Cyclopedia Of Economics

Mortality and Immortality

The noted economist, Julian Simon, once quipped: "Because we can expect future generations to be richer than we are, no matter what we do about resources, asking us to refrain from using resources now so that future generations can have them later is like asking the poor to make gifts to the rich."

Roberto Calvo Macias, a Spanish author and thinker, once wrote that it is impossible to design a coherent philosophy of economics not founded on our mortality. The Grim Reaper permeates estate laws, retirement plans, annuities, life insurance and much more besides.

The industrial revolution taught us that humans are interchangeable by breaking the process of production down to minute - and easily learned - functional units. Only the most basic skills were required. This led to great alienation. Motion pictures of the period ("Metropolis", "Modern Times") portray the industrial worker as a nut in a machine, driven to the verge of insanity by the numbing repetitiveness of his work.

As technology evolved, training periods have lengthened, and human capital came to outweigh the physical or monetary kinds. This led to an ongoing revolution in economic relations. Ironically, dehumanizing totalitarian regimes, such as fascism and communism, were the first to grasp the emerging prominence of scarce and expensive human capital among other means of production. What makes humans a scarce natural resource is their mortality.

Though aware of their finitude, most people behave as though they are going to live forever. Economic and social institutions are formed to last. People embark on long term projects and make enduring decisions - for instance, to invest money in stocks or bonds - even when they are very old.

Childless octogenarian inventors defend their fair share of royalties with youthful ferocity and tenacity. Businessmen amass superfluous wealth and collectors bid in auctions regardless of their age. We all - particularly economists - seem to deny the prospect of death.

Examples of this denial abound in the dismal science:

Consider the invention of the limited liability corporation. While its founders are mortals – the company itself is immortal. It is only one of a group of legal instruments - the will and the estate, for instance - that survive a person's demise. Economic theories assume that humans - or maybe humanity - are immortal and, thus, possessed of an infinite horizon.

Valuation models often discount an infinite stream of future dividends or interest payments to obtain the present value of a security. Even in the current bear market, the average multiple of the p/e - price to earnings - ratio is 45. This means that the average investor is willing to wait more than 60 years to recoup his investment (assuming  capital gains tax of 35 percent).

Standard portfolio management theory explicitly states that the investment horizon is irrelevant. Both long-term and short-term magpies choose the same bundle of assets and, therefore, the same profile of risk and return. As John Campbell and Luis Viceira point in their "Strategic Asset Allocation", published this year by Oxford University Press, the model ignores future income from work which tends to dwindle with age. Another way to look at it is that income from labor is assumed to be constant - forever!

To avoid being regarded as utterly inane, economists weigh time. The present and near future are given a greater weight than the far future. But the decrease in weight is a straight function of duration. This uniform decline in weight leads to conundrums. "The Economist" - based on the introduction to the anthology "Discounting and Intergenerational Equity", published by the Resources for the Future think tank - describes one such predicament:

"Suppose a long-term discount rate of 7 percent (after inflation) is used, as it typically is in cost-benefit analysis. Suppose also that the project's benefits arrive 200 years from now, rather than in 30 years or less. If global GDP grew by 3 percent during those two centuries, the value of the world's output in 2200 will be $8 quadrillion ... But in present value terms, that stupendous sum would be worth just $10 billion. In other words, it would not make sense ... to spend any more than $10 billion ... today on a measure that would prevent the loss of the planet's entire output 200 years from now."

Traditional cost-benefit analysis falters because it implicitly assumes that we possess perfect knowledge regarding the world 200 years hence - and, insanely, that we will survive to enjoy ad infinitum the interest on capital we invest today. From our exalted and privileged position in the present, the dismal science appears to suggest, we judge the future distribution of income and wealth and the efficiency of various opportunity-cost calculations. In the abovementioned example, we ask ourselves whether we prefer to spend $10 billion now - due to our "pure impatience" to consume - or to defer present expenditures so as to consume more 200 years hence!

