple years.  The PE fund wants a big exit and once the deal closes the only thought is the exit. Running the business is only important to the degree it helps tell a story that helps them exit.

Why would anyone pay that in a couple years from now?  Go back up to the section on “What’s it Worth?”.  There aren’t that many routes for exit for a PE firm:

  • do an IPO (initial public offering) -not likely here since they just took it private – obviously the public market wouldn’t value it high enough
  • find a bigger sucker PE fund – the story of why there are untold, untapped riches becomes critical
  • find a really big, deep pockets corporation that wants to add to it’s portfolio of businesses thinking this will add that magical “synergy” to its other businesses.  This is a possibility for Instructure, but the likely candidates are:
    • Google, FB, MSFT, Amazon, or Apple – the people trying to collect everybody’s data about everything in the hope of controlling/monetizing everything.  A story of the value of the data and the ability to predict the future lives of students could lead them to write a big check.
    • Textbook publishers – OK, there are only two left, Pearson and Cengage-McGraw Hill.  They could fall in love with a story of becoming the single source books-homework-courseware-LMS provider. In fact, they’ve tried the LMS before, but couldn’t do it themselves. They might choose to buy in. I’m not sure their pockets are deep enough though.
    • When all else fails, merge. Instructure could merged with Bb or Brightspace using some other PE fund’s money.

Whatever route leads to the exit, that’s the priority now at Instructure. In my opinion, all those avenues are fraught with very good reasons why colleges, professors, and students should be concerned.

Where will the money come from?

Another thing I read on the Twitter was the suggestion that Instructure is somehow impervious to the all-too-common private equity strategy of carve-it-up and sell off the parts.  Nonsense. That tweet came from somebody who purports to know and advocate for private equity but apparently, judging by their tweet, thinks Hollywood movies about whores are primers about finance.  I won’t deal with that aspect of the tweet other than to say that misogynistic tweet was all the evidence to convince me the dude has spent too much time in either tech or finance culture. Unfortunately, he’s not very skilled at the private equity portion. It takes little imagination to see how Instructure could be carved up and pieces sold off. I’m not saying they will. I’m just saying it’s a piece of cake. They’ve made 2-3 acquisitions in recent years. Reverse those and sell. They’ve already told everyone they’re positioning for a possible split-off. They’ve stated they’re separating the codebase for Bridge from Canvas.  Add to that, any business with multiple services, even when sold to the same segment, can be carved up. It doesn’t even take much imagination to do it. All it takes is a willing buyer. And all that takes is a plausible story about the riches at the end the rainbow.

Education is not THE Story Anymore

We in higher education have a tendency to think we’re important as a market. We’re not. For a long time, edtech companies and Silicon Valley have fed that fantasy. We think in terms of the edtech “market” and think it’s attractive. In truth, it’s largely failed to meet to meet SV expectations.  The LMS market is mature. Very mature. Most LMS’s are really based on 1990’s architectures ported to the Web. Canvas was an innovation in 2008 by being cloud based. But product wise, all of them are still largely the same conception of the product as 20+ yrs ago. Everybody who needs an LMS has one.

Yes, Instructure has had decent growth numbers (not sterling by SV standards, but good) in recent years. But finance is all about how are you going to top that going forward. Finance doesn’t look back. Truth is, Instructure or any of the LMS’s are going to have a hard time finding big new sources of revenue. There just isn’t much left in the higher ed budget for their stuff. Even the data analytics for learning part has failed to take off revenue wise. That’s why data mining for AI/Algorithms, monetizing the data to non-education folks, is so tempting.

Yes, any of these LMS firms, or publishers for that matter, could have had decent solid, satble, modestly profitable businesses that were mature. But that’s not how finance capitalism works.  Instructure isn’t an education tech company anymore. It’s just a software company and data processing service that happens to get its data from college and university students.  It will likely be managed that way.

FUD for thought?

I should put a word in about FUD.  Not sure if I introduced it into the conversations on Twitter or somebody else did. I didn’t realize the term was new to so many.  It’s an acronym that stands for Fear, Uncertainty, and Doubt.  The original usage that I’m familiar with dates back to software deals and business deals in the 90’s. FUD was something some firms tried to create in the market about their competitors. For example, back in those days, Microsoft was often accused of putting out PR releases and statements trying to create FUD about whether Linux or open source software was any good.  A more recent example in edtech world would be a few years ago when for-profit publishers would spread stories casting doubt (FUD) about whether OER was any good. They helped perpetuate doubts about the quality of OER in order to justify their high priced books. Nowadays, those publishers have tried to enclose (“embrace and extinquish” – another old Microsoft strategy) OER instead of spreading the FUD.

