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PostPosted: Sun Jul 29, 2007 2:40 pm    Post subject: Book In Progress Reply with quote

When the Fed targets prices, output fluctuates little.
When the Fed targets output, prices fluctuate a lot,
which leads to instability. I suspect, if the Fed
targeted the money supply, that would also lead to
instability, because of shifts in the foreign exchange
market or changes in the velocity of money in the
short-run. However, the money supply determines prices
in the long-run. Asset prices are residuals of
monetary policy. So, price stability (of goods &
services) is the Fed's best choice, although it also
attempts to keep inflation expectations low, i.e. a
cautious stance. U.S. monetary policy can't get much
better.

Posted by: Arthur Eckart | Friday, June 29, 2007 at
09:21 PM

Also, I may add, it's not important whether the Fed
Funds Rate is 10% or 5%, the money supply is high or
low, or how many booms and busts take place in asset
markets. What's important is maintaining sustainable
growth, which is optimal growth.

However, many shocks take place, e.g. Y2K (when the
money supply spiked higher and then lower around
2000), 9-11, an oil shock (or commodities in general,
e.g. gold, copper, and steel), minor technology shocks
in the '80s and '90s, and the quick and massive
"Creative-Destruction" process in the early '00s,
where resources were freed-up in Information Age
firms, along with Agricultural and Industrial
Revolution firms, and shifted into emerging
industries, resulting in more or better output per
input in older industries.

In the '90s, U.S. actual output was slightly above
U.S. potential output, and in the '00s, U.S. actual
output was slightly below U.S. potential output. The
U.S. remains in position to gain the most, or lose the
least, in the global economy. However, the gains over
the next few years will likely be mostly in production
rather than consumption. So, wage and employment
growth may rise faster than profit growth, or exports
may rise faster than imports.

Posted by: Arthur Eckart | Saturday, June 30, 2007 at
08:29 PM

Large economies tend to expand. Contractions are rare.
Many only focus on purchasing power, e.g. $1 in the
past is worth $0.10 today. However, given living
standards have risen substantially, over time, it
shouldn't be ignored that the increase in output must
have been greater than the rise in prices.

Posted by: Arthur Eckart | Wednesday, July 18, 2007 at
09:04 AM

I'm an engineer by trade, not an economist, so please
forgive me if my questions are not so well informed.

Can anyone explain why the Fed targets price
inflation? It would seem more logical to target a very
low level of monetary inflation. Arthur, why would
targeting monetary inflation cause instability,
exactly? Can the money supply can be significantly
effected by the monetary policies of other countries,
leading to possible instabilities unless the Fed acts
in response?

If foreign exchange markets are a major cause, what
about a currency which has global usage and
acceptance? I suppose the dollar never got that widely
accepted. I wonder how something like the Terra, or
even something as simple as a pure gold standard would
do? I suppose foreign governments could then alter the
money supply by trading gold or the commodities the
Terra is based off of? I can't help but think that
manipulation in foreign markets due to foreign
policies wouldn't be harmful to all parties involved.

I'm having a hard time understanding why changes in
the short-term velocity of money would be a problem. I
would think that with more stable monetary growth,
we'd have a more stable velocity of money.

I would expect there is a lot of political pressure on
the Fed to inflate the money supply more than would be
necissary, because of the advantages to debtors. And
what politician wants to cut back on inflation and
possibly be blamed for a temporary recession?

Posted by: G | Sunday, July 22, 2007 at 01:09 PM

The U.S. central bank printed excess money to maintain
sustainable growth, because the excess money was
absorbed by many U.S. major trading partners. If these
trading partners fall into recessions, the world would
be flooded with U.S. dollars (causing a precipitous
fall in the Dollar). This is why the Fed is "sitting
on the fence" with a Fed Funds Rate at 5 1/4% (after
the tightening cycle), although U.S. economic growth
has slowed. Changes in fiscal policy can change the
velocity of money, MV = PT. However, in the long run,
V and T are constant. So, M equals P.

Posted by: Arthur Eckart | Sunday, July 22, 2007 at
02:10 PM

Also, I may add, in the equation MV = PT, if M and P
are constant, then V = T, i.e. V, the velocity of
money, or the number of times money is exchanged,
equals T, the number of transactions, or the quantity
of goods exchanged. T can be represented by real GDP.
The goal of monetary policy should be to keep actual
GDP close to potential GDP, which smooths-out the
business cycle creating optimal growth (since there's
neither strain nor slack in the economy). The fact
that there are monetary tightening and easing cycles,
to close output gaps, are attempts to smooth-out T in
the short-run. V and T fluctuate in the short-run,
which require adjustments in M to stabilize P and
smooth-out T. For example, if people decide to hoard
money, then V and T will fall (in the short-run). So,
M needs to rise (higher than a constant growth rate).