Yet, though their behavior indicates a denial of imminent death - studies have demonstrated that people intuitively and unconsciously apply cost-benefit analyses to decisions with long-term outcomes. Moreover, contrary to current economic thinking, they use decreasing utility rates of discount for the longer periods in their calculations. They are not as time-consistent as economists would have them be. They value the present and near future more than they do the far future. In other words, they take their mortality into account.

This is supported by a paper titled "Doing it Now or Later", published in the March 1999 issue of the American Economic Review. In it the authors suggest that over-indulgers and procrastinators alike indeed place undue emphasis on the near future. Self-awareness surprisingly only exacerbates the situation: "why resist? I have a self-control problem. Better indulge a little now than a lot later."

But a closer look exposes an underlying conviction of perdurability.

The authors distinguish sophisticates from naifs. Both seem to subscribe to immortality. The sophisticate refrains from procrastinating because he believes that he will live to pay the price. Naifs procrastinate because they believe that they will live to perform the task later. They also try to delay overindulgence because they assume that they will live to enjoy the benefits. Similarly, sophisticated folk overindulge a little at present because they believe that, if they don't, they will overindulge a lot in future. Both types believe that they will survive to experience the outcomes of their misdeeds and decisions.

The denial of the inevitable extends to gifts and bequests. Many economists regard inheritance as an accident. Had people accepted their mortality, they would have consumed much more and saved much less. A series of working papers published by the NBER in the last 5 years reveals a counter-intuitive pattern of intergenerational shifting of wealth.

Parents gift their off-spring unequally. The richer the child, the larger his or her share of such largesse. The older the parent, the more pronounced the asymmetry. Post-mortem bequests, on the other hand, are usually divided equally among one's progeny.

The avoidance of estate taxes fails to fully account for these patterns of behavior. A parental assumption of immortality does a better job. The parent behaves as though it is deathless. Rich children are better able to care for ageing and burdensome parents. Hence the uneven distribution of munificence. Unequal gifts - tantamount to insurance premiums - safeguard the rich scions' sustained affection and treatment. Still, parents are supposed to love their issue equally. Hence the equal allotment of bequests.

Mortgage (Financed Construction)

The Buyers

1. 
   The Buyers of residential property form an Association.
   

2. 
   The Buyers’ Association signs a contract with a construction company chosen by open and public tender.
   

3. 
   The contract with the construction company is for the construction of residential property to be owned by the Buyers.
   

4. 
   The Buyers secure financing from the Bank (see below).
   

5. 
   The Buyers then pay the construction company 25% of the final value of the property to be constructed in advance (=Buyer’s Equity). This money is the Buyers’ own funds, out of pocket – NOT received from the Banks.
   

6. 
   The Buyers Association together with the Banks appoints supervisors to oversee the work done by the construction company: its quality and adherence to schedule.
   

The Banks

1. 
   The government provides a last resort guarantee to the commercial banks. This guarantee can be used ONLY AFTER the banks have exhausted all other legal means of materializing a collateral or seizing the assets of a delinquent debtor in default.
   

2. 
   Against this guarantee, the commercial banks issue 10 years mortgages (=lend money with a repayment period of 120 months) to the private Buyers of residential property.
   

3. 
   The money lent to the Buyers (=the mortgages) REMAINS in the bank. It is NOT be given to the Buyers.
   

4. 
   The mortgage loan covers a maximum of 75% of the final value of the property to be constructed according to appraisals by experts.
   

5. 
   A lien in favour of the bank is placed on the land and property on it – to be built using the Bank’s money and the Buyers’ equity. Each Buyer pledges only HIS part of the property (for instance, ONLY the apartment being constructed for HIM). This lien is an inseparable part of the mortgage (loan) contract each and every buyer signs. It is registered in the Registrar of Mortgages and the Courts.
   