The thing about FUD is that it usually isn’t specific or justified.  It’s an attempt to cause people to feel uncomfortable about things.

The ironic part now is that I don’t think the concerns expressed on Twitter about the Intructure deal are FUD.  What the concerns have shown is there’s reason to be uncertain – the details aren’t disclosed and won’t be. There’s good reason to be doubtful: private equity deals very often do end up butchering or hampering the core business.

And there’s reason to be fearful:  that giant database of student data has value to big players in the surveillance capitalism industry. There’s the big obvious ones: Google, MSFT, Apple, Amazon, and FB. But there’s a host of other hidden players – data brokers, Palantir, banks, and many others, the lords of the algorithm cults. They often have deep pockets or they’re backed by funds with deep pockets. All Instructure/TB needs to do is convince them of a story about how Instructure’s data can add value to their existing trough.

A Final Lesson

I’ve argued extensively that higher education (perhaps all education, but I’m not expert in K-12) is best organized as a commons. The boundary between commons and the market-oriented capitalist economy is tricky. Capitalists and market-thinkers inevitably seek to enclose the commons, privatizing benefits and externalizing costs onto society.

This boundary is particularly tricky in the edtech world. If there’s one lesson I hope to impart to people in education, it’s the need to do your due diligence on your vendors and “partners”.  Current product offerings aren’t enough. Product roadmaps matter. Plans matter.

But most of all, capital structure matters. No matter how nice the people at the vendor, no matter how good the values of the hired managers are at that edtech “partner”, ultimately it’s capital that calls the tune.  That’s why it’s called capitalism.

That’s No Plagiarism Checker

I finally went on spring break as in “I actually got away from work and stuff”.  We took our first cruise.  For a social and institutional economist with a critical bent that just loves to observe people and capitalism in the wild, let’s just say that a cruise offers a target rich environment.  I’ll have more on that in some other post yet to be written.  But what I did want to comment on was the news last week in the edtech sector.

Last week Advance  acquired Turnitin, the notorious stealer of student intellectual property doing business under the guise of offering “plagiarism checking” services. Turnitin also has some other related businesses such an auto-grading service, etc.  The price was apparently $1.75 billion dollars.  That’s billion with a b.

I’m not here to talk about how awful the pedagogy of mistrusting all students is or how it’s immoral and unethical to steal/coerce student’s copyrights away from them.  These are all horrid aspects of Turnitin and among the reasons why I’ve always, for over a decade, opposed and fought against use of it at my school.  I’m not here to talk about those aspects because people much more knowledgeable than I have been saying that a lot – people like Jesse Stommel and Sean Michael Morris.  And the sale announcement last week has brought a lot of faculty and teacher anger out in public about the sale.

What I want to talk about is the numbers on this deal (I am an economist, after all).  $1.75 billion for this company. That’s a pretty hefty valuation. Especially for a company that really isn’t that big and hasn’t been a huge growth tear.  Yes, it’s been growing and the core product/service probably has a lot of room to expand internationally. But from what I can tell on the Interwebs, Turnitin probably has annual revenue in the $127.7 million range. That’s million with a m.  1.75 B to buy an annual 127.7 M. That means Advance is paying approximately 14 times annual revenue to buy it.  Valuation of a company as a multiple of the annual revenue is common way in finance of comparing whether a deal is highly valued or cheaply valued,  especially for technology companies and startups.  Turnitin isn’t exactly a startup – it was founded circa 1998, but it’s still a “tech” company.  For a tech company 14 x revenue isn’t out of range, but it’s not cheap either. Tech companies, especially ones that are expected to grow fast don’t usually have strong current earnings (profits), so revenues times a multiplier is used to estimate value.  So what this valuation tells us is that Advance expects Turnitin to produce some very significant growth – probably much faster than Turnitin has achieved so far in it’s 20 year life.

And that’s what scares me. Advance isn’t really just a “family-owned company” as some reports have it.  Yes, the ownership of Advance is private and dominated by descendants of Newhouse family (think newspaper publishers). But “family-owned” sounds warm and fuzzy like the diner down the street where you get breakfast.  Advance is a serious technology, publishing, and communications conglomerate. And they’ve got ambitions. And they’re serious with their money.  They think like venture investors. If they invest $1.75 billion, they’ll expect to turn it into $100 billion or more. That’s the game.