Posted by: Arthur Eckart | Monday, July 23, 2007 at
12:22 AM

Moreover, political pressure has little real influence
on the Fed, given it's independent structure. The
Greenspan and Bernanke Fed would prefer a mild
recession than accelerating inflation. Of course, the
Fed works in the future economy, because of lags in
the adjustment process, which is difficult. I'm sure
the Fed would prefer a domestic currency than a global
currency, because of better U.S. monetary policy. The
ultimate goal of the Fed is to raise U.S. living
standards at the fastest sustainable rate, including
at the expense of foreign countries. U.S.
globalization and fiscal policies are also designed to
capture the most gains.

Posted by: Arthur Eckart | Monday, July 23, 2007 at
01:14 AM

Thank you for the great information. I've not been
able to find anything like this elsewhere.

I am slightly skeptical on your assertion on political
pressure and the Fed, because I know the Supreme Court
was designed with similar political isolation in mind.
That seemed to fail in the face of FDR's New Deal,
among other things. But I understand the current
system is probably very preferable to congressional
management of the money supply, which would be
downright frightening.

I cannot help but be more skeptical of the Fed being
able to predict what real GDP is. As far as I've read,
the market process itself is the best means for
determining the price level of anything. It seems to
me that if money is horded, it must be in response to
an anticipated greater demand for the dollar at a
later date, which in itself would work to predict and
preempt a contraction of the money supply which would
increase the demand for the dollar. Alternatively, if
saved money is spent and V and T rise, wouldn't that
be in response to an anticipated decrease in demand
for the dollar in the future? I would think that
fluctuations in the growth of the money supply caused
by the Fed would prevent people from making rational
decisions on future currency investments. If someone
correctly anticipated a period of deflation and
invested in the dollar, the Fed would counteract this
by increasing the money supply and causing
malinvestment for the rational actors in the market.
Is there something I am missing, or is this a valid
criticism?

I started looking into monetary policy after I
wondered how something like the housing bubble came
into being. It seemed illogical to me that investors
across the nation would suddenly partake in such
extreme malinvestment, seemingly independent of each
other. After understanding how our monetary system
worked, I felt it was logical that an increase in the
money supply would create cheaper credit, which could
inflate markets (like real estate) closely tied with
credit. All in all I'm wondering if enforced monopoly
control of a national currency is really a good thing.

Thank you for any help.
-Grant

Posted by: G | Monday, July 23, 2007 at 04:36 AM

Grant, thanks. In reply to your first paragraph, the
Fed is aware of politics. However, at least over the
Greenspan and Bernanke Fed, politics hasn't influenced
monetary policy. In early '92, Bush the first wanted
the Fed to ease the money supply faster. However,
Greenspan (also a Republican) didn't. The following
quarter after Bush lost the election, GDP growth was
reported much higher. So, the Fed may have cost Bush
the election. Also, after hurricane Katrina, Bush Jr
wanted the Fed to pause tightening the money supply.
However, Greenspan continued to tighten at each
meeting, which turned out to be correct monetary
policy. Moreover, it appeared Greenspan was helping
Clinton, although it was really sound monetary policy.
In the mid or late '90s, Greenspan eased the money
supply to a point where many thought inflation would
accelerate. However, it didn't. Furthermore, many
thought Bernanke, who believes the U.S. can always
avoid a liquidity trap by throwing money out of a
helicopter (hence the nickname helicopter Ben) was an
inflation dove. However, so far it seems Bernanke is
an inflation hawk (or prefers a mild recession than
accelerating inflation).

Posted by: Arthur Eckart | Monday, July 23, 2007 at
08:47 AM

Grant, I agree, GDP is difficult to predict, in the
short-run, e.g. because of seasonal and cyclical
factors, along with structural breaks. However, the
Fed doesn't target GDP (although, in the '90s, the Fed
believed potential GDP was understated). It targets
the general price level (e.g. GDP Price Deflator and
Personal Consumption Expenditures). Also, if the Fed
targeted individual markets, that may lead to economic
instability, perhaps much worse than targeting money
or GDP. If people expect prices to fall (rise),
they'll save (spend). So, price stability is important
to smooth-out real GDP.