The Construction Company

1. 
   The construction companies use the advance of 25% to start the construction of the residential property – to buy the land, lay the foundations and start the skeleton. All the property belongs to the BUYERS and is registered solely to their names. The Banks have a lien of the property, as per above.
   

2. 
   When the advance-money is finished, the construction company notifies the BUYERS.
   

3. 
   The Buyers then approach the Bank for additional money to be taken from the mortgage loans deposited at the Bank (=the money that the Bank lent the Buyers).
   

4. 
   The Bank verifies that the construction is progressing according to schedule and according to quality standards set in the construction contract.
   

5. 
   If everything is according to contract, the Bank releases the next tranche (lot) of financing to the Buyers, who then forward it to the construction firm.
   

6. 
   The funds that the Buyers borrowed from the Banks are released in a few tranches according to the progress of the construction work. When the construction is finished – the funds should be completely exhausted (=used).
   

When the Construction is Finished

1. 
   The construction company will have received 100% of the price agreed in the contract.
   

2. 
   The Buyers can move into the apartments.
   

3. 
   The Buyers go on repaying the mortgage loans to the Banks.
   

4. 
   As long as the mortgage loan is not fully paid – the lien on the property in favour of the Bank remains. It is lifted (=cancelled) once the mortgage loan and the interest and charges thereof has been fully repaid by the Buyers.
   

While the Mortgage Loan is Being Repaid…

1. 
   The Buyers can rent the apartment.
   

2. 
   The Buyers can live in the apartment.
   

3. 
   The Buyers can sell the apartment only with the agreement of the Bank – or if they pre-pay the remaining balance of the mortgage loan to the Bank.
   

4. 
   The Banks can securitize the mortgage pool and sell units or mortgage backed bonds to the public. This means that the Banks can sell to the public pass through certificates - securities backed by an underlying pool of mortgages of various maturities and interest rates. This way the Banks can replenish their capital stock and re-enter the mortgage market.
   

Moslems (in Europe)

They inhabit self-imposed ghettoes, subject to derision and worse, the perennial targets of far-right thugs and populist politicians of all persuasions. They are mostly confined to menial jobs. They are accused of spreading crime, terrorism and disease, of being backward and violent, of refusing to fit in.

Their religion, atavistic and rigid, insists on ritual slaughter and male circumcision. They rarely mingle socially or inter-marry. Most of them - though born in European countries - are not allowed to vote. Brown-skinned and with a marked foreign accent, they are subject to police profiling and harassment and all manner of racial discrimination.

They are the new Jews of Europe - its Muslim minorities.

Muslims - especially Arab youths from North Africa - are, indeed, disproportionately represented in crime, including hate crime, mainly against the Jews. Exclusively Muslim al-Qaida cells have been discovered in many West European countries. But this can be safely attributed to ubiquitous and trenchant long-term unemployment and to stunted upward mobility, both social and economic due largely to latent or expressed racism.

Moreover, the stereotype is wrong. The incidence of higher education and skills is greater among Muslim immigrants than in the general population - a phenomenon known as "brain drain". Europe attracts the best and the brightest - students, scholars, scientists, engineers and intellectuals - away from their destitute, politically dysfunctional and backward homelands.

The Economist surveys the landscape of friction and withdrawal:

"Indifference to Islam has turned first to disdain, then to suspicion and more recently to hostility ... (due to images of) petro-powered sheikhs, Palestinian terrorists, Iranian ayatollahs, mass immigration and then the attacks of September 11th, executed if not planned by western-based Muslims and succored by an odious regime in Afghanistan ... Muslims tend to come from poor, rural areas; most are ill-educated, many are brown. They often encounter xenophobia and discrimination, sometimes made worse by racist politicians. They speak the language of the wider society either poorly or not at all, so they find it hard to get jobs. Their children struggle at school. They huddle in poor districts, often in state-supplied housing ... They tend to withdraw into their own world, (forming a) self-sufficient, self-contained community."