Even if they had modest ambitions and only wanted to turn Turnitin into (read those last three words again just for fun)  a modest 10 or 20 billion dollar company, they have to do something big and different. Turnitin isn’t getting to that range on it’s own by doing what they currently do: call students cheats and check for plagiarism.

So how does Advance expect to get it’s money back multiple times?  I don’t know. They didn’t share their thoughts with me.  But they did share them The Chronicle:

Chris Caren, chief executive of Turnitin, said the company’s next step is to become a platform for colleges and high schools to submit all types of student assignments, digital or on paper. It would then use AI to help instructors review that work to, among other things, spot at-risk students and devise remediation plans. The company is also developing Turnitin’s software to branch out into the STEM fields and detect plagiarism in coding, for example. In other words, it hopes to become a one-stop shop for all sorts of tech-driven teaching services.

Advance, which owns companies like Condé Nast, has recently begun investing in data and analytics companies, said Janine Shelffo, Advance’s chief strategy and development officer. Turnitin’s strong market presence and its advanced technologies, said Shelffo, make Turnitin a valuable investment. “There’s a whole road map where we can see where tech innovation will increasingly power personalized learning and enhance outcomes for all students.”

It’s time we connect the dots, folks.  Advance isn’t just a newspaper publisher. They’re  adept at cookies, tracking of readers on the web, and data collection just as Facebook and Google are.  They publish online magazines (Conde Nast, hello?). They publish Reddit and Arstechnica and other sites. They also have very capable big data analysis capabilities (1010data) that “transforms Big Data into smart insights to create the High-Definition Enterprise that can anticipate and respond to change” for 850 large companies.

In the Chronicle article, Sean Michael Morris rightly observes that Advance/Turnitin could develop profiles of students using their data and monetize that via marketing and advertising.  That’s true but I think we’re missing the mark. We’re being distracted by the fact the big two of early surveillance capitalism, Facebook and Google, have monetized their vast troves of surveillance data by using it to sell advertising. Rule of thumb in business strategy:  there’s only room for 2-3 big monsters in any particular big industry.  I don’t think Advance/Turnitin will go that way.

I think it will be worse. They’re already pushing automated-grading systems and student “feedback” systems.  There’s no technological difference between a system that checks a student’s written posting or submission for plagiarism against a database of collected writings and a system that checks those same posts/submissions against a database of “approved” thoughts and phrases. In a way, isn’t that what grading is anyway? Advance/Turnitin can easily morph into the thought police.

But can thought policing be monetized?  You bet. First, any nation that thinks a social credit system for controlling ordinary behaviors like jay-walking is a good idea, will love the idea of policing thoughts and utterances. That will be worth a pretty penny. Let’s suppose that social credit would never take off in the US or Western Europe (an assumption I am loath to make).  Many, many institutions of higher education will jump at such a system.  It’s just an extension of grading – until the database of vetoed utterances, ideas, or word strings is expanded to include controversial ideas.  Are you going to tell me there aren’t some religious based schools that would buy a system that automatically rejects papers or forum postings that suggest abortion is acceptable? Of course, the system won’t just “reject”, it will provide “feedback”.  Those controversial ideas can be handled automatically and merged with the “inclusive” repository of acceptable learning materials (free!) which is also, ironically, the exclusive source of learning materials.

picture of Star Wars deathstar with caption "that's no plagiarism checker, that's a teaching death star"For profit colleges will love the systems since they’ ll allow further cutbacks on faculty. Replacing labor with capital investment is one the oldest tricks in the capitalist toolchest. And, those colleges will get automated stats and data “proving” their students learned!  Not only were the students’ papers “correct” but everything they’ve said on Reddit and other social forums since has conformed to the acceptable.

Forget social credit. We’ve got the possible (probable?) platform for thought control scoring.

By all means let’s complain, scream, and object to the abuses of the Turnitin plagiarism model. But let’s keep our eyes open for the next big data thing.  That’s no plagiarism checker.  That’s the teaching death star.