Posted by: Arthur Eckart | Tuesday, July 24, 2007 at
08:07 PM

Also, I may add, given the Fed's crude tools, it
cannot micromanage the economy, because targeting one
market will influence other markets. However, the Fed
may want fast technology growth, e.g. to raise
productivity, or housing to expand quickly, e.g. to
lower wage growth (since homeownership tends to make
people more responsible, e.g. to remain employed
longer). However, the Fed may not want commodity
prices (e.g. oil, copper, and steel) to rise quickly,
because of higher input costs. So, the Fed may prefer
a tech or housing bubble rather than a commodities
bubble.

Posted by: Arthur Eckart | Thursday, July 26, 2007 at
07:29 AM

Loneprimate, right, if the U.S. had a lower fertility
rate, U.S. per capita income would be even higher
(currently, it's over $10,000 a year higher than the
E.U.). There may be more "free" benefits in the E.U.
However, the trade-off is fewer opportunities, more
meaningless jobs, along with higher unemployment,
higher prices, etc. It's uncertain if E.U. labor will
be scarce and valued, because of low fertility rates.
Other factors, e.g. higher costs, can lower supply. An
average American has a much higher living standard
than an average European and the disparity will likely
increase.

Posted by: Arthur Eckart | Wednesday, July 18, 2007 at
06:56 PM

Also, I may add, the U.S. economy is more flexible
(since there are fewer wage rigidies, labor
immobility, unnecessary costs, etc.). Consequently,
older industries can easily shift into "core" products
(e.g. the most profitable goods or goods with market
power) and outsource or discontinue other products.
Shifting into core products frees-up domestic
resources for emerging industries. So, the quality of
U.S. output is high in older and newer industries. The
U.S. is the world's only superpower not only because
it leads the rest of the world combined in the
Information and Biotech Revolutions, it's also most
productive and profitable in the Agricultural and
Industrial Revolutions. One reason the E.U. and China
cannot become superpowers or leading engines of global
growth (e.g. being able to expand with huge negative
net exports) is their true costs are understated (e.g.
E.U. government intervention and China's negative
externalities).

Traditional economics is based on generalizations,
e.g. rational choice, perfect information, value
judgments, etc. In the real world, there are many
reasons why everyone does not maximize utility, why
marginal cost does not always equal marginal revenue,
why the optimal combination of guns and butter is not
achieved, etc. It seems arrogant to reject orthodox
economics only based on anomolies. Nonetheless,
behavioral economics has value, although no where near
orthodox economics.

The E.U. merchandise and service exports amount to 2.5
trillion annually(US dollars) with a 7-8% Growth rate.

That's not Competitive?
That almost double the US export totals!
The EU is the world's largest recipient of Foreign
Direct Investment(50% of world total) and the world's
largest investor! Why?
The US does not even come close!
Name a country that comes close!

The E.U. Per Capita income is around 30,000 Euros
Yearly with some states richer and some states poorer
but in Exchange rate parity that equates to 42,000 in
U.S. dollars.
Why?
Healthcare is Univeral, Higher Education is much
cheaper then US tuition costs ,much stronger welfare
safety nets and here is one of the most important
figures-Inflation rates in Germany and Japan(for
example) have been lower since 1982 compared to the
U.S.
Why?
For every dollar of GDP Growth the US is adding 6
dollars in new debts and that's why the US is a Debtor
Nation!

We have 2% of the world's currency reserves, 3% of the
world's oil reserves,and a Current account deficit
approaching 1 trillion yearly(meaning we have lost our
manufacturing base).

The Eurozone is a Credititor with much less debts
throughout it's economy.Why?

The European Union has 40 million manufacturing jobs
compared to 14 million in the US. Why?

The Median income for a US Male is 30,000
yearly(before taxes)
The Median per capita income for females in the US is
20,000(Before taxes)
Converted to Euro Dollars the median US male would
make $18,000 Euros yearly.
Female per Capita median income would be $12,000
Euros(before taxes)
We have the most expensive healthcare in the world.

Most Expensive College tuition in the world.

Very few welfare safety nets.

My car insurance is twice what I would pay in Germany?
Why?

Why is my Grocerices in Florida more expensive then in
Germany.
Milk costs $4.00 a gallon for example!

Why is our house insurance more in Florida then
Germany?
Hurricanes? Greed? Many people are spending 5,000 or
6,000 dollars yearly for modest homes!

Why is our land taxes in Florida more then Germany?
Land taxes are sometime $4,000/yearly for a modest
home and that does not include Water, Garbage and
local taxes such as drainage!

Why does the average Floridian pay 200.00/monthly for
electricity?

Why does Germany have State sponsered Daycare for it's
children?

Why does Germany have lower crime rates versus the US

Why does the US have 8 times the Prison population per
capita versus Germany?
Why is the average wages in Germany higher then
American Wages?