This self-imposed segregation has multiple dimensions. Clannish behavior persists for decades. Marriages are still arranged - reluctant brides and grooms are imported from the motherland to wed immigrants from the same region or village. The "parallel society", in the words of a British government report following the Oldham riots two years ago, extends to cultural habits, religious practices and social norms.

Assimilation and integration has many enemies.

Remittances from abroad are an important part of the gross national product and budgetary revenues of countries such as Bangladesh and Pakistan. Hence their frantic efforts to maintain the cohesive national and cultural identity of the expats. DITIB is an arm of the Turkish government's office for religious affairs. It discourages the assimilation or social integration of Turks in Germany. Turkish businesses - newspapers, satellite TV, foods, clothing, travel agents, publishers - thrive on ghettoization.

There is a tacit confluence of interests between national governments, exporters and Islamic organizations. All three want Turks in Germany to remain as Turkish as possible. The more nostalgic and homebound the expatriate - the larger and more frequent his remittances, the higher his consumption of Turkish goods and services and the more prone he is to resort to religion as a determinant of his besieged and fracturing identity.

Muslim numbers are not negligible. Two European countries have Muslim majorities - Bosnia-Herzegovina and Albania. Others - in both Old Europe and its post-communist east - harbor sizable and growing Islamic minorities. Waves of immigration and birth rates three times as high as the indigenous population increase their share of the population in virtually every European polity - from Russia to Macedonia and from Bulgaria to Britain. One in seven Russians is Muslim - over 20 million people.

According to the March-April issue of Foreign Policy, the non-Muslim part of Europe will shrink by 3.5 percent by 2015 while the Muslim populace will likely double. There are 3 million Turks in Germany and another 12 million Muslims - Algerians, Moroccans, Pakistanis, Bangladeshis, Egyptians, Senegalese, Malis, or Tunisians - in the rest of the European Union.

This is two and one half times the number of Muslims in the United States. Even assuming - wrongly - that all of them occupy the lowest decile of income, their combined annual purchasing power would amount to a whopping $150 billion. Furthermore, recent retroactive changes to German law have naturalized over a million immigrants and automatically granted its much-coveted citizenship to the 160,000 Muslims born in Germany every year.

Between 2-3 million Muslims in France - half their number - are eligible to vote. Another million - one out of two - cast ballots in Britain. These numbers count at the polls and are not offset by the concerted efforts of a potent Jewish lobby - there are barely a million Jews in Western Europe.

Muslims are becoming a well-courted swing vote. They may have decided the last election in Germany, for instance. Recognizing their growing centrality, France established - though not without vote-rigging - a French Council of the Islamic Faith, the equivalent of Napoleon's Jewish Consistory. Two French cabinet members are Muslims. Britain has a Muslim Council.

Both Vladimir Putin, Russia's president and Yuri Luzhkov, Moscow's mayor, now take the trouble to greet the capital's one million Muslims on the occasion of their Feast of Sacrifice. They also actively solicit the votes of the nationalist and elitist Muslims of the industrialized Volga - mainly the Tatars, Bashkirs and Chuvash. Even the impoverished, much-detested and powerless Muslims of the northern Caucasus - Chechens, Circassians and Dagestanis - have benefited from this newfound awareness of their electoral power.

Though divided by their common creed - Shiites vs. Sunnites vs. Wahabbites and so on - the Muslims of Europe are united in supporting the Palestinian cause and in opposing the Iraq war. This - and post-colonial guilt feelings, especially manifest in France and Britain - go a long way toward explaining Germany's re-discovered pacifistic spine and France's anti-Israeli (not to say anti-Semitic) tilt.

Moreover, the Muslims have been playing an important economic role in the continent since the early 1960s. Europe's postwar miracle was founded on these cheap, plentiful and oft-replenished Gastarbeiter - "guest workers". Objective studies have consistently shown that immigrants contribute more to their host economies - as consumers, investors and workers - than they ever claw back in social services and public goods. This is especially true in Europe, where an ageing population of early retirees has been relying on the uninterrupted flow of pension contributions by younger laborers, many of them immigrants.