 

Goals, A Non-News Announcement, and Preview of 2019

So this is just a self-indulgent note to my readers as to what to expect this year. Looking over the stats I see I didn’t achieve last year’s Don’t Call It A Resolution.  Twenty-some posts is way more than I thought I had done last year. A few were good ones of which I’m proud. But many were just posting slides from presentations and there were way too many good-topic posts started and then left to whither in the drafts folder.

Goals:  Write More, duh

So this year, I’m attempting to write more – again.  Only this time I’m making some in-person group commitments that should force the issue.  One implication is that I’m likely to jump around from topic to topic a lot more this year.  It may be economics of money creation one day and critical pedagogy the next, all followed by ramblings about the commons or accessibility and out-of-league mumblings about literacy.

The Announcement: Open Learning Faculty Fellow

It’s really kind of non-news event since I’ve already let many of my friends know, but as of last fall I’m now the “Open Learning Faculty Fellow” in my school’s Center for Teaching Excellence. It’s a 1/2 time appointment, so I’ll still be teaching a 1/2 load. Basically, I’ll be continuing the Open Learning Lab, our name for our Domains of One’s Own effort.  I’ve been doing this for 3 years but it’s all been “experimental” and tentative – meaning semester-to-semester. The school I teach at has finally committed to “institutionalize” this experimental effort and locate it in our Center for Teaching Excellence.  Doing a DoOO at a community college has been a, um, “learning experience”.  In some ways, it’s been chaos for 3 years, but I think we’re finally breaking the code on how to do it in a 2 year school with limited funds and over-loaded faculty.  I’m really excited about this new position and the opportunities it provides.  It’s going to bring additional work, though. Not only do I have the Open Learning & DoOO stuff now, but I’m also getting involved in redesign of what amounts to critical pedagogy/inclusion development efforts and our UDL/accessibility initiatives. Good stuff, but lots of work. I hope writing about it will help me and maybe I can help somebody else by documenting my mistakes (how else do we learn?).

Preview: The Topics for 2019

One of the barriers to my writing more in the past has been my insistence that a post be some kind of fully thought out argument – conclusions, not in-process thinking. That usually led to loooong posts, few and far between. I’m going to see in 2019 if this old dog can learn a new trick. I’m going to try to write my thoughts in shorter pieces. They’ll be less complete. They’ll be more a window into what I’m wondering – more wonderings than conclusions. We’ll see if this works.

So among the topics you can expect mixed up in the coming year:

  • Economics – especially macro posts. I’m teaching a face-to-face class again for first time in 4+ years. I want to shake up my previous lecture- and theory-heavy format and spend more time on the rhetoric of economics. That means I’ll need to post current stuff and help students critique it.
  • Literacy and Education – Leslie Johnson (@mtflamingo on the Twitter thing) has organized a hybrid Faculty Learning Community group at LCC this semester. I’m not only supporting the online portion through our Open Learning Lab, but I’ve decided to participate. That means reacting to a lot of readings.  You’ll know those posts from the category /hashtag #literacyflc.
  • Commons and Higher Ed Governance/Policy – I’ve really got the bit in my mouth for researching & studying the concept of higher ed as a  commons.  I talked more about this back in my Shelter post.  The OpenEd18 post on Commons  was only the start. I’ve got a big stack of notes now and Lord willing, I’ll get it in writing this year. My spouse insists it’s the beginning of a book. We’ll see. I know I’ll be updating it at OER19. It’s the passion right now.
  • Accessibility and Critical Pedagogy – These are the high priority initiatives in the CTE, so I’ll be sharing my thoughts as learn. So far, the more I learn, the more I realize how much more I just don’t know.

Conference Hopes:

The conferences I’m planning on attending/presenting – not including the ones we present on campus as part of the CTE:

  • LAND – Michigan Liberal Arts Network for Development for MI community college folks, Feb 6-8. I’ll just be listening.
  • OER19 – Ireland and Galway here we come! Accepted to speak about the Commons and the connections to pedagogy and open.
  • Domains19 – Reclaimhosting is getting the gang together again.  I’ll be there, god willing in June.
  • WPCampus – always a worthwhile WordPress conference in July.  Not sure yet where or when exactly, but I really hope to make it again. It’s become my go-to “wordcamp”.
  • Digital Pedagogy Lab – UMW in August, of course.  I went last year.  I really hope I can repeat, but depends on some issues at the school.

The rest are all just aspirational at the moment. We’ll see.