Why does the Average German receive more benefits
versus the Average American?
The Mercer Survey in 2006 ranked the US 20th in wages
and 37th in healthcare!

Why does the average German receive 50 days off yearly
while many American recieve 6 days and many more do
not take any days off?

Why does the Average European Live longer then the
average American?
The average Americans life expectancy was ranked 47th
in 2006(CIA webpage)

Why did America not sign the Kyoto treaty?

Why are we behind in the Renewable Energy Revolution?

Why does the average American not have the right to
protest without being put inside of a cage like in
Boston during the presidential election(2004)?
They put US citizen Protesters in a pit, surrounded by
fences and barb-wire if they wanted to protest the
president and those where the lucky ones. Many were
just arrested, most non-violent protestors. Why?

Why is America's Gini-index 50?

Those are a few question you could all answer for me!

Posted by: thomas | Saturday, July 21, 2007 at 03:56
PM

Thomas, if you're paying $4 a gallon for milk, you
must be living in a remote island in Florida or shop
at the most expensive stores. Even in San Francisco,
where almost everything is more expensive than the
rest of the country, milk is still less than $3 a
gallon, although it has risen recently. There was an
article on this site that showed the global share of
U.S. manufacturing has remained roughly constant, even
though millions of U.S. manufacturing jobs were lost
and U.S. trade deficits increased (which increased
manufacturing offshore). So, obviously, U.S.
manufacturing is productive. The Gini coefficient
measures relative inequality. Would you rather be
relatively richer, although absolutely poorer, or
absolutely richer? Quality is more expensive, e.g. in
education and health care. The U.S. may have a higher
infant mortality rate. However, cancer rates are
lower, etc. (see link below). Anyway, much of your
data are questionable (and skewed) and they aren't in
any economic context. Perhaps, you can explain why
U.S. living standards (on both the production and
consumption sides) are much higher than in the E.U.
and why you're living in Florida instead of Germany?
Also, I may add, perhaps, criminals prefer the U.S.

http://rex.nci.nih.gov/NCI_Pub_Interface/raterisk/rates39.html

Posted by: Arthur Eckart | Saturday, July 21, 2007 at
06:28 PM

Also, I may add, the stronger Euro and weaker Dollar
does not change living standards within the E.U. and
U.S. The E.U. is overproducing and underconsuming,
while the U.S. is underproducing and overconsuming.
The trade imbalance should narrow and Europeans are
more likely to vacation in the U.S. (perhaps, more
Germans will visit the U.S., since they also have 50
days off a year). It costs less than $200 a month in
electricity for most six bedroom houses in the U.S. Of
course, you failed to mention the following (in first
link below): "Florida is one of only seven states that
does not tax individual wage income. It does, however,
assess a state corporate income tax. The state's
intangible personal property tax was eliminated in
2007." Also, Florida median property tax is $1,500
(second link). It seems, finding the truth about crime
is as difficult as finding the truth about health care
and causes of climate change. Unfortunately, there's a
lot of political hype. The third link below suggests
crime rates in the U.S. are not much different than
other developed countries, e.g. taking into account
differences in conviction and custody rates. Also, the
study states: "There are enormous problems of
comparability over time and between countries, in
laws, measurement methods, recording practices, and
macrosocial cultural and political factors."

http://www.bankrate.com/yho/itax/edit/state/profiles/state_tax_Fla.asp

http://articles.moneycentral.msn.com/Taxes/Advice/PropertyTaxesWhereDoesYourStateRank.aspx

http://www.ojp.usdoj.gov/bjs/abstract/cnscj.htm

Posted by: Arthur Eckart | Sunday, July 22, 2007 at
01:46 PM

Posted by: Arthur Eckart | Saturday, July 14, 2007 at
01:22 AM

Also, I may add, there seems to be a lot of
fundamental flaws in behavioral economics. One
assumption is there's a disparity between "true
preferences" and actual preferences. The example used
is Americans want to save more. So, a policy should be
designed to induce saving. However, there may not be a
disparity between true and actual preferences. Given
the choice of spending or saving, Americans prefer to
spend. Of course, if interest rates or prices were
higher, Americans may save more. Also, experimental
economics often don't reflect real economics.
Rejecting a $1 gain for another to lose a $9 gain,
because of fairness and punishment, may work in
experiments. However, in the real world, e.g. in terms
of wages and profits or international trade, one side
often accepts $1 of the $10 gain (or less than 50%).

Amit, obviously some force, or combination of forces,
caused you to save energy. Consequently, another set
of forces may cause energy producers to lower energy
supply. Disequilibriums take place all the time.
However, normally, the greater the disequilibrium, the
more powerful forces become to move variables toward
equilibrium, one way or another. Also, the sum of
individual choices representing the aggregate is not
flawed, since it's proven mathematically.