Business has been paying attention to this emerging market. British financial intermediaries - such as the West Bromwich Building Society - have recently introduced "Islamic" (interest-free) mortgages. According to market research firm, Datamonitor, gross advances in the UK alone could reach $7 billion in 2006 - up from $60 million today. The Bank of England is in the throes of preparing regulations to accommodate the pent-up demand.

Yet, their very integration, however hesitant and gradual, renders the Muslims in Europe vulnerable to the kind of treatment the old continent meted out to its Jews before the holocaust. Growing Muslim presence in stagnating job markets within recessionary economies inevitably generated a backlash, often cloaked in terms of Samuel Huntington's 1993 essay in Foreign Affairs, "Clash of Civilizations".

Even tolerant Italy was affected. Last year, the Bologna archbishop, Cardinal Giacomo Biffi, cast Islam as incompatible with Italian culture. The country's prime minister suggested, in a visit to Berlin two years ago, that Islam is an inherently inferior civilization.

Oriana Fallaci, a prominent journalist, published last year an inane and foul-mouthed diatribe titled "The Rage and the Pride" in which she accused Muslims of "breeding like rats", "shitting and pissing" (sic!) everywhere and supporting Osama bin-Laden indiscriminately.

Young Muslims reacted - by further radicalizing and by refusing to assimilate - to both escalating anti-Islamic rhetoric in Europe and the "triumphs" of Islam elsewhere, such as the revolution in Iran in 1979. Tutored by preachers trained in the most militant Islamist climates in Saudi Arabia, Yemen, Somalia, Pakistan and Iran, praying in mosques financed by shady Islamic charities - these youngsters are amenable to recruiters from every fanatical grouping.

The United Kingdom suffered some of the worst race riots in half a century in the past two years. France is terrorized by an unprecedented crime wave emanating from the banlieux - the decrepit, predominantly Muslim, housing estates in suburbia. September 11 only accelerated the inevitable conflict between an alienated minority and hostile authorities throughout the continent. Recent changes in European - notably British - legislation openly profile and target Muslims.

This is a remarkable turnaround. Europe supported the Muslim Bosnian cause against the Serbs, Islamic Chechnya against Russia, the Palestinians against the Israelis and Muslim Albanian insurgents against both Serbs and Macedonians. Nor was this consistent pro-Islamic orientation a novelty.

Britain's Commission for Racial Equality which caters mainly to the needs of Muslims, was formed 37 years ago. Its Foreign Office has never wavered from its pro-Arab bias. Germany established a Central Council for Muslims. Both anti-Americanism and the more veteran anti-Israeli streak helped sustain Europe's empathy with Muslim refugees and "freedom fighters" throughout the 1960s, 70s and 80s.

September 11 put paid to this amity. The danger is that the brand of "Euro-Islam" that has begun to emerge lately may be decimated by this pervasive and sudden mistrust. Time Magazine described this blend as "the traditional Koran-based religion with its prohibitions against alcohol and interest-bearing loans now indelibly marked by the 'Western' values of tolerance, democracy and civil liberties."

Such "enlightened" Muslims can serve as an invaluable bridge between Europe and Russia, the Middle East, Asia, including China and other places with massive Muslim majorities or minorities. As most world conflicts today involve Islamist militants, global peace and a functioning "new order" critically depend on the goodwill and communication skills of Muslims.

Such a benign amalgam is the only realistic hope for reconciliation. Europe is ageing and stagnating and can be reinvigorated only by embracing youthful, dynamic, driven immigrants, most of whom are bound to be Muslim. Co-existence is possible and the clash of civilization not an inevitability unless Huntington's dystopic vision becomes the basic policy document of the West.