  • Michigan OER Summit – usually in September at some Michigan CC.
  • Lilly Teaching Conference – Traverse City in October
  • OpenEd19 – Phoenix at end of October. Can’t believe this will be my fifth year. As David Wiley says, I’m old-timer now.
  • OE Global – Milan around Thanksgiving time.  Gee, if I’m really good, maybe Santa comes early and finds a way for me to go to OE Global.  We’ll see….

Shelter in the Open

This is the second of my two reflections on last week’s OpenEd18 conference. This one is personal. I’m stepping outside my normal economist persona and sharing my personal experience. Actually, it’s less a reflection on the conference than reflection on what I learned about myself at the conference.

Open conferences like OpenEd, OER, and OEGlobal should come with warning labels. I’d throw Digital Pedagogy Lab and Domains conferences in there, too, but it would ruin my alliteration around “open”. At good conferences you learn lots of useful things. You think differently afterward. At great conferences  you connect with people. You work differently afterward. But the open conferences can change you. You may be different afterward. I am.  I first wrote about this experience a couple years ago after OpenEd16. It happened last spring at OER18 and OEGlobal. And it happened again last week at OpenEd18. I wasn’t ready for it. They really need a warning label.

At an evening get together with some friends I finally confessed. I’ve never karaoke’ed. Reasons. Many reasons. Some include an utter lack of singing ability. Another is age. I’m from a different generation. I’m a boomer. Karaoke seems like it’s more a Gen X/Millenial thing. An 80’s-90’s thing. I’m a boomer. Grew up in 60’s. Came of age in 70’s. We had radio. Lots of radio. So I don’t sing in public. Instead, there’s a constant rock’n’roll soundtrack in my head. The Who. Stones. Doors. Dylan. Pink Floyd.

This past summer has been brutal. Heck, the last two years have been brutal at the news and macro level. Trump. More war. More hate. At work, it’s been just as stressful. No home or certainty for the open learning project I started. Political infighting. Overwork and no appreciation. Stress. A valued personal friendship hitting the rocks as collateral damage.  That 60’s soundtrack has been turned up to 11, maybe even 12.

The stress culminated in some serious health issues this summer.  Doc says slow down, take care of yourself first.

Ooh, a storm is threat’ning
My very life today
If I don’t get some shelter
Ooh yeah, I’m gonna fade away
War, children
It’s just a shot away, it’s just a shot away

I needed shelter.  A home.
The physical issues have me feeling my age.  People my age, including many colleagues, are thinking retirement. But my soundtrack keeps screaming. There’s work to do. I’m not done yet.

Ooh, see the fire is sweeping
Our very street today
Burns like a red coal carpet
Mad bull lost your way
Rape, murder.
It’s just a shot away, it’s just a shot away

Work to do. But I’ve been lost about how I can help. The Open conferences the past few years have been fantastic. They feel like a home. But I’ve not been clear what I can do. I’m not really an expert in pedagogy. I’m an economist, not ed psychologist or sociologist. I understand tech systems. I can even design some innovative ones. But I don’t actually code. At the school, the semester starts with me feeling ghosted.

Mmm, the floods is threat’ning
My very life today
Gimme, gimme shelter
Or I’m going to fade away

Gimme, gimme shelter.

OpenEd18 answered.  Last year’s OpenEd17 pointed me towards the commons and education.  It led to this blog post last spring. Conversations with David Wiley (and my scholarly spirit animal, Chris Gilliard) inspired me to rejuvenate my scholarly work and do a deep dive on the economics of commons and education. That led to my OpenEd18 presentation and it’s blog post. Conversations and the reaction to it have me fired up to do more on the topic.  And  while they weren’t at this year’s conference, I was reading Sean Morris and Jesse Stommel’s new book at the conference An Urgency of Teachers.  They describe critical pedagogy. One aspect is:

“How can critical pedagogy help to examine, dismantle, or rebuild the structures, hierarchies, institutions, and technologies of education?”

Bingo. I can do that. I know that work. I’ve 40+ years of work leading up to this. I can contribute here.  Thank you to David Wiley, Paul Stacey, Lisa Petrides, Doug Levin, Sean Morris, Jesse Stommel, Robin DeRosa, Rolin Moe, and others for helping see my niche to contribute. I know a lot of you saw this before me, but when it’s about the self, I’m a little slow. Thanks to a comment Rolin Moe made I understand I need to take care of myself precisely so I can continue to contribute for a long time. It’s a long haul.