Amit, economies are dynamic. So, not all vectors will
be in equilibrium at the same time. Nonetheless, over
time, there is an aggregate equilibrium point, since
the sum of all residuals are zero. Economies aren't
yet optimized. However, some economies had better
aggregate equilibrium points than others, over time,
because of better economics.

When the Fed targets prices, output fluctuates little.
When the Fed targets output, prices fluctuate a lot,
which leads to instability. I suspect, if the Fed
targeted the money supply, that would also lead to
instability, because of shifts in the foreign exchange
market or changes in the velocity of money in the
short-run. However, the money supply determines prices
in the long-run. Asset prices are residuals of
monetary policy. So, price stability (of goods &
services) is the Fed's best choice, although it also
attempts to keep inflation expectations low, i.e. a
cautious stance. U.S. monetary policy can't get much
better.

Posted by: Arthur Eckart | Friday, June 29, 2007 at
09:21 PM

Also, I may add, it's not important whether the Fed
Funds Rate is 10% or 5%, the money supply is high or
low, or how many booms and busts take place in asset
markets. What's important is maintaining sustainable
growth, which is optimal growth.

However, many shocks take place, e.g. Y2K (when the
money supply spiked higher and then lower around
2000), 9-11, an oil shock (or commodities in general,
e.g. gold, copper, and steel), minor technology shocks
in the '80s and '90s, and the quick and massive
"Creative-Destruction" process in the early '00s,
where resources were freed-up in Information Age
firms, along with Agricultural and Industrial
Revolution firms, and shifted into emerging
industries, resulting in more or better output per
input in older industries.

In the '90s, U.S. actual output was slightly above
U.S. potential output, and in the '00s, U.S. actual
output was slightly below U.S. potential output. The
U.S. remains in position to gain the most, or lose the
least, in the global economy. However, the gains over
the next few years will likely be mostly in production
rather than consumption. So, wage and employment
growth may rise faster than profit growth, or exports
may rise faster than imports.

Posted by: Arthur Eckart | Saturday, June 30, 2007 at
08:29 PM

Large economies tend to expand. Contractions are rare.
Many only focus on purchasing power, e.g. $1 in the
past is worth $0.10 today. However, given living
standards have risen substantially, over time, it
shouldn't be ignored that the increase in output must
have been greater than the rise in prices.

Sweden's economy is roughly the size of the U.S. state
of North Carolina's economy. However, what may work in
North Carolina may not work for the U.S. Nonetheless,
U.S. states can learn from each other. California
tends to be anti-business and ignorant about
economics, perhaps, because one party has extensive
control of government. Consequently, regions, e.g. San
Francisco and Los Angeles, are run-down. However, the
U.S. state of Colorado tends to be pro-business.
Colorado's state, county, and city governments work
together with business. Consequently, a lot of
improvements are made. In Denver Colorado, there has
been extensive economic development, e.g. a new
international airport, three new professional sports
stadiums (football, baseball, basketball/hockey), a
new light rail system, new main library (where a G-8
meeting was held one year), new convention center,
renovation of lower downtown, general improvements of
city streets, etc. However, in Oakland California,
there have been almost no city improvements. Yet,
local and state taxes are higher in Oakland than in
Denver. Oakland tends to focus on income
redistribution and there seems to be extensive
corruption (because of one party rule). Living
standards for the poor seem much lower in Oakland than
in Denver (including higher crime rates, rolling
blackouts, garbage strikes, water shortages, etc.). On
the state level, California government has little
understanding of economics. Exxon wanted to build a
huge refinery in California, because of projected
future shortages. However, there were so many attacks
on Exxon's reputation, lawsuits, and hostility in
general by many groups, that Exxon concluded it would
have to be out of its mind to build in California,
which contributed to the highest gasoline prices in
the country. The California Public Utilities
Commission, totally controlled by one party, has
attacked Wall Street, big business, and other states
(which exported energy to California) for making
money, and seems to have no understanding of
economics. California has many policies that result in
higher prices and costs, which lowered living
standards. It's important that government and business
understand each other's concerns, work together, treat
each other equally, and with more trust and respect.

The tide may be turning at the wrong time.
Globalization has generally benefited the U.S.
However, there have been winners and losers. Over the
next few years, there may be fewer benefits in
productivity, prices, and capital, and more benefits
in wages and employment.

Posted by: Arthur Eckart | Tuesday, June 26, 2007 at
08:56 AM

Generally, income redistribution creates more
negatives than positives. The fastest growing segments
of the U.S. labor market are high-skilled workers,
followed by low-skilled workers, and then
average-skilled workers. Most low-skilled workers have
reservation wages of roughly $10 an hour, or $20,000 a
year without overtime, while high-skilled workers are
often paid well over $100,000 a year. There's a
surplus of low-skilled workers and a shortage of
high-skilled workers. Almost everyone knows, including
government, business, and Asians (who are the highest
income group), that education is the key to higher
income. Yet, it seems, not enough has been done to
better place students with skills and jobs.

Lafayette, right, you pay for what you get. In the
U.S., most Americans get higher quality education and
health care. In education, Americans also get free
scholarships and grants, along with low interest loans
and other benefits, e.g. work study. I suspect, the
opportunity cost is the reason why many Americans
don't attend or finish college. You should thank the
brave Americans who've promoted democracy and defended
Europe, which continues its free ride.

Lafayette, I've shown why studies in health care are
biased. Anyone who has the misfortune of being sick
would be most fortunate to receive U.S. health care.
Also, much if not most of the advancements in medicine
originate in the U.S. Moreover, the U.S. has a larger
proportion of top-quality schools and even average
U.S. schools are high-quality. Europe has lowered
total welfare for greater equality, while the U.S. has
tended to maximize total welfare. Consequently, living
standards are much higher in the U.S. than in Europe.
It's not in the best interest of Europe to become a
society of "free riders," domestically or
internationally (e.g. through the U.S. military).

Lafayette, I revealed to you that 60% of the WHO study
criteria were based on equality. Unfortunately, there
have been few studies on health care, which tend to be
unscientific, place more weight on equality, or
exclude areas where the U.S. leads, i.e. normative (or
political hype) rather than positive (or unbiased).
However, it seems, all OECD countries spend little on
preventative care, e.g. 3%, while the U.S. leads in
many treatments, e.g. curing heart disease and most
cancers, which are expensive. 85% of the U.S.
population is covered by health insurance, while the
other 15% qualify for (inferior) government health
care. Americans rejected universal health care in
1994. However, there can be improvements in U.S.
health care. Below is a link to an economic study.

http://www.oecd.org/LongAbstract/0,2546,en_2649_33733_21547787_1_1_1_37443,00.html

The "Great Inflation" and the "Great Moderation"
periods may be explained, to a large extent, by a
long-wave boom and bust business cycle (caused by
uneven labor supply). Over the Great Inflation period,
potential output was overstated, which lead to
inflation. Over the Great Moderation period, potential
output was understated, which lead to disinflation.
Also, errors in monetary policy are more forgiving in
a disinflationary period than in an inflationary
period.

The article seems to be an accurate summary of China's
economy. However, the poverty line at $1 a day is
absurd. China not only has a water problem, among
other environmental problems, it also has a small
amount of arable land that has been shrinking (link
below).

http://www.worldwatch.org/node/3912

T Yang, I stated before Warren Buffett earns $1 a year
and has $50 billion in wealth. So, he could be
considered impoverished (although, his social security
would lift him out of poverty). It doesn't seem
possible anyone can live on $1 a day. However, if
there are few stores, to spend money, then $1 a day
may be sufficient. Obviously, there isn't mass
starvation in China. So, living standards seem higher
than the $1 a day suggests. The lack of property
rights in China creates a misallocation of resources
(e.g. destruction of high-yielding farmland in link
above) China seems to have worse slums than developed
countries (link below). In short, many of China's
economic (or government) policies are suboptimal to a
large extent.

http://english.people.com.cn/200509/09/eng20050909_207472.html

T Yang, I agree with Lafayette. At least the
communists are optimistic, in spite of the damage. The
article you cite states a new property law becomes
effective in October. That's a step in the right
direction. However, how much power will the state
really give up? Also, nothing in the article suggests
Yao is receiving rental income. Moreover, the article
I cited is by Xinhua, which you recommended. Xinhau is
controlled by the state and tends to cast the best
light (link below). So, it seems, the slum problem has
become so large or severe, that it cannot be avoided.

http://en.epochtimes.com/news/5-10-12/33256.html

T Yang, I agree with Lafayette again. Output growth is
a narrow or incomplete measure of living standards.
For example, unbridled growth is suboptimal, because
of economic strain in the boom phase and economic
slack in the bust phase. So, resources are utilized
inefficiently, in both the boom and bust phases.
Another example, is facilitating exports and
restricting imports, which can lead to small gains
from trade. China's economic policies show massive
improvements in some areas and massive degenerations
in others. However, the net benefit seems too low,
particularly given the huge efforts. Below is a link
to a short film of a slum in China, which looks worse
than any slum in the U.S. a hundred years ago. Also,
I've shown photos of factory conditions in China
before, which also looked like a slum.