I had hoped to see my friends at OpenEd18 and I did. But I didn’t expect the love. I know I should have, but I didn’t.  Friends like Ken Bauer, Bonnie Stewart, and Amy Collier not only understood but made sure I took care of myself.

The list of of other people I want to thank is so long I fear I’ll leave too many out. But thanks to Ken, Rolin, David, Bonnie, my new friend Jess Mitchell, Amy, Lisa, Doug. Also Daniel Lynds, Terry Greene, Sundi Luella, James GlapaGrossklag, Shawna Brandle, Bryan Ollendyke, Hugh McGuire, Billy Meinke, Steele Wagstaff,  Autumm Caines, Joe Murphy, Nate Angell, Christina Hendricks, and many many others.

I tell you love, sister
It’s just a kiss away, it’s just a kiss away

I’m not instantly cured. I still need to pace myself. But with friends and kindred souls like these, I will.

In true boomer tradition, the first song on the “radio” (Pandora counts as “radio” right?) in the car on the way home from OpenEd18 was, you guessed it, Gimme Shelter.

I got shelter. I got love. In the open.


Lyrics excerpts in block quotes quoted are from Gimmer Shelter by The Rolling Stones as found at Genius.com. Copyrights apply. Excerpts used under U.S. fair use.

 

Debt: Good, Bad, Ugly, and Not-Really

Debt is often considered something bad in our society. At the beginning of any semester in the macroeconomics principles I’ll have many students identify debt – either the “national debt” or student loan debt or even just household debt – as a leading macroeconomic challenge facing the nation. The reason is because debt is an ideological issue as much as an economic issue. The ideology surrounding debt, the ideas that it’s purely an individual decision, that the borrower is the one morally culpable, and that default is a character or moral failure of the borrower, is part of enforcing a particular property rights and political power structure.

To determine if debt is “good” or not economically, we should ask what the function or role of debt is.  Why is money being borrowed? What is accomplished economically by allowing borrowing? Why might loans not be repaid? Who benefits from a loan?

The basic economic role of private debt is to help overcome a temporal mismatch. The role of public debt is often to change the distribution of resources and activities.

Private debt is basically a temporal problem. Many desirable economic activities have a mismatch in timing. For example, consider one of the oldest temporal mismatches: agricultural production. Farming requires spending resources (costs) well in advance of the receiving payment or revenue. A farmer has to eat all year and pay for seed, etc, before and during growing season but only receives revenue at the end at harvest. A farmer who isn’t independently wealthy then borrows and pays it back from the harvest.

Student loan debt is another example of temporal mismatch. An educated student can be highly productive as a worker/employee after they receive their education. But the costs of education come first. Obviously having students borrow money to pay the costs and then pay back later out of their (assumed) higher productivity and earnings is a way to pay for the costs. It’s not the only solution. It would also be possible for the government to pay the costs of education now and then recoup the government’s “investment” through a larger tax base and/or more prosperous populace.

Since food and knowledge are generally good things and debt facilitates producing them both, you might think debt would be considered good. But there are also situations where it’s not desirable.  To explain, I’m going to classify debt into four types: Good, Bad, the Ugly, and Not-Really.

Good Debt

Good debt is a temporal (and temporary) redistribution of resources aimed at increasing total production. This includes the example above of a farmer borrowing capital to enable clearing fields, acquisition of seed and fertilizers, equipment, and working capital before and during the growing season. The debt is then paid back from part of the proceeds of the harvest. Much corporate borrowing when the debt is used to finance expansion or capital equipment falls into this “good debt” category. Among individuals and households, debt can also be “good debt”.  Student loans fall into this category. Even car loans can sometimes be considered this category since access to a car is often necessary for employment.

These are economically “good” debts because they enable greater production, greater goods, and a better life in general – all aims of our economy. But being “good” debt doesn’t mean risk free. Any debt is inherently risky. The future is unknowable. Since debt means a partial transaction now (borrower gives lender $) and a completion of the transaction (repayment in the future), it’s always possible the future doesn’t play out as expected. The harvest prices might be too low and the farmer can’t repay. Employers might not pay enough to graduates to enable repayment of loans or recessions may send unemployment rates too high. Societies often provide a “reset” button to enable individuals who are deeply in debt and the future didn’t work out right to enable repayment. In ancient times, many societies instituted “debt jubilees”. In our society we have bankruptcy courts. Either way, the function is to spread some of the risk of the future to lenders and not just on borrowers.

Bad Debt

Economically, bad debt would be debt that facilitates excessive consumption of resources today without increasing our future ability to produce. It’s just shifting consumption forward without creating new or greater resources. It’s prodigality. It’s the spendthrift.

This is image that I suspect many have when they think of debt as “bad”. In most systems or religion, morality, or ideology there are often admonitions against prodigality or being a spendthrift. In our current society this debt could be the household that borrows excessively for recreational toys such as boats, excessive clothing, etc. But it’s not just households that engage in “bad” borrowing. Firms often do too. The productive, profitable firm who is acquired and taken private by “private equity investors” is often forced to borrow excessive amounts of money simply to pay dividends to those same “investors”. No new economic productive capability or resources are created. It’s just a redistribution of wealth to the wealthy.

Not all borrowing for immediate consumption purposes should be judged “bad” though. It depends, like most economic analyses, on what the alternatives are. Typically, the idea of borrowing to finance current personal consumption needs is considered unwise. For example, borrowing money on a credit card to finance the weekly grocery shopping strikes most as a bad idea. But, if the only alternative to borrowing money is starvation or disease, then borrowing is the right thing to do.

The Ugly Debt

Economically ugly debt is debt that’s tainted by fraud or moral hazard. Socially we condemn the borrower who borrows knowing they don’t intend to pay back (Fraud) or conceals from the lender information about future actions (moral hazard). But fraud and moral hazard are present on the lending side as well. In the run-up to the Great Financial Crisis of 2008 banks and mortgage brokers often encouraged marginal borrowers to take out mortgage loans knowing those borrowers were unlikely to be able to afford it. The lenders then sold the mortgages to others, getting their fees and leaving others with the risks and costs of default. Fraud and moral hazard.  Neither are economically useful.

Not Really Debt

All the situations I’ve described above involve what economists classify as “private debt”. That is, it’s private parties, either firms, banks, or households, that are the lenders and borrowers.

When the borrower is the national government it is “public debt”, not private. In the U.S., this is often called the “national debt”. Public debt isn’t like private debt at all. At least if the government is a national government with its own sovereign currency. This means the US, UK, Canada, Australia, China, Japan, and many, many others.  It does not include members of the European Monetary Union such as Germany, Italy, Spain, or Greece.  As long as the nation borrows in its own currency and that currency is a fiat currency, there is no risk of default. This is because the nation can always issue new currency to pay off any bonds used to “borrow”.

In practice, such public debt isn’t really debt in the way we traditionally think of private debt. It doesn’t really have to be “paid off”. Technically bonds come due but can either be rolled over into new bonds or paid off with newly issued currency or acquired by the central bank (same effect as issuing currency). In fact, it’s misleading to draw analogies between the public debt to private debt. Public debt is more like the currency itself. Consider the differences between a $1000 government bond and a $1000 note. Both represent commitments from the government to provide $1000 worth of value in exchange. The key difference is the bond pays interest and the note doesn’t.

There is a limit on the borrowing/spending capacity of the government though. That limit, though, is not the kind of limits we associate with private borrowing/lending. Rather, the limit is inflation and availability of real resources. As long as the unused, unemployed real resources or productive capacity exists in the economy, then the government can create the spending to utilize those resources. Whether or not the government decides for accounting purposes to create new money or to borrow existing money from banks is a macroeconomic policy choice decision. Unlike private borrowing where the money must be borrowed or otherwise obtained first before being spent, the government spends the money into existence first and then uses either taxation or borrowing to remove the money from circulation in the economy.

A major reason for governments to “borrow” money has to do with risks and private spending habits. Wealth and money are very unevenly distributed across the economy. A few very wealthy people possess most of the money. However, those people often do not desire to risk their fortunes by lending it as “good debt”. Instead, they seek interest-paying safe, risk-free ways to store their wealth. Government bonds provide those risk-free ways of storing money. However, in the process, this means the money (capital) is withdrawn from general circulation and doesn’t get put to economically useful “good debt” productive activity.  The government, by issuing risk-free bonds and simultaneously running a budget deficit, provides the safe “investments” for people’s savings and puts the money back into circulation through government spending. In the absence of such deficits, people’s private desires to save part of their incomes and put it into risk-free bonds would create a shrinking spiral of circular flow money in the economy, leading to recession and depression. Deficit spending restores the vitality of the circular flow.