http://www.youtube.com/watch?v=KAzWWgSWKVE

Mike: "Maybe one day China will be free and stable and
prosperous, just like Iraq!" Or maybe after Nazi and
Soviet Europe, WWII Japan, South Korea, Vietnam,
Bosnia & Kosovo, Somalia, Afghanistan, etc. The first
Iraq War was limited under the U.N. mandate and U.S.
Senate. Do you expect the U.S. to make the whole world
"free and stable and prosperous" through wars and
economics? Can you imagine if the U.S. and E.U. worked
together instead of opposed each other. However,
unfortunately, when the Europeans, with the exception
of the British, are armed, they tend to kill each
other.


Posted by: Arthur Eckart | Saturday, July 07, 2007 at
06:02 PM

Also, I may add, with the exception of U.S. Middle
Eastern allies, e.g. Saudi Arabia and Kuwait, the
region needs economic development badly. Also, more
freedom, e.g. in Iran, wouldn't hurt.

Posted by: Arthur Eckart | Saturday, July 07, 2007 at
06:24 PM

At least Iraq was stable, although not free and
prosperous under Saddam. However, Saddam made the
mistake of attempting and failing to kill the elder
Bush (second box in link below). Consequently, Bush Jr
sure killed Saddam's sons, and Saddam was executed.
The U.S. can either stay the course or pullback. It
seems, staying the course would result in fewer
civilian deaths. A pullback may create a full-fledged
civil war. It's really up to the major Iraqi leaders.

http://www.pbs.org/wgbh/pages/frontline/shows/longroad/etc/assassination.html

Posted by: Arthur Eckart | Sunday, July 08, 2007 at
01:37 AM

It seems, even the N.Y. Times agrees with me, although
it contradicts itself, stating today: The Times
conceded that, as violent as Iraq is, the situation
there might turn even deadlier after a withdrawal of
U.S. forces. "Americans must be clear that Iraq, and
the region around it, could be even bloodier and more
chaotic after Americans leave." Still the Times,
wrote, "Americans must be equally honest about the
fact that keeping troops in Iraq will only make things
worse.

http://ca.news.yahoo.com/s/afp/070708/world/us_iraq_media_1

Lafayette: "Europe learned its lesson..." Yes, it did,
although it took several massive destructions of
Europe. Last time I looked, the Middle East was in the
European hemisphere. Yet, Americans always have to go
over there to clean up the messes. In the U.S., there
may be more guns than people (link below), and yet
most Americans refrain from shooting each other (of
course, except for a few, e.g. the Vice President).

http://members.tripod.com/~HawkseyesA/gunsin.htm

In the U.S., undergraduate economics teaches a little
about a lot, while graduate economics teaches a lot
about a little. Perhaps, schools at the pre-college
level should teach more subjects in less time (e.g. a
subject each 30 minutes rather than each hour). So, a
larger variety of subjects can be taken. Students can
then better choose the subject they're most interested
in. So, they'll be good at it, be happier, and the
money will follow.

Before 1965, U.S. immigrants had similar skill and
education levels with the non-immigrant population.
However, after 1965, there were higher quotas of
high-skilled and low-skilled immigrants, at the
expense of average-skilled immigrants. It seems,
immigrants are more willing to work and work hard.
However, studies show the social costs of poor
immigrants, particularly for health care and
education, given higher fertility rates, far exceed
what they pay in taxes. Consequently, unrestricted
open borders may be costly, and increase poverty, in
rich countries.

Samib, that article makes no adjustments in skill
differences over time. If the U.S. population doubled
with people who had similar skills, GDP would double
and per capita income would be the same. However, it
seems, if the U.S. population doubled with people who
had higher skills, GDP would more than double and per
capita income would rise, etc. Also, immigrants with
higher education, more wealth, greater productivity,
etc. would have a similar effect.

Income inequality doesn't belong on the list, which
reflects desired outcomes of price, quality, cost, and
productivity. Income inequality in itself has little
meaning. So, other factors need to be considered, e.g.
aggregate utility, and creation (or quantity) and
distribution (or access) of capital. Income inequality
can be offset by many factors, e.g. women paying lower
prices, because they're better shoppers. Political
activism can be a positive or a negative. The goal
should be to optimize an economy. So, for example, if
the E.U. has high income and high unemployment, while
China has low income and low unemployment, how will
high income and low unemployment be achieved?

Lafayette, retarding living standards through income
equality will not increase happiness. So, income
inequality doesn't belong on the list. If you want
real income equality, then everyone in the world
should earn or live on the same income. However, I
doubt Europeans who receive money and benefits from
higher income people will give most of their income
and benefits to lower income people, e.g. billions of
people who live on less than $3 a day. Too many
Europeans don't understand or care about the
trade-offs and immorality of income equality, and it
won't optimize economies. However, I agree a "safety
net" is needed. More equal incomes can make society or
everyone poorer or lift all boats at a slower rate.
Happiness is not subjective in economics. Maximizing
utility (i.e. happiness or satisfaction) given
constraints can be proved mathematically. Diminishing
marginal utility, for example, is a real force.

Lafayette, obviously, U.S. policies were more
effective winning the Cold War than European policies.
Income inequality is higher in the U.S. than in the
E.U. However, U.S. per capita income is $10,000
higher. Also, U.S. prices are lower (given trade
deficits, which mostly benefit lower income workers).
Moreover, U.S. capital is more abundant (because of
capital creation and trade policies, which also help
lower income workers). The E.U. has a more equal
society (i.e. equally poorer), along with a more
sluggish economy.

Suvi, the U.S. hard line and competitive policy
towards the Soviets, which was unpopular and feared in
Europe, help win the Cold War. You assume poverty is
higher in the U.S. However, poverty is relative and
the U.S. has a "safety net." For a large country, with
a higher birth rate and higher immigration of poor,
the U.S. has little poverty. It's remarkable the U.S.
economy can expand, and outperform E.U. output over
time, with huge negative net exports.

Suvi, under Reagan, the U.S. initiated an arms race
(including deploying nuclear missles in Europe), which
most Europeans didn't seem too "happy" about. I stated
above poverty is relative. It seems, U.S. poverty is
defined as a family of four earning less than roughly
$19,000 a year in 2003. It excludes tax credits, the
value of assets, employee fringe benefits, food
stamps, medicare, medicaid, subsidized housing,
educational grants & loans, cost of and access to
capital, prices of lower end goods, etc. (although
cash welfare and unemployment payments are included).
Roughly 12% of the U.S. population lives in poverty. I
doubt poorer countries define poverty the same way.
So, what's considered poverty in the U.S. may not be
poverty in the E.U.

Suvi, Reagan's massive arms build-up and massive tax
cuts facilitated the end of the Cold War and spurred
economic growth. On the other side, Warren Buffett,
who pays himself $1 a year and has $50 billion in
wealth could be considered impoverished, although his
social security would be counted as income and lift
him out of poverty. PPP is much less accurate than
world prices. Using only PPP or income is very narrow.
However, in the U.S., there are low-skilled $35,000 to
$45,000 a year jobs with overtime (e.g. in
transportation and before in construction), which I
doubt exist in Turkey. What helped make Britain great
was being a nation of shopkeepers. Taxing small
business owners will tax away jobs, which helps
explain why E.U. unemployment is about 10%. There are
many causes of poverty. However, greater prosperity
for more people may not be one of them.

Posted by: Arthur Eckart | Sunday, June 10, 2007 at
01:17 PM

Below is a link to nightime satellite photos of North
America, Europe, and the world (click pictures for
larger images), which reflect economic activity to a
large extent.

http://www.nasa.gov/vision/earth/lookingatearth/NIGHTLIGHTS.html

Corporate America (or large U.S. corporations) is
unethical to some extent. Nonetheless, it generally
maintains profit, for shareholders, through
productivity. Consequently, a few top managers often
receive higher incomes for stagnant wages or lost
jobs. However, America's future is in small firms,
using capital created by large firms (see link below).

http://www.nfib.com/object/4239852.html

One observation, over my years in banking & investing,
is most U.S. corporations are very well-managed,
because of intense competition domestically (e.g.
number of firms) and internationally (e.g. through
cheap imports). The only way a small firm can become a
medium or large firm, in the U.S., is through better
management. It seems, successful management spares no
expense in making sure its workers are the most
well-equipped in the world. This is reflected in
purchasing prime land and the most durable materials
to build facilities (or long-term investment). So, the
property tends to increase in value and the buildings
require less maintenance. Also, each year, a large
batch of new equipment is purchased (or short-term
investment). So, workers can utilize the most advanced
equipment that function with fewer breakdowns.
Moreover, I may add, whether most of the corporate
workforce is high-skilled or low-skilled, they both
utilize high-quality capital equipment. Given the
enormous expenditures in capital equipment, along with
wages and other expenses, I wondered how these
corporations made a profit. Yet, somehow they manage.
Furthermore, I may add, purchasing capital equipment
frequently adds to overall economic growth.